LECTURE 5

THE SOUTH AFRICAN SYSTEM OF NATIONAL

ACCOUNTS: INPUT-OUTPUT TABLES
AND THE SUPPLY AND USE TABLES

LEARNING OBJECTIVES

1. Qualify the meaning of an interrelationship between the various

industries and the role of input-output analysis in the quantification
of these interrelationships.
2. Know the base assumptions pertaining to an input-output system.
3. State the three tables that an input-output system consists of and the
basic information contained in each.
4. Know the most important uses for input-output analysis.
5. Know how the information contained in a transaction table is
recorded; the distinction between the inputs and outputs and the
basis on which these are categorised in the different quadrants of the
table.
6. Be able to interpret the elements of (or entries to) the transaction
table.
7. Know which column totals and row totals should be equal and the
reasons for this equality.
8. Be able to calculate, apply and interpret the technical coefficients in
order to explain the inter-industry flows.
9. Be able to extract information and interpret the data contained in the
Supply and use table.
10. Be able to compile the Production accounts and Generation of
income accounts for a particular industry from the data in the Supply
and use table.
11. Be able to determine the national GDP at market prices according to
the production, expenditure and income approaches by using Supply
and use table data.

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Take total output by industry (38,

STUDY MATERIAL FOR LECTURE 5

No additional material is prescribed for this lecture. The information

contained in the section below is adequate for the purposes of this lecture.

5.1 INTRODUCTION

Input-output analysis represents a way of systematically quantifying the

mutual interrelationships amongst the various sectors of a complex
economic system. Any effort to the quantification of sectoral production will
invariably lead to an analysis of the degree of interrelation between the
various production sectors. In other words, it is virtually impossible to
analyse the sectoral contribution of a specific production sector (industry) to
overall aggregate production without taking its links to other production
sectors into consideration.

Likewise, if one needs to analyse the increase of a specific input price (due
to, for example, an increase in excise duties), it is important to know exactly
what the input structure of the industry under consideration consists of.
Take for example the case where an additional tax is levied on the
production of all raw tobacco. What would the effect of this be on the price
of cigarettes? In order to make a meaningful analysis, one needs to know
what portion of the final output price of cigarettes is accounted for by
tobacco as an input. Cigarettes surely do not consist only of tobacco.
Paper, ink and synthetic fibre are for example also used in the
manufacturing of cigarettes. Labour, capital and other production factors
are also used as primary inputs in the production of cigarettes. To be able
to calculate the exact effect of the price increase of raw tobacco on the final
price of cigarettes, one thus needs to know what proportion of tobacco
relative to the other inputs is used in the manufacturing of cigarettes.
These sectoral interrelationships can therefore be defined by means of
input-output analysis.

The input-output system involves basic matrix algebra and though we will
not go into too much detail on the specific mathematical basis of the
account, it would be helpful if the reader at least has a basic working
knowledge of matrix algebra. However, the term "working knowledge"
merely requires the most basic knowledge of matrix algebra. The
knowledge obtained on this subject in an introductory course on statistics is

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more than adequate.

5.2 INPUT-OUTPUT TABLES

The input-output tables provide a deconsolidated account of the production

account (Account 1, as discussed in Lecture 2). It however goes further and
describes the interrelationships between the various production sectors in
detail - information that one would not find in the national income and
production accounts. By publishing the links between the various
production sectors, it enables an analyst to do a more detailed analysis of
the existing production structure in a country.

Due to the enormous amount of work entailed in compiling an input-output

table, it only appears periodically. South Africa for example only published
these tables in 1971, 1978, 1983, 1985, 1988, and 1993. Only an unofficial
version of the 1996 tables exists due to the changeover towards the
publishing of Supply and Use tables (dealt with later in the lecture) from
1998 onwards.

Therefore the discussion of the tables will be done with reference to the
1993-Input-output tables. There are however certain base assumptions that
the input-output system is built upon and the reader should be aware of
these. All of the transactions are reflected in monetary terms and recorded
on the assumption that general equilibrium exists in the economy.
However, due to the nature of the data requirements and the enormity of
the collection task, only cross section data is used for the purpose of
compiling the input-output tables. This causes a so-called static-dynamic
approach to analysis. It means that the analyst progresses from one
equilibrium position to the next (each represented by the year of the
recorded data) - this represents the dynamic part of the analysis. However,
each year of recording (which is based on cross section data) provides a
static picture of events. It can be compared to one frozen frame in a whole
motion picture through which the analyst can obtain a glimpse of the
production structure as it had been in that specific year of recording. Thus,
the method of recording sacrifices a lot of information on the ever-changing
dynamics of the production structure within the economy.

For any input-output study, it is necessary to produce three main tables

(which are collectively known as an input-output system):

(i) A transactions table

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(ii) A table of technical coefficients
(iii) A table of interdependence coefficients (sometimes also referred to
as the table of total coefficients).

Table (iii) however requires more involved matrix algebra and is therefore
left for study on graduate level. The reader should just be aware of the
existence of such a table and know how the information contained in it can
be applied.

