Conceptually, the aggregate "intermediate consumption" is equal to the amount of the difference between gross output (roughly, the total sales value) and net output (gross value added or GDP). In the US economy, total intermediate consumption represents about 45% of gross output. The services component in intermediate consumption has grown strongly in the US, from about 30% in the 1980s to more than 40% today.
Thus, intermediate consumption is an accounting flow which consists of the total monetary value of goods and services consumed or used up as inputs in production by enterprises, including raw materials, services and various other operating expenses.
Because this value must be subtracted from gross output to arrive at GDP, how it is exactly defined and estimated will importantly affect the size of the GDP estimate.
Intermediate goods or services used in production can be either changed in form (e.g. bulk sugar) or completely used up (e.g. electric power).
Intermediate consumption (unlike fixed assets) is not normally classified in national accounts by type of good or service, because the accounts will show net output by sector of activity. However, sometimes more detail is available in sectoral accounts of income & outlay (e.g. manufacturing), and from input-output tables showing the value of transactions between economic sectors.
Exclusions
Excluded from intermediate consumption in the UNSNA system are:
The value of the depreciation of fixed assets.
valuables bought by enterprises such as works of art, precious metals and stones, ornaments and jewellery.
Major renovations, reconstructions, or enlargements of existing fixed assets enhancing their efficiency or capacity, or prolonging their expected working lives.
Military weapons such as rockets, missiles and their warheads which are actually used in fighting, and military machinery and equipment of the same type as that used by civil establishments for non-military purposes (the 2008 UNSNA revision changes the definitions somewhat).
Collective services provided by the public sector (the provision of transport facilities, security, etc.).
Expenditures on mineral exploration.
Social transfers provided by government to households.
Inclusions
Included in intermediate consumption in the UNSNA system are:
Operating expenses such as the rentals paid on the use of fixed assets leased, and also fees, commissions, royalties, etc., payable under licensing arrangements.
The value of goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc.
The ordinary, regular maintenance and repair of fixed assets used in production.
Expenditures on durable producer goods which are small, inexpensive and used to perform relatively simple ongoing operations.
Expenditures on research and development, staff training, market research and similar activities.
all goods except dwellings acquired by governmental establishments engaged in the production of defence services, including expenditures by the military on weapons of destruction and the equipment needed to deliver them.
Rentals paid on buildings or equipment under an operating lease.
etc
Valuation principles
Conceptually, intermediate goods or services should be valued at purchaser's market prices (including transaction costs and tax), at the point in time when the good or service enters the process of production, not when they were acquired by the producer.
In practice, the two times will coincide for inputs of services, but often not for goods, because these can be bought and stored some time as inventories, before they are actually used in production. Taxes
Workers' consumption
Some goods and services bought by enterprises do not enter directly into production of output itself, but are consumed by workers (e.g. work clothing, accommodation, meals, transport, washrooms, medical check-ups).
In such cases it is necessary to distinguish whether items are intermediate consumption or, alternatively, a remuneration "in kind" to employees (for example, fringe benefits such as company cars and meal tickets for private use).
In general, when items are used by employees in their own time and at their own discretion for their own use, they are regarded as remuneration in kind, not intermediate consumption. In that case, they are part of the aggregate compensation of employees, and included in gross value added. But if employees have to use them specifically to do their work, they are included in intermediate consumption, and excluded from value-added.
Statistical effects of ownership relations on the boundary between intermediate consumption and value-added
The statistical boundary between intermediate consumption and value added is affected by ownership relations.
If, for example, an enterprise buys services from other enterprises, instead of producing them in-house, its own value added will be reduced, and its intermediate consumption will be increased.
But because in-house production itself has intermediate inputs, the value of the increase in intermediate consumption that results from in-house production is likely to be less than the value of equivalent services purchased from another enterprise.
Thus, the sizes of total value added and intermediate consumption are affected by the degree to which ancillary activities are either produced in-house by an enterprise, or bought from other enterprises within the domestic economy.
