Oecd Statistics Directorate

STD/STESEG(2002)24

1

STD/STESEG(2002)24

TABLE OF CONTENTS

A REVIEW OF CONCEPTS AND NATIONAL EXPERIENCES IN THE COMPILATION OF: DEMAND INDICATORS; AND OUTPUT INDICATORS

a)Introduction

b)Summary of existing international guidelines and recommendations

c)Terminology, concepts and definitions

d)Conceptual relationship between demand and output indicators

e)Comparison of key aspects of national methodologies used to compile the indicators

f)Possible areas for future work by the OECD Short-term Economic Statistics Expert Group on Demand and Output Indicators

A REVIEW OF CONCEPTS AND NATIONAL EXPERIENCES IN THE COMPILATION OF: DEMAND INDICATORS; AND OUTPUT INDICATORS

a. Introduction

1.OECD Member countries compile a wide range of short-term[1] statistics on demand and output to meet the myriad needs of national users. The primary purpose of such indicators is to assist in analysing short-term trends, particularly cyclical fluctuations of the economy and key sectors of the economy. The objective of this paper is to stimulate discussion on key issues on the future evolution of short-term demand and output indicators at the Expert Group meeting through:

-presentation of existing international guidelines and recommendations for these statistics. The aim of the review is to highlight differences between those standards (if any) and to flag gaps in existing standards;

-clarification of terminology as the basis for a common understanding of issues surrounding future development work on the indicators. The initial starting point are terms contained in existing international standards;

-an initial explanation of the conceptual relationship between the various indicators in this area;

-a brief review of the main demand and output indicators currently compiled by OECD Member countries and an initial, and also very brief, comparison of methodologies used by OECD Member countries to compile them;

-recommendations for future work by the Expert Group.

2.It should be emphasised from the outset that this paper is very much work-in-progress and a (brief) presentation of the above issues. The focus of the paper is a qualitative clarification of concepts and definitions in order to highlight their relationship to each other. This is a prelude to further work over the next 12 months by task forces created by the Expert Group. Comments, suggestions, clarifications, etc from Expert Group members on the content of the paper are welcomed. Finally, although there is a rich field of statistics provided on both output and demand in qualitative business tendency surveys only quantitative indicators in these areas are scheduled for discussion at this years’ Expert Group meeting, and consequently included in this paper.

b. Summary of existing international guidelines and recommendations on output and demand indicators

3.International guidelines and recommendations on quantitative demand and output indicators are embodied in the following standards:

-System of National Accounts 1993: The SNA 1993 contains a number of relevant definitions specifically including those for: production; output; stocks, though in the context of the compilation of national accounts rather than as short-term economic indicators.

-There is also specific mention of output and demand indicators in other United Nations guidelines and recommendations such as those for statistics in the industrial, distributive trades and services and construction sectors. These are outlined in the following publications:

• Studies in Methods – Index Numbers of Industrial Production, United Nations, New York, 1950, Series F, No. 1;

• International Recommendations on Statistics of the Distributive Trades and Services, United Nations, New York, 1975, Statistical Papers, Series M, No. 57;

• Organisation and Conduct of Distributive Trade Surveys, United Nations, New York, 1977, Studies in Methods, Series F, No. 19

• International Recommendations for Industrial Statistics, United Nations, New York, 1983, Statistical Papers, Series M, No. 48, Rev. 1;

• International Recommendations for Construction Statistics, United Nations, New York, 1997, Statistical Papers, Series M, No. 47, Rev. 1.

-European Council Regulation on Short-term Statistics (No. 1165/98 of 19 May 1998). This Regulation calls for the collection of a range of short-term statistics for industry, construction, retail trade and repair, and other services. The relevant specific indicators covered by the Regulation comprise: production; turnover; new orders and other demand indicators for specific sectors such as building permits for the construction sector. Also, over the last ten years a number of Eurostat task forces, working groups and seminars have been held to develop standards for implementation by European Union and candidate countries in these areas, and to identify best practice.

-The earlier work of the Voorburg Group also touched on the measurement of output in a range of service industries such as distributive trades, banking, insurance and business services and non-market services[2]. The Group was established to assist the United Nations Statistics Division in developing the parts of ISIC Rev. 3 and the CPC dealing with services. Having completed that task it continued to provide a forum for the exchange of views on service statistics.

-The work of Meetings of Service Statistics Experts convened by the OECD in the early part of the 1990’s, the last annual meeting being held in March 1996. This Group brought together experts in services statistics from between 15-20 OECD Member countries, the OECD and Eurostat to discuss and formulate recommendations on a wide range of issues involving services statistics. These included recommendations on the compilation of short-term output indicators for services. Although some of these recommendations have been implemented by a small number of Member countries there are still a number of outstanding issues related to their wider implementation.