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The question that subsequently comes to mind is: What are these tables
then used for? The following are possible analytical uses for these tables:

• Economic policy: The information contained in the input-output tables

enables policy makers to formulate and implement economic policy on
various issues on both the supply side (production) and the demand side
(the final demand for goods and services) in the economy.

• Forecasts: Simple manipulations of the data contained in the tables can

enable policy makers and other interested analysts to do somewhat
crude forecasts on issues mostly pertaining to the production structure
of the economy.

• Analysis of the production structure: Information on the production

links between the various production sectors (industries) enables the
analyst to obtain a good idea of the existing production structure. For
example it can be deduced from the information in the table, which
industries are the most significant input suppliers of a specific industry.
One can also determine which are the most important sectors to which
both the intermediate outputs and final outputs of a specific production
sector flow.

• Production functions: Due to the detailed information that is available

from the tables on the production structure, one can also compile a
technical production function for a specific industry. This is done by a
thorough analysis of the available information on the input structure for
that industry.

• Multiplier effects: By converting the information into a table of technical

coefficients, one can determine the direct multiplier effects of changes in
certain components of the outputs or input requirements of an industry.

5.2.1 Transactions table

This table forms the basis of the input-output system and records (in value
terms) the various intersectoral economic flows existing in any economic
system. The outputs of each sector are distributed along the rows of the
matrix, whereas the inputs of every sector are listed in the columns. Table
5.1 provides a useful summary of the contents of the transactions table.

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Table 5.1 Transactions table

Intermediary outputs Final outputs

Outputs Production sectors C+G+I+X Total
Inputs 1…….n output

Intermediary 1 x11 x12 x1n

Inputs

Quadrant I Quadrant II

n xn1
Primary inputs
Quadrant III Quadrant IV
Net indirect taxes

Total inputs

As stated above, the inputs are listed in the columns whereas the outputs of
every sector are stated along the rows of the transactions table.
Furthermore, the inputs (columns) are divided into primary inputs and
intermediary inputs. The outputs are divided into intermediary outputs
(those outputs that are still to be used in production by other industries and
are therefore not yet destined for consumption on the market for final
goods and services) and final outputs. Final outputs are naturally ready to
be used/consumed by the end users.

The table is divided into four quadrants - each containing certain

information on the composition of production in a country:

• Quadrant I:

This shows the flows of goods and services that are both produced and
consumed in the process of current production. In other words the
intermediate outputs (recorded along the rows) are used by other industries
as intermediate inputs (reflected in the columns of each industry) (see the
discussion of this quadrant in the input-output table of South Africa for
example). These are referred to as inter-industry flows or intermediate
demand. It is therefore probably the most important quadrant for the
analysis of inter-industry flows as it is one of the key sectors used for
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deriving both the technical coefficients and the interdependence
coefficients.

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• Quadrant II:

This quadrant shows the final demand for the output of each sector, i.e
outputs that flow directly to end users. In most cases the final demand is
divided up into the four macroeconomic expenditure components, being
private consumption expenditure (C), government consumption
expenditure (G), investment (consisting of fixed investment and changes in
inventories) and exports (X).

• Quadrant III:

This quadrant shows what is known as primary inputs to the various

production sectors. They are described as primary because they do not
form part of the intermediary outputs (current production) listed in the rows
of quadrants I and II.

• Quadrant IV:

This quadrant shows the primary inputs that are directly destined for use in
the final demand sectors.

An essential feature of the transactions table is that quadrant I (which

reflects the intermediate demand must always be a square matrix. This
means that it must have exactly the same number of columns and rows. If
not, an inter-industry multiplier analysis would not be possible. This is
however the only quadrant in the table that needs to meet this requirement
and in practice the number of columns and rows in the other sectors
seldom corresponds.

The contents of the 1993 South African input-output table will subsequently
be discussed in order to provide a better understanding of the way in which
this useful tool can be applied to derive legion information. These figures
are reflected in Table 5.2 and the reader is referred to this table for the
following discussion.

The first row of the table shows the output of the agricultural sector. The
section of the row that forms part of quadrant I of course displays the
intermediate outputs and the section in quadrant II shows the final demand
for agricultural production in 1993. If we proceed to column 1, it shows
R2 050m intermediate agricultural production that was reabsorbed into the
agricultural sector. This would for example constitute the total value of
agricultural production that was for example held back in the form of seed
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or other plant material for further seasons' production. Column 2 shows an
agricultural output of R31m that was sold in the mining sector. This would
for example be the timber used in mines.

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 In column 3, we find that R17 354m of agricultural output was sold to the
manufacturing industry. The bulk of this output is accounted for by
intermediate demand of the food processing industry (R14 797m - this does
not appear in Table 5.2, but was found in the original source), but a
substantial amount (R1 026m) of this had also been sold in the tobacco and
beverages industry. These sales to the tobacco and beverages industry in
turn represented the tobacco sales to cigarette manufacturers and malting
barley sold to breweries. A considerably smaller portion of the
intermediate output went to the electricity and water sector (R16m), as
reflected in column 4. The building, engineering and construction
industries took up R4m's worth of agricultural output (Column 5). This once
again mainly consists of timber supplied by the agricultural industry to
these industries.

