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Appendix B Methods for Deriving Bureau of Economic Analysis Measures of Output As part of the National Income and Product Accounts (NIPA) series, the Bureau of Economic Analysis (BEA) of the Department of Commerce publishes annual measures of gross product originating (GPO) by industry in current and constant dollars to supplement the measures of gross national product (GNP) for the U.S. economy as a whole. These data are useful for understanding the diversity of movement in output among the various come\ ponent industries of the economy. However, for a variety of reasons, prin- cipally data limitations, these measures do not have the same degree of accuracy as the overall measures of GNP. When requested, the Bureau of Labor Statistics (BLS), the federal gov- ernment agency that develops the government's measures of productivity, does make available the productivity measures that could be derived by relating these data on output to the corresponding data on labor input. Be- cause of the limitations in the data, however, the BLS does not publish these measures as part of its regular set of productivity indexes. In the framework of the national accounts, the relevant measure of output for purposes of gauging productivity is the constant-dollar GPO. To derive this measure the BEA uses three principal methods. One is termed double deflation, another extrapolation, and the third direct deflation. The method chosen for each service industry usually depends on the availability of adequate data. In the double-deflation method, constant-dollar GPO is derived as the difference between current-dollar gross or final output divided by an appro- priate output price index, and the current-dollar intermediate input (materi- als and purchased services) divided by an appropriate input price index. In 228

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APPENDIX B 229 the extrapolation method, constant-dollar GPO is derived by extrapolating the base-year current-dollar GPO from some related series such as constant- dollar gross (not net) output, employment, or the number of hours worked. In the direct-deflation method, constant-dollar GPO is derived by dividing each year's current-dollar GPO by either a gross output price index or an hourly earnings index. Generally, the double-deflation method is used whenever possible, since it is most consistent with the definition of GPO, namely, final output minus intermediate input. For the other methods to be appropriate approxima- tions, certain assumptions are made. In the extrapolation method, the as- sumption is that the change in constant-dollar gross output is the same as the change in constant-dollar input. In the direct-deflation method, the assumption is that the changes in the output price deflators and the input price deflators are the same. In recent years there have been substantial improvements in the NIPA data, and the number of industries for which double deflation is used has increased. Table B.1 shows the methods currently used to derive the con- stant-dollar GPO for the various service industries. As can be seen, double deflation is used for a substantial number of service industries. However, the quality of the double-deflation estimates varies consider- ably. Table B.2 lists the various measures of output prices and other data and the sources of data used to derive the constant-dollar gross output portion of GPO as measured by the double-deflation method. These data come from both government and private sources, and the definitions in many cases differ considerably from those underlying the current-dollar estimates. Although double-deflated gross output is generally calculated by divid- ing the current-dollar output by an output price index, as shown in Table B.2, in some cases, part of the constant-dollar gross output is deflated and part of it is based on direct extrapolation of base-year quantitative output measures. This is the case in local and interurban passenger transportation, where gross output for taxicabs is based on revenues deflated by the con- sumer price index for taxi fares; but gross output for intercity buses is based on base-year current-dollar revenues adjusted by changes in total passenger- miles; gross output for other local transit services is based on base-year revenues adjusted by changes in the number of passenger trips; and gross output for school buses is based on base-year revenues adjusted by changes in employment. Thus, measures for local and interurban passenger trans- portation by definition cannot take into account changes in productivity that may have taken place, and in some cases, the output price indexes used to deflate output are not price indexes but cost indexes. As such, deflated output measures cannot take into account changes in productivity. In developing measures of constant-dollar input to subtract from mea- sures of constant-dollar gross output, changes in the composition of the

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230 INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY TABLE B.1 Methods for Estimating Constant- Dollar GPO for Various Service Industries Industry Transportation Railroads Local passenger transit Trucking and warehousing Water transportation Air transportation Pipelines Transportation services Communications Telephone and telegraph Radio and television broadcasting Electric, gas, and sanitary services Retail trade Wholesale trade finance, insurance, and real estate Banking Credit agencies Security and commodity brokers Insurance carriers Business and personal services Hotels and other lodging places Personal services Business services Auto repair services and garages Miscellaneous repair services Motion pictures Amusements and recreation Health services Legal services Educational services Social services Miscellaneous professional services Private household services Government General government Government enterprises Method Double deflation Double deflation Double deflation Double deflation Double deflation Double deflation Extrapolation Double deflation Double deflation Double deflation Double deflation Double deflation Extrapolation Extrapolation Double deflation Double deflation Double deflation Double deflation Extrapolation Double deflation Double deflation Direct deflation Double deflation Double deflation Double deflation Double deflation Direct deflation Direct deflation Direct deflation Extrapolation Extrapolation SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis. 1991. Survey of Current Business, January.

