Difference between Value-Added TFP and Gross-Output TFP?

Question

I am working with EU-KLEMS data, and I am using TFP growth as a proxy for technological change. However, there are 2 variables for TFP - TFP based on Gross Output and TFP based on Value Added.

I understand that Value added in this case might be Gross Output-intermediate consumption, but I am not sure whether this is indeed the case, as there is no such explanation in the EU-KLEMS dataset. The two TFP measures move in a similar fashion across industries, but there are indeed some differences - for example, the VA TFP average increases at a much slower rate than the GO TFP.

I would be eternally grateful if some clarification could be provided on these two measures.

Answer 1

Your assumption is correct. Value added is Gross Output-intermediate consumption(inputs).

value-added approach is a simple measure that ignores the difficulties of dealing with inter-industry and intra-industry flows of goods and services. Intermediate inputs are simply excluded here.

The value-added approach provides a simple link of industry-level MFP and sectoral or aggregate MFP growth.

For gross output-based estimates of MFP growth they acknowledge and allow for intermediate inputs as a source of industry growth. In this method they provide a more complete picture of the production process.

If you need more information this manual can help: https://www.pc.gov.au/research/supporting/comparison-gross-output-value-added-methods/cgovam.pdf