Trade, catering and accommodation industries accounted for the third

highest intermediate demand for agricultural output (R396m) (Column 6).
The transport and communications sector absorbed R65m of agricultural
output (Column 7). Column 8 and 9 reflect the intermediate demand for
agricultural goods by the financial and business services and other services
(R30m and R78m respectively). This brings us to column 10 that recorded
the total intermediate demand for 1993. From this it can be determined that
the total intermediate demand for agricultural products in that year
(R20 024m) roughly constituted two thirds of the total demand for
agricultural products (compare column 10 to column 16). Because all these
outputs are recorded in quadrant I, it means that all of the listed agricultural
output components were seen as intermediate outputs (in other words:
outputs that needed to be further refined by other industries before it could
have been sold on the market for final goods and services).

In column 11 we see that approximately R8 549m of total agricultural output

was directly absorbed in the form of private consumption. Government
consumption expenditure in turn accounted for R365m of the final
consumption of agricultural outputs. Columns 13 and 14 reflect the total
amount of agricultural output that was used for gross domestic investment.
Though it is stating the obvious that the nature of agricultural outputs does
not allow for it to be used as any form of fixed capital formation, one would
wonder how to interpret the -R298m in column 14 (changes in inventories).
This represents mainly the changes in livestock on farms between the
beginning and end of the year. The negative sign of the entry implies that
the stocks have indeed decreased over that period. Column 15 indicates
that R1 864m of the agricultural production was destined for the export

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Take total output by industry (38,

market. Finally column 16 reflects the total of agricultural output (both
intermediate and final) (R30 503m) for the year 1993. All of the above
entries are classified in quadrant II, which accounts for that portion of total
output destined for final demand (or end use).

If we now return to the first column of Table 5.2, we can proceed vertically
along the first column to analyse the input structure (origin of inputs) that
resulted in a total agricultural output of R30 503m. In row 1, it is stated that
agriculture industry needed R2 050m inputs from the agricultural industry.
The R36m inputs from the mining industry mainly consisted of the
fertilisers used by farmers. The manufacturing industry contributed R7
653m of the inputs of the agricultural sector. The main contributions made
were those of the food processing industry (probably mainly animal feed)
(R3 229m) and the chemicals, rubber plastic and petroleum industry (R3
364m). The electricity and water industry accounted for R354m and
building, engineering and construction for R156m of the intermediate inputs
used by the agricultural industry. Trade, catering and accommodation once
again contributed a substantial share of the inputs (R2 059m) of which most
of course would have been spent on trade. The transport and
communications sector contributed R703m of the agricultural intermediate
input requirements and financial and business services R217m. Other
services provided R474m of the intermediate inputs of agriculture. This
brings us to the total intermediate input requirements for the agricultural
sector of R13 702m.

If we consider the next row (first row of quadrant III), we see that R1 172m
imports were used as primary inputs in the agricultural industry. This will
include imports of plant material (seed), live animals, implements, etc.
Other primary inputs used include remuneration of employees (R3 746m),
gross operating surplus (remuneration paid out to the other production
factors that were involved in the agricultural production) that amounted to
R11 329m. Furthermore, net indirect taxes paid by the agricultural industry
amounted to R554m for 1993. The total inputs therefore (consisting of the
total intermediate inputs (row 10) listed in quadrant I and the primary inputs
listed in quadrant III amounted to R30 503m. It must be mentioned here
that the column total for the agricultural inputs will inevitably correspond
with the total production or output (indicated by the row total). At first
glance it may seem strange that the value of inputs and outputs precisely
correspond. What about any profits then? Remember that the gross
operating surplus (listed as a primary input) will have included all dividends
and profit made in the agricultural sector.

It will prove to be a tedious task to discuss all of the entries in the other

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industries. The discussion above should however be adequate for the
reader to grasp what information can be obtained from the individual
entries of the transactions table.

The only features about the transactions table that still needs to be
discussed are some of the row entries of quadrant III and of quadrant IV:

• Imports:
The figures recorded along the Import row in quadrant IV are the imports
which go directly for household and government consumption, for capital
formation and for re-export. These figures include invisibles such as
expenditure by residents of South Africa travelling abroad. The total
imports of South Africa for 1993 was R84 644m (see column 16).

• Remuneration of employees:
The total value of salaries and wages accruing to persons working in all
sectors of the economy amounted to R210 024m (Column 16). As could be
expected, most of these wages were allocated to employees working in the
intermediate sector (R155 960m), leaving only R54 064m for Final Demand
(total of all the remuneration recorded in quadrant IV).

• Gross operating surplus:

The entries in the gross operating surplus represent all the costs incurred
due to the use of the other production factors (capital, land and
entrepreneurship) in the production process in the form of interest, rent,
dividends and profits. As once again could be expected, the majority of
these were paid out to intermediate production (R134 036m). The
remaining R2 077m of the total R136 113m recorded as total gross
operating surplus (Column 16) was allocated to government. This consisted
mostly of revenue obtained by government from their various assets and
government enterprises.

