15-001-XIE Gross Domestic Product by Industry March 2001

Appendices

Appendix IIa - GDP by Industry: Overview

1. Gross Domestic Product by Industry at Factor Cost, at Constant Prices

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Definition

Gross Domestic Product by industry at factor cost (GDP) is a measure of the economic production which takes place within the geographical boundaries of Canada. As the name suggests, it is designed to show the industrial distribution of total output. GDP for a single industry is also referred to as net output, or value added. Conceptually it is equal to the total value of production by the industry (gross output) less the value of inputs purchased from other industries or imported (intermediate inputs). Primary factors of production, such as labour and capital, produce gross output by adding value to the intermediate inputs. Value added can therefore also be derived as the remuneration to the primary factors of production, that is as the sum of labour income, depreciation, and profts. GDP for the economy as a whole is the sum of net output, or value added, for all industries. Summing net rather than gross outputs avoids double counting the output of one industry which is an intermediate input to another.

The term "gross" in Gross Domestic Product means that capital consumption costs, that is the costs associated with the depletion of capital assets (buildings, machinery and equipment), are included. The expression "at factor cost" means that production is valued at the cost of production rather than at market prices, which include indirect taxes but exclude subsidies. GDP valued at "factor cost" excludes indirect taxes but includes subsidies.

"Constant prices" means that the estimates are valued at the prices that prevailed in some base year rather than those of the current year. As a result changes in the estimates of value added by industry reflect changes in the physical volume of production, and do not reflect changes that are simply due to price fluctuations. With this publication, the base year for constant price estimates is 1992.

2. Differences Between Industry-Based and Expenditure-Based GDP

2.1 Differences in Objectives

The Canadian System of National Accounts (CSNA) publishes two constant dollar subannual measures of Gross Domestic Product: (1) the monthly GDP by industry and (2) the quarterly expenditure-based GDP. Both measures are designed to measure total production in Canada, but serve different analytical purposes. GDP by industry provides information about the sources of output, while the expenditure-based GDP shows the disposition of output among the various categories of final demand. The two series yield similar results, but because of conceptual, statistical and methodological differences, they are not identical.

2.2 Conceptual Differences: Factor Cost and Market Price Valuation

Because expenditure-based GDP is viewed from the perspective of purchasers, the analysis is concerned with final demand categories such as personal expenditure, government expenditure, capital formation, and exports and imports. Output is valued at market prices, which reflect what purchasers actually pay for the goods and services. Market price valuation includes indirect taxes such as sales and excise taxes, licences, property taxes, etc., and excludes subsidies.

When the output of goods and services is looked at in terms of the industries which produce them, valuation is confined to the costs incurred in producing the products. Various taxes on expenditure (indirect taxes) are excluded while government subsidies are included. Indirect taxes fall more heavily on some products (for example liquor or tobacco) than on others, and consequently the contribution of specific industries to total GDP is more accurate if such taxes are not taken into consideration. GDP by industry is therefore estimated on a factor cost basis.

Whether GDP is calculated by the industry or the expenditure approach, the two totals should in principle be different only in net indirect taxes (indirect taxes less subsidies), but in fact there are some statistical discrepancies as well.

2.3 Statistical Differences

The estimates of monthly GDP by industry and the quarterly expenditure-based GDP are built up somewhat independently. The estimates are prepared using various data sources which, in addition to being weighted differently, also result from different estimation methods. For example, the industry-based estimates do not rely on data for exports but are based on manufacturers' shipments data. The expenditure-based estimates of GDP use exports, but not shipments. Since exports by manufacturers must have been shipped, both systems will reflect the same underlying activity. However, since they do so via different statistical vehicles, there will be statistical differences between the two systems.

3. Methodological Overview: GDP by Industry

3.1 Annual Benchmarks

For all but the most recent two years, the annual estimates of Gross Domestic Product by industry are derived within the framework of the Input-Output accounts by subtracting the intermediate inputs from the gross output of industries. The data sources are typically annual surveys or censuses. For the most recent two full years and part of the current year, GDP is estimated using the monthly methodology described below.

3.2 Monthly Estimates

On a monthly basis information on industry activity, especially the consumption of inputs, is not as complete as it is annually. As a result, the monthly values of GDP by industry are projections, estimated using proxy indicators such as gross output or employment, usually obtained from monthly surveys (see Appendix IIb). The main assumption inherent in the monthly projector system is that the relationship between inputs and outputs changes slowly enough that it can be regarded as constant over short spans of time. This assumption will be true if both technology and the product mix change slowly. It is therefore more useful for projecting GDP over short time spans than over long ones, and at lower levels of industrial disaggregation, where product mix is relatively homogenous and stable. Prices of inputs and output do not necessarily evolve at the same pace during a given period. As a result, the relationship between inputs and output can be distorted at current prices. For that reason, the assumption above only applies to the calculation of GDP at constant prices.

3.3 Benchmarking

This is the process by which monthly estimates are adjusted to the new benchmark levels. Since the monthly estimates are projections, they are adjusted to sum to the annual benchmark levels once they become available. This adjustment is based on a quadratic minimization technique, which preserves the month-to-month movements in the original series as much as possible, subject to the constraint that the monthly estimates sum to the annual benchmarks.

