Net output
Encyclopedia
Net output is an accounting concept used in national accounts
such as the United Nations System of National Accounts (UNSNA) and the NIPA
s, 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.
during an accounting period when producing enterprises use inputs (labor and capital assets) to produce outputs. Gross value added
is called "gross" because it includes depreciation charges or Consumption of fixed capital
. The calculation is importantly influenced by the definition of expenditures and incomes included within the scope of "production" - some incomes and expenditures are included as "factor income" or "factor expenditure" directly related to production, other are not.
The calculation involves an accounting procedure of "grossing and netting" the revenues which enterprises obtain from their outputs of goods and services, in order to establish what the real value of those outputs is.
This procedure must consistently identify and distinguish between costs and revenues, and between materials or services used up, fixed assets and new outputs, according to a standard valuation. In national accounts, this is especially important because the inputs of one enterprise are the outputs of another, and vice versa; lacking a consistent procedure, double counting
would result. In turn, the "grossing and netting" procedure assumes a value theory
and a definition of the coverage of production
. Once we have that, we can aggregate a multitude of prices to obtain a price for the total value of net output.
In calculating net output for national accounts, government subsidies received by producing enterprises are normally subtracted from indirect tax levies paid by them during the same accounting period..
or GDP. Included in this total is the productive activity of government agencies and certain income-generating activities of households.
, a way of grossing and netting, and techniques for aggregating the prices of transaction volumes in a consistent way. Obviously, there are many different ways of going about this, but normally a legal framework limits the number of variations possible or permitted (business accounts have to be audited and so on, to guarantee a fair statement of business operations within the law of the land). Nevertheless, the procedure for establishing net output can be contested.
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
such as the United Nations System of National Accounts (UNSNA) and the NIPA
Nipa
NIPA, Nipa or nipah may refer to:* Nipa palm, Nypa fruticans* Nipa grass, Distichlis palmeri* Nipah virus, a Henipavirus* National Income and Product Accounts * National Institute of Public Administration...
s, 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.
Definition
In national accounts, net output is equivalent to the gross value addedValue added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
during an accounting period when producing enterprises use inputs (labor and capital assets) to produce outputs. Gross value added
Gross value added
Gross Value Added ' is a measure in economics of the value of goods and services produced in an area, industry or sector of an economy...
is called "gross" because it includes depreciation charges or Consumption of fixed capital
Consumption of fixed capital
Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...
. The calculation is importantly influenced by the definition of expenditures and incomes included within the scope of "production" - some incomes and expenditures are included as "factor income" or "factor expenditure" directly related to production, other are not.
The calculation involves an accounting procedure of "grossing and netting" the revenues which enterprises obtain from their outputs of goods and services, in order to establish what the real value of those outputs is.
This procedure must consistently identify and distinguish between costs and revenues, and between materials or services used up, fixed assets and new outputs, according to a standard valuation. In national accounts, this is especially important because the inputs of one enterprise are the outputs of another, and vice versa; lacking a consistent procedure, double counting
Double counting (accounting)
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...
would result. In turn, the "grossing and netting" procedure assumes a value theory
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
and a definition of the coverage of production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
. Once we have that, we can aggregate a multitude of prices to obtain a price for the total value of net output.
Components of net output
The value of an aggregate net output is normally understood to be equal to the sum of- labour costs (or Compensation of employeesCompensation of employeesCompensation of employees is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well...
), - depreciation (or consumption of fixed capitalConsumption of fixed capitalConsumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...
), - income tax and indirect tax imposts on production, reduced by government subsidies to producers,
- profit (or operating surplusOperating surplusOperating surplus is an accounting concept used in national accounts statistics Operating surplus is an accounting concept used in national accounts statistics Operating surplus is an accounting concept used in national accounts statistics (such as United Nations System of National Accounts (UNSNA)...
).
In calculating net output for national accounts, government subsidies received by producing enterprises are normally subtracted from indirect tax levies paid by them during the same accounting period..
Net output and GDP
The total net output of resident producers in a national economy is equal to Gross Domestic ProductGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
or GDP. Included in this total is the productive activity of government agencies and certain income-generating activities of households.
- Usually the term "net output" is used to refer to the contribution which a particular economic sector (for example, agriculture, manufacturing, business services etc.) makes to total value added or GDP during a quarter or a year.
- The net output of a particular industry should not however be confused with the total value of its outputs, since in reality that total value includes the value-added by production plus the value of inputs used up (i.e. intermediate consumptionIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
) in producing the total value of outputs. For example, in making a car, a car factory adds value to the materials and components used to make the car. But the value of the finished car doesn't just include that value-added in production, but also the materials and ancillary operating costs used to make the car. Thus, if we want to know the total sale value of the output of the car factory, the relevant measure is not the "net output" (the value-added), but rather the gross outputGross OutputGross output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
. If, for example, we wanted to calculate a "unit labour-cost" for the output value of the cars, the appropriate ratio is between labour costs and the gross output value of the cars. It follows that the total new net output value of a whole country, after deducting the value of goods and services used up from the gross expenditure or gross sales revenue, is a different concept from the net output of a particular industry.
Input-output analysis
In input-output analysis, disaggregated data on gross and net outputs of different economic sectors and sub-sectors is used to study the transactions between them. Thus, for example, a sector purchases inputs from several other sectors and sells outputs to several other sectors. By identifying the quantities of inputs and outputs involved, we can estimate what the effect will be of fluctuations in business activity within one sector, or group of sectors on the economy as a whole.Criticism
As mentioned, the calculation of net output requires a value theoryValue theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
, a way of grossing and netting, and techniques for aggregating the prices of transaction volumes in a consistent way. Obviously, there are many different ways of going about this, but normally a legal framework limits the number of variations possible or permitted (business accounts have to be audited and so on, to guarantee a fair statement of business operations within the law of the land). Nevertheless, the procedure for establishing net output can be contested.
- The valuation standards applied may be contested and differ somewhat between different countries.
- In Marxian economicsMarxian economicsMarxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
, the value productValue productThe value product 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...
is offered as an alternative output measure, reflecting the new value produced by living labor.
- But there is also an ecologicalEcologyEcology is the scientific study of the relations that living organisms have with respect to each other and their natural environment. Variables of interest to ecologists include the composition, distribution, amount , number, and changing states of organisms within and among ecosystems...
criticism that is sometimes made. The argument here is that, in calculating net output, costs and results are only assessed in price terms. Therefore, inputs to production and outputs which are not priced, are excluded in the valuation. Yet those inputs and outputs may nevertheless have an economic or human value, regardless of whether a price could be imputed to them or regardless of whether they can be made an object of trade. If the air is polluted, or depletion of fish stocks in the open seas occurs, the cost of repairing that is not accounted for in the net output of polluters or fishing companies. Sometimes taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
levies are therefore imposed. Nowadays the Kyoto protocolKyoto ProtocolThe Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...
has inspired "emissions trading", where the right to pollute is bought and sold, which some regard as a strictly perverse activity. Others however argue it proves the ability of competitive markets to solve any problem of resource allocation.