• Net indirect taxes:

Net indirect taxes consist of the indirect taxes paid by the various economic
subjects less the subsidies paid out to them. The figures recorded in the
indirect taxes row in quadrant IV are mainly the rates on dwellings and
customs duties on imports. One of course has to look at the column in
which it is recorded to ascertain the source of this expenditure on indirect
taxes. The brunt of indirect taxes (R19 853) has been paid as part of
household consumption. This makes perfect sense considering that the
largest contributor in quadrant II (and IV) to final consumption had by far
been private consumption expenditure. (Compare in this regard the sum of
total intermediate consumption and imports for private consumption
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expenditure that roughly came to about R207 179m, to the totals for the
other expenditure entries in quadrant II + imports).

• Equality of entries:
The last remark that needs to be made about the composition of the
transactions table is on the equality of the rows and columns. In an input-
output table, the total value of output of each production sector (i.e. the row
totals) is always equal to the value of the total expenditure on inputs (i.e.
the column totals). No such equality restrictions are however imposed on
the Final Demand sectors or on the Primary inputs sectors (i.e. the column
and row totals of quadrant IV). In line with these equality restrictions it
should be noted that in Table 5.2, the totals of each of the first nine rows are
equal to the totals of the first nine columns.

Likewise, the summation of total intermediate inputs and primary inputs

(i.e. total inputs) as reflected in row 15 column 10 will always be equal to
the total for intermediate demand and final demand (row 10, column 16).
Remember that it was stated in Lecture 2 that the Input-output table
represents the deconsolidation of Account 1 of the national income and
production accounts. This explains the equality of total production
(represented by the R641 160m that reflects the total cost of inputs (row 15,
column 10) - or the left-hand side of Account 1) and the total demand for
goods and services (row 10, column 16 - or the right-hand side of Account
1). For a useful summary of the cell entries that are supposed to be equal,
the reader can refer to Table 5.4, which summarises the Transactions table
in symbolic form.

5.2.2 Technical coefficients

After preparing the transactions table, which forms the statistical basis of
the input-output system, the next operation is to calculate what is called the
unit cost structure or the technical coefficients. The technical coefficients
are obtained by dividing every entry in quadrants I and III of Table 5.2 by
the total of the column in which it is recorded.

Table 5.3 is a condensed version of Table 5.2. Several of the columns in

Table 5.2 have been aggregated for the sake of brevity. Quadrant 1 has
thus been reduced to primary sector, secondary sector, tertiary sector and
intermediate production (the industries that these consist of, are provided in
the notes to Table 5.3).

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Table 5.3 Input-output table, 1993 (Sectorally aggregated)

Inter-industry flows

INTERMEDIATE
CONSUMPTION
Outputs

Secondary
Inputs

Primary

Tertiary
Primary 2209 26853 692 29754
Secondary 18196 93303 29234 140733
Tertiary 8735 41571 65351 115657
TOTAL INTERMEDIATE INPUTS 29140 161727 95277 286144

TOTAL IMPORTS 14892 18630 19464 53436

REMUNERATION OF EMPLOYEES 18985 57741 79233 155960
GROSS OPERATING SURPLUS 26648 48352 59036 134036
NET INDIRECT TAXES 1926 2424 7234 11584
TOTAL INPUTS 91591 288874 260244 641160

Notes:
1. The primary sector comprises the agriculture and mining industries.
2. The secondary sector comprises the manufacturing, electricity and
water, building, engineering and construction industries.
3. The tertiary sector comprises the trade, catering and accommodation,
transport and communication, financial and business services, and
other services.
Source: Table 5.2

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This table can be expressed in general symbolic form as done in Table 5.4.
Note once again the equality of certain entries (column totals of quadrant III
and the row totals of quadrant II) in the Transactions table as discussed
above.

Table 5.4 Commodity flows by sector of origin and destination

(Symbolic terms)

Inter-industry
flows
Outputs Total final Total
Secondary
Primary

Tertiary
demand output
Inputs

Primary x11 x12 x13 Y1 X1

Secondary x21 x22 x23 Y2 X2
Tertiary x31 x32 x33 Y3 X3
ALL PRIMARY INPUTS Z1 Z2 Z3 - -
TOTAL INPUTS X1 X2 X3

It seems appropriate at this stage to add a brief note explaining the notation
used in Table 5.4. To those acquainted with the basics of matrix algebra,
the following note will be common knowledge. The symbol for each
element listed above, should be interpreted as follows:

The symbol of entry (element in the matrix) x31 provides useful information
on the exact location of the element in the matrix.
x31 therefore signifies that the entry is located in the third row of the first
column, or in general symbolic terms:

aij implies an entry in the i-th row of the j-th column

Applying this general notation, we can express the technical coefficients for
each of the entries in Table 5.3 in symbol form for the purpose of deriving a
general mathematical formula for the calculation of the technical
coefficients as done in Table 5.5.

