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5216.0 - Australian National Accounts: Concepts, Sources and Methods, 2000  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 15/11/2000   
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Production

4.2 As explained in Chapter 3, the central concept in a national accounting system is economic production. Production is the process whereby inputs of labour, materials (produced or natural), accumulated capital assets and knowledge are combined to provide outputs of goods and services. Such a definition of production includes:

      • production of goods that are supplied to units other than their producers, including goods used as inputs to the production of other goods;
      • production of goods that are retained for the producer's own use;
      • provision of services of all kinds which add to the value of goods (such as transport and merchandising services);
      • provision of services directly bought and sold in the market in their own right (such as the services of doctors, teachers and entertainers); and
      • illegal production, comprising production of illegal goods and services (i.e. for which distribution or possession is forbidden by law) or production of legal goods and services by unauthorised producers (e.g. unlicensed medical practitioners).

4.3 Production is not confined to goods and services that are clearly of monetary value because they are bought and sold. Some produced goods and services do not enter the market, but are made available free of charge by the producer (for example, many goods and services produced by governments and non-profit organisations) or are for the direct use of the producer, either as final consumption or as inputs to the producer's own production or capital formation. Such non-market production can be regarded as including, in addition to the goods and services produced as the result of current work, the services which durable assets (such as houses, cars, television sets and public parks) yield to their owners/users, and domestic services produced by households for use within the producing household. Such services are outside the market since they flow to their owners/users without any current exchange of money equivalent to the value of the services.

The production boundary

4.4 In the central accounts of the national accounts system, a more restricted view of production is taken. The national accounts are primarily constructed to assist governments and others to make market-based macroeconomic policy decisions, including analysis of markets and factors affecting market performance, such as inflation and unemployment. In SNA93 (and the ASNA), the value of domestic services produced and consumed within households, such as cleaning, washing, preparing meals, and child and aged care, is excluded from production because such services are relatively isolated and independent from markets, and are difficult to value in an economically meaningful way. Although the production of such services is not part of the central framework of the national accounting system, the value of the services can be shown in satellite accounts to the main accounts.

4.5 With the exception of own-account household services, SNA93 recommends coverage of the production of all goods and services that legally enter the market, and also that part of production which does not enter the market, but for which a realistic value can be imputed using closely related or analogous market transactions. Because illegal goods and services, such as illicit drugs and illegal gambling, are purchased in the market, their production is included in the SNA93 production boundary. However, because of data limitations, illegal production is not covered in the ASNA, although the effects of some of these activities may be included by default; for example, if money obtained from such activities is laundered through legitimate institutions that are covered by the national accounts.

4.6 Paragraph 6.15 of SNA93 states that, to satisfy the definition of production in an economic sense:

        "There must be an institutional unit that assumes responsibility for the (production) process and owns any goods produced as outputs or is entitled to be paid, or otherwise compensated for, the services provided."

Institutional units, which are explained fully in Chapter 5, are the basic units for which flows and stocks are recorded in the national accounts. The SNA93 description excludes from economic production natural processes without human involvement or direction, such as the unmanaged growth of fish stocks in international waters (but economic production includes the activity of fish farming and fishing for profit). Activities which cannot be purchased from producers are also outside the production boundary, regardless of whether the service may be beneficial to overall economic production. Included in this category are basic human activities such as eating and sleeping.

4.7 Although consumer durable assets such as cars, washing machines, microwave ovens and dishwashers provide a stream of services to their users over many years, in SNA93 (and the ASNA) such services are conventionally treated as consumed as soon as the assets are bought by a household. Paragraph 6.28 of SNA93 states:
        "The use of a durable good, such as a vehicle, by persons or households for their own personal benefit or satisfaction is intrinsically a consumption activity and should not be treated as if it were an extension, or continuation, of production."

The disadvantage of this treatment is that, in time of hardship, households may temporarily reduce their purchases of these goods to a low level without significantly reducing their consumption of the services these goods provide. At such times, the national accounts figure for consumption, being restricted to purchases, may give a misleading impression of the community's ongoing level of consumption. However, to account for the services of consumer durables would require treatment of the durables as capital goods providing a stream of services over a number of years. As with own-account household domestic services, such a concept would not be appropriate for most market-based analyses.

4.8 Units of the general government sector (as defined in Chapter 5) provide goods and services free of charge or at nominal prices. Such activity nevertheless meets the definition of production. Because such government-provided goods and services are not purchased by the users, the general government sector is regarded as consuming its own output. The non-market output is valued at its cost of production. Similar considerations apply to many non-profit institutions (also defined in Chapter 5), which meet their production costs from donations provided by members and benefactors and are able to provide goods and services free or at prices that are not commercially determined. As with general government bodies, the non-market production of non-profit institutions is valued at cost.

