1. A Global Integrated Industry-Level Production Account
Jon D. Samuels and Erich H. Strassner
Fifth World KLEMS Conference
June 4-5, 2018
Cambridge, MA

2. Motivation Industry-level production account for the world economy
Economic questions:
Contributions of individual countries, industries, and factors of production, to world economic growth
Capture global linkages in production
Competitiveness and productivity level comparisons
Approach: Extend country-level production account to reflect international trade and price level differences
This presentation:
KLEMS and Global Value Chain (GVC) Accounting
Background on country-level production accounts
BEA experience on constructing an integrated aggregate-industry account
Components of a world production account
The fundamental motivation for Chapter 4 is to produce an industry level production account for the world economy.
The account that we have outlined in this chapter allows analysts to address important questions that are not possible to examine without such an account: For example the contributions of individual countries, industries and factors or production to world economic growth. The account captures global linkages through trade flows that are important when analyzing production and provides measures of industry competitiveness across countries, and productivity level comparisons.
The basic approach that the chapter uses to formulate the world account is to extend the framework from a set of production accounts at the country-level to reflect international trade.
Thus, in this presentation I will devote some time to introducing a country-level production account and talking through BEA’s experience on producing an integrated aggregate-industry account. The country-level accounts are the building blocks for the world accounts, therefore I think its helpful to share how BEA has built its account.
From this, I will move on to discussing how the accounts need to be expanded and integrated to form the world production account that is the motivation for the chapter.

3. KLEMS and GVC Accounting
GVCs: origins of economic value
Production is fragmented across countries, but economic accounting statistics are compiled nationally
United Nations “Handbook on Accounting for Global Value Chains”
Conceptual framework for compiling GVC statistics
Ground-up approach, using firm-level data on specific industries and final products of an MNE: “Extended” Supply- Use Tables (SUTs) or GVC-specific satellite accounts AND
Extended global SUTs, OECD-WTO TIVA accounts, or the World Input-Output Tables

4. KLEMS and GVC Accounting
Inherently linked by overlapping conceptual issues and data requirements
Measuring global production, attributing sources of value, underlying SUTs/IOTs
And, are used to analyze complementary questions
Analytical purposes of GVC: origins of economic value
Integrated KLEMS is used to analyze growth and competition:
Country-industry level contributions to world economic growth
Analyze international competition: industry price level indexes
Industry-country multifactor productivity level comparisons
Essential for economic policy and analysis of globalization

5. Industry-level Production Account
Permits a bottom-up analysis of the sources of economic growth within a country, including the contributions of capital (K), labor (L), and intermediates (EMS)
Output side of the account includes nominal and real industry output and value added
Aggregating over industry value added produces real GDP growth from the industry side
The input side of the account includes nominal and real estimates of intermediate and capital and labor inputs used by industry
MFP is the ratio of the quantity of output to the quantity of input
SNA (2008) discusses deflators for capital and labor services are covered in chapters 19 and 20. Thus, all of the pieces to construct a country-level production account are included in the SNA 2008
I’ll start with some basic information on the industry level production account. One purpose of in constructing such an account is that it permits a bottom up analysis on the sources of economic growth within a country including the contributions of capital labor and intermediate inputs, the so called KLEMS measures. With such an account we can differentiate the contributions of the IT industry for example, from the Construction sector to both GDP and TFP growth.
Some basic details of the account are:
The output side of the account includes nominal and real industry output and value added. Aggregating over industry value added produces real GDP growth from the industry side.
The input side of the account includes nominal and real estimates of intermediate and capital and labor inputs used by industry and TFP is the ratio of the quantity of output to the quantity of input.
It is worth noting that deflators required to produce the quantity indexes of capital and labor are covered in SNA (2008) in chapters 19 and 20. Thus, all of the pieces to construct a country-level production account are included in the SNA 2008 manual.

6. Growth Accounting Requires an industry-level production account
Industry-level outputs and inputs in current and constant prices
Symmetric treatment of outputs, intermediate inputs, and primary inputs
Consistent with aggregate GDP constructed within SUT Framework: In United States, BEA-BLS collaboration
Gross output, intermediate input, value added: BEA
Capital input: BLS, based on BEA Fixed Assets
Labor input: Hours from BLS, Composition from BEA
∆𝑀𝐹𝑃=∆𝑙𝑛𝑄− 𝑣 𝐾 ∆𝑙𝑛𝐾− 𝑣 𝐿 ∆𝑙𝑛𝐿− 𝑣 𝐸 ∆𝑙𝑛𝐸− 𝑣 𝑀 ∆𝑙𝑛𝑀− 𝑣 𝑆 ∆𝑙𝑛𝑆

7. Sources of U.S. Economic Growth, 1987-2016
Average Annual Percentage Point Contribution
To give you a sense of the usefulness of this account, this figure presents the sources of US economic growth over the period using the production account. The height gives aggregate GDP growth and the colors the different sources. Over the period as a whole in the US, capital accounted for the preponderance of growth, labor second and TFP third.
By taking out the Recession period we can compare how the end of the previous business cycle compared to the ongoing recovery. We can see the productivity slowdown, but we can also see that the deceleration in capital services was the major driver in terms of sources of growth.
Source: BEA-BLS Integrated Industry-level production account