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Table 5.5 Inter-industry Technical Coefficients (Symbolic terms)

Inter-industry flows

Outputs
Primary Secondary Tertiary
Sector Sector sector
Inputs

Primary a11 a12 a13

Secondary a21 a22 a23
Tertiary a31 a32 a33

As explained above, the technical coefficients are calculated by dividing the

figures in quadrants I and III of the Transactions table by the corresponding
column total. Therefore from Tables 5.3 and 5.4 we can determine that the
technical coefficient for the first column (first row entry) in the primary
sector column (i.e. element a11) is calculated as follows:

x11
a11 = ;
X1

x21
and element a21 = ;
X1

xij
or in general terms: aij = (5.1)
Xj

where i represents the number of the row and j the number of the column
in which the coefficient is located

If we then apply formula (5.1) to the sectorally aggregated values in

Table 5.3 we can compile the inter-industry technical coefficients as
displayed in Table 5.6.

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Table 5.6 Inter-sectoral technical coefficients, 1993
(Sectorally aggregated)

Inter-industry flows

INTERMEDIATE
Primary

Secondary

Tertiary

CONSUMPTION
Outputs

Inputs

Primary 0.024 0.093 0.003 0.046

Secondary 0.199 0.323 0.112 0.219
Tertiary 0.095 0.144 0.251 0.180
TOTAL INTERMEDIATE INPUTS 0.318 0.560 0.366 0.446

TOTAL IMPORTS 0.163 0.064 0.075 0.083

REMUNERATION OF EMPLOYEES 0.207 0.200 0.304 0.243
GROSS OPERATING SURPLUS 0.291 0.167 0.227 0.209
NET INDIRECT TAXES 0.021 0.008 0.028 0.018
TOTAL INPUTS 1 1 1 1

Notes:

1. The primary sector comprises the agriculture and mining industries.

2. The secondary sector comprises the manufacturing, electricity and
water, building, engineering and construction industries.
3. The tertiary sector comprises the trade, catering and accommodation,
transport and communication, financial and business services, and
other services.

Source: Table 5.3

From formula (5.1) it also follows that:

xij = aijXj (5.2)

so that x11 = a11X1; x12 = a12X2 etc.

This implies that we can determine exactly what the additional input
requirements from each of the industries would be for an increase in total
output for example, by using formula (5.2). Take for example the case
where primary sector exports were to increase by R1m ceteris paribus.
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Then the input requirements for the primary sector will be

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x11 = a11X1
x21 = a21X1
x31 = a31X1

Therefore, by substituting the values for the technical coefficient and the
increase in exports (increasing X1 by R1m), the input requirements can be
calculated as:

x11 = 0.024(R1m) = R24 000

x21 = 0.199(R1m) = R199 000
x31 = 0.095(R1m) = R95 000 etc.

Therefore, for an increase in output of R1m in primary exports, an

additional R24 000 inputs will be required from the primary sector in the
form of intermediary inputs, R199 000 from the secondary sectors and so
on.

It can therefore be seen that these coefficients provide a very useful tool to
interpret the first order effect of changes in final demand on intermediate
production.

With the term "first order effect" is implied that these coefficients can
provide information on the immediate or direct effects of changes in one of
the final demand sectors. Remember that we stated in the introduction to
this lecture that all of the production sectors or industries are interrelated.
Subsequently, no change in one industry can therefore only influence the
circumstances in that specific industry. It will have second or even higher
order effects on the levels of production in these industries. To use a
practical example: Suppose the final demand for motor vehicles increase.
Subsequently, it will have a first order effect on the input requirements in
the manufacturing sector (which needs to produce more to comply with the
higher demand). This, will also have an effect on all the other industries
that provide inputs to the manufacturing industry in the sense that they will
also have to increase their intermediate production to comply with the
higher demand generated by the manufacturing industry. These are all first
order effects.

Second and higher order effects occur when these industries that supply
the motor manufacturing sector with intermediate inputs in turn start to
require more intermediate inputs in order to meet the higher production
levels of intermediate outputs. These higher order effects are however
explained by using indirect multipliers. The calculation of these multipliers
or coefficients however is not part of the syllabus and will subsequently be

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left for study on graduate level.

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Worksheet 5.1:

1. Briefly describe what input-output analysis is about and what it can be

used for.
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2. Discuss the assumptions on which an input-output system is based.

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3. Discuss the information contained in all four quadrants in the

transactions table.
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4. Complete the following Transactions table by calculating the values for

the open spaces:

Inputs Inter-industry Final Total

1 2 3 Demand Output

Industry 1 10 30 45 55 …..

Industry 2 8 ….. 10 90 123

Industry 3 ….. 10 6 …. 135

Total intermediary inputs 38 …. 61 …. …..