4.9 In the ASNA, values are also imputed for production of some other goods and services that are not sold in the market place. Imputations are confined to a small number of cases where a reasonably satisfactory basis for the valuation of the implied transaction is available, and where their exclusion could result in significant distortions in the accounts. Imputations are made for the following:
      • services provided by owner-occupied dwellings;
      • food and other goods produced by households for their own final consumption ('backyard production');
      • services provided by financial institutions over and above explicit charges made; and
      • services provided by owner-builders in the construction of dwellings and major alterations and additions to dwellings.

Details of the above imputations are provided later in this chapter and in Chapters 14 and 15.

Gross domestic product (GDP)

4.10 GDP is the national accounting measure of production occurring in a whole economy during an accounting period (for example, a quarter or a year). GDP is based on the concept of value added, which is the unduplicated value of goods and services produced in any given period. Gross value added is equal to a producer's value of outputs from the production process less the value of commodity inputs (intermediate consumption) plus taxes on products payable less subsidies receivable. GDP is equal to the sum of the gross value added of all resident producers. GDP less consumption of fixed capital is called net domestic product.

4.11 GDP can be derived from income and expenditure flows as well as from direct measures of production. GDP is the source of income for the factors of production (labour and capital). Total factor income can therefore be derived by summing factor incomes (i.e. compensation of employees, gross operating surplus, gross mixed income). Adding taxes less subsidies on production to total factor income gives GDP at purchasers' (or market) prices. GDP can also be derived as the sum of all final expenditures on goods and services (that is, final consumption expenditures and gross fixed capital formation), changes in inventories of finished goods, work-in-progress and raw materials, and the value of exports of goods and services less the value of imports of goods and services. Imports are deducted because, although included in final expenditures, they are not part of domestic production. The various income and expenditure flows that can be used to derive GDP are discussed later in the relevant sections of this chapter.

4.12 GDP is a measure of production and not a measure of economic welfare. The level of production is important because it largely determines how much a country can afford to consume, and it also affects the level of employment. The consumption of goods and services, both individually and collectively, is one of the most important factors influencing the welfare of a community, but it is only one of several factors. Moreover, aggregate measures such as consumption expenditure and income do not show which sectors of the population are increasing (or decreasing) expenditure, nor the distribution of income within the economy, nor whether the income generated is the result of more or fewer hours worked. Total welfare also depends on non-economic events, such as epidemics, droughts, floods, the state of the environment, individual and community stress levels, levels of crime, and political factors such as freedom and security. As a measure of production, GDP is not intended to embrace non-economic events. The national accounts are primarily intended to provide data at different levels of aggregation to meet the needs of analysts and others interested in the behaviour of the economy and the factors responsible for major market occurrences such as inflation, employment and unemployment. While certain aggregates may indicate changes in some aspects of welfare, changes in GDP do not necessarily correspond to changes in the overall welfare of the community.

Output

4.13 Output consists of the value of goods and services produced within an establishment. (Establishments, which are producing units belonging to institutional units, are discussed in Chapter 6). Output includes production that is completed in the accounting period and production in the accounting period that remains incomplete at the end of the accounting period. Goods and services produced as outputs may be:

      • sold at 'economically significant' prices (i.e. prices which have a significant influence on both the amounts producers are willing to supply and the amounts purchasers wish to buy);
      • bartered in exchange for other goods, services or assets that are provided to employees as compensation in kind, or used for other payments in kind;
      • held as unsold 'finished' goods in the producers' inventories for subsequent sale, or held as work-in-progress in producers' inventories;
      • supplied to another establishment belonging to the same enterprise as intermediate inputs into the latter's production (enterprises, which are institutional units, are discussed in Chapter 5);
      • retained by the producers for own final consumption or gross fixed capital formation;
      • supplied free, or sold at prices that are not economically significant, to other institutional units (including households), as often occurs in the case of output of general government units and non-profit institutions.

4.14 The output of an establishment is defined as the value of total sales or other uses of goods (including capital work done on own account) and services produced as outputs plus the value of changes in the inventories of goods produced as outputs. Two categories of output are recognised for national accounting purposes: market output and non-market output, which includes output produced for own final use and other non-market output.

Market output

4.15 Market output is output that is sold at economically significant prices or otherwise disposed of on the market, or output that is intended for sale or disposal on the market. Market output includes the value of goods or services bartered, supplied by one establishment to another in the same institutional unit for use in intermediate consumption, or used for payments in kind. Market output also includes the value of changes in inventories of finished goods and work-in-progress intended for disposal on the market.

4.16 The valuation of changes in inventories poses special problems in a national accounting context. Changes in the valuation of inventories held at particular points in time can include the effects of price changes, as well as additions to and subtractions from inventories. As such holding gains or losses are not the result of production, and are excluded from the value of output in the national accounts, values of inventories used in measuring changes in inventories need to be adjusted to exclude them. In the ASNA, this adjustment is known as the inventory valuation adjustment (IVA), details of which are explained in Chapter 17.

