From the March 1998 SURVEY OF CURRENT
BUSINESSNote.—Brian C. Moyer, John Sporing, and Robert A. Sylvester assisted in the preparation of the estimates and the tables.
This articlepresents annual estimates of prices and unit costs by industry group for 1977–96. The price measures of gross product originating by industry (GPO) provide insight into the sources of change in the aggregate price level by industry. For example, the relative growth rates of prices among industries can be compared, and their contributions to the aggregate (economy-wide) rate of price change can be computed. The unit-cost measures by industry can be used to identify the sources of GPO price change among the cost components of GPO—compensation of employees, indirect business taxes, and property-type income.
These measures of GPO prices and unit costs have not previously been included in the articles on gross product by industry in the SURVEY OF CURRENT BUSINESS, and providing them marks another step in continuing efforts by the Bureau of Economic Analysis (BEA) to make the industry accounts data more useful. Until last year, these articles dealt almost exclusively with current-dollar and real GPO. In November 1997, BEA presented and discussed annual estimates of gross output and intermediate inputs by industry for the first time./1/
The first part of this article discusses the measurement and interpretation of GPO prices, including the relationship of GPO prices to gross output prices and intermediate inputs prices. The second part develops the concept of unit costs in the context of the GPO estimates, and it describes how these measures can be used to analyze changes in industry-cost structure and the return to capital. The third part discusses trends in GPO prices and unit costs by industry group for 1992–96. Tables 4 and 5 at the end of the article present industry price and unit-cost measures by industry group for 1977–96.
The GPO price index for an industry or industry group represents the implicit price for gross output less intermediate inputs. For most industries and industry groups, the GPO price measures are chain-type Fisher price indexes computed from data on gross output and intermediate inputs. For some industries, the GPO price measures are implicit price deflators because data for gross output prices are not available.
GPO can be defined as either an output measure (gross output less intermediate inputs) or as an input measure (costs incurred and incomes earned); see the box "Gross Product Originating." The measurement of the GPO price index is based on GPO's definition as an output measure. As an output measure, GPO is the difference between the industry's gross output and its intermediate inputs. Real GPO and the GPO price index can be derived from these separate measures using the double-deflation method. In the double-deflation method, estimates of gross output and of intermediate inputs are used in the calculation of real GPO./2/ As an input measure, an industry's GPO represents the value-added inputs (labor services and capital services) that are combined with the intermediate inputs (energy, materials, and purchased services) to produce the gross output of the industry. The GPO price index thus represents the implicit price paid by the industry for its value-added inputs. Changes in the GPO price index for the industries for which the double-deflation method is used primarily reflect (1) changes in the prices and quantities of the gross output of the industry, (2) changes in the prices and quantities of the intermediate inputs used by the industry, and (3) changes in the ratio of intermediate inputs to gross output.
Gross output prices represent the prices received by an industry for its products. The chain-type price index for gross output is computed from detailed data for the industry on product sales, shipments, and prices. Data on current-dollar product sales and shipments by industry are primarily from annual surveys by the Bureau of the Census. Detailed price indexes for manufacturing and wholesale trade are primarily producer price indexes (PPI's) from the Bureau of Labor Statistics (BLS). Price indexes for farm products are from the U.S. Department of Agriculture, and price indexes for mineral products are mostly from the U.S. Department of Interior and the U.S. Department of Energy. Price indexes for selected products—including computers, semiconductors, digital telephone switching equipment, and selected equipment purchased by the U.S. Department of Defense—are from the national income and product accounts (NIPA's). Price indexes for retail trade and for services are primarily BLS consumer price indexes (CPI's), or they are derived from the NIPA's./3/
Intermediate inputs prices represent the prices paid by an industry for its inputs of raw materials, semifinished goods, energy, and services purchased from other industries. The chain-type price index for intermediate inputs is computed from detailed data on industry product purchases and prices. Data on the commodity (product) composition of current-dollar intermediate inputs by industry are obtained primarily from BEA's input-output accounts./4/ Detailed price indexes for inputs of manufactured goods are from BLS: Primarily PPI's for domestic goods and international price indexes for imports. These indexes are supplemented by selected price indexes from the NIPA's. Detailed price indexes for inputs of services are primarily CPI's, or gross output implicit price deflators./5/
An industry's input-output (I-O) ratio is computed as its intermediate inputs divided by its gross output. For an industry with one product, changes in the I-O ratio from year to year reflect shifts in the mix between intermediate inputs and value-added inputs (labor services and capital services). Such shifts may be viewed as changes in production technology that result from changes in the optimal input mix. Examples include economies of scale that result from changes in the rate of output and the contracting out of services that were once performed in-house by employees. At the GPO industry level, which approximates the two-digit Standard Industrial Classification (SIC), changes in the I-O ratio may also reflect changes in the relative size of the detailed industries that the GPO industry comprises.