Imports …. 22 13 0 52

Remuneration …. 18 …. 0 92

Gross operating surplus 15 …. 14 0 41

Net indirect taxes 33 16 …. 0 59

Total inputs …. …. …. 244 642

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5. Calculate the technical coefficients for quadrants I and III based on the
information contained in the table in question 4:

Inputs Inter-industry Final Total

1 2 3 Demand Output

Industry 1 …. …. ….

Industry 2 …. …. ….

Industry 3 …. …. ….

Total intermediary inputs …. …. ….

Imports …. …. ….

Remuneration …. …. ….

Gross operating surplus …. …. ….

Indirect taxes …. …. ….

Total inputs …. …. ….

If final demand for the output of industry 2 increases with R1m, how will the
input requirements of industry 2 be affected?

Calculate the effects and show all calculations.

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5.3 SUPPLY AND USE TABLE

The Supply and use table provides a detailed disaggregation of Expenditure

on GDP. The Expenditure on GDP (as reflected on the right-hand side of
Account 1) is also known as the goods and services account for the total
economy. The goods and services account can also be compiled for
detailed product groups and this information is displayed in the Supply and
use table.

Therefore, in a sense the information contained in the Supply and use table,
is very similar (but not identical) to that reflected in the Input-output table.
Though it is technically possible to compile the Input-output table from the
information in the Supply and use table, one can obtain much more
detailed information from the Supply and use table than the case is for the
Input-output table. Moreover the Supply and use table provides another
means of calculating the national GDP according to production, income and
expenditure approach.

The Supply and use table used in this section is a simplified model of an
economy and is based on fictitious data. The Supply and use table is split
into two sub-tables, the one which reflects the components of the supply of
certain products (Supply table), while the other (Use table) reflects the uses
of specific product groups.

Therefore total supply (as recorded in the Supply table) is calculated in the
following way:

Output at basic prices

+ Imports of goods and services at c.i.f prices
+ Trade and transport margins
+ Taxes on products
Less: Subsidies on products

TOTAL SUPPLY at purchasers’ prices

A few of these concepts require further discussion. Output at basic prices

refers to the same way of valuating output than we have used previously in
Lecture 2 for the production account (See section 2.6.1 in Lecture 2). The
basic price refers to the actual amount receivable by the producer. It
therefore includes any other taxes and subsidies on production.

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The c.i.f (cost, insurance and freight) price refers to the price of a product
delivered at the border of the importing country. Hence it includes all
transportation and insurance costs irrespective whether these are paid to a
resident or non-resident of the importing country. But it is important to
note that this excludes all import duties or other taxes payable on the
imports.

Trade margins are realised by wholesalers and retailers (their added profit
to the basic prices). Transport margins covers all extra transport charges
paid separately by the purchaser (end-user of the product).

Taxes and subsidies on products have already been discussed in Lecture 2.

As a refresher it can be stated that these include all subsidies and taxes that
are attributable to (or payable per) units of output (products or services)
when they are produced, sold or used.

Take note:

For the sake of simplifying the terminology used here, you can equate the
concepts of valuating production at purchasers’ prices and at market prices.
Therefore:

Total output at purchasers’ prices = total output at market prices

The Use table reflects the different categories of uses of total output. The
Use table can also be used to determine cost structures of industries and
components of value added.

Total use of products (as recorded in the Use table) is calculated in the
following way:

Intermediate consumption at purchasers’ prices

+ Final consumption at purchasers’ prices
+ Gross fixed capital formation at purchasers’ prices
+ Changes in inventories at purchasers’ prices
+ Exports of goods and services at f.o.b. prices

TOTAL USE at purchasers’ prices

From the above calculation of total uses in the economy it is important to

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note that all of the different categories of uses are valued at purchasers’
prices (Refer to the “Take note” insert above). These are the prices at which
the values of products and services are normally stated in data surveys and
other information sources. The f.o.b (free on board) prices reflect the value
of the exported goods and services at the border of the exporting country.
It includes all costs associated with the distribution to the border, as well as
any export taxes. The f.o.b.-price is therefore used because it is seen as a
“special” type of purchasers’ price applicable only to the use category of
exports. All of the other concepts displayed in the Use table have already
been dealt with in the notes on the Production Account in Lecture 2.

5.3.1 A Supply and Use Table for a Simplified Economy

This section is modelled on the example provided in the System of National

Accounts 1993 – Training Manual, which was published in 1999 by the
SADC. The South African Supply and use table is reported in a 94×94
matrix, reflecting the production and use of 94 sectors and 94 product
groups. However, the industries and products that we are investigating in
this simplified model are as follows:

Industries:
• Agriculture
• Manufacturing
• Trade and transport
• Government
• Other service activities

Each industry produces certain goods and services categorised as principle

products. These are typical products of the various industries. Besides the
principle products, the different industries also provide by-products and
secondary products which are principle products for other industries. A
good example of that would be SASOL that produces fuel as a principle
product as well as fibres, plastic and wax as secondary or by-products that
are principle products in various other industries. The products used for the
example are all principle products and as such reflects the principle activity
of each industry listed above.

