The importance of output choice: implications for productivity measurement

This article presents three alternative concepts of output (gross output, sectoral output, and value-added output) and describes how they are related. In addition, the article discusses the advantages and disadvantages of using different output concepts in productivity measurement. These advantages and disadvantages are illustrated with an empirical comparison focusing on the U.S. manufacturing sector and selected industries within that sector. Firms produce goods and services by combining inputs of labor, capital, energy, materials, and purchased services. How efficiently these inputs are converted into outputs is captured in measures of productivity. However, output can be measured in different ways, each having advantages and disadvantages for evaluating productivity. There are three commonly used output concepts: gross output, sectoral output, and value-added output. These concepts vary by whether the goods and services counted are limited to those produced for final consumption or whether they include goods and services purchased by firms as inputs to further production.