The GPO price index can be viewed as a weighted average of gross output prices less intermediate inputs prices; thus, changes in the I-O ratio affect the GPO price index by changing the relative weights associated with these prices. Normally, this effect is small in comparison with the effects of changes in gross output prices or of changes in intermediate inputs prices./6/
For the NIPA's, gross domestic product (GDP) is measured as the sum of final expenditures. GDP can also be measured as the sum of industry value added. In concept, the GDP price and quantity indexes computed from NIPA final expenditures are consistent with those computed from industry value added because both approaches exclude intermediate inputs. Consistency is maintained between the two approaches by the use of common source data for prices whenever possible. For example, the price indexes that are used for the producers' durable equipment component of NIPA final expenditures are also used for the gross output of durable goods manufacturing industries.
In practice, the results of the two approaches differ because of the lack of data for gross output prices for certain private services-producing industries and because of the lack of annual data for the commodity composition of intermediate inputs by industry. In addition, the two approaches differ in the treatment of trade margins and transport costs. In the NIPA's, final expenditures are valued in purchasers' prices which include the wholesale trade and retail trade margins and transport costs incurred as goods move through the distribution system from producers (or importers) to final users. In the industry approach, value added is valued in producers' prices. Price measures associated with trade margins and transport costs are classified in the wholesale trade, retail trade, and transportation industries./7/
As a result, price measures for specific GPO industries are not necessarily comparable to price measures for related NIPA expenditure components. For example, the NIPA chain-type price index for all durable goods products may differ from the GPO price index for durable goods manufacturing. GDP prices by type of expenditure reflect the prices of goods and services purchased for final use, whether domestically produced or imported; GPO prices by industry reflect the prices of the industry's gross output net of intermediate inputs. Gross output prices from the industry approach are more comparable to NIPA final expenditure prices, but gross output prices reflect sales by an industry to all of its customers, whereas NIPA price measures reflect sales to final purchasers, including sales of imports.
GPO unit costs show the contribution of the cost components of GPO to the GPO price index. GPO measures of unit cost are computed by dividing current-dollar GPO and its components by real (chained-dollar) GPO./8/ The resulting quotients provide the GPO chain-type price index and the part of the price index associated with each component. If the unit cost for a component grows faster than the GPO price index, then the relative importance of that component in the cost structure has increased.
As an input measure, current-dollar GPO is measured as the sum of costs incurred and incomes earned in production; it is equal to gross domestic income, the components of which can be grouped into categories that approximate the shares of labor and capital. The labor share of production can be approximated using compensation of employees, which consists of wage and salary accruals, employer contributions for social insurance, and other labor income (primarily employer contributions to private pension plans and health insurance). The capital share of production (property-type income) can be approximated using the remaining components of GPO except indirect business tax and nontax liability, which is excluded because it can be viewed as a part of the pretax return to capital that accrues to government rather than to business./9/
GPO unit-cost measures for compensation of employees (unit labor costs) include wage and salary accruals, employer contributions for social insurance, and other labor income. Unit-cost measures for property-type income (income per unit of gross product) include both debt-financed and equity-financed capital, including capital consumption allowances. GPO unit-cost measures do not provide information on the separate contributions of labor and capital services or of labor and capital prices to the change in GPO prices, because GPO unit-cost measures attribute changes in GPO unit prices to the components of GPO in proportion to each component's share of current-dollar GPO. Thus, year-to-year changes in component shares of current-dollar GPO will result in changes in the contributions of the components to GPO prices, even if the prices do not change.
This part of the article presents estimates of changes in GPO prices and unit costs by industry group for 1992–96. The first section discusses differences in GPO price changes among industries, including the effects of differences in changes in gross output prices and in intermediate inputs prices. The second section discusses the contributions of GPO components to changes in the GPO price index.
The GDP chain-type price index increased at an average annual rate of 2.5 percent in 1992–96; private industries increased 2.2 percent, and government increased 3.3 percent (table 1). Among the private industry groups, the GPO price index for durable goods manufacturing declined 1.2 percent. The GPO price indexes for all the other industry groups increased; the increases ranged from 0.4 percent for electric, gas, and sanitary services to 3.8 percent for agriculture, forestry, and fishing. Except for electric, gas, and sanitary services, the industry groups with GPO price changes that were less than the GDP price change (2.5 percent) were those associated with the production and distribution of manufactured goods (manufacturing, transportation, wholesale trade, and retail trade).