Products:
• Agricultural products
• Manufactured products
• Trade and transport services
• Government services

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 • Other services

(a) The Supply table

The rows in the Supply table represent the specified products and there is
one row for each of the five product groups. The sixth row records all direct
purchases abroad, which cannot be categorised into one of the above-
mentioned product categories. The columns contain information about the
origin of the supply (at basic prices) as well as information on the addition
of trade and transport margins, taxes and subsidies on products. See Table
5.7 in this regard. The following will provide a brief explanation of the
content in Table 5.7.

Rows 1 and 2 list the agricultural and manufactured products. These

products are distinguished from the services on the basis of the trade and
transport margins that it carries. Consider for example manufacturing:
(Row 2). Cell 2/(1) indicates that, of the total manufactured output valued at
purchasers’ prices (1 555), a very small portion (25) was produced by the
agricultural sector. The bulk of total manufacturing output was produced in
the manufacturing industry itself (930), as can be seen from cell 2/(2). Cell
2/(3) and 2/(4) show that small portions of total manufactured output were
produced in the trade and transport industries (10) and services industries
(5). Cell 2/(6) provides a summation of all manufactured production by the
various (domestic) production sectors, valued at basic prices (970).

Cell 2/(7) displays all imports of manufactured products at c.i.f prices (310),
and with its addition to the total domestic production, the total supply of
manufactured goods in the country valued at basic prices (cell 2/(8))
amounted to 1280. This represents the overall value (at basic prices) of
domestic and imported manufactured products. The rest of the columns
recorded for manufactured products (across row 2) are used to convert the
value of output from basic prices to purchasers’ prices. Cell 2/(9) shows the
trade and transport margins on manufactured products, which amounted to
175. In cell 2/(10), the taxes on products are added and seeing that there
were no subsidies on manufactured products (would have been reflected in
cell 2/(11)), the total supply of manufactured products for the period under
consideration, amounted to 1 555 (cell 2/(12)) expressed at purchasers'
prices. In other industries where there were subsidies (see agricultural
products, cell 1/(11), the subsidies are subtracted in order to convert the
values to purchasers’ prices. The information in the rest of the Supply table
can be interpreted in a similar fashion.

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Another point possibly requiring further explanation in the Supply table is
the amount of –205 in cell 3/(9). This displays the value of trade and
transport margins paid by the other sectors to the transport sector. These
are recorded as a negative in order to adhere to basic accounting principles.
Seeing that these margins were already added to the basic prices of goods
in rows 1 and 2 and also recorded as part of the principle production of
transport services in cell 3/(6) (part of 350), this needs to be shown as a
negative to avoid double-counting.

The column-wise analysis of the Supply table provides information on the

origin of total output levels in the various industries. Considering column
(1): In the agricultural sector, we have realised a total output for the sector
of 325 (cell 7/(1)). The largest quantity (300 - cell 1/(1)) of the total output
originating in this sector is accounted for by agricultural products. The rest
of agricultural output was recorded as secondary production. This implies
that the agricultural sector has also produced manufactured products (as
secondary products), amounting to 25 (cell 2/(1)).

(b) The Use table

The first seven rows of the Use table (Table 5.8) reflects the products with
one row each for the five product groups (like in the Supply table) and two
additional rows, one for direct purchases by residents abroad (row 6) and
one for purchases on the domestic market by non-residents (row 7). The
last two rows reflect purchases that can not be categorised according to
product type (mostly due to insufficient survey information). The first six
columns reflects the production costs of each industry, while the following
columns (columns (7) – (12)) up to the total column (column (13)), shows
the final use categories by product.

Rows 1 – 6 show how the supply of goods and services (at purchasers’
prices) are distributed to different uses: intermediate use (columns (1) – (6))
and final uses (column (7) to (12)). Take row 1 for example: It shows us
that agricultural products are used in four of the five sectors as intermediate
products, totalling 275 (cell 1/(6)).

Cells 1/(7) to 1/(11) show the final uses of production specified by product,
totalling 235 (cell 1/(12)) for agricultural products.

Row 8 contains the total use of goods and services by category. Row 9
records the gross value added for each industry. This is calculated as the

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difference between total output for each industry (cells 14/(1) to 14/(6)) and
the total intermediate consumption (cells 8/(1) to 8/(6)). Note that total
output (cells 14/(1) to 14/(6)) has been brought down from the Supply table
(cells 7/(1) to 7/(6) in the Supply table).

Rows 10 to 13 show the components of value added, with operating surplus

calculated as the difference between gross value added and the sum of
compensation of employees, other taxes on production less other subsidies
on production. As values added are recorded as a gross value, it implies
that operating surplus should also be a gross entry, in other words still
including consumption of fixed capital.