4.Section ( c ) below provides definitions of key concepts derived from these international standards and sources and Section (d) provides an initial view of the relationship between key concepts.

c. Terminology, concepts and definitions

5.Before discussing key concepts and terminology it is worthwhile clarifying precisely what is meant by the terms “output indicators” and “demand indicators” being discussed at this years Expert Group meeting and for which there are no existing international standard definitions. For the purpose of the OECD Short-term Economic Statistics Expert Group:

-demand indicators comprise indicators of turnover (industry only), new orders received, sales, stocks; investment; building permits;

-output indicators comprise indicators of: production for industry and construction and turnover for services.

The dichotomy between the “demand” and “supply” aspects of these indicators is discussed below in Section (d). This Section also clarifies the above distinction involving the dual use of “turnover” as a demand indicator for all sectors except services and as an output indicator for services.

Output

6.The SNA defines “output” (SNA para. 6.38) as consisting of those goods or services that are produced within an establishment that become available for use outside that establishment, plus any goods and services produced for own final use. Such output may be:

-sold;

-entered into the producer’s inventories prior to sale, barter, etc;

-supplied to other establishments belonging to the same enterprise for use as intermediate inputs;

-retained by their owners for own final consumption or own gross fixed capital formation;

-supplied free, or sold at prices that are not economically significant to other institutional units.

-provided to their employees as compensation in kind or used for other payments in kind;

-bartered in exchange for other goods, services or assets.

Production

7.The SNA defines (economic) production (in SNA para. 6.15) as a process or activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital, and goods and services to produce outputs of goods and services. Production indices are normally compiled at monthly or quarterly frequency to measure increases and decreases in production output. Indices of industrial production that are compiled in all OECD Member countries which are used as a main short-term economic indicator in their own right because of the impact that fluctuations in the level of industrial activity have on the remainder of the economy. The availability of such indices on a monthly basis and the strong relationship between changes in the level of industrial production and economic cyclical behaviour facilitates the use of production indices as a reference series in the compilation of cyclical or leading indicators in a number of countries and by the OECD.

8.The Eurostat Manual of Business Statistics[3] identifies two possible meanings for the concept of “production” in the context of manufacturing, the:

-activity of manufacturing, i.e. the transforming of goods; or

-result of this activity, i.e. the output of manufactured goods in a fixed period.

The sub-aggregates indices of industrial production compiled by the OECD reflect these dual meanings. Most countries compile their sub-aggregate indices both on an activity basis (e.g. manufacturing, mining, electricity gas and water) or by type of end-use of the output (e.g. finished investment goods, finished consumer durable goods, finished consumer non-durable goods, finished intermediate goods). The different methods of index compilation are discussed in Section (e) below. As will also be discussed further below, the problems of identifying the “outputs” for many service activities has resulted in the adoption of turnover as a proxy measure of output for services.

Turnover

9.There is currently no universal definition of the concept “turnover”. The nearest thing to a standard are the various definitions of turnover included in the Council Regulation on structural business statistics[4] which essentially define turnover as:

“the totals invoiced by the observation unit during the reference period, and this corresponds to the market sales of goods or services supplied to third parties. ….. Reductions in prices, rebates and discounts as well as the value of returned packaging must be deducted. Price reductions, rebates and bonuses conceded later to clients (e.g. at the end of the year) are not taken into account.”

Turnover includes / Turnover excludes
All duties and taxes on the goods or services invoiced by the unit.
All other charges (transport, packaging, etc) passed on to the customer, even if listed separately in the invoice
For the distributive trade sector turnover corresponds to receipts from the sales of goods purchased by the unit in its own name and for its own account and resold in the same condition in which they were purchased, or after such labelling, packaging and wrapping as in usually practised in distributive trade enterprises.
For other service activities turnover includes revenue from all services rendered including those from a secondary services activity. / VAT invoiced by the unit vis-à-vis its customer and other similar deductible taxes directly linked to turnover
Income classified as other operating income, financial income and extraordinary income in company accounts.
Subsidies received from public authorities or the institutions of the European Union.
For the industry and construction sectors turnover derived from the resale of goods and services purchased for resale in the same condition.

10.The terms “turnover” and “sales” are often used interchangeably by a number of national and international agencies. Unfortunately, in many instances, the methodological information provided by agencies does not provide sufficient detail on the variable labelled “turnover” to enable the precise agency definition of that variable to be identified. To illustrate this point, the table in Attachment 1 below table provides examples of definitions applied by some OECD Member countries in the context of their retail trade indicator. From these examples it can be seen that some countries apply the term “turnover” only in the context of receipts from sales of merchandise (i.e. receipts from the primary activity of the unit) whilst others also include other types of receipts such as those from services, repairs, commissions, etc. In some countries, turnover or sales exclude taxes but includes deferred payments for orders received.

