Net output

Net output is an accounting concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the NIPAs, and sometimes in corporate or government accounts.

Definition

In national accounts, net output is equivalent to the gross value added during an accounting period when producing enterprises use inputs (labor and capital assets) to produce outputs. Gross value added is called "gross" because it includes depreciation charges or Consumption of fixed capital. Included in net output may also be inventories of unsold outputs, valued at average market prices. Net output is sometimes also calculated in terms of physical product units which can be sold.

Derivation

Net output is obtained by subtracting the value of intermediate goods and services from the Gross Output of enterprises.

This involves an accounting procedure of "grossing and netting" the revenues which enterprises obtain from their outputs of goods and services, in order to establish what the real value of those outputs is.

This procedure must consistently identify and distinguish between costs and revenues, and between materials or services used up, fixed assets and new outputs. In national accounts, this is especially important because the inputs of one enterprise are the outputs of another, and vice versa; lacking a consistent procedure, double-counting would result. In turn, the "grossing and netting" procedure assumes a value theory and a definition of the coverage of production. Once we have that, we can aggregate a multitude of prices to obtain a price for the total value of net output.

Components of net output

The value of an aggregate net output is normally understood to be equal to the sum of

labour costs (or Compensation of employees),
depreciation (or consumption of fixed capital),
income tax and indirect tax imposts on production, reduced by government subsidies to producers,
profit (or operating surplus).

In calculating net output for national accounts, government subsidies received by producing enterprises are normally subtracted from tax levies paid by them during the same accounting period.

Net output and GDP

The total net output of resident producers in a national economy is equal to Gross Domestic Product or GDP. Included in this total is the productive activity of government agencies and certain income-generating activities of households.

Usually the term "net output" is used to refer to the contribution which a particular economic sector (for example, agriculture, manufacturing, business services etc.) makes to total value added or GDP during a quarter or a year.

Input-output analysis

In input-output analysis, disaggregated data on gross and net outputs of different economic sectors and sub-sectors is used to study the transactions between them. Thus, for example, a sector purchases inputs from several other sectors and sells outputs to several other sectors. By identifying the quantities of input and output involved, we can estimate what the effect will be of fluctuations in business activity within one sector, or group of sectors on the economy as a whole.

Criticism

As mentioned, the calculation of net output requires a value theory, a way of grossing and netting, and techniques for aggregating the prices of transaction volumes in a consistent way. Obviously, there are many different ways of going about this, but normally a legal framework limits the number of variations possible or permitted (business accounts have to be audited and so on, to guarantee a fair statement of business operations within the law of the land). Nevertheless, the procedure for establishing net output can be contested.

In Marxian economics, the value product is offered as an alternative output measure, reflecting the new value produced by living labor. But there is also an ecological criticism that is sometimes made.

The argument here is that, in calculating net output, costs and results are only assessed in price terms. Therefore, inputs to production and outputs which are not priced, are excluded in the valuation. Yet those inputs and outputs may nevertheless have an economic or human value, regardless of whether a price could be imputed to them or regardless of whether they can be made an object of trade.

If the air is polluted, or depletion of fish stocks in the open seas occurs, the cost of repairing that is not accounted for in the net output of polluters or fishing companies. Sometimes tax levies are therefore imposed. Nowadays the Kyoto protocol has inspired "emissions trading", where the right to pollute is bought and sold, which some regard as a strictly perverse activity. Others however argue it proves the ability of competitive markets to solve any problem of resource allocation (see also Flatulence).