5.3.2 Applications for the Supply and Use Table

The Supply and use table can be used to obtain the production and
generation of income accounts for specific industries and it is also a useful
tool to compile the GDP according to the production, income and
expenditure approaches. The following is still based on the hypothetical
information contained in Tables 5.7 and 5.8

(a) The Production and Generation of income accounts

The following is an example how the Supply and use tables can for
example be used to determine the production accounts and generation of
income accounts for the agricultural industry. It is here presented in T-
shape:

Production Account for Agriculture

Intermediate consumption 160 Output 325
Agricultural products 20 Agricultural products 300
Manufactured products 85 Manufactured products 25
Trade & transport 30
services
Other services 25
Government services
Direct purchases abroad
Gross value added 165
Total output 325 Total output 325

This account is compiled in order to provide a detailed breakdown for each

industry on the origin of each industry's inputs (left-hand side). This can
also be used to give an indication of the cost of production, as well as the
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value added by each industry during production. On the right-hand side
one can assess the overall primary and secondary production (output)
levels of a specific industry.

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The generation of income can also be compiled by using the information
contained in the Use table:

Generation of Income Account

Compensation of employees 50 Value added 165
Other taxes on production 5
Other subs. on production -10
Operating surplus 120

Total income 165 Total value added 165

(b) Determining GDP according to the Production, Income and

Expenditure Approaches by using Data from the Supply and Use
Table

The Supply and use table also enables one to derive GDP at market prices
according to the production, income and expenditure approaches:

Production side
Agriculture 165 Use table, cell 9/(1)
Manufacturing 305 Use table, cell 9/(2)
Trade and transport 200 Use table, cell 9/(3)
Other service industries 225 Use table, cell 9/(4)
Government 235 Use table, cell 9/(5)
Sum of values added, basic prices 1 130 Use table, cell 9/(6)
Taxes on products 155 Supply table, cell 7/(10)
Less: Subsidies on products 25 Supply table, cell 7/(11)
GDP at market prices 1260

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Expenditure side
Final consumption by h/holds 715 Use table, cell 8/(7)
Final consumption by govt. 325 Use table, cell 8/(8)
Gross fixed capital formation 275 Use table, cell 8/(9)
Changes in inventories -15 Use table, cell 8/(10)
Gross domestic expenditure 1 300
Exports of goods & services 625 Use table, cell 8/(11)
Less: Imports of goods &
services 665 Supply table, cell 7/(7)
GDP at market prices 1 260

Income side
Compensation of employees 580 Use table, cell 10/(6)
Taxes on production & 225 Supply table, cell 7/(10)
imports +Use table, cell 11/(6)
Less: Subsidies on production & 40 Supply table, cell 7/(11)
imports +Use table, cell 12/(6)
Operating surplus 495 Use table, cell 13/(6)
GDP at market prices 1 260

Worksheet 5.2:

1. Briefly describe the main differences between the Input-output table and
the Supply and use table, by referring to its different analytical uses.
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 2. How is total supply at purchasers’ prices calculated in the Supply table?
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3. How is total use at purchasers’ prices calculated in the use table?

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4. Complete the following Supply and use tables for the Republic of
Hypothetica by calculating the values for the open spaces:

Supply Output of industries Imports Total Trade & Taxes Subs Total
1 2 3 All supply transp on on supply
Tran Indus- basic margin pro- pro- purch
sport tries prices s ducts ducts prices

Product 1 10 30 45
85
….. 30 115 85 45 -55
190
…..

7 15 40 60
Product 2 8 ….. 10 25 ….. ….. 20 …. -20 100
20 36 136 -105 -5
Transport ….. 10 6 ….. 100 ….. ….. 109 …. 135
Direct
[Link] 140
140
…. 140
….

47 146 431 0….. 214 565

TOTAL 38 …. 61 ….. 285 ….. ….. -80 …..

All industries + Imports = Total Supply at Basic Prices

Then we add the margins & taxes & subtract subsidies to get the Total Supply at Purchases Prices
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Take total output by industry (38, 47, 61

& 146 to the use table
Take these 4 numbers over to the use
table
 Use table for Hypothetica:

Use Intermediate consumption of Final use

industries
1 2 3 All Final Final Gross Change Total Total
Indus- cons. cons. fixed in X final supply
tries of of govt. cap. inven- use purch
[Link] form. tories prices
23 167 190
Product 1 5 8 10 ….. 50 0 20 87 10 ….. …..

5 20 16 100
Product 2 2 2 …. 9 ….. 25 10 20 …. 91 …..

27 -27 108 135

Product 3 10 10 7 ….. 30 35
….. 50 ….. 20 …. …..
Direct purch. 40 100 140
abroad 10 10 20 …. 100 …. ….

30 99 46 466 565
TOTAL 27 …. 42 ….. 200 60 80 80 ….. ….. …..
Gross value
added 11
….. …..17 19
….. 47
…..
Compens. of
employees 10 8 ….. …..
Other taxes
on production 5 10 8 …..
Other subs.
on production -15 ….. -11 …..
Operating
surplus ….. 6 7 …..
TOTAL
OUTPUT 38
….. 47
….. 61
….. 146
…..
5. Compile the Production and Generation of income accounts for
Industry 2
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6. Determine GDP at market prices from the information above for

Republic Hypothetica according to the income approach
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Take total output by industry (38, 47, 61

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Take total output by industry (38, 47, 61, 146