8. Industry Capital Contributions to Economic Growth
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This slide provides a bottom up accounting of the slowdown of the contribution of capital services. The figure plots the contribution in capital services in the period less the contribution in the period for some of the largest contributors. We can see clearly the contribution of the slowdown in Real estate investment, but also the investment slowdown in trade and the banking industries.
You may be interested in knowing that the capital contribution of all industries did not decelerate over this period, so there is industry heterogeneity that the account is important for capturing. For example, the contributions of Mining, Oil and gas, and Petroleum refining all increased in the later period compared to the earlier.
Average annual percentage point

9. A Global Integrated Industry-Level Production Account
The World and EU KLEMS initiatives provide proof of concept for implementing country-level accounts
Consortium of researchers and economic statisticians
Data for about 40 countries
Common classification system for industries, outputs, and inputs
Based on official data
Next steps: Integrating the country-level data to account for world trade
Moving from the U.S. experience with production account to the world economy, the EU and World KLEMS initiatives provide a proof of concept for implementing country-level accounts for the world economy.
This includes KLEMS data for about 40 countries built by a consortium of researchers are economic statisticians. I mention this because this approach has been a very successful approach to making progress in economic statistics to address ongoing challenges. Other examples of using this collaboration model to make progress include work ongoing work to provide extended TiVA statistics, such as work that BEA is doing with Mexico and Canada to produce a reconciled set of statistics to analyze value chains.
It worth emphasizing that the objective of these initiatives is to produce data on a common classification scheme for industries outputs and inputs. This permits a straight forward mechanism to compare and analyze the data.
Its also important to note that these accounts are based on and tied to official data so that the estimates are comparable to official statistics.
Starting with the country-level KLEMS accounts, the next step towards a world production account, conceptually is integrate information on world trade. This is necessary, in part, to do price comparisons, but also to capture global linkages in production.

10. World Production Account Input-output table
From Nomura and Miyagawa, 2015
Based on Japan-US Input-output Table produced by METI
The objective in the chapter is to move from a country-level account to a world account. The building block for this is expanding the domestic IO table to an international table that reflects world trade. This is important for comparisons of production structures across countries in a consistent way.
This international IO table is taken from Nomura and Miyagawa 2015 and its shows world trade between the two countries (Japan and the US) and the rest of the world, labeled exogenous countries here. Their implementation is based on work done METI Ministry of Economy, Trade and Industry, Japan which has extensive experience in compiling international input output tables (The reason for mentioning this is that it may be useful in interacting with METI to discuss practical experience in such exercises).
It may be hard to read this IO table, but it includes information on outputs and inputs by country and the trade flows between countries in current and constant prices. One important component of the Nomura and Miyagawa approach is to use the input output structure and accounting identities to convert PPPs for final demand to PPP for industry output and intermediate input. This allows for the construction of the table in comparable units.
Furthermore, there is some production, like semiconductors that is not a component of final demand, emphasizing the importance of PPPs at the industry level.

11. Price Competitiveness
The world production account formulated with the world input output table yields measures of price competitiveness at the industry level that are consistent with GDP accounting. In comparison to price competitiveness measures based on final demand, these measures are based on industry production technology. For example, a final demand based measure of the price of fish reflects imported fish, while the industry price is the production price of fish.
To talk you through this figure, aggregate GDP prices were 13 percent higher in Japan than in the US in 2005 and this figure shows the industry production price contributions to this price gap. For example, Wholesale and Retail prices contributed about 6 percentage points , ie margin prices were significantly higher in Japan compared to the US.
On the other hand, prices for Motor Vehicle production and Medical Care services were significantly lower in Japan. These figures are relevant for policy makers that are concerned about understanding industrial competitiveness and assessing different economic policies.
Source: Jorgenson, Nomura, Samuels (2016)

12. World Production Account MFP Level Comparisons
Requires outputs and inputs in common units
PPPs at the industry and commodity level
For outputs and intermediate inputs, this involves comparing prices for homogeneous goods
For primary inputs, PPPs defined analogously
For labor: unit price is comp/hour for workers cross classified by industry, sex, age, education
For capital: rental price by industry and asset
Putting this all together yields MFP level comparisons by industry
Another application of the world production relies on integrating measures of capital and labor into the international input output table to measure gaps in TFP levels. This is important for measuring the relative efficiency of industries throughout the world economy.
This requires outputs and inputs in common currency units. One component of this is the PPPs at the industry and commodity level that are required for the international IO table in common currency units.
For outputs and intermediate inputs this involves comparing unit prices for homogeneous goods.
For primary inputs, PPPs should be defined analogously. For labor, the unit price is the compensation per hour for each type of worker, where workers are differentiated by industry, sex, age and education. For capital, the price is the rental price by industry and asset.
Putting this all together yields TFP level comparisons by industry

13. Industry Contributions to Japan-U.S. TFP, 2005
MFP Level Comparisons
Industry Contributions to Japan-U.S. TFP, 2005
This figure gives and example of the TFP level comparisons that would be part of a complete world production account. It shows that a large portion of the level productivity gap between Japan and the US (in 2005) was due to lower TFP in the Trade sectors, for example.
Source: Jorgenson, Nomura, Samuels (2016)
Note, this is a bilateral comparison only

14. Way Forward
KLEMS and GVC analysis are inherently linked by overlapping conceptual issues and data requirements
And, are used to analyze complementary questions.
Analytical purposes of GVCs: origins of economic value
Integrated KLEMS is used to analyze growth and competition
Essential for economic policy and analysis of globalization
Prototype exists from (Jorgenson, Nomura, Samuels 2016)
Both are integral components of a global accounting system
UN Handbook on GVC Accounting will make this case
Next steps…