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Index of Services Conceptual basis

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This page is currently under review as part of the GDP Output Improvement Programme (226.7 Kb Pdf) .

The IoS has the same conceptual basis as the output measure of Gross Domestic Product (GDP(O)); it is designed to be a short-term measure of gross value added (GVA).

The IoS is based on the same data sources as the equivalent series within the quarterly estimates of GDP(O) and the monthly values for the IoS are consistent with the quarterly totals in GDP(O).

Measurement of Gross Value-added (GVA) - for GDP(O) and the IoS - in the UK Economic Accounts

The UK economic accounts are based on the European System of Accounts (ESA), which in turn is based on the UN System of Accounts (SNA). Under the ESA, the level of gross value added (GVA) for each industry is measured in basic prices as:

GDP is measured at market prices and is the sum of the industry GVA estimates, plus taxes on products (for example, value added tax, alcohol duty), less subsidies on products.

The output measure of GDP, and hence the IoS, is based on each industry's net output. Net output is the same as gross value added, that is the value of its gross (or total) output less any goods or services it has acquired from other industries or has imported.

For example, the value of the gross output of the road transport industry includes the value of the fuel and insurance needed to operate vehicles and other such 'intermediate consumption'. The value of these goods and services is deducted in order to arrive at net output. Net output is before making provision for depreciation but after adjusting for any changes in stock levels (or inventories).

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Indicators used

The output measure of GDP is calculated as chained volume indices (linking volume growth between consecutive time periods). Conceptually, net output at constant or previous years prices (depending on the level of detail the indicator is measuring - see the next heading, 'Industry classification and weighting' for more detail) for each industry should be estimated by revaluing both the gross outputs and the inputs; then subtracting the latter from the former.

This method, known as double deflation, is very difficult to apply reliably in practice. It requires a great deal of high quality detailed information on the value and price of outputs and inputs. Double deflation is particularly uncertain where net output is small in relation to gross output.

In practice more information is available on outputs than on inputs so changes in gross output are frequently used as an approximate indicator of changes in net output.

Although the gross output to net output ratio is not always stable for individual industries, the impact on the aggregate for all industries will be less. For example, if an intermediate process is transferred from one industry to another this does not necessarily alter the combined amount of work done. So if one gross output indicator overstates the change in net output of an industry, the error may be offset by an understatement in the net output of another industry. Nevertheless, the use of gross output as an indicator is only a proxy for what is ideally required.

In order of preference, the following types of indicator are used:

  • the ‘ESA-preferred' type of output indicator is one that measures deflated gross output (or turnover) for an industry. These use an appropriate price change estimator to remove the effects of inflation

  • the use of volume indicators is also acceptable under ESA regulations. These require no deflation but will usually miss quality changes, or changes in the mix of outputs

  • other types of indicator, which measure inputs to an industry, are not now regarded as satisfactory, but for some industries they are the only short-term indicators available. The most obvious and widely used of these is employment

Within the IoS and GDP(O), indicators used to estimate short-term change are selected for their:

  • appropriate industrial coverage

  • consistency over time; and

  • suitable quality and timeliness

For current-price indicators the choice of indicator also takes account of the need for suitable price deflators. The data used to compile the Index of Services are described in the section on Source Data. The process by which these data become the Index of Services is described in the section on Index Construction.

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Industry classification and weighting

The categories used for classifying industries in the IoS and GDP(O) are the UK version of the latest international standard classification of industries, usually abbreviated to the 'SIC(2003)'. Using this, industry indicators are combined together according to their relative contribution to total GDP, based on their gross value added.

The contributions, or 'weights' of indicators at class level (which is normally below the level of 4-digit SIC(2003)) are updated every five years. The weights of indicators at group level (normally equates to 4-digit SIC) and above are updated every year. The current weights can be found in the section on Source Data.

The starting point for the calculation of the weights are the value added estimates in the 'combined use' matrix of the Input-Output (IO) balance for the UK. This gives an industry analysis of value added consistent with the required concepts of net output. The derivation of these estimates is described in the 'Input-Output Methodological Guide - 1997 edition', published by the Office for National Statistics (ONS).

The Input-Output analysis gives figures for 123 industry groups based on the SIC(2003), of which 35 cover the services sector. For IO group 115 (public administration and defence: compulsory social security), IO group 116 (education), IO group 117 (human health and veterinary services) and IO group 118 (social work activities) the IO data are adjusted to a SIC(2003) basis. Expenditure on teachers' pay is reallocated from IO group 115 to IO group 116, the departmental administrative costs of the NHS are reallocated from IO group 117 to IO group 115, and the probation service is reallocated from IO group 115 to IO group 118.

The broad Input-Output group weights are further sub-divided on a SIC(2003) basis using the same source inputs as the Input-Output estimates. The absence of comprehensive data sources for further sub-divisions of the service industries below the SIC level necessitate a 'piecemeal' approach. For transport via railways, for example, the sub-divisions into passenger travel, freight transported and mail transported are made on the basis of gross receipts plus subsidies for each activity. The further sub-division of freight transported into: a) coal and coke; b) iron and steel; and c) other commodities, is made on the basis of the volume of activity. Within some other industries the relative weights are based on employment and average earnings data.

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National Accounts balancing

Quarterly GDP(O) is part of an integrated set of UK National Accounts and as such may, on occasions, have to be adjusted to balance with the other two methods of measuring GDP (that is, the income (GDP(I)) and expenditure (GDP(E)) measures). These adjustments are allocated to components of the IoS. For more information about this, see the section on National Accounts.

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