The GPO price changes for private services-producing industries (2.6 percent) exceeded the GDP price change, and the GPO price change for private goods-producing industries (1.2 percent) was less than the GDP price change. The slower growth in the GPO price index for private goods-producing industries, compared with the growth for private services-producing industries, continues a trend that started in 1982 and continued each year except for 1989 (chart 1). In 1989, the GPO price index for goods-producing industries was boosted by a relatively large increase in gross output prices for oil and gas extraction. Since 1977, GPO prices for private services-producing industries have increased faster than GDP prices; since 1992, a deceleration in GPO prices for private services-producing industries has contributed to a deceleration in GDP prices.
As mentioned earlier, the GPO price index can be viewed as a weighted average of gross output prices and intermediate inputs prices for industries for which the double-deflation method is used. Changes in GPO prices are positively correlated with changes in gross output prices and negatively correlated with changes in intermediate inputs prices. GPO prices increase faster than gross output prices when gross output prices increase faster than intermediate inputs prices; conversely, GPO prices increase slower than gross output prices when gross output prices increase slower than intermediate inputs prices. In 1992–96, GPO prices increased faster than gross output prices in agriculture, forestry, and fishing, in construction, and in communications. GPO prices increased slower than gross output prices in all other industry groups.
In 1996, the GPO price index for private industries increased 2.4 percent, slightly more than the 2.3-percent increase in the GDP price index. The GPO price index for manufacturing declined for the second consecutive year, as an increase in nondurable goods was more than offset by a decline in durable goods. Three of the four other industry groups for which the GPO price index either increased less than the GDP price index or decreased are at least partly involved with the distribution of goods to consumers: Transportation (0.6 percent), electric, gas, and sanitary services (0.3 percent), wholesale trade (-1.1 percent), and retail trade (0.5 percent). Among the industry groups for which the GPO price index increased more than the GDP price index, the increases were large in agriculture, forestry, and fishing (16.6 percent) and mining (21.0 percent). The increases were smaller in finance, insurance, and real estate (4.1 percent) and services (3.4 percent). Government increased 3.7 percent.
Contributions to change.—GPO prices can be used to assess an industry's contribution to the change in GDP prices. Because real GDP can be viewed as the combined result of aggregate inputs of labor services and capital services, the GDP price index can be viewed as the price index for aggregate inputs of labor services and capital services. Because GPO as an input measure represents the industry's value-added inputs of labor services and capital services, the GPO price index can be used to compute contributions to GDP price change.
The extent to which industries contribute to the change in the GDP price index depends on the industry's size relative to GDP as well as on the growth rates in GPO prices./10/ In 1992–96, the largest contributors to the change in the GDP price index were services and finance, insurance, and real estate (0.7 percentage point each) (table 2). Government contributed 0.5 percentage points./11/ In manufacturing, prices were unchanged, so the contribution of manufacturing prices to GDP price change was 0.0 percentage point; durable goods manufacturing contributed -0.1 percentage point. In 1995 and 1996, the contribution of durable goods manufacturing was -0.3 percentage point. Finance, insurance, and real estate made the largest positive contribution in each of those years (0.8 percentage point).
Gross output prices.—Gross output prices, which are the prices received by producers, can be viewed as a weighted average of the prices for intermediate inputs and for value-added inputs (labor services and capital services). In manufacturing, gross output prices increased only 1.1 percent in 1992–96. Gross output prices in durable goods manufacturing were unchanged, while gross output prices in nondurable goods manufacturing increased 2.3 percent. The slow growth in the prices of manufactured products, especially durable goods, together with the deceleration of prices for private services-producing industries, have contributed substantially to the low rate of GDP price change since 1992.
Within durable goods manufacturing, gross output prices in 1992–96 declined in electronic and other electric equipment (5.7 percent) and industrial machinery and equipment (2.8 percent). The declines were primarily for products deflated with BEA's quality-adjusted price indexes: Computers, semiconductors, and digital telephone switching equipment. Gross output price increases in the remaining industries ranged from 1.0 percent for instruments and related products to 4.4 percent for lumber and wood products.
Because the GPO price index measures the change in the cost of the value-added inputs of labor services and capital services, it can be used in combination with the components of GPO to assess their contributions to the change in total value-added costs. When a component of GPO unit costs grows faster than the GPO price index, then that component's contribution to the growth in unit costs has increased.
