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Acquired operating surplus

What Is Operating Surplus?

Operating surplus represents the income derived from production activities by incorporated enterprises, such as corporations and government business entities, after accounting for certain costs. It is a fundamental concept in National Accounts, a branch of Macroeconomics that systematically records a nation's economic activity. In essence, the operating surplus captures the portion of a business's revenue that remains after compensating employees and covering production taxes (less subsidies), but before accounting for property income like interest or rent. This measure reflects the surplus accruing to the capital factor of production from the creation of goods and services. Operating surplus is a key component in the income approach to calculating Gross Domestic Product (GDP), providing insight into the profitability of the corporate sector.

History and Origin

The concept of operating surplus is integral to the internationally recognized statistical framework known as the System of National Accounts (SNA). The SNA provides a comprehensive, consistent, and flexible set of macroeconomic accounts used globally for policymaking, analysis, and research. The 2008 SNA, developed under the auspices of organizations including the United Nations, European Commission, OECD, International Monetary Fund, and World Bank Group, formalized the definitions and methodologies for national income components, including operating surplus.9 This framework builds upon earlier versions, such as the 1993 SNA, reflecting evolving economic environments and advancements in methodological research.8 The derivation of operating surplus as a balancing item in the generation of income account in national accounts is designed to align with a country's total value added from production.

Key Takeaways

  • Operating surplus is a macroeconomic measure reflecting the income generated by incorporated enterprises from their production activities.
  • It is calculated before deducting property income (like interest or rent) and before taxes on profits.
  • Operating surplus is a crucial component in the income approach to calculating a nation's Gross Domestic Product (GDP).
  • The concept is defined and standardized within the System of National Accounts (SNA), an international statistical framework.
  • It serves as an indicator of the profitability and efficiency of the corporate sector within an economy.

Formula and Calculation

The operating surplus is typically derived as a residual in the generation of income account within national accounting frameworks. It represents the income left over after covering the costs of production directly linked to labor and certain taxes.

The basic formula for Gross Operating Surplus (GOS) in national accounts is:

GOS=Gross Value Added (GVA)Compensation of Employees (CE)(Taxes on Production and ImportsSubsidies)\text{GOS} = \text{Gross Value Added (GVA)} - \text{Compensation of Employees (CE)} - (\text{Taxes on Production and Imports} - \text{Subsidies})

Where:

  • Gross Value Added (GVA): The total value of goods and services produced by an industry or sector, minus the cost of intermediate consumption (goods and services used up in the production process).
  • Compensation of Employees (CE): All remuneration in cash or in kind payable by an employer to an employee in return for work done, including wages, salaries, and social contributions.
  • Taxes on Production and Imports: Taxes payable on goods and services when they are produced, delivered, sold, transferred, leased, or otherwise disposed of, or on the production process itself. This also includes taxes on imports.
  • Subsidies: Current payments made by government to producers based on the levels of their production activities or the quantities or values of the goods or services which they produce, sell, or import.

To obtain Net Operating Surplus (NOS), Consumption of Fixed Capital (depreciation) is deducted from Gross Operating Surplus:

NOS=GOSConsumption of Fixed Capital (CFC)\text{NOS} = \text{GOS} - \text{Consumption of Fixed Capital (CFC)}

Interpreting the Operating Surplus

Interpreting the operating surplus involves understanding its role as an indicator of an economy's productive capacity and the financial health of its corporate sector. A rising operating surplus generally suggests that businesses are generating more income from their core operations, which can be a sign of robust economic growth and increased efficiency. This surplus is what remains for corporations to cover financial obligations, make new investments, pay dividends, or retain for future expansion. It reflects the return to capital employed in production.

Conversely, a declining operating surplus may indicate weakening corporate profitability, potentially due to rising production costs, decreased demand, or increased competition. Analysts use changes in operating surplus to gauge trends in corporate earnings and the overall economic cycle. It helps economists understand how the income generated from production is distributed between labor (compensation of employees) and capital (operating surplus). This distinction is vital for formulating economic policies aimed at fostering capital formation and sustainable development.

Hypothetical Example

Consider the national accounts data for a hypothetical country, "Diversifica," for a given quarter.

  • Gross Value Added (GVA) of all incorporated businesses: $500 billion
  • Compensation of Employees (CE): $280 billion
  • Taxes on Production and Imports: $60 billion
  • Subsidies (received by producers): $10 billion
  • Consumption of Fixed Capital (CFC): $40 billion

To calculate the Gross Operating Surplus (GOS):

GOS=GVACE(Taxes on Production and ImportsSubsidies)\text{GOS} = \text{GVA} - \text{CE} - (\text{Taxes on Production and Imports} - \text{Subsidies}) GOS=$500 billion$280 billion($60 billion$10 billion)\text{GOS} = \$500 \text{ billion} - \$280 \text{ billion} - (\$60 \text{ billion} - \$10 \text{ billion}) GOS=$500 billion$280 billion$50 billion\text{GOS} = \$500 \text{ billion} - \$280 \text{ billion} - \$50 \text{ billion} GOS=$170 billion\text{GOS} = \$170 \text{ billion}

The Net Operating Surplus (NOS) would then be:

NOS=GOSCFC\text{NOS} = \text{GOS} - \text{CFC} NOS=$170 billion$40 billion\text{NOS} = \$170 \text{ billion} - \$40 \text{ billion} NOS=$130 billion\text{NOS} = \$130 \text{ billion}

In this example, Diversifica's incorporated businesses generated a gross operating surplus of $170 billion, meaning $170 billion remained from their production after paying employees and net taxes. After accounting for the wear and tear on their assets, the net operating surplus was $130 billion. This $130 billion is the true "acquired" profit-like income from production available to the capital owners.

