10.2 Business investment in non-farm inventories

Estimation methods, benchmark years and non-benchmark years

10.13 For manufacturing, retail trade and wholesale trade industries, the annual surveys are extensions of the monthly surveys; they provide more detail and cover a broader universe. They are used to calibrate the monthly or quarterly information. However, the estimation method is still monthly, and quarterly and annual figures are derived by adding up the sub annual estimates.

10.14 Annual data for the logging industry are obtained from the annual Survey of Forestry and those for the mining industry from the Annual Census of Mines, conducted by Natural Resources Canada.

10.15 For other non-farm inventories categories (construction, mining, finance, insurance and real estate, transportation and utilities) the monthly or quarterly approach for manufacturing and retail and wholesale trade, described below, is applied annually.

Estimation methods, monthly and quarterly

10.16 For each of the 128 categories of goods for which business investment in non-farm inventories is measured (see Table 10.2), a 10-step approach is used. The inventory valuation adjustment item, an aggregate that is part of the calculation of income-based gross domestic product, is estimated as part of the same process.1

Table 10.2 Series and deflators used in the calculation of business investment in non-farm inventories, 2000. Opens in a new browser window.

Table 10.2
Series and deflators used in the calculation of business investment in non-farm inventories, 2000

10.17 Estimates of business investment in inventories are produced monthly for the manufacturing, retail trade and wholesale trade industries. The quarterly data are obtained by adding up the monthly figures. For gold and other sectors, estimates are produced on a quarterly basis.

10.18 The following data are needed for the calculations:

  • the value of sales and shipments;
  • the book value of inventories as reported by businesses;
  • the accounting method used by businesses to arrive at the book value; and
  • price indexes that, to the extent possible, reflect purchase costs rather than selling prices.

10.19 Each of these datasets is explored in the sections below. A description of the ten-step calculation method follows.

Sales and shipments

10.20 Sales and shipments for manufacturing are derived from the Monthly Survey of Manufacturing. (MSM)2 For the wholesale industry, monthly sales and shipments data are provided by the Wholesale Trade Survey (Monthly).3 For the retail industry, the data are taken from the Monthly Retail Trade Survey (Department Store Organizations) and the Retail Trade Survey (Monthly).4

10.21 For gold, a supply and demand model is used as a quarterly distributor of the annual benchmarks provided by the Input-Output-Tables. The same model is used to produce the current estimates; it relies on the Industry Accounts Division's estimates of gold production, gold exports and imports from the International Trade Division, and the Balance of Payments Division's surveys for the Bank of Canada's activities in managing gold reserves and sales of gold coins.

10.22 For construction, the benchmark data are projected using information from the Survey of Employment, Payrolls and Hours and the Survey of Employment, Payrolls and Man-hours.5 The same approach is followed for financial services, except that the projectors are taken from personal expenditure on consumer financial services.

10.23 For the logging industry, a supply and demand model is used. The information is provided by the Industry Accounts Division and the International Trade Division.

10.24 For the mining industry and the transportation and telecommunications industry, quarterly information is available from the Quarterly Survey of Financial Statistics for Enterprises.6

10.25 For electric utilities, information is provided by the Public Institutions Division. For gas utilities, it is supplied by the Manufacturing, Construction and Energy Division.

Book value stocks

10.26 The book values of inventory stocks for the manufacturing, wholesale, retail, gold and other industries are derived from the same sources as sales and shipments.

Accounting method

10.27 The accounting method refers to the LIFO (last in first out) and FIFO (first in first out) methods of booking inventories. The FIFO assumes for costing purposes that the goods are charged to production or sales in order of their acquisition. The LIFO method assumes that the goods charged out first are the goods last acquired.

10.28 Since the accounting method used for inventories is not captured in surveys, the Income and Expenditure Accounts Division assumes that the FIFO method is used.7 The exception is inventories of petroleum for both the wholesale and the manufacturing industries. In that case, producers specified that they were using the LIFO method.

Price indexes for deflation and revaluation

10.29 Price indexes are used twice in the calculation of business investment in inventories. In one case, they are used to deflate the book values of inventories reported by businesses. In the other, they are used to revalue the physical change in inventories at average quarterly prices (revaluer price indexes).

10.30 While deflators and revaluer price indexes are constructed from the same price indexes, they are distinct because of differences in weighting. For details on the indexes used, see Table 10.2. In general, the manufacturing series use industrial product price indexes8 while consumer price indexes9 are used to construct the deflators for retail trade, and a combination of industry product price indexes and import price indexes10 (from the International Trade Price Indexes) are used to produce the deflators and revaluer price indexes for the wholesale sector. For gold and other commodities, raw materials price indexes11 and other specific price indexes are used.

Book value deflators

10.31 The price indexes used to deflate the book values of inventories reported by businesses have to reflect the accounting method used.12 In the IEA, it is assumed that businesses use the FIFO (first in, first out) method. In this case, each commodity included in the inventories has its own turnover rate, which is the average time that the commodity remains in inventory. One way of understanding the turnover rate is to look at the number of production days, months or years that a business holds a commodity in inventory. Thus, the book value of inventories reported by businesses for the reference period is the sum of the costs of the commodities that entered inventory during the reference period.