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APPENDIX B 23 TABLE B.2 Sources of Data for Output Price or Other Measures Used in Deriving Double Deflation GPO Measures for Various Service Industries Industry Price or Other Measurea Transportation Railroads Local passenger transit Taxicabs Intercity buses School buses Local transit Trucking and warehousing Water transportation Air transportation Pipelines Communications Telephone and telegraph Radio and television broadcasting Electric, gas, and sanitary services Electric utilities Gas utilities Sanitary services Retail trade Eating and drinking places Other Wholesale trade Merchant wholesalers Manufacturers' sales offices Agents and brokers Finance, insurance, and real estate Security brokers and services Commissions Mutual funds Underwriting Trading gains Commodity brokers Insurance brokers and agencies Real estate services Business and Personal Services Hotels, rooming houses Laundries and dry cleaners Shoe repair shops IPD from revenue ton-miles and passenger-miles from AMTRAK data CPI for taxi fares Passenger-miles from ABA Employment from BLS Passenger trips from APTA Ton-miles from DOT Index of ton-miles for deep sea from BEA, ton-miles for other water transportation from DOD, and ton- miles of marine cargo from DOD Separate revenue passenger-miles for domestic and international travel and freight ton-miles by DOT Ton-miles from AOP PPIs for local telephone and toll telephone services and direct advertising Index based on cost per 1000-member audience Kilowatt-hours from EEI BTUs of gas for resale and BTUs of gas utility sales from AGA CPI for water and sewage maintenance CPIs Base-year margin times sales deflated by CPIs 1982 gross margin rate-weighted sales deflated by PPIs For equipment rental, IPD from BEA capital stock data; for rest, PPIs PPIs Number of public securities orders from SEC and NYSE IPD for securities commissions New securities registrations from SEC IPD for GNP IPD for GNP Insurance carrier deflators weighted by commissions from A.M. Best Co. IPD for PCE Laventhol & Horwath room-rate index CPIs from BLS CPIs from BLS Continues

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232 TABLE B.2 Continued INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY Industry Photographic studios Beauty shops Barber shops Funeral services Automotive rental Automotive repair services Electric repair shops Watch and jewelry repair Furniture repair Miscellaneous repair shops Amusement and recreational services Dance studios and schools CPIs from BLS Theatrical producers and entertainers CPIs from BLS Bowling alleys and pool halls CPIs from BLS Commercial sports CPIs from BLS Health services Physicians and dentists CPIs from BLS Nursing and personal care facilities HCFA input price index Hospitals Composite deflator of hospital room CPI and HCFA Price or Other Measurea CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS Average earnings from BLS Medical and dental laboratories Outpatient care facilities Health and allied services, not otherwise classified Legal services Education services Private schools and libraries Private education housing and meals input prices CPIs from BLS CPIs from BLS CPIs from BLS CPIs from BLS PCE deflators PCE deflators aAbbreviations: ABA American Bus Association AGA American Gas Association AOP Association of Oil Pipelines APTA American Public Transit Association BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics BTU British thermal unit CPI Consumer price index DOD U.S. Department of Defense DOT U.S. Department of Transportation Edison Electric Institute Federal Communications Commission Gross national product EEI FCC GNP HCFA Health Care Financing Administration IPD M-E NYSE PCE PPI SEC Implicit price deflator McCann-Erickson Co. New York Stock Exchange Personal consumption expenditures Producer price index Securities Exchange Commission SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.

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APPENDIX B 233 TABLE B.3 Sources of Data for GPO Series Based on Extrapolation and Direct Deflation Industry Method Source of Data Transportation services Extrapolation BEA employment Banking Extrapolation BEA employment Credit agencies Extrapolation BEA employment Real estate Direct deflation Trade source rent index for office buildings Holding companies Extrapolation BEA employment Business services Extrapolation BLS employment weighted by Census Bureau receipts Motion pictures Direct deflation BLS prices and earnings Social services Direct deflation BEA average wages and salaries Miscellaneous Direct deflation BEA average wages and salaries professional Private households Direct deflation BLS prices Government General Extrapolation BEA hours worked weighted by measures of experience Government enterprises Extrapolation BEA and Census Bureau employment and BLS output indexes SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis. 1991. Survey of Current Business, January. material and other input have to be taken into account in deriving the appro- priate input price indexes. To do this an input-output table, which measures in some detail the purchases from one industry by another, is used. The last fully developed input-output table is for 1977. To update this information for the current measures, changes in the composition were estimated by assuming that both constant-dollar gross output and input have changed at the same rate since 1977. Table B.3 provides information on the sources of data used to develop GPO measures in those industries for which the double-deflation method is not used. In many of these cases, and particularly for financial institutions, extrapolation was used, and the base-year revenues were adjusted by changes in employment or wages and salaries. In such cases, measures of output do not reflect changes in productivity that have taken place. NOTE 1 For a detailed description of the estimating methods used for the measures of constant- dollar GPO, see De Leeuw, Frank, Michael Mohr, and Robert P. Parker, 1991, "Gross Product by Industry, 1977-88: A Progress Report on Improving the Estimates," Survey of Current Business, January, pp. 23-37.