Transcript Evaluating the Impact of One NorthEast

The North East Economy and GVA
Will Haywood
Economic Intelligence Specialist Advisor
Policy & Research Team
22 January 2007
Introduction
The structure of the presentation is as follows:
1)
2)
3)
4)
5)
The key points
What is GVA (Gross Value Added)?
Measuring the economy and GVA
Economic growth and the North East
The key points revisited
Key points
GVA measures the total value of goods and services
available through economic activity
GVA = Output = Income = Expenditure
Regional GVA is measured using the income approach:
North East GVA = NE wages + NE profits
Economic growth is generated by:
1) More jobs = Additional wages = Higher GVA
2) Higher productivity = Higher profits = Higher GVA
What is GVA?
Broadly GVA is a measure of the total value of goods
and services made available through economic activity
– in other words, the size of the economy
National Statistics GVA definitions:
Company WRH
Sales
£100
Cost of Sales
£30
Wages
£40
Expenses
£20
Net Profit
£90
£10
GVA for Company WRH = £50
• Sales less CoS less Expenses = £50
or
• Wages plus Net Profit = £50
—“GVA measures the contribution to
the economy of each individual
producer, industry or sector in the UK”
—“The difference between output and
intermediate consumption (the cost of
raw materials and other inputs used in
production)”
GVA has now replaced GDP
(Gross Domestic Product) as the
measure of a region’s economy.
However, at national level GDP
remains the preferred measure
The relationship between GDP, GVA
and component parts
100%
NIT
G
NIT
P
80%
Key
GDP – Gross Domestic Product
GVA – Gross Value Added
GOS
I
60%
% of
GDP
GDP*
GVA
40%
Value
added
by
sector
GDP
CoE
C
20%
0%
C – Consumers expenditure
I – Investment
G – Government spending
NX – Exports less Imports
NIT – Net indirect taxation - Taxes
less subsidies on products
P – Taxes less subsidies on
production
CoE – Compensation of employees
GOS – Gross operating surplus
*GDP measure not now used
NX
GDP* at Aggregate
income
factor
cost
GVA at
basic
prices
Aggregate GDP at
product
market
prices
Aggregate
expenditure
Note that headline GVA figures are published at basic prices and that taxes less subsidies on production (P) are
generally included as part of Gross operating surplus (GOS)
Measuring GVA and the economy
The size of an economy can be measured in three ways. The
UK National Accounts are constructed so that these methods
give (in theory) the same answer:
i)
The output or production approach
•
ii)
The income approach
•
iii)
Aggregate Output aka Aggregate Product aka Aggregate Supply
Aggregate Income
The expenditure approach
•
Aggregate Expenditure aka Aggregate Demand
So: GVA = Output = Income = Expenditure
Whilst this rule holds for any level of geography, availability of
data means that Regional GVA estimates are presently only
made using the income approach
Output or production approach 1
How a loaf of bread’s value added is sliced up
0
10p
20p
30p
40p
Farmer’s
value added
Farmer
Value of
wheat
Miller
Value added
Intermediate expenditure
Miller’s
value added
Final expenditure
Baker
Grocer
Note that the sum of all value
added is also equal to final
expenditure. Total value
added across all industry
sectors gives total output
based GVA i.e. aggregate
product
Grocer’s
value added
Wholesale value of bread
Retail value of bread
Final expenditure on bread
Consumer
0
GVA
Baker’s
value added
Value of flour
10p
Farmer’s
value added
Miller’s
value added
20p
30p
Baker’s
value added
Gross output = GVA + Intermediate expenditure
Grocer’s
value added
40p
‘Double counting’ both the
expenditure on final goods
and intermediate goods will
give gross output figures
Output or production approach 2
How bread’s GVA adds up at each stage of production
Intermediate
expenditure
(Purchases)
Gross output
(Sales)
GVA
(Sales less
purchases)
0
10p
10p
Miller
10p
20p
10p
Baker
20p
30p
10p
Grocer
30p
40p
10p
Total
60p
100p
40p
Farmer
The point at which the final good (i.e. the bread) is traded is the relevant one in
terms of economic accounting. At this point GVA is equal to income (i.e. the
Grocer’s income from the sale of the bread) and expenditure (i.e. the
Consumer’s expenditure on the bread) – all 40p
Expenditure approach
The expenditure approach calculates aggregate expenditure
(aka aggregate demand or total spending) in terms of market
prices i.e. inclusive of indirect tax such as VAT and therefore
strictly a measure of GDP
There are four main elements:
Consumption expenditure (C) – approx 65% of UK GDP
Investment (I) – 17%
Government expenditure (G) – 21%
Exports (E) less Imports (M) – (3%)