10.32 Table 10.3 provides an example of how to calculate a turnover rate; in this case, the rate is based on the inventories-to-sales ratios reported by the Wholesale Trade Survey (Monthly) for two trade groups, food products and machinery and equipment. The turnover rate is less than one month for food products and over two months for machinery and equipment.

Table 10.3 Example of turnover calculation using wholesale trade data, November 2004 to February 2005. Opens in a new browser window.

Table 10.3
Example of turnover calculation using wholesale trade data, November 2004 to February 2005

10.33 To deflate the book values of inventories reported by businesses, the deflator must reflect price movements during the turnover period. Hence, the deflator is calculated as the weighted average of the price indexes during the turnover period. For example, for machinery and equipment and food products in Table 10.3, the inventory book value deflator for February 2005 is computed as follows:

Examples of the calculation of inventory book value deflators, February 2005

  • Deflator food products (turnover rate of 0.67) = Combination of the IPPI index and import index of February.
  • Deflator machinery and equipment (turnover rate 2.38) = ((Combination of the IPPI index and import index of February)
    + (combination of the IPPI index and import index of January)
    + (0.38 × combination of the IPPI index and import index of December))
    ÷ 2.38

10.34 When the turnover rate is less than a month, the index of the last month is used as the deflator.

10.35 For the manufacturing sector, the turnover rates are an average of the turnover for the last four years, based on manufacturing shipments and inventories data from the Annual Survey of Manufactures and Logging. For gold and other stocks, the ratio is determined yearly based on data from various annual surveys. For retail and wholesale trade, the turnover rates are estimated monthly using the sales and inventories series (see Table 10.3). This information is provided by the surveys of retail and wholesale sales (see the section Sales and shipments).

Revaluer price indexes

10.36 Like book value deflators, revaluers are price indexes, but they have a different purpose. They are used to revalue the volume of business investment in inventories at average prices for the reference period in order to make the series comparable with other aggregates of final expenditure. The aim is to reflect the average cost of inventories during the current period. For the monthly estimates, the revaluers are simply the price indexes reported in the price surveys. For the quarterly estimates, an average of the monthly indexes is used.

10.37 It is important to note that the method described above applies to the most detailed components of the estimate. The implicit indexes used at aggregate levels (ratio of current dollars to volumes) can be quite different from the component indexes.

Ten-step calculation process

10.38 Table 10.4 summarizes the calculation method used at the most detailed level. The first six steps show the calculation of business investment in non-farm inventories in current dollars, which appears in the IEA's expenditure-based gross domestic product table.13 Lines 7 and 8 show the derivation of the inventory valuation adjustment item that appears in the IEA's income-based gross domestic product table.14 Lines 9 and 10 contain the equations for calculating the inventory level used to produce volume estimates under the chain Fisher formula.

Table 10.4 The ten step calculation for investment in non-farm inventories and inventory valuation adjustment. Opens in a new browser window.

Table 10.4
The ten step calculation for investment in non-farm inventories and inventory valuation adjustment

10.39 Step 1. Obtain the end-of-period inventory book values reported by businesses. These are the reported book values. The code for this is CBVe, the e indicating that it is the end-of-period value.

10.40 Step 2. Create a weighted price index for deflation of inventory book values. This implies knowledge of the composition of inventories, their turnover period, changes in the prices of goods in inventory, and the various methods of valuing them. These series are known as book value deflators. The code is DEFe, the e indicating that it is the end-of-period inventory composition.

10.41 Step 3. Deflating the book values (CBVe ÷ DEFe) produces the end-of-period inventory book value at constant prices. The code is KBVe, the e indicating that it is the end-of-period volume measure.

10.42 Step 4. Taking the first difference of the end-of-period inventory book value obtained in Step 3 yields a measure of the change in inventory volume between the beginning and end of a period. This concept is also referred to as the value of physical change in inventories at constant prices. The code is KVPCt; the t indicates that the physical change in inventories is being measured for a particular period (e.g., the first quarter of 2001), whereas e indicates that the series reflect the situation at the end of a period (e.g., KBVe would be the volume of inventories on March 31, 2001, and KBVe-1 would be the volume on February 28, 2001).

10.43 Step 5. A revaluer price index is introduced in this step, reflecting the composition of inventories and the average value of inventories during the current period. The code is REVt, the t indicating that it is an index that reflects the average price of inventories during the period.

10.44 Step 6. Compute the value of physical change in inventories at current prices. The calculation involves multiplying the value of physical change in inventories at constant prices from Step 4 by the revaluer price index from Step 5. Using an average quarterly price to estimate the value of physical change in inventories at current prices makes the investment in inventories estimates comparable to other GDP aggregates.

10.45 The next two steps compute the inventory valuation adjustment item and have no effect on the business investment in inventories aggregate.