3.4 Seasonal Adjustment

To aid interpretation of economic developments the estimates of GDP by industry are seasonally adjusted and are published in both seasonally adjusted and unadjusted forms. Seasonal adjustment removes movements caused by repetitive climatic or institutional events, thereby making the underlying activity more apparent.

The seasonal adjustment technique relies heavily on the use of moving averages, that become less reliable towards the end of the series. To minimize this problem, the series are projected one more year so that the last real data point is 12 months from the end point of the extended series. An ARIMA (autoregressive integrated moving average) model is used for this purpose.

3.5 Trading-Day Adjustment

In many monthly economic time series a significant portion of the monthly growth rate is associated with differences in the composition of calendar months. For example, the volume of production usually varies with the different days of the week, and since consecutive months contain different combinations of days, a significant portion of the month-to-month changes may be caused strictly by the calendar. To give a more precise idea of economic developments, the calendar months are put on an equalized basis. This is done by applying a smoothing procedure, known as trading-day adjustment. Trading-day adjustment alters the distribution of monthly output to reflect changes in production that would occur if all months contained the same number and type of days.

3.6 Rebasing

In order to analyse the behaviour of GDP independently of the influence of price changes, GDP is calculated for each industry in constant prices. In loose terms, constant price measures inform about the volume of goods and services produced, independently of changes in prices. Such series are calculated by choosing a reference period in the past, called the base year, and valuing current production of goods and services in the prices of that year.

The selection of the base year can have significant consequences, as different base years may yield different growth rates in total GDP and other aggregates. Consider an industry whose output price has declined, relative to that of other industries, between two years. The contribution of this industry to total output will be larger when valued in prices of the earlier period since the relative price was larger in that period, and movements in this industry will have more impact on movements in total output. If the industry is growing faster than average, valuing output in prices of the earlier period will result in a total GDP measure that grows faster than it would were output valued in prices of the later period.

A notable example is the computer industry, in which soaring output and accelerating quality changes were combined with rapidly falling prices during the 1986 to 1992 period. In 1986, the computer industry comprised a mere 0.2% of total GDP, and this proportion remained flat in current prices between 1986 and 1992. However, when production was valued in 1986 prices, the industry's contribution to total real GDP rose to 0.6% by 1992. This means that changes in current price output were magnified through deflation, giving enhanced importance to the computer industry in the constant price series.

Ideally the base year is a typical year, followed by a number of years in which the relative prices of commodities remain stable. In a dynamic economy, however, relative prices constantly shift due to such factors as uneven technological developments in different industries, variations in productivity, shifts in consumer demand, cycles in economic growth and so on. The more remote a base year becomes in time, the more today's relative prices will have changed compared to those of the base year, and the less prices of the base year will be relevant for the current period. The usefulness of constant price estimates therefore diminishes as we move away from the base year. The rate of obsolescence depends on the degree of relative price change.

The frequency of rebasing is a compromise between using a more representative reference period and maintaining a stable definition of output for a reasonable length of time. In Canada rebasing has traditionally been done at 10-year intervals: 1961, 1971, and 1981. Since 1986, the rebasing is now done at shorter intervals of five to six years. This conforms to U.N. recommendations regarding the frequency of rebasing.

With the release of the October 1997 data, a new base year was adopted. The year 1992 (previously 1986) became the new base year for the constant dollar estimates. At the same time, the monthly GDP estimates were adjusted to a new set of Input-Output Tables, which were revised to conform more closely to international standards as described in System of National Accounts 1993.

Major Changes Introduced by the Historical Revision:

With this histrorical revision, FISIM (financial intermediation services indirectly measured), an imputation which prescribes that net interest received be used when measuring the banking industry's contribution to GDP, has now been extended to credit unions and trust, mortgage and consumer loan companies.

In the past, banking activities were deconsolidated so that output of banks would only reflect deposit-lending type of activities. Other activities related to brokerage or mutual fund activities were classified in other financial services. When conducted by banks, these activities now remain part of the banking industry.

The "Royalties industry" disappeared and the royalty payments on natural resources are now part of the surplus of the extracting industry. In other words, royalties are considered a return on natural resources or investment income. This will increase the GDP in the mining sector while reducing it in finance, insurance and real estate industries.

General exploration expenses as well as geological and geophysical expenses are now considered capital expenditures. As a result, inputs in the mining sector will be lower, and GDP higher while it will be the opposite in several engineering construction industries.

A large portion of the GDP in gambling operations is considered a "profit" by lottery Corporations. This amount is now considered an indirect tax. As a result, GDP related to gambling operations will be lower.

Also, a new classification, closer to the one proposed by the 1980 SIC was adopted. The classification changes are covered in more detail in the next section.

4. Classification

The industrial classification framework used in the preparation of the monthly GDP estimates follows fairly closely the Standard Industry Classification of 1980 (1980 SIC). At the highest level of aggregation, industries are regrouped in 18 categories which correspond to the "Divisions" of the 1980 SIC. Divisions are identified by a letter and often referred to as a one-digit level.

