Smaller is larger: manufacturing’s contribution to GDP
Kaveh Pourvand, 3 April 2013
Manufacturing’s contribution to the UK’s Gross Domestic Product (GDP) is much smaller than services. In 2010, manufacturing’s nominal Gross Value Added (GVA) – which effectively measures a sector’s contribution to national GDP – was £139bn while that of services was £1tn. This statistic often gives the impression that manufacturing is increasingly irrelevant to the UK economy. Much of the talk of rebalancing seems to assume we don’t make things anymore and we need to start to do so again.
However, the official statistics, if taken at face value, can be misleading. A high share of GDP is not necessarily a sign of efficiency and vice versa.
Wikipedia provides a helpful standard definition of GDP as ‘the market value of all officially recognized final goods and services produced within a country in a given period of time’.
It is important to remember that GDP measures market value, the prices paid for goods or services in the economy. It is a financial measure of output. The main reason why manufacturing’s contribution to GDP has reduced is that productivity growth in manufacturing industries tends to be faster than in services. In many manufacturing industries, the actual physical output per labour hour has increased over time – as in the car industry for example. The greater supply of manufactured products leads to a fall in market prices of such goods which is in turn reflected as a lower share of GDP for manufacturing.
On the other hand, productivity growth in many service industries is static because you cannot increase output per labour hour without diluting the quality of the product. As Ha-Joon Chang puts it: ‘If a string quartet trots through a twenty-seven-minute piece in nine minutes, would you say that its productivity has trebled? ‘ Of course, wages in the service sector have continued to rise in line with the high productivity manufacturing sector. However, the static productivity growth in many service industries has meant that there has been no corresponding decrease in the prices of service goods.
What this means is that the growth in services has been driven by the underlying productivity of the manufacturing sector. Some claim that ICT and other technologies will allow genuine productivity growth in various services industries which would allow services to drive future growth. But, except in a few service industries, that remains unproven. The smaller contribution of manufacturing to GDP is a sign of strength. Manufacturing goods are cheaper and so free up wealth to be spent on services.
Does this suggest that we should not be worried about the state of UK manufacturing?
No, for two reasons.
One is that long-term economic growth is dependent upon a growing manufacturing sector. Much of the pre-crisis growth in financial services for example, turned out to be illusionary. The second is that we don’t meet enough of our demand for manufactured goods domestically. We import too much of it and it is highly unlikely that this will be sustainable in the long-run.
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