Likewise, rentals paid by a business on buildings or equipment under an operating lease are recorded in national accounts as intermediate consumption, and are excluded from its value-added.
Yet, if an enterprise owns its own buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption; depreciation charges are included in gross value added, and interest costs, both actual and implicit, are included in net operating surplus. Only the expenses of materials needed for physical maintenance and repairs to buildings and equipment appear under intermediate consumption.
Consequently, if businesses decide for economic reasons to rent more physical assets, or alternatively buy more physical assets, this can independently affect the size of GDP components and the size of intermediate consumption. If they buy, this boosts GDP; if they rent or lease, this lowers GDP.
Criticisms
One criticism that is made of official national accounts in respect of intermediate consumption concerns the treatment of income from rents, especially business rents.
In UNSNA, a distinction is drawn between property incomes and the rentals receivable and payable under operating leases by producing enterprises.
Such rentals payable by lessees to lessors are treated as purchases of "services produced" by the leasing enterprises, and recorded either as intermediate consumption of renting enterprises, or as the final consumption of households or government.
Yet at the same time owners of funds, land or subsoil assets who exclusively rent out these assets are not considered to be themselves engaged in productive activity at all, and therefore excluded from the production account. The assets loaned, rented or leased are regarded as not being produced in this case, and no capital consumption is considered to be incurred in respect of their use. On the other side, having been included in intermediate consumption, the property incomes payable by enterprises that borrow funds or rent land or subsoil assets do not enter into the calculation of their value added, or operating surpluses, at all.
Thus, even although rents must be paid out of the gross revenue of producing enterprises, they are to a large extent excluded from value-added and GDP. This may be consistent from the point of view of the definition of value-added used, but will provide a misleading view of economic activity and gross profit income, if in fact the proportion of property income in the national income increases.
At the same time, value-added includes the imputed rental value of owner-occupied housing. This is the average market rent owner-occupiers would receive if the housing they occupy is rented. But this addition to GDP is largely fictitious, because the huge majority of owner-occupiers do not rent out their dwellings. The imputation is based on a value theory according to which owner-occupiers receive a "service" provided by dwellings.
According to some estimates, about one in five dollars of profit income in the USA nowadays consists of rentier income, but this is difficult to trace in the accounts (see Epstein & Jayadev 2005 and Michael Hudson 2005[1] for some discussion). In reality, insofar such estimates are themselves derived from gross product data, they will underestimate the true significance of property income from rents, because many those rents are excluded from gross product accounts.
In Marxian economics, net rents paid out of the current gross income of producing enterprises are not regarded as intermediate expenditure, but as part of the value product. Marx himself commented: "The line between repairs proper and replacement, between costs of maintenance and costs of renewal, is rather flexible. Hence, the eternal dispute, for instance in railroading, whether certain expenses are for repairs or for replacement, whether they must be defrayed from current expenditures or from the original stock. A transfer of expenses for repairs to capital account instead of revenue account is the familiar method by which railway boards of directors artificially inflate their dividends." (Das Kapital, Vol. 2, chapter 8, section 2).
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic health of a country or region. Definitions of GDP are maintained by several national and international economic organizations, such as the OECD and the International Monetary Fund.
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), Gross national income (GNI), net national income (NNI), and adjusted national income. All are specially concerned with counting the total amount of goods and services produced within the economy and by various sectors. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. For instance, some measures count only goods & services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.
In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which is durable or isn't fully consumed in a single time period. It contrasts with circulating capital such as raw materials, operating expenses etc.
Fixed investment in economics is the purchasing of newly produced fixed capital. It is measured as a flow variable – that is, as an amount per unit of time.
Household final consumption expenditure (POES) is a transaction of the national account's use of income account representing consumer spending. It consists of the expenditure incurred by resident households on individual consumption goods and services, including those sold at prices that are not economically significant. It also includes various kinds of imputed expenditure of which the imputed rent for services of owner-occupied housing is generally the most important one. The household sector covers not only those living in traditional households, but also those people living in communal establishments, such as retirement homes, boarding houses and prisons.
