Intermediate Use and Output Ratios in the Australian Economy

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Released
1/03/2023
Source
Australian National Accounts: National Income, Expenditure and Product, December 2022

Introduction

Gross Value Added (GVA) on an industry basis is the difference between Output and Total Intermediate Use (TIU). Output refers to the domestic production of goods and services while TIU is the value of the goods and services consumed as inputs to the production process. These inputs exclude costs such as wages, salaries, superannuation payments and the cost of capital assets such as machinery and equipment.

Gross Domestic Product (GDP) has three measures: Production, Income and Expenditure. In the National Accounts, GVA by industry is aggregated to produce the Production measure of GDP. GVA by industry is published quarterly in Australian National Accounts: National Income, Expenditure and Product. The underlying Output and TIU are not compiled quarterly but can be found annually in Australian National Accounts: Supply and Use tables 2020-21 Financial Year.

The ratio of TIU to Output reflects how inputs to the production process are used to generate Output, and drive GDP and productivity growth. The higher the ratio, the more intermediate inputs it takes to produce a unit of Output, and vice versa. In current prices, changes in the ratio include changes in the price and volume of intermediate inputs and Output. In volume terms, changes in the ratio reflect only changes in the volume of inputs and outputs.

Productivity growth and TIU to Output ratio

Shifts in the TIU to Output ratio over time can be due to improvements in broader economy or specific industry productivity. Productivity increases when more units of Output are generated in volume terms for a given volume of inputs. A more comprehensive coverage on ABS productivity measures, can be found in Estimates of Industry Multifactor Productivity, 2021-22 financial year. Gross Output-based productivity measures outlining the use of capital; labour; energy; materials and services (KLEMS) in production are also presented in Estimates of Industry Level KLEMS Multifactor Productivity, 2020-21 financial year.

Other drivers of change in the TIU to Output ratio

There are a range of other factors beyond productivity growth which can influence the TIU to Output ratio, especially on a current price (nominal) rather than volume basis. Notable factors include:

  • Changes in the relative prices of Output and TIU, such as volatile commodity prices (e.g. Iron ore) or input prices (e.g. Energy).
  • Major events, such as drought or the COVID-19 pandemic, which can suddenly restrict and/or change the amount of input needed to produce Output.
  • Structural or technological changes in the economy over time that results in substitution between production factors (for example, from Capital or Labour to TIU in the case of outsourcing).

This article explores these factors for the Australian economy as a whole, with a particular focus on the Mining and Transport industries.

The Australian Economy

Figure 1 shows that the TIU to Output ratio for the Australian economy in current prices declined from 0.55 in 1994-95 to 0.50 in 2020-21. That is, fewer intermediate inputs were required for a unit of Output in 2020-21 than were required in 1994-95. The ratio for the combined goods producing industries (Agriculture, Mining and Manufacturing) declined from 0.65 in 1994-95 to 0.56 in 2020-21. The Service industries (all remaining ANZSIC divisions) had a slower overall decline from 0.50 in 1994-95 to 0.48 in 2020-21.

Industries producing goods have a higher TIU to Output ratio than Service industries, as they often require a larger proportion of material intermediate inputs. Service industries, such as Public administration or Education are more labour intensive in comparison. Services industries grew from 77.8% to 80.1% of GVA between 1994-95 and 2020-21, further driving change in the economy wide TIU to Output ratio.

A lens on the Mining industry

Figure 2 shows Output, TIU and the TIU to Output ratio for the Mining Industry in current prices. The TIU to Output ratio for the Mining industry fell from 0.45 in 1994-95 to 0.36 in 2020-21. In simple terms, this means that 0.45 units of TIU were needed to generate one unit of Mining Output in 1994-95, compared to 0.36 units in 2020-21. The decline in the ratio occurred because Output increased at a faster rate than TIU, particularly over the last five years of the time series.

The TIU to Output ratio for Mining declined during the mid-2000s and again after 2015-16. Figure 2 shows that this is driven by changes to Output with only minor growth in TIU. The periods of high Mining Output in Figure 2 correspond with periods of high Mining commodity export prices (see Figure 3). These high prices spurred an investment boom as businesses sought to increase Output to take advantage of high demand for Mining commodities.

There are two notable peaks in Mining export prices over this period. The first was in 2008-09, driven by Coal export prices, and the second in 2020-21, driven by Iron ore prices.

After removing the impact of volatile Output prices, the relationship between TIU and Output is more stable. Figure 4 shows the ratio of TIU to Output of the Mining industry expressed in 2020-21 prices and in current prices. This shows that in physical terms, the number of inputs needed to produce a unit of Output is comparatively stable year on year, showing a gradual increase in efficiency over the time-series.

Changes in the Transport industry due to the COVID-19 pandemic

The Transport industry was affected by the COVID-19 pandemic in 2020-21, as travel restrictions resulted in less demand for passenger air transport services, while lockdowns saw high demand for postal and delivery services.

The TIU to Output ratio for the Transport industry in current prices was unchanged at 0.56 over 2019-20 and 2020-21. However, changes in operating conditions resulted in differences in the TIU to Output ratios for different parts of the industry.

In 2020-21, COVID-19 related restrictions and testing requirements constrained activity in the Road Transport industry. One result of this constrained activity was that outsourcing within the industry, where typically a large haulier business subcontracts to a smaller haulier, fell significantly. This reduced both Output and TIU. The result was the TIU to Output ratio fell significantly more than for the economy as a whole, from 0.59 in 2019-20 to 0.55 in 2020-21.

The TIU to Output ratio for Air and Space Transport increased from 0.67 in 2019-20 to 0.86 in 2020-21 as domestic and international passenger volumes declined due to COVID-19 related travel restrictions. The airline industry experienced a fall in Output of 61.9%, while TIU declined 51.2%, due to fixed costs such as maintenance services and aircraft storage. Reduced passenger operating load factors also meant that more variable costs, such as fuel, were needed per unit of Output.

In the Postal and Delivery Services industry, a strong and sudden increase in demand in 2020-21 outstripped existing production capacity. Businesses needed to quickly lease new facilities, hire additional transport equipment and charter flights to keep up with demand. This sudden change meant that businesses could not achieve their usual level of efficiency in meeting this new demand, and the TIU to Output ratio increased from 0.59 in 2019-20 to 0.66 in 2020-21.

Further information

This article has explored changes in the ratio between Output and TIU in the Australian Economy and selected industries. The data used in this article and information on other industries can be found in Australian National Accounts: Supply and Use tables 2020-21 Financial Year.