UK GDP breakdown in 2003
C = £761bn
I =£199bn G =£251bn
UK GDP in 2003 = £1,177bn
E = £299bn
M = £334bn
Income approach 1
This method is the one used to generate Regional
GVA estimates
Only income generated through the output of
goods and services i.e. via the production process
is included in the calculation of income-based GVA
Therefore, the following are excluded:
—
—
—
Transfer payments – unemployment benefits and
the state pension
Private transfer of monies between individuals and
income not registered with the Inland Revenue
The Black or Shadow Economy
Income approach 2
The main components of income-based GVA
Major Components
Source of data
Approximate %
of total NE GVA
Compensation of
employees
Wages
Employers’ social
contributions
IR tax returns
Government
accounts and ONS
surveys
65%
Gross operating
surplus
Company profits
Rental income from
property ownership
IR and ONS/DTI
inquiries and ONS
estimates
28%
Mixed Income
Income of soletraders and the selfemployed
Taxes less
subsidies on
production
Total GVA
Business rates
IR and DEFRA
HM Customs and
Excise
5%
2%
100%
Source: UK Gross National Income (ESA95) Inventory and DBS Regional Economic Model
Economic growth and Real GVA
Economic growth rate = Rate of increase of Real GVA
Nominal v Real
—
—
Nominal figures are expressed in current prices with no allowance
made for inflation
Real figures are expressed in constant prices with allowance made
for inflation enabling year on year comparison to be made
GVA Growth
Example of derivation
of Real GVA growth
Nominal
GVA
Real
GVA
Real
GVA
GVA
deflator
2005
2006
Nominal NE GVA
growth rate
5%
Inflation rate
3%
Real NE GVA
growth rate
2%
UK Trend Growth
A recession occurs when
Real GDP falls – this was last
observed in the UK (and the
NE) in the early 1990s
Real UK
GDP
Boom
Below trend
Bust
Mid 1980s
UK Trend Growth
2.5% p.a.
Actual
Growth
Above trend
(£s)
Key
Now
Actual growth fluctuates
around trend growth –
aka the economic or
business cycle. UK
growth in the past
decade has exhibited
less ‘variation’ around
trend than during earlier
periods of rapid growth
and decline or ‘boom
and bust’
Drivers of GVA growth
Productivity
—
is a measure of how efficiently factors of production (land,
labour and capital) are used in the production process
Productivity = GVA per job or GVA per hour worked
“Higher growth in per capita incomes can only be sustained
by raising the trend rate of productivity growth”
Source: HM Treasury
Participation
—
—
Employment rate
Population of working age
Typical annual contributions
to UK Trend Growth
Productivity rate  2.0%
Working age pop  0.4%
Employment rate  0.1%
Higher output growth and the role of
the key drivers
Increasing the productive potential of the economy enables
more goods and services to be produced, leading to higher
potential consumption. This is long-term economic growth
The Production Possibility Frontier
(PPF) indicates the limits of an
economy’s productive capacity
Goods
c
PPF2
Initially productive potential
stands at PPF1 or ‘ab’ but can be
shifted outwards to PPF2 or ‘cd’
through improvements in
productivity as shown or through
increased levels of capital stock
Skills
a
Investment
PPF1 Innovation
Enterprise
Competition
0
b
d
Services
GVA, GVA per capita and the
North East picture
GVA v GVA per head
Economic performance comparison - GVA per head
—
—
UK v China
North East v UK
North East double-whammy
—
—
Low productivity – concentration of employment in less
well paid sectors and relatively low pay for the same
occupation
Less workplace participation – relatively low
employment rates and an ageing population profile
Ways to increase GVA per head
Increase the following:
—
—
—
—
Employment rate – more people in employment and
earning
Number of businesses – greater levels of enterprise and
competition leads to higher productivity
Skill levels – very strong correlation between higher
skills and higher earnings
Innovation and investment in the latest technologies –
the highest returns flow from competing at the cutting
edge of any sector
Decrease the following:
—
Economic inactivity and benefit dependency – any work
done by North East residents previously unemployed or
not in the labour market will increase GVA per head
Key points revisited
GVA measures the total value of goods and services
available through economic activity
GVA = Output = Income = Expenditure
Regional GVA is measured using the income approach:
North East GVA = NE wages + NE profits
Economic growth is generated by:
1) More jobs = Additional wages = Higher GVA
2) Higher productivity = Higher profits = Higher GVA