Download Methodology Notes: Links between GDP and Gross Value Added

Economic Trends 627 February 2006
Methodology Notes:
Links between Gross Domestic
Product (GDP) and Gross Value
Added (GVA)
Mark Brereton
Office for National Statistics
This is the latest article in a new
series called ‘Methodology
Notes’. This series aims to explain
statistical issues relevant to our
data in a simple, non-technical
way. As well as defining the
topic areas, the notes explain
when, why and how these
methodologies are used within
the Office for National Statistics
(ONS) . Where possible, we also
point the reader to further sources
of information.
Introduction
GDP and GVA are measures of economic activity before allowing for depreciation
(or capital consumption) of fixed assets. However, it is important to note there are
differences between GDP and GVA.
What is Gross Domestic Product?
Gross Domestic Product (GDP) is defined as the total value of all goods and services
produced within a country. In the United Kingdom, three theoretical approaches
are used to estimate GDP: production, income and expenditure. GDP is either shown
in current (nominal) prices or in chained volume terms (after removing the impact
of price inflation) and is the figure most often used to compare the performance of
a country’s economy.
What is Gross Value Added?
Gross Value Added (GVA) measures the contribution to the economy of each
individual producer, industry or sector in the United Kingdom. The GVA generated
by any unit engaged in production activity can be calculated as the residual of the
units’ total output less intermediate consumption (that is, goods and services used
up in the process of producing the output), or as the sum of the factor incomes
generated by the production process. GVA also allows for regional analysis and
productivity comparisons to be made.
Link between GDP and GVA – which is the more appropriate to
use?
GDP at market prices provides a key indicator of the state of the whole economy
and is used in analysing the expenditure measure of GDP. However, when using
the production or income approaches, the contribution to the economy of each
individual producer, industry or sector is measured using GVA at basic prices, and
not by using GDP at market prices.
The production approach looks at the contribution of each economic unit by
estimating the value of their output less the value of inputs used in the production
process to produce their output. The income approach measures the incomes earned
by individuals and corporations in the production of goods and services.
The link between GVA and GDP in both current prices and chained volume terms is
shown below:
Gross Value Added at basic prices
plus Taxes on products
less Subsidies on products
equals Gross Domestic Product at market prices
Office for National Statistics
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Methodology notes: Links between Gross Domestic Product (GDP) and Gross Value Added (CVA)
Taxes on products less subsidies on products are also known
in the UK National Accounts as the Basic Price Adjustment
(BPA). GVA forms a component in the estimation of GDP.
The valuation link between GVA and GDP is given below:
impact, GVA and GDP in chained volume terms grow at the
same rate.
For further information on the UK estimation of GDP and
GVA:
■
Basic Prices
Gross Value Added
(GVA)
+
=
Taxes on Products – Subsidies
on Products
(BPA)
Market Prices Gross Domestic Product
(GDP)
The production, income and expenditure approaches to GDP
are wholly integrated in the Input-Output Annual Supply
and Use Tables framework. Consistent income totals can be
derived in three ways: by industry, by institutional sector
and by category of income. When balanced, the UK InputOutput Annual Supply and Use Tables provide a coherent and
consistent story for a single year, including:
■
a single annual estimate of GDP at current market prices,
which is underpinned with the components of the
production, income and expenditure measures of GDP
■
detailed Goods and Services Account
■
Production Accounts by sector and by industry
■
generation of Income Accounts by sector and by industry
Why has there been debate about the growth
rates of GDP and GVA?
When measuring at current prices – that is, before
adjustments are made for price inflation – it is clearly
possible for the growth rates of GDP and GVA to differ. This
is because the former is measured at market prices while the
latter is measured at basic prices (that is, deducting taxes
(less subsidies) on products). Given that the prices used are
different, it is not surprising that at times the growth rates will
also differ. Indeed, this is inevitable unless growth is evenly
spread across all sectors.
It has recently been argued that the BPA – which is
responsible for these differences between GVA and GDP
– causes only a nominal effect and not a real one. It changes
nothing in the volume of output. Ideally, the BPA would have
a corresponding deflator showing its real effect to be zero.
Unfortunately, as all the different sectors within the economy
are growing at a different rate (this is called differential
growth), the BPA is extremely difficult to deflate accurately.
To solve this, ONS constrains the BPA growth rate difference
to zero and sets the deflators accordingly, as conceptually
it should not affect GDP growth in chained volume terms.
Consequently, with the BPA now constrained to make no real
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Office for National Statistics
Economic Trends 627 February 2006
The latest United Kingdom Input-Output Analyses, 2005
edition containing the 1992–2003 Input-Output Annual
Supply and Use Tables and a range of other analyses. These
are available on the National Statistics website address
shown below:
www.statistics.gov.uk/inputoutput
■
The link on the National Statistics website to GDP is
shown below:
www.statistics.gov.uk/CCI/nugget.asp?ID=56