The Adjustment for Stock Appreciation is a small amendment made to the calculation of GDP to ensure that it measures real economic growth and not just price changes.
When goods are produced but not sold they go into stock. The overall stock change is the change in the value of stock between the end of last year and the end of this year. However, this overall change has two components: price change of the existing stock and a physical change in stock levels. These two components have to be separated and treated differently for National Accounts. More physical goods in stocks add to GDP. However, if the value of stock has changed because of price changes, then we do not add that to GDP since it is not produced but a ‘holding gain’. The Adjustment for Stock Appreciation then is that portion of the change in the value of stocks during each year attributable to price changes alone.
The Adjustment for Stock Appreciation is calculated as the overall change in value less the value of the physical change. How is the value of the physical change calculated? We estimate this by re-valuing beginning and end year stock levels at average annual prices.
When we calculate GDP by the Income Approach, we use the Gross Operating Surplus, which is calculated using the production cost and the sale price of goods. If goods have been sold from stock, and the price of the stock has gone up, then the Gross Operating Surplus will have been increased, only due to price changes. For National Accounts, to remove this ‘holding gain’ addition to GDP, we subtract the element due to price change which is the Adjustment for Stock Appreciation. Similarly, if the price of goods goes down, it is then necessary to adjust then for a ‘holding loss’.
For example, over a year the price the brewer can get for a litre of beer increased by 10% from €10 per litre to €11 per litre. At the start of the year there were 50 litres in the brewer's warehouse worth €10 each, which is €500 in total. At the end of the year there were 100 litres in the warehouse worth €11 each, which is €1100 in total. So the stock of its beer in the warehouse was worth €500 at the start of the year and worth €1100 at the end of the year, so the overall change in stock is €1100 - €500 = €600. Over the year the volume in stock increased by 100 - 50 = 50 litres. The increase in stock is valued at average annual prices, which is €10.50. So the value of the physical change in stock is €10.50 x 50 = €525. The Adjustment for Stock Appreciation is the overall change less the physical change, which is €600 - €525 = €75. So €75 is deducted in the calculation of GDP by the Income Method because some of the profit is a holding gain that takes advantage of price changes while the beer was in the warehouse, and holding gains are not included in production.