11.Goods sold to produce turnover may be derived from either available stocks or production. This indicator shows the production process not from the supply side, as is the case for production and output, but from the demand side. As the Eurostat guidelines state, turnover data provide an indication of “the future flow of money towards the units for the activities observed and hence an indicator of future investments.[5]” It may therefore be used for forecasting and to assess the possibility of financing future investment.

New orders

12.New orders indicators provide a measure of the value of orders received by the unit during the reference period. It is defined as the value of all legally binding contracts between a producer and a consumer for future deliveries by the producer of goods or services. New orders are a leading indicator of production in that they measure future demand and production requirements. Enterprises may meet orders through: their own production processes; by sub-contracting some or all of the production process or through the resale of goods purchased. The comparability of the indicators compiled by different countries is largely dependent on the inclusion or exclusion of these and other elements.

Stocks

13.Interest in stocks (or inventories) data stems primarily from the observation that fluctuations in stocks over time are an important feature of business cycles. The SNA refers to stocks of goods as “inventories” which are defined (SNA para. 3.66) as holdings of assets and liabilities at a point in time. The SNA records stocks in accounts, usually referred to as balance sheets, and tables at the beginning and end of the accounting period. Stocks result from the accumulation of prior transactions and other flows and they are changed by transactions and other flows in the period. The United Nations guidelines for industry and distributive trade activities cited above in para. 3 provide a number of definitions for stocks specific to each sector.

Activity / Definition
Industry / The value of stocks (industry) comprises the value of all stocks owned by the parent enterprise and held by, or under the control of, the establishment, either at the establishment or elsewhere. Stocks held at ancillary units, in bonded stores or public warehouses on consignment , in transit and materials being manufactured, processed or assembled on commission by others should be included. Materials owned by others but held by the establishment for processing should be excluded.
The UN guidelines provide additional definitions for:
-stocks of finished goods manufactured by the unit;
-stocks of finished goods include all goods made by the establishment that are ready for shipment as of the reference date;
-stocks of finished goods to be shipped in the same condition as received; and
-stocks of work in progress;
Distributive trades / The value of stocks of goods intended for sale and of materials, fuels and supplies for use by the units should be that at the beginning and end of the enquiry period for goods intended for sale, irrespective of where held, and of materials for use by the unit, that are owned by the establishment if it is part of a single-unit enterprise or that are controlled by the establishment and owned by its parent enterprise if it is part of a multi-unit enterprise. Goods for which the establishment has transferred has transferred the effective right to use to others with a view to ultimate purchase by them are excluded. Goods for which effective right to use has been transferred to the establishment with a view to ultimate purchase by it are included.

d. Conceptual relationship between output and demand indicators

14.There is an obvious relationship and sequencing for each of the demand and output indicators being discussed at this years’ Expert Group meeting. For example, indicators of:

-new orders provide measures of anticipation of activity and demand;

-production provides a measure of activity and supply;

-turnover (or sales or deliveries) reflect the demand side of the production process

-stocks provide an indication on both supply and demand.

There is user interest for short-term economic indicators that make the distinction between the process or activity of production and the disposal or destination of such output either initially into stocks or inventories or through sales (which results in “turnover”). Production takes place in one period of time and disposal may take place in another. This relationship is further illustrated in the following diagram.

15.In the case of services the nature of services activity is relatively straight forward though not the nature of the output produced. As discussed by Hill (1987)[6], the problem with measuring service outputs is essentially one of classifying, quantifying changes. Some changes (e.g. tonne or passenger miles travelled, tourist arrivals) are fairly easy to define and measure whilst others are more difficult. Goods producing activities tend to be classified on the basis of their main outputs (using a commodity classification) whereas the focus of the classification of services tends to be their production activity rather than the outputs of such activity. Countries compiling output indicators for services also tend to use turnover from those activities as a proxy measure of output (refer para. 21 below).

e. Comparison of national methodologies used to compile output and demand indicators

16.The main demand and output indicators compiled by each OECD Member country is summarised below in Attachment 2. As can be seen from this table and even a quick review of the papers prepared by Expert Group members for this meeting, the national statistical institutes (NSIs) of the various OECD Member countries compile a range of indicators in this area. However, the availability of the indicators does not imply that they are completely comparable between countries. The majority of the indicators have been prepared by national agencies primarily to meet the requirements of policy departments within their own country. In most instances the indicators have been developed within international guidelines, recommendations and regulations such as those cited for demand and output indicators in para. 3 above.