Practical Applications

Operating surplus is a key data point used by economists, policymakers, and financial analysts to understand the structure and performance of an economy. Its practical applications include:

  • Economic Analysis: As a component of the income approach to GDP, operating surplus provides insights into the income generated by the capital sector of an economy. It helps analysts assess how national income is distributed among factors of production. For instance, the U.S. Bureau of Economic Analysis (BEA) regularly publishes data on gross and net operating surplus as part of its comprehensive national economic accounts.7,6
  • Policy Formulation: Governments and central banks monitor operating surplus trends to inform fiscal and monetary policies. A strong operating surplus can signal conditions conducive to higher business investment, while a weak one might prompt measures to stimulate corporate activity or address structural issues.
  • International Comparisons: Harmonized definitions under the System of National Accounts (SNA) allow for consistent comparisons of operating surplus across different countries, aiding in understanding relative economic performance and identifying potential imbalances. For example, Eurostat publishes gross operating surplus and mixed income data for the Euro Area and its member states.5,4
  • Investment Decisions: While not a direct measure of individual company profit, aggregate operating surplus can provide a macro-level backdrop for investors assessing the overall financial assets and liabilities landscape and the attractiveness of a country's corporate sector.

Limitations and Criticisms

While operating surplus is a vital statistical measure in national accounts, it has certain limitations and criticisms, particularly when used as a proxy for business profits or overall economic welfare.

One significant limitation is that operating surplus, as defined in national accounts, is not strictly equivalent to the pre-tax profit figures reported in business accounting. It is a residual item derived after specific deductions from gross value added, and it excludes certain property income and financial transactions that would be part of a company's profit and loss statement.

Furthermore, the very nature of national accounting aggregates like operating surplus and GDP has faced broader critiques. The International Monetary Fund (IMF) has highlighted that GDP, and by extension its components like operating surplus, may not fully capture the nuances of economic activity or social well-being. Issues such as the exclusion of unpaid household work, the difficulty in accounting for quality improvements due to technological advancements, and the lack of consideration for environmental externalities (like pollution costs) mean that these figures provide an incomplete picture.3,2 Economists and statisticians acknowledge that GDP was primarily designed as a measure of total economic activity, especially pertinent during wartime for tracking production, rather than as a comprehensive indicator of welfare.1 Therefore, relying solely on operating surplus or GDP to assess the complete economic health or social progress can be misleading. Issues like income inequality are also not directly reflected in these aggregate measures.

Operating Surplus vs. Mixed Income

The distinction between operating surplus and Mixed Income is crucial within the framework of national accounts, particularly the System of National Accounts (SNA). Both terms represent the balancing item of the generation of income account, reflecting the surplus from production. However, the differentiation lies in the type of enterprise generating this income.

Operating Surplus specifically refers to the income generated by incorporated enterprises (e.g., corporations, government business enterprises) from their production activities. This income accrues primarily to the capital factor of production, meaning it represents the return to the owners of capital after labor and net production taxes have been accounted for.

Mixed Income, conversely, is the term used for the surplus arising from the productive activities of unincorporated enterprises (e.g., sole proprietorships, partnerships, small family businesses). The term "mixed" is used because it is often difficult to clearly distinguish between the remuneration for the labor provided by the owner(s) of the enterprise and the return to the capital employed in the business. It contains elements of both entrepreneurial income (return to capital) and a proxy for wages or salaries for the owner's work.

Therefore, while both are measures of profit-like income from production, operating surplus applies to larger, formally structured businesses, whereas mixed income applies to smaller businesses where the owner's labor and capital contributions are intertwined.

FAQs

What does "acquired" mean in "Acquired Operating Surplus"?

The term "acquired" in the context of Operating Surplus generally refers to the fact that it is a derived or residual measure within National Accounts. It is not directly transacted like wages or sales but is "acquired" or calculated by subtracting other costs from the total value of production.

Is Operating Surplus the same as company profit?

No, Operating Surplus in national accounts is not the same as the profit reported in a company's financial statements. It's a macroeconomic aggregate that measures the surplus from production before accounting for property income (like interest or rent) and certain taxes that are typically part of a company's bottom line.

How does Operating Surplus relate to GDP?

Operating Surplus is a key component of Gross Domestic Product (GDP) when calculated using the income approach. GDP can be viewed as the sum of various incomes generated in the economy, and operating surplus represents the income accruing to capital.

What factors can influence Operating Surplus?

Factors such as overall economic growth, changes in productivity, labor costs (impacting Compensation of Employees), the level of taxes on production and subsidies, and the general business environment can all influence the level of operating surplus in an economy.

Why is Operating Surplus important for economic analysis?

Operating Surplus provides a crucial insight into the profitability of the corporate sector and the overall efficiency of production within an economy. It helps economists and policymakers understand income distribution and the drivers of economic activity and capital formation.