Understanding IMPLAN: Measures of GDP & Value Added

If you review the results of an IMPLAN economic impact study, you will not find GDP listed in the results. Naturally the question arises, "What is the GDP?" Within IMPLAN results, that value is actually demonstrated in multiple ways. 

Gross Domestic Product (GDP) is defined as the total market value of all final goods and services produced within a region in a given period of time (usually a quarter or year). GDP is the sum of value added at every stage of production (the intermediate stages) for all final goods and services produced within a region in a given period of time. In other words, GDP is the wealth created by industry activity.

How is GDP Measured?

GDP can be measured multiple ways. Conceptually, all measurement approaches are tracking the exact same thing, though some differences can arise based on data sources, timing, and mathematical techniques used.

In IMPLAN, GDP can be viewed from the National Income or National Expenditure perspective. The National Income Approach measures GDP as the sum of income generated by production, which is equivalent to total Value Added in IMPLAN. The National Expenditure Approach measures GDP as the sum of expenditures by final users, which is equivalent to total Final Demand in IMPLAN.

National Income Approach & Value Added

The National Income approach sums the incomes generated by production. This includes the following:

• Compensation of employees (wages, salaries, benefits, payroll taxes, etc.)
• Proprietor income (the income earned by sole proprietors and unincorporated businesses)
• Rental income (income from property ownership)
• Corporate profits
• Net interest (paid by business)
• Taxes on production and imports (sales tax, property tax, custom duties, and other taxes and fees) less government subsidies (TOPI)
• Net business transfer payments (net payments by businesses to persons, government, and the rest of the world, for which no current services are performed)
• Surplus of government enterprises

Incomes generated by production are referred to as Value Added at each stage of production, where Value Added is defined as total Output (also known as value of production) less the value of Intermediate Inputs into the production process. This can be calculated either by subtracting input costs from the final Output of each Industry or by summing each Industry’s payments made the components of Value Added (VA): Labor Income (LI), Other Property Income (OPI), and Taxes on Production and Imports (TOPI). So, if you’d like to report the contribution to GDP estimated by your IMPLAN Analysis, simply report total Value Added from your Results.

National Expenditures & Final Demand

The National Expenditure approach adds up the value of purchases made by final users, called Final Demand. Final Demand expenditures consist of:

• Personal consumption expenditures: spending by households on non-fixed-capital items
• General government final consumption: spending by government institutions on non-fixed-capital items, excluding transfer payments
• Gross domestic fixed capital formation: the value of houses and other durables formed during the year plus increases in stocks and works in progress (i.e., net additions to inventory)
• Net Exports: exports represent items that are produced in the region and sold to purchasers outside the region; imports are subtracted from this value to arrive at a net value.
• From this sum, institutional sales must be subtracted since they are accounted for elsewhere in GDP. For example, a government institution might provide hospital services to a household. Government then has extra income and extra spending (e.g., buying more stethoscopes). The sale/purchase of hospital services cannot increase both personal consumption expenditures and government final consumption.

How are Value Added & Final Demand Related?

IMPLAN uses a balanced Social Accounting Matrix (SAM) to model impacts. Within a SAM model, final demand is equal to value added in a given region. The sum of Value Added for every Industry in an economy produces the total GDP for the Region. Summing Value Added follows the National Income Approach for calculating GDP. This is explained through a series of equations, but the basic overview is as follows. 

The value of any industry production is identified as Output. You can define the value of an Industry's production as Output or Outlay. In a balance input-output matrix, these values are equivalent for each Industry. Output measures value of production from the perspective of revenue/potential revenue generated from production, while Outlay measures value of production from the perspective of of production costs. Output includes Final Demand plus Intermediate Output, which is production consumed by other Industries. Outlay includes Value Added plus Intermediate Inputs, which are the goods and services the Industry consumes. Intermediate Inputs can be purchased not only from Industries but also from Institutions and Imports. Accounting for these non-industrial Intermediate Inputs purchases produces a Total Regional Final Demand equivalent to the Total Regional Value Added.

The Takeaway

GDP is a frequently used means of quantifying the size and value of an economy. While this exact terminology is not found in IMPLAN, the value that it represents is found in even greater granularity within Value Added and Final Demand. Digging into the underlying data within your region allows you to identify these existing values. Understanding what values in IMPLAN represent the most commonly identified value outside of it (GDP), ensures you can explain your results with clarity and confidence.

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