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Concepts and definitions

Compensations of capital and labour

The compensation of labour force, i.e. wage and salaries, is the price of labour input from the perspective of the producer. When examining the effect of the change in the quality of labour force to the change in productivity, the hours worked by employees with different types of educational levels are weighted by the share of this employee group’s compensations of labour force in all compensations of labour force.

When compensations of labour force are deducted from the industry's value added, capital compensation remains. When examining the effect of capital services on productivity, the amount of capital compensations is used for calculating weights of capital good types by industry (cf. compensations of labour force). The amount of compensations of capital is also used in the calculation of the internal rate of return.

Contribution of capital intensity

The effect of changes in capital intensity (volume of capital services/hour worked) on the change in productivity of labour.

Contribution of labour composition

The labour composition refers to changes occurring in labour input. In productivity surveys, hours worked and labour compensations are cross classified according to employees’ age, educational level and sex. It is thus possible to notice what part of productivity growth is caused by changes in these factors.

The employment statistics data starting from 1975 have been used in evaluating the labour composition. The data are divided into the above-mentioned categories. A specific weight is determined for each category by utilising average wages and salaries in the category (assuming that wages and salaries describe the marginal productivity of the labour force). One category consists of, say, highly educated women aged 30 to 54, who, by their age and education, can be assumed to earn more than a man with upper secondary level education aged under 30, for example. If the relative share of highly educated people, for example, grows inside the total labour input or if the relative pay of the highly educated rises, this is visible as growth in the labour composition term.

Depreciation rate

The depreciation rate describes how much of the capital stock is used up during the year. In productivity surveys, consumption rates are specific for industries and capital good types. Consumption of fixed capital represents the amount of fixed assets used up during the period under consideration. Consumption is the result of normal wear and tear and foreseeable obsolescence, including a provision for losses of fixed assets as a result of accidental damage, which can be insured against.

Consumption of fixed capital should be distinguished from the depreciation shown in business accounts. It refers to the amount of fixed assets used up during the period under consideration. It should be estimated on the basis of the stock of fixed assets and the probable average economic life of the different capital goods.

Gross domestic product

GDP, gross domestic product at market prices is the final result of the production activity of resident producer units. It can be defined in three ways: as the sum of gross value added of the various institutional sectors or the various industries plus taxes and less subsidies on products; as the sum of final uses of goods and services by resident institutional units (final consumption, gross capital formation, exports minus imports); as the sum of uses in the total economy generation of income account (compensation of employees, taxes on production and imports less subsidies, gross operating surplus and gross mixed income). (ESA 1995 8.89.)

Growth accounting method

The name of growth accounting method comes from that annual changes in value added are broken into growth components, whereby it is possible to examine from which factors growth has derived. Let’s assume that from year t to year t-1, value added has grown by five per cent (logarithmic % changes). This growth can be broken into components: the share of growth caused by the growth in the amount of capital, the share due to growth in labour input and the share resulting from improved multi-factor productivity. The components are summed to the change in value added, that is, if in the example above we assume that the effect of capital is 0.7 per cent and that of labour force 1.3 per cent, the effect of multi-factor productivity is three per cent.

Primary inputs – capital and labour – can be further broken into sub-items. In productivity calculations the contributions have been separately calculated for ICT and RD assets, machinery and equipment, residential buildings and other capital resources. The effects of hours worked and the contribution of labour composition are separated from labour input.

The most precise productivity survey calculations are made for 63 industries. Value added, labour productivity, contribution of capital and labour force to productivity and multifactor productivity are calculated for each industry. After this, industry-specific data are aggregated with value added weights to less detailed levels and afterwards to the level of the whole economy.

Intermediate consumption

Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods and services may be either transformed or used up by the production process.

Products used for intermediate consumption should be recorded and valued at the time they enter the process of production. They are to be valued at the purchasers’ prices for similar goods or services at that time.

Internal rate of return

The internal rate of return refers to the cost of capital, i.e. internal interest. It is part of the user cost of capital goods. It can be calculated as a residual when capital compensations, capital gains/losses caused by price changes and the consumption rate of capital are known.

Labour productivity

Labour productivity is calculated by dividing gross domestic product (i.e. value added) or output by the number of hours worked to achieve it. According to the neoclassical economic theory, economic growth is born out of growth in productivity of labour.

Multi-factor productivity (MFP)

Multi-factor productivity (or total factor productivity) refers to the part of growth in value added which is not explained by the growth in inputs (capital, labour). However, this cannot be measured directly, so its effects have to be assessed as a residual, when other factors having influenced the growth of productivity have been subtracted. Usually, the multi-factor productivity is thought to be almost the same as technical development, but it may also include other factors.

Multi-factor productivity can be calculated based on value added or output. It is derived when the effects of contributions of capital and labour force are deducted from value added (or output). If the calculation is based on the output method, the effect of intermediate consumption is also deducted.

Multi-factor productivity based on output

It is justified to assume that there is exchange of intermediate products between industries. For instance, industry x may supply conductors for industry y. The conductors of industry x are the final products of industry x, but not the end products for the whole production chain. Industry y utilises conductors for manufacturing its own end products, e.g. this is the case in industries that produce technical devices or other high tech equipment. When using the value added method, the contribution of the intermediate input remains unnoticed. Output based productivity calculation accounts for this effect:

The calculation formula for multifactor productivity changes into form: ?multifactor productivity?_output=change in output-(contribution of capital +contribution of labour + contribution of intermediate consumption)

Multi-factor productivity based on value added

By definition, value added is output minus intermediate consumption. When applying value added calculation for assessing multi-factor productivity, the contributions of capital and labour are deducted from the change in value added, i.e. ?multifactor productivity?_(value added)=change in value added-(contributions of capital + labour)

Output at basic prices

Output at basic prices consists of the products which have been produced in the accounting period. Three categories of output are distinguished: market output, output for own final use, and other non-market output. Output is to be recorded and valued when it is generated by the production process.

Productive capital stock

In national accounts, the capital stock refers to the amount of capital in the economy. This includes both physical capital such as machinery, equipment and buildings and intellectual property products such as research and development.

The profitable capital stock used in productivity calculations differs from that used in national accounts. It measures the capital services provided by the capital stock. The amount of capital services describes better the capital stock than the production capacity of capital and corresponds to other factors of the production function.

The user cost of capital

The user cost of capital is the price of capital services. The user cost of capital describes the amount of money which would have been needed during the year to cover the use of capital good services to the value of EUR x. This includes capital financing costs or an alternative cost for capital now being unavailable for use elsewhere in production and gains or losses caused by price changes in the capital good and consumption of capital in use...

Value added

Value added (gross) refers to the value generated by any unit engaged in a production activity. In market production it is calculated by deducting from the unit's output the intermediates (goods and services) used in the production process and in non-market production by adding up compensation of employees, consumption of fixed capital and possible taxes on production and imports.