Overview

In South Africa, official GDP is measured using the production approach, which is also known as the value-added approach. The approach estimates how much value is added by each unit of economic activity, e.g., a pizza restaurant. To do this, we measure the total revenue earned by the restaurant for its output, pizza. We then deduct all the input costs incurred by the restaurant, e.g., flour, cheese, and electricity. The result is the value added by the pizza restaurant. The value added from the cheese itself would be found in the dairy farm in the agricultural sector, and the value added from transporting the cheese to the restaurant will be found in the transport sector.

The different economic sectors are split into three levels which broadly match actual supply chains:

• The primary sector consists of agriculture and mining.
• The secondary sector consists of manufacturing, construction, and utilities (electricity, gas, and water).
• The tertiary sector consists of business services (including finance, insurance, real estate sales, legal services, accounting, etc.), personal services, logistics (communication and transport), government services, and trade, catering, and accommodation (where trade is the wholesaling and retailing of goods).

For nominal GDP, output and value added are measured at the prices that prevailed within the year under consideration. For real GDP, when the impact of inflation is removed, 2015 is used as the base year. This means that output is valued in each year under the assumption that 2015 prices prevailed (both prior and post-2015).

Advanced understanding

The value added in each sector is allocated between the contribution from:

• Labour (i.e., salaries and wages)
• Capital (i.e., profit). The latter, which is formally called "gross operating surplus," is similar to EBIT (earnings before interest and tax).

It is worthwhile to drill down into the treatment of interest and tax in more detail.

Tax treatment. You will notice from the dashboard that at a factor level there are three categories: labour, capital, and VAT / Levies. The latter is what STATS SA refers to as taxes less subsidies. Why do we use the term VAT / Levies? Because this segment of GDP is not income tax, which is paid out of labour's salaries and wages and capital's operating profit. Income tax is already included in the value attributed to labour and capital. Rather, it is taxes like VAT, excise duties (e.g., on alcohol and tobacco products), or other levies/taxes which are not already included in the value of outputs from labour and capital. These taxes form part of the value of products and services ultimately paid for by end users.

Interest treatment. We understand that the interest paid by companies to financial institutions is captured within the operating surplus of the companies and the sectors to which those companies belong. This means that the interest earned by financial institutions from loans to companies is not included in the value-added element of financial institutions. The negative of this approach is that the full size of the financial sector is not properly captured. The positive of this approach is that a loan from one entity to another is more of a transfer rather than something that incrementally adds goods and services to the economy. Moreover, the capital that is loaned to agriculture is ultimately being used productively in agriculture, and by using a "before interest" profit measure, the contribution of the agricultural sector will not depend on whether farmers use their own capital or borrow capital from others. Note, where the financial institution loans money to households and Government, we understand that the net interest earned by financial institutions is captured in their value added. We are open to refining this interpretation upon further feedback.

Finally, note that STATS SA provides operating surplus in gross form - which means before "fixed capital consumption" has been deducted. Fixed capital consumption is similar to accounting depreciation, but it differs in that only actual reductions in asset value are allowed (as opposed to when an asset is written off for tax purposes but still has productive value). Because gross operating surplus is used, the result is Gross GDP as opposed to Net GDP.

Dashboard approach

This dashboard relies directly on the GDP data files provided by STATS SA. For the most part, this is a simple dashboarding of the underlying data. But we did make certain adjustments for ease of use.

Terminology changes. The terminology map is shown in the table below.

Labour vs Capital split for real GDP. STATS SA only provides the labour / capital split for nominal values. For real values, only the overall sector value is provided. To derive the real value splits for labour and capital, we apply the weighting between employee and profit that occurred nominally (within each sector in each year) to the overall real sector value provided by SARS. This is a reasonable approach for two reasons:

• We would expect that inflation indexes (and associated deflators) within a given sector would not be different between the employee and profit elements.
• We note that for various time series within the expenditure approach (not shown on those dashboards), the splits between different segments within a category (i.e. the split between government vs business spend in non-residential buildings) do not differ between the real and nominal values, as expected.