Thinking Outside the Box (Part 2): Real Labour Productivity

Date01 May 2019
Published date01 May 2019
AuthorDavid Hearne,Alex de Ruyter
In this chapter, we consider the impact of regional price dif-
ferences on gross value added (GVA). We attempt to develop
regional purchasing power parities (PPPs), focussing on the
creation of both lower-bound and central estimates there-
of. We conclude that nominal gures understate the size of
the real economy in northern regions and commensurately
overestimate the size of the economy in London. This has
important ramications for regional policy, particularly in
a post-Brexit environment. Moreover, similar patterns are
likely to be visible across Europe, suggesting that future
European Union (EU) policy will also want to take subna-
tional price-differences into account. There are strong policy
implications from this chapter, which we explore in more
depth in Chapter 4.
40 Regional Success After Brexit
• Introduction – This section outlines the importance
and appropriate uses of GVA and briey discusses the
regionalisation process adopted by the Ofce for National
Statistics (ONS).
• Price levels: As with other measures, GVA fails to
adequately account for price differences across regions.
The theory of price-level comparisons: outlining the
Eurostat-OECD methodology
From GVA to gross domestic product (GDP)…
A discussion of taxation and methods of apportionment
Setting upper and lower bounds…
Price comparisons in the household sector
Methods of apportioning household nal
consumption expenditure (HHFCE)
Calculating relative price levels (RRCPLs + rents –
challenges re: national and domestic)
Price comparisons in the Government sector
Apportionment (easier?)
Calculating relative price levels (straightforward
outside London but depends on London weighting
and importance of wages)
Price comparisons for investment
Gross capital formation (GCC) and Gross xed
capital formation (GFCF): assume prices are
constant for all industries except construction
Apportionment = data on construction AND
remainder can use one of several methods (ONS
data or DIY by industry?)
41Real Labour Productivity
How to treat non-prot institutions serving households
Net exports
• Technical Issues: Two further technical issues remain to
be discussed – Financial intermediation services indirectly
measured (FISIM) and imputed rents
FISIM – In Appendix 3, we outline why the size of
the nancial services sector is overstated and how this
affects regional GVA
Imputed rents – Here we reprise the discussion of
the previous chapter regarding the regionalisation of
imputed rents and their implications for regional GVA
• Putting it all together: Establishing credible upper and
lower bounds for price levels and GDP.
• Showing the impact on productivity.
• Conclusion: Time to reassess regional success?
GVA can be thought of as a ‘pure’ measure of economic output1
and is also sometimes referred to as GDP at basic prices. Like
GDP, it is a measure of the value added within an economy.
However, whereas GDP measures value added at market prices
(i.e. the price paid by the end user), GVA measures value added
at the prices received by the producer. The difference between
the two is therefore equal to the value of taxes less subsidies on
goods. In the UK, the majority of this is accounted for by value-
added tax (VAT) with a lesser portion being accounted for by
various duties (predominantly on fuel, alcohol and tobacco).
The importance of GVA should thus be clear. On an of-
cial level, GVA per capita is used to determine eligibility for

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