Value and volume are concepts used in publications about the economy. However, volume is often mistaken for quantity, which is just one of the three components that make up volume. In this Focus we highlight all three volume components, using the statistic on household consumption as an example.
Almost every day Statistics Netherlands publishes some economic news on its website. The developments of many economic indicators are described on the basis of the percentage change of the volume compared to the previous year. This is the most relevant economic figure.
In most indicators the volume is the value corrected for price changes. This provides a correct idea of how an economic indicator develops. By looking at the year-on-year change any seasonal effects will be filtered out.
Economic indicators that make use of the volume concept include household consumption, international trade, manufacturing and economic growth. In the rest of this Focus household consumption is used as an example to clarify the concept of volume. The developments of the expenditure on goods and services by households are derived from this statistic.
Volume is an abstract concept
Volume is an abstract concept mainly used in macro and meso statistics. In the statistic on household consumption it indicates what is sold, and when the correction for price changes is made. Volume cannot be measured directly. It is derived from value and price. Value equals turnover.
Volume is always published as a change. For the statistic on household consumption, the volume changes consist of three components: the changes in quantity, quality, and the basket of goods. In practice volume is not split into these components, since that is not particularly relevant at the macro level. Furthermore it would require very detailed and unavailable data. The three components are discussed below.
The first volume component is quantity. Quantity and volume have different meanings, contrary to popular belief. Quantity is just one of the three components that make up volume. Quantity is a concrete, directly measurable concept, involving things that can be measured: pieces, kilos, litres, etc. The concept is mainly used at the detailed level, but not in economic statistics.
The second volume component is quality. The consumer buys a similar product of better quality, but without an increase in price. This often happens with high-tech, where you keep getting more value for money, or in other words, where a comparable product becomes cheaper and cheaper. Price statistics adjust for such quality improvements. If the value stays the same and the price is lower than the volume is higher.
Changes in the basket of goods
The third volume component consists of change in the basket of goods. Consumers buy many different goods and services and sometime one of the goods or services is replaced by another (substitution). So consumers have to switch to the new article. This is no quality change because this is a different article. A change in total basket of goods is made up of changes at the detailed level. More is sold of one particular article and less of another. So a change in the basket does not always have to influence the volume of expenditure as a whole since the plusses and minuses may cancel each other out.
The substitution effect can also occur when consumers buy the same product through another sales channel. For instance, if people buy less and less bread at the bakery shop and more and more bread in the super market. When the value drops and prices in the purchase channel do not change, the volume drops as well.
The formula Volume = Value / Price applies to the volume concept in general. The division of the volume concept into its three constituent components applies in most economic indicators that publish in volume.