What substitutes are used when value added is unknown?

When value added cannot be obtained for the separate activities of a unit, the manual allows substitute criteria as proxies for the unknown value added data. Paragraph 72 lists output based and input based substitutes. The substitutes are approximations only. They do not change the method, and they do not determine a code for a specific reader.

Which substitutes does the manual list?

Paragraph 72 divides the substitutes into two families. Output based substitutes are gross output attributable to the goods or services of each activity, and the value of sales or turnover of the groups of products within each activity. Input based substitutes are wages and salaries, or income of self employed people, plus depreciation attributable to the different activities; the number of staff involved in the different activities; and the time worked by staff attributable to the different activities. Paragraph 73 states the purpose of the list: the substitutes should be used as proxies to obtain the best approximation possible to the result which would have been obtained from value added data.

Paragraph 73 also states the status of the substitutes clearly. The use of substitute criteria does not change the methods used to determine the principal activity, because the substitutes are only operational approximations of value added data. The top down method, the stability rule and the treatment of integrated activities all continue to apply. Only the input numbers change, from value added shares to substitute shares, and the cautions in the following paragraphs govern how far the substituted numbers can be trusted.

What cautions apply to output based substitutes?

Paragraph 74 warns that the simple use of substitute criteria may be misleading whenever the structure of the substitute is not directly proportional to the unknown value added. Paragraph 75 gives the turnover example in detail. Turnover and value added are not proportional in certain cases. Turnover in trade usually has a much lower share of value added than turnover in manufacturing, and even within manufacturing the relation between sales and resulting value added may vary between activities. For some activities, such as financial intermediation and insurance, turnover is defined in a specific way which makes comparisons with other activities misleading. The same considerations apply to gross output data used as a substitute.

Paragraph 76 gives a better indicator for units that perform both trade and other activities. Trade turnover figures are highly unsuitable indicators for the unknown value added share of the trade activity. A much better indicator is the gross margin, defined as the difference between trade turnover and purchases of goods for resale, adjusted by changes in stocks. The manual adds that trade margins may vary within a single wholesale or retail trade activity and between different trade activities, and that the specific classification rules for trade in paragraphs 90 to 95 must also be considered. The margin is therefore a better proxy, not a substitute for the trade rules.

What cautions apply to input based substitutes?

Paragraph 77 applies similar precautions to input based substitutes. The proportionality between wages and salaries or employment, on the one hand, and value added, on the other, is not reliable when the capital intensity or labour intensity of the various activities differ. Higher capital intensity normally implies higher depreciation and a lower share of wages and salaries in value added. Capital intensity and labour intensity may vary substantially between different economic activities, and between activities of the same class. The manual gives the example of producing a good with craft techniques and hand tools, which is more labour intensive, against producing the same good with a mechanised process, which is more capital intensive.

| Substitute family | Example measure | Main caution in the manual |

|---|---|

| Output based | Turnover or gross output | Not proportional to value added across activities |

| Output based, trade | Gross margin | Margins vary within and between trade activities |

| Input based | Wages, staff numbers, time worked | Capital and labour intensity differ between activities |

The table summarises paragraphs 74 to 77. It does not rank the substitutes, because the manual does not rank them in general terms. The choice among them depends on which measure is available and which distortion is smallest for the activities in the unit concerned, a judgement the manual leaves to the statistical office working with the unit’s data, under the requirement in paragraph 78 that the application of substitutes to different activities be consistent.

What does this classification not decide?

The limit matters because the same activity words appear in many different registers and forms. The classification gives the activity a statistical place. It does not give the unit a right, a rate or a status. Eurostat gives two limits: the legislation applies only to the use of the classification for statistical purposes, and member states are not obliged to collect, publish or supply data. A principal activity label therefore cannot be quoted as proof of eligibility for a scheme, a licence or an agreement. The institute or register named at the end of this guide is where the separate step of confirming a specific unit entry is taken.

Where is the entry confirmed?

Checking this subject starts with the manual paragraphs cited in the sources, continues with the explanatory note for the category in question, and finishes with the institute or register holding the entry. Each step answers a different question, and the last step is the only one that answers a question about a specific unit.

Choose the substitute closest to value added for the activities concerned, apply the cautions in paragraphs 74 to 77, and confirm the entry with the institute or register that holds it.