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Definition: Production (Index)

Short-term statistics

2006 definition

It is the objective of the production index to measure changes in the volume of output at close and regular intervals, normally monthly. It provides a measure of the volume trend in value added over a given reference period (1).

The production index is a theoretical measure that must be approximated by practical measures.

Value added at basic prices (2) can be calculated from turnover (excluding VAT and other similar deductible taxes directly linked to turnover), plus capitalised production, plus other operating income plus or minus the changes in stocks, minus the purchases of goods and services, minus taxes on products which are linked to turnover but not deductible plus any subsidies on products received.

Income and expenditure classified as financial or extraordinary in company accounts is excluded from value added.

Hence, subsidies on products are included in value added at basic prices, whereas all taxes on products are excluded.

Value-added is calculated "gross" as value adjustments (such as depreciation) are not subtracted.

Note: indirect taxes can be separated into three groups.

(i) The first comprises VAT and other deductible taxes directly linked to turnover (which are excluded from turnover). These taxes are collected in stages by the enterprise and fully borne by the final purchaser.
(ii) The second group concerns all other taxes and duties on products which are either (1) linked to turnover and not deductible or (2) taxes on products not linked to turnover. Included here are taxes and duties on imports and taxes that become payable as a result of the production, export, sale, transfer, leasing or delivery of goods and services or as a result of their use for own consumption or own capital formation.
(iii) The third group concerns other taxes on production, which comprise all taxes that enterprises incur as a result of engaging in production, independently of the quantity or value of the goods and services produced or sold. They may be payable on the employment of labour, the ownership or use of land, buildings or other assets used in production.

The theoretical formula for an index of production (Q) is a Laspeyres-type volume index.

The data necessary for the compilation of such an index are, however, not available on a monthly basis. In practice, suitable proxy values for the continuation of the indices are:

- continuation with gross production values (deflated),
- continuation with volumes,
- continuation with turnover (deflated),
- continuation with labour input,
- continuation with raw material input,
- continuation with energy input.

Dependent on the approximation method used, the index of production should take account of:

- variations in type and quality of the commodities and of the input materials,
- changes in stocks of finished goods and work in progress on goods and services,
- changes in technical input-output relations (processing techniques),
- services related to the achievement of value added, such as the assembling of production units, mounting, installations, repairs, planning, engineering, creation of software.

Notes

(1) The common understanding of the term "production index" as an index of "development of value added" contradicts the definition of "production" in the framework of national accounts or structural business statistics, but nonetheless is the term traditionally used in this area of business statistics. The term "value added index" is never used in practice. As the index follows the development of production at constant prices, sometimes the term "production volume index" is used. The term production index is always used in this text as a quantity index, in other words at constant prices.
(2) Output and hence value added at basic prices is the valuation adopted in ESA95. The basic price excludes all taxes on products, but does not attempt to exclude other taxes on production as in the former concept of value added at factor cost. If value added at basic prices is not available, for instance from the Structural Business Statistics, gross value added at factor cost may be used as a proxy.
Source:
European Union, Commission Regulation (EC) No 1503/2006 of 28 September 2006 implementing and amending Council Regulation (EC) No 1165/98 concerning short-term statistics as regards definitions of variables, list of variables and frequency of data compilation
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