4.2 Value-added Versus Sector Size
Increasing the productivity of a sector that is small but has high value-added is likely to increase GDP. Value-added is the increase in value that a sector adds to the intermediate inputs it uses by adding labour, capital, and other factors of production. Increasing the productivity of a high value-added sector could occur by targeted management training, increased or improved tertiary education, or a technology improvement like the recent information and communications technology revolution. But can this increase be enough to make up for the small size of the sector? This scenario compares a 10% increase in productivity in small but high value-added manufacturing sectors to a 10% increase in productivity in larger but lower value-added agricultural sectors. These are represented by sectors in the upper left and lower right quadrants respectively of Figure 5.
- Figure 5 - Choosing the industries
- Source: (Schilling, 2011)
Footwear, ship building, transport equipment, and other manufacturing are four manufacturing industries with high value-added, chosen for this scenario. Together, they contribute about 0.5% of total economy-wide gross output, but 0.6% of value-added, making them higher-than-average value-added sectors. By contrast, dairy, and beef and sheep farming are two agricultural sectors with a high contribution to GDP, but lower value-added. In total these two sectors contribute about 2.9% of economy-wide gross output, but only 2.5% of value-added. The agricultural sectors contribute 5.4 times more to gross output than the manufacturing sectors, but they only contribute 4.0 times more to value-added.
| Share of economy output | Share of economy value-add | |
|---|---|---|
| Specified agricultural sectors | 2.9% | 2.5% |
| Specified high value manufacturing sectors | 0.5% | 0.6% |
| Ratio of shares | 5.4 | 4.0 |
Source: (Schilling, 2011)
In addition to the differences in size and value-added, the agricultural sectors also differ from the manufacturing sectors in their proportions of outputs exported and intermediate inputs imported. The agricultural sectors export around 64% of their output and only import 13% of their intermediate inputs. The manufacturing sectors export a much lower proportion of their outputs, at 13%, but are more dependent on imports, which comprise 42% of their intermediate inputs.
The same change, applied to each of the two sets of sectors, is likely to have very different economy-wide effects. Changes to larger sectors tend to have larger effects on the economy. So do changes to the productivity of higher value-added sectors and high-exporting sectors. While larger sectors tend to scale up all effects, changes to high-value-added sectors and to high-exporting sectors concentrate their effects on specific and different parts of the economy.