Divisions

1. Agricultural and related services industries


2. Fishing and trapping industries


3. Logging and forestry industries


4. Mining (including milling), quarrying and oil well industries


5. Manufacturing industries


6. Construction industries


7. Transportation and storage industries


8. Communication and other utility industries


9. Wholesale trade industries


10. Retail trade industries


11. Finance and insurance industries


12. Real estate operator and insurance agent industries


13. Business services industries


14. Government service industries


15. Educational service industries


16. Health and social service industries


17. Accommodation, food and beverage service industries


18. Other service industries

Divisions are further subdivided into three lower levels. The highest one being the major group which is essentially a two-digit level. Food and wood industries are among the 22 major groups that compose manufacturing. Transportation services and pipeline transport also represent major groups. The last two levels correspond mostly to three- and four-digit levels as defined in the 1980 SIC.

In order to provide detail below the two-digit level in certain industries, notably among services producing industries, it was necessary to create new groupings of three- or four-digit industries due to data gaps. Those groupings are identified and defined in Appendix I. The appendix also shows the relationship between the monthly industrial classification system and the worksheet (W) level in the Canadian Input-Output framework from which industry benchmarks are derived.

Monthly GDP estimates are compiled back to 1961. At the lowest level of aggregation of the current industrial classification framework, it is not always possible to have an homogeneous series from 1961 to the present. Data gaps as well as changes in the SIC classifications of 1961, 1971 and 1980 are responsible for this.

With the introduction of a new SIC, establishments are sometimes reclassified from one industry to another. Thus an industry with a similar name in two different SIC's may have a somewhat different composition in terms of establishments.

In some cases the differences will be small, and in others large. In general there is greater such definitional discontinuity at lower levels of industrial dis-aggregation than at higher levels. For some purposes it is useful to have definitional continuity at as low a level of dis-aggregation as possible. For this reason, special industry groupings that provide relatively good continuity were created back to 1961. These groupings are identified with an asterisk (**) in Appendix I.

The groupings were determined based on two criteria. Near equality of value added under the new and old definitions was a necessary but not a sufficient criterion. The value added of incoming establishments could be large and nearly equal to the value added of outgoing establishments. In this case, the composition of the industry would have changed substantially while the overall value added would have changed only marginally. As a result, a second criterion was introduced to define continuity: the value added of incoming and outgoing establishments had to be small relative to the total value added before reclassification.

In order to help users monitor economic activity from a global point of view, industrial aggregates in addition to the "division" level have been defined. There are 12 such aggregates including goods producing industries, services producing industries, industrial production and others. They are identified in Appendix I with an industry code prefixed by a "T".

5. Dissemination Vehicles

5.1 The Daily/CANSIM

As with many Statistics Canada series, the monthly estimates of GDP are officially released to the public simultaneously through the Statistics Canada Daily Bulletin and CANSIM (Statistics Canada's machine-readable database). The CANSIM database is available on Internet at the following address: www.statcan.ca. The estimates are published approximately 60 days after the end of the reference month. The data are also released in a publication, Catalogue no.15-001-XIE Gross Domestic Product by Industry, about a week after the release date. Data can also be obtained directly from the division on diskette, print-out or other.

Reference month

Release dates

August	2000	October 31, 2000
September	2000	December 30, 2000*
October	2000	December 22, 2000
December	2000	January 31, 2001
December	2000	March 28, 2001*
January	2001	March 30, 2001
March	2001	April 30, 2001
March	2001	May 31, 2001*
April	2001	June 29, 2001
May	2001	July 31, 2001
June	2001	August 31, 2001*
July	2001	September 28, 2001
August	2001	October 31, 2001
September	2001	December 30, 2001*
October	2001	December 24, 2001
December	2001	January 31, 2002
December	2001	March 28, 2002*

* The quarterly income and expenditure-based GDP at market price will also be released on these dates. Release dates for the upcoming year are published, along with those for other major economic indicators, in December.

The data on CANSIM appear in greater industrial detail than in the Daily and are also in both seasonally adjusted and in seasonally unadjusted form. They are available historically from January 1961, and may be retrieved from the following matrices (see Appendix III):

Data and Matrix Numbers
Annual	4677
Quarterly, seasonally adjusted	4678
Quarterly, without seasonal adjustment	4679
Monthly, seasonally adjusted	4680
Monthly, without seasonal adjustment	4681

Information can also be obtained by calling any Statistics Canada regional office or Industry Measures and Analysis Division (1-800-877-IMAD).

5.2 Publications

The monthly, quarterly and annual constant price estimates of Gross Domestic Product by industry are published in Gross Domestic Product by Industry, Statistics Canada, Catalogue no. 15-001-XIE, available approximately five working days after the data have been released. This publication contains seasonally adjusted data extending back to 1992, the current base year.

For the period 1961 to 1992, the historical monthly, quarterly and annual values in 1992 prices are published in Gross Domestic Product by Industry (1992=100), 1961-1992, Catalogue no. 15-512- XPB (September 1998).

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