The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general economic activity in the United States.
Consumption of fixed capital (CFC) is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process of generating new output, and because unlike depreciation it is not valued at historic cost but at current market value ; CFC may also include other expenses incurred in using or installing fixed assets beyond actual depreciation charges. Normally the term applies only to producing enterprises, but sometimes it applies also to real estate assets.
Gross fixed capital formation (GFCF) is a component of the expenditure on gross domestic product (GDP) that indicates how much of the new value added in an economy is invested rather than consumed. It measures the value of acquisitions of new or existing fixed assets by the business sector, governments, and "pure" households minus disposals of fixed assets.
The value product (VP) is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies. Its annual monetary value is approximately equal to the netted sum of six flows of income generated by production:
Productive and unproductive labour are concepts that were used in classical political economy mainly in the 18th and 19th centuries, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts in the Soviet Union and other Soviet-type societies.
In economics, gross output (GO) is the measure of total economic activity in the production of new goods and services in an accounting period. It is a much broader measure of the economy than gross domestic product (GDP), which is limited mainly to final output. As of first-quarter 2019, the Bureau of Economic Analysis estimated gross output in the United States to be $37.2 trillion, compared to $21.1 trillion for GDP.
Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid by employers to employees for work done in an accounting period, such as a quarter or a year.
Operating surplus is an accounting concept used in national accounts statistics and in corporate and government accounts. It is the balancing item of the Generation of Income Account in the UNSNA. It may be used in macro-economics as a proxy for total pre-tax profit income, although entrepreneurial income may provide a better measure of business profits. According to the 2008 SNA, it is the measure of the surplus accruing from production before deducting property income, e.g., land rent and interest.
Net output is an accounting concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the NIPAs, and sometimes in corporate or government accounts. The concept was originally invented to measure the total net addition to a country's stock of wealth created by production during an accounting interval. The concept of net output is basically "gross revenue from production less the value of goods and services used up in that production". The idea is that if one deducts intermediate expenditures from the annual flow of income generated by production, one obtains a measure of the net new value in the new products created.
Double counting in accounting is an error whereby a transaction is counted more than once, for whatever reason. But in social accounting it also refers to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output, or the value of total investments.
Aggregate income is the total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting. Aggregate income is a form of GDP that is equal to Consumption expenditure plus net profits. 'Aggregate income' in economics is a broad conceptual term. It may express the proceeds from total output in the economy for producers of that output. There are a number of ways to measure aggregate income, but GDP is one of the best known and most widely used.
Material Product System (MPS) refers to the system of national accounts used by 16 Communist countries for different lengths of time, including the former Soviet Union and the Eastern Bloc countries, Cuba, China (1952–1992) and several other Asian countries. The MPS has now been replaced by the UNSNA accounts in most countries that used MPS, although some countries such as Cuba and North Korea have continued to use MPS alongside UNSNA-type accounts. Today it is difficult to obtain detailed information about accounting systems which are an alternative to UNSNA, and therefore few people know that such systems exist and have been used by various countries.
In economics, gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy. "Gross value added is the value of output minus the value of intermediate consumption; it is a measure of the contribution to GDP made by an individual producer, industry or sector; gross value added is the source from which the primary incomes of the System of National Accounts (SNA) are generated and is therefore carried forward into the primary distribution of income account."
Sectoral output for an industry or combination of industries ("sector") is the value of its output sold outside that sector. It is usually calculated as the value of the sector's gross output minus the value of shipments within the sector from one establishment to another.
The annual United Kingdom National Accounts records and describes economic activity in the United Kingdom and as such is used by government, banks, academics and industries to formulate the economic and social policies and monitor the economic progress of the United Kingdom. It also allows international comparisons to be made. The Blue Book is published by the UK Office for National Statistics alongside the United Kingdom Balance of Payments – The Pink Book.
References
↑ Michael Hudson, "How Rent Gets Buried in the National Income Accounts"
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