10.46 Step 7. Calculate the change in inventory book value reported by businesses, compiled in Step 1. The code is ∆CBVt; the t indicates that the change in inventory book value is being measured for a particular period (e.g., the first quarter of 2001), whereas e indicates that the series reflect the situation at the end of a period (e.g., CBVe could be the inventory book value on March 31, 2001, and CBVe-1 could be the value on February 28, 2001).

10.47 Step 8. The inventory valuation adjustment is the difference between the physical change in inventories at current prices (Step 6) and the value of change in inventory book value (Step 7). This adjustment, usually negative because of ongoing inflation, is a distinct entry on the income side of the GDP ledger. This entry amounts to an ex-post correction to the profits of corporations and government enterprises and the net income of unincorporated businesses for the net capital gains or losses that businesses incur on their inventories as a result of price changes. Those gains or losses must be eliminated before the value of current dollar output can be measured.

10.48 Steps 9 and 10 compute the value of inventories held at the start and end of a period. The estimates obtained are used in the chain Fisher formula that calculates volume estimates of investment in inventories aggregates.

10.49 Step 9. To obtain Fisher volume estimates of investment in inventories, we need to measure the end-of-period inventory value at current prices for the quarter. This is done by multiplying the inventory value in constant dollars (KBVe) by the average price of inventories during the period (REVt). The code for the series is RBVe, the e indicating that it is the end-of-period value; for monthly estimates, for example, it could be the value of inventories in current dollars on March 31, 2001, the inventories having been evaluated at the average prices for March 2001.

10.50 Step 10. To produce the Fisher volume estimates of investment in inventories, we also need to measure the start-of-period inventory value at current prices for the quarter. This is done by subtracting the value of physical change in inventories at current prices from the end-of-period inventory value computed in Step 9. This method of calculating the start-of-period inventory value is equivalent to multiplying the start-of-period inventory values in constant dollars (KBVe-1) by the average price of inventories during the period (REVt). The code for the series is RBVb, the b indicating that it is the start-of-period value. For monthly estimates, for example, it could be the value of inventories in current dollars on March 1, 2001, the inventories having been evaluated at the average prices for March 2001. In mathematical terms it is expressed as follows:

RBVb = RBVeVPCt Step 10 equation

RBVb = (KBVe × REVt) − (ΔKPCt × REVt), substitution of Step 9 equation and Step 6 equation

RBVb = (KBVe − ΔKPCt) × REVt

RBVb = (KBVe − (KBVe − KBVe−1)) × REVt, substitution of Step 4 equation

RBVb = (KBVe − KBVe + KBVe−1) × REVt

RBVb = KBVe−1 × REVt

Estimation methods, provinces and territories

10.51 For most series, the national estimates of business investment in non-farm inventories are distributed by region on the basis of the reported book values for each province and territory. The exceptions are:

  • gold;
  • finance, insurance and real estate; and
  • construction.

10.52 For finance, insurance and real estate, the provincial or territorial distribution is based on household expenditure on legal and financial services, reported in Detailed Average Household Expenditure for Canada, Provinces/Territories and Selected Metropolitan Areas.

10.53 For construction, the provincial or territorial distribution of national data is based on the value of building permits for each province and territory, published in Building Permits.

10.54 For gold, the provincial or territorial breakdown is based on the distribution of families with incomes over $60,000. This information is taken from Income in Canada.

10.55 For inventory valuation adjustment, the 10-step method is followed using provincial or territorial book values and national price indexes.

Continue

Back to


Notes

1. For further details on concepts, see the inventory valuation adjustments section of Chapter 4. Calculation methods are described in this chapter.

2. Survey no. 2101, published in Monthly Survey of Manufacturing, catalogue no. 31-001.

3. Survey no. 2401, published in Wholesale Trade, catalogue no. 63-008.

4. Survey no. 2406, published in Retail Trade, catalogue no. 63-005.

5. Survey no. 2612, published in Employment, Earnings and Hours, catalogue no. 72-002.

6. Survey no. 2501, published in Quarterly Financial Statistics for Enterprises, catalogue no. 61-008.

7. Two studies provided information on the accounting method. According to the 1975 study, 35% of manufacturers were using the FIFO method and 31% the average cost method. In 1990, a small study with retailers and wholesalers indicated that 68% of them were using the specific cost method, confirming the increasing role of computer in the control of inventories.

8. Industrial Product Price Index, survey no. 2318, published in Industry Price Indexes, catalogue no. 62-011.

9. Consumer Price Index, survey no. 2301, published in The Consumer Price Index, catalogue no. 62-001.

10. Estimates from this survey are published in Canadian International Merchandise Trade, catalogue no. 65-001.

11. Estimates from this survey are published in Industry Price Indexes, catalogue no. 62-011.

12. Financial information reported to Statistics Canada are those that appear in the financial statements of businesses. This Statistics Canada policy was established to reduce the response burden of businesses.

13. National Income and Expenditure Accounts, catalogue no. 13-001, Table 2, line 15.

14. National Income and Expenditure Accounts, catalogue no. 13-001, Table 1, line 7.