Trade &
6.4. Adjustment – Technical Description
Having explained briefly the concept of SUT and IO tables as well as difference between possible price valuations within this framework we can proceed to outline algebraic formulation of the adjustment procedure used in this study. The formal framework will be developed based on the IO system; however possible modifications and simplified version of the procedure will also be discussed. All notations and variables’ definitions can be found in the section E.1 of the Appendix E.
Adding all elements of the IO system in basic prices along the rows we get total demands:
1
Similarly, adding all elements of the system along the columns we get the total value of output of corresponding industries:
The fundamental accounting identity in this case is that total demands for products should be equal total amount produced domestically and imported (assuming for simplicity that imports are equal to zero):
, for all
b b
i j
z =z i= j (6.12)
41 UN, (1999) “Handbook of Input-Output Table Compilation and Analysis”. Series F, No 74, United Nations, New York., page 56.
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To translate this system into the consumer price representation one needs to add indirect taxes and trade and transport margins and subtract subsidies on products from intermediate demand and final demand components. Note that after these adjustments, the identity (6.12) will not hold since column sums zbj will not change, whereas row sums from zib will
One important clarification regarding the transport and trade margins should be made at this point. The basic price representation includes trade and transport margins as output of trade and transport sectors correspondingly. However in consumer prices, the output of trade and transport sectors includes only the direct services provided by them, whereas margins are allocated to the output of products where it has been generated. This is why the transition from basic to consumer prices does not change the values of industrial output (the column sums). Accordingly, when we perform the transformation from basic to consumer prices we add corresponding margins to sectors of origin and subtract exactly the same amount from trade and transport sectors and vice versa when we go from consumer to basic prices (see the schematic representation of trade margins matrix below for further clarification).
Thus, (6.11) can also be rewritten as:
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In short, the adjustment procedure involves changing the matrix of margins, as expressed in shares of total resources in consumer prices, thus changing the output of product in basic prices (row sums). Because in basic prices the equality (6.12) must hold and the column sums of the intermediate demands matrix are unaffected by the changes in the margins due to their structure, the corresponding adjustment will be made to the value added component of the IO system to reconcile the difference. More formally:
Given (6.13) we have
On the other hand, from (6.14) we can derive that:
Now, if transport or trade margins are modified it would not affect the equation (6.16) due to reasons explained above, however the identity (6.12) would be violated. To correct that and restore the IO structure we find the new value added v by substituting expression for j
b
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Given that we now have a formal outline of the methodology we can provide the more general intuition behind it.
Margins in the system of national accounts form part of the output of the sector which provides the corresponding services (e.g. trade margins form part of the trade sector output, transport margins are part of the transport sector output etc.). For example, if the final market value of a barrel of oil is 100 dollars this does not represent the value of the output of a barrel of oil for the oil industry. In the first place it has to be transported and the cost of this transportation is treated as a transport margin and eventually recorded as the output for the transport sector. Then, wholesale or retail traders retain part of the 100 dollars value as their commission, which is then recorded as an output of the trade sector. Even though it was the oil product that generated the 100 dollars, only part of it goes directly to the value of output of this product. Therefore, if margins represent significant share of output and GDP, incorrect treatment or misplacement of margins may considerably alter the sectoral output structure and make international comparison less meaningful.
The example of the oil industry was not chosen at random. Most developed mineral rich countries such as UK, Canada, Norway etc., treat trade margins on extraction of natural resources as output of corresponding extracting industries. This means that the trade margin in these counties on oil and gas production is zero or very small relative to the output. In this case, if a country reports significant trade margin on mineral extraction, which will eventually be allocated to the output of the trade sector then output of extracting industry in this country will be underestimated and trade sector will be inflated compared to the standard treatment used by most developed countries. Such mistreatment of trade margins is profound in the system of national accounts of some of the energy rich transition countries, namely Russia and Kazakhstan. Thus, the adjustment described above is required first of all to put these countries on the same basis for the possibility of cross-country comparison.
By changing the composition of margins we change the composition of output too. So that if value of output of an oil industry was 70 and trade margin was 30, we subtract 30 from the trade sector and add it to the output of the oil industry. Thus, value of output of trade industry is reduced by 30 and value of output of oil industry is increased by 30, whereas trade margin on oil is made equal to zero in this example.
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The adjustment of margins should change the structure of the value added as well as output.
According to SNA, gross value added of an industry is calculated as the difference between the industry output in basic prices and the intermediate consumption in consumer prices.
The value of intermediate consumption for any industry would not change when margins are changed, because whenever we add to an extracting industry we subtract the same amount from the trade industry. If before for example, agriculture consumed 5 units from oil industry and 10 from trade (15 from the two), now it would consume 10 from oil and 5 from trade, so the total is unaffected. If intermediate consumption and imports are unchanged then in order to have equality between the output of an industry and demand for products of this industry, value added needs to be adjusted to correspond to the new demand and hence output structure.