Output is the total value of goods and services produced in a year. So if a brewer makes a million litres of beer in a year, and each litre is worth €10 then their Output that year is €10 million. If a teacher gives 1 hour of grinds per week at €50 per hour for 36 weeks of the year the teacher’s Output from grinds is €1,800 in the year.
1 hour x 36 weeks x €50 = €1,800
In most cases, Output is similar to the business accounting concept of turnover, with some differences as we will see later. Output is not the same as Gross Value Added: the brewer and the teacher have costs and overheads (Intermediate Consumption) that must be deducted from Output to arrive at the value added. However, sometimes the term 'net Output' is used to describe what national accounts call Gross Value Added.
In general, increased Output is a sign of a growing economy, while Ouput generally declines in a recession. But as Output increases, Intermediate Consumption is also likely to increase – and probably at a different rate than the increase in Output. It is even possible that an increase in Output may lead to a decrease in Gross Value Added. Because of the different concepts being captured by Output and Value Added, Output is a good way to compare economic activity across sectors or across time periods. But Gross Value Added is a more appropriate way to compare and examine economic growth over time. An increase in activity does not necessarily mean an increase in growth and vice versa.
Output is the value of what is produced, rather than what is sold. Sometimes companies will make more than they sell in a year, and they will add to their Stocks; they might also sell off some stock in addition to what they produced in the year. Regardless of stock movement, Output counts production not sales.
We mentioned above that Output and turnover are similar concepts, but they are not always the same thing. The most important cases where these are different are:
- Retail trade (shops) and wholesale trade in goods. The Output is the difference between what the goods are sold for and what they are bought for. The cost of the goods sold is not part of Intermediate Consumption or the Output.
- Output for the producer's own final use: if a construction company builds its own headquarters, or if a brewer drinks his own beer then the market value of the headquarters and the beer are added to total Output for the economy, even though no money has changed hands.
- Imputed Rent: If you own your own home we say you pay yourself rent and add this imputed rent to the Output of the economy, even though no money changes hands. The value of the imputed rent is estimated based on real rents of comparable rented dwellings. Imputed rent is a particular case of Output for the producer's own final use (Output of dwelling services by the home owner for the use of the home owner).
- Banking: Banks make most of their money by charging interest to their lenders at a higher rate than they pay to their depositors. The margin between these rates is their Output. See FISIM. The banks may also charge some explicit fees and commissions, and these are added to their Output too.
- Insurance and pension funding: The Output of these services is set as the difference between contributions paid by clients (insurance premiums and pension contributions) and benefits received by clients (insurance claims and pension payments). In the case of pension funds and life insurance companies, corrections are made for changes in actuarial reserves (the stock of money available to pay premium holders or pension fund members).
- Government mainly produces collective services. Since there are no market prices available, Government Output is calculated from production costs and is estimated as the total of Intermediate Consumption, Compensation of Employees, Consumption of Fixed Capital and the Net Taxes on Production paid by the Government itself.
Read next: Intermediate Consumption
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