The cost per unit of real GPO for private industries increased 2.2 percent in 1992–96 (table 3). Compensation of employees per unit of GPO (unit labor costs) increased 1.7 percent. Unit costs for indirect business tax and nontax liability increased 0.8 percent, and unit costs for property-type income increased 3.2 percent. The larger increase in the unit costs for property-type income indicates that capital costs became a larger part of GPO unit costs during the period or that the return to capital per unit of gross product increased.
In 1992–96, unit labor costs declined in two private industry groups: Mining and durable goods manufacturing. Unit labor costs increased in all other private industry groups except wholesale trade, which was unchanged. In agriculture, forestry, and fishing and in services, the increases in unit labor costs were larger than the increases in total unit costs.
As with GPO prices, declines and relatively small increases in unit labor costs were in industry groups involved with the production and distribution of goods. In manufacturing, unit labor costs declined at an average annual rate of 1.7 percent in 1992–96, compared with a 0.2-percent increase in total unit costs. Unit labor costs in durable goods manufacturing declined 3.5 percent, while total unit costs declined 1.2 percent. In wholesale trade, in retail trade, and in transportation and public utilities, the increases in unit labor costs were substantially smaller than the increases in total unit costs.
In 1996, unit labor costs increased 1.9 percent in all private industries, less than the increase in total unit costs (2.4 percent). Unit labor costs increased in all private industry groups except durable goods manufacturing and wholesale trade. Durable goods manufacturing fell 3.9 percent; this fall marked the fourth consecutive year that unit labor costs fell in this industry group. Unit labor costs in manufacturing fell 1.1 percent, the third consecutive annual decline, despite an increase in nondurable goods manufacturing.
In 1996, the increases in unit labor costs exceeded the increase in total unit costs in only three industries: Construction; finance, insurance, and real estate; and services. In construction, unit labor costs rose faster than total unit costs for the first time since 1992; unit property-type income increased only 0.6 percent. In finance, insurance, and real estate, unit labor costs increased considerably more than in the 2 preceding years. In services, the increase in unit labor costs was somewhat less than the increase in 1995.
Footnotes:
1. See Sherlene K.S. Lum and Robert E. Yuskavage, "Gross Product by Industry, 1947–96," SURVEY OF CURRENT BUSINESS 77 (November 1997): 20–34.
2. For more information on the double-deflation method, see Robert E. Yuskavage, "Improved Estimates of Gross Product by Industry, 1959–94," SURVEY 76 (August 1996): 142–145.
3. For a list of the sources for current-dollar product detail and price indexes for gross output, see Yuskavage, "Improved Estimates," table 8.
4. Ann M. Lawson, "Benchmark Input-Output Accounts for the U.S. Economy, 1992: Make, Use, and Supplementary Tables," SURVEY 77 (November 1997): 36–82.
5. For a list of the sources for the price indexes for intermediate inputs, see Yuskavage, "Improved Estimates," table 9.
6. The direction and magnitude of the effect on the GPO price index depends on interactions among the gross output price index, the intermediate inputs price index, and the input-output ratio.
7. In the GPO estimates, the gross output of the wholesale trade and retail trade industries primarily consists of margin, which is defined as sales minus the cost of goods sold. Because price indexes for margin are not available, sales by detailed type of business are deflated, and the margin rate is assumed to be constant. Such assumptions are not required for the deflation of NIPA final expenditures.
8. Current-dollar cost per unit of real GPO equals the GPO price index divided by 100.
9. For purposes of this analysis, property-type income is defined as the sum of corporate profits, proprietors' income, rental income of persons, net interest, capital consumption allowances, business transfer payments, and the current surplus of government enterprises less subsidies. However, a substantial portion of proprietors' income represents the labor share of production.
10. For a description of the calculation of these contributions, see "Note on Computing Alternative Chained Dollar Indexes and Contributions to Growth" in J. Steven Landefeld and Robert P. Parker, "BEA's Chain Indexes, Time Series, and Measures of Long-Term Economic Growth," SURVEY 77 (May 1997): 63. The procedure described in the note was modified to replace the chain-type quantity index with the chain-type price index.
11. The GPO price index for government is an implicit price deflator computed as current-dollar GPO divided by real (chained-dollar) GPO. For general government, which comprises most of government, current-dollar GPO consists of compensation of employees and consumption of fixed capital. Real consumption of fixed capital is estimated by direct deflation using price indexes from the NIPA's. Real compensation of employees is estimated by extrapolating base-year current-dollar values by an indicator of labor input.