Non-market output

Output for own final use

4.17 Output for own final use includes output for own final consumption and output for own gross fixed capital formation. The former consists of goods and services that are produced for final use by the owners of the enterprises in which they are produced. As discussed later, corporations have no final consumption (only intermediate consumption used in producing their outputs), and output for own final consumption is produced only by unincorporated enterprises (including those operated by households). Two examples of such output are agricultural goods produced and consumed by members of the same household, and rent of owner-occupied dwellings (see paragraph 4.76 for further discussion of these items).

Output used for own gross fixed capital formation

4.18 Goods or services used for own gross fixed capital formation can be produced by any kind of unit, whether corporate or unincorporated. Examples are machinery or equipment produced by an establishment for use in the same establishment; and construction, extension or alteration of an establishment's building by the enterprise owning the establishment. As discussed, in the ASNA, imputations are made of the value added by owner-builders in the construction, alteration or extension of their dwellings and for significant own-account construction carried out by private and public enterprises.

Other non-market output

4.19 Other non-market output consists of goods and services produced by non-profit organisations or general government units and supplied free, or at prices that are not economically significant, to other institutional units or to the community as a whole. For general government output, economically significant prices may not be charged to users either because the consumption of the goods or services cannot be monitored or controlled, as is the case with public administration and defence, or because governments make policy decisions not to charge the full cost, as with education and health services. Likewise, non-profit institutions often do not fully charge for their services because such institutions are formed to provide services to members or the needy. As noted in paragraph 4.8, the non-market output of general government units and non-profit institutions is valued at the costs of producing the outputs, comprising compensation of employees, the cost of purchased goods and services used in production (intermediate consumption) and consumption of fixed capital. These units therefore do not generate a net operating surplus (defined in paragraphs 4.53 and 4.54) from their non-market production.

Output of particular industries

4.20 The general rules governing the recording and valuation of output require elaboration in application to the output of certain industries, mostly service industries such as transport and storage, wholesale trade and retail trade. The methods used to estimate the output of such industries are described in Chapter 24. However, measurement of the output of the finance and insurance industries is a special case and is discussed below.

Financial intermediaries (except insurance and pension funds)

4.21 Banks and other financial intermediaries incur liabilities on financial markets by borrowing funds (for example, in the form of deposits) which they lend, on different terms and conditions, to other institutional units, such as households, governments and corporations. Such institutions intermediate between lenders and borrowers by channelling funds from one to the other, incurring risk in the process.

4.22 Although financial intermediaries make explicit charges for a number of financial services, the charges do not cover the cost of all services provided. If receipts from the charges were the only measure of output, financial intermediaries would invariably appear to be running at a loss. However, financial intermediaries are able to provide services for which they do not charge explicitly, through charging higher rates of interest to borrowers than they pay to lenders. The resulting 'interest margin' is used to defray expenses. The interest-rate differential therefore includes an implicit charge to customers for services provided and plays a part in determining the level of interest rates observed in practice. In the system, interest is treated as property income and is not recorded as either output or intermediate input. However, in effect, interest receivable by financial intermediaries excludes payments by borrowers for the services provided by the financial institutions, and interest payable by financial intermediaries is lower than it would otherwise be to cover the costs of financial services provided to depositors. Accordingly, in the national accounts, interest flows are adjusted to take account of the service charges that form part of the output of financial intermediaries. As these charges cannot be measured directly, they must be estimated indirectly. The imputed charges are accordingly referred to as financial intermediation services indirectly measured (FISIM).

4.23 In the ASNA, FISIM is estimated as the difference between the interest rates on loans and deposits and a 'pure', or reference rate, of interest. As FISIM forms part of the output of financial intermediaries, it must also be recorded as part of consumption by the intermediaries' customers. FISIM is therefore shown as consumption by individual industries, government units and households, for both depositors and borrowers. Exports and imports of FISIM are also estimated. For a detailed explanation of the estimation of FISIM see Chapters 14 and 20.

Insurance and pension funds

4.24 Insurance is a form of financial intermediation in which funds are paid by policyholders and invested in financial or other assets, which represent technical reserves to meet future claims arising from the events specified in insurance policies. Typically, insurance enterprises do not make a separate charge for the service of arranging the financial protection or security which insurance is intended to provide. The value of such services, which form part of the output of insurance and pension funds, has to be estimated indirectly from the total receivables and payables of insurance enterprises, including the income accruing from the investment of technical reserves.

4.25 The value of output of the services produced by insurance enterprises is estimated as the difference between (i) revenue from premiums and interest on investments and (ii) expenses in the form of expected claims and changes in allocations to technical reserves required to build up the capital sums guaranteed under policies. The methods for estimating output of insurance enterprises are explained fully in Chapters 14 and 20.

Intermediate consumption

4.26 Intermediate consumption (or intermediate input) consists of the value of the goods and services consumed as inputs to the production process. The goods and services may be either transformed (e.g. flour may be transformed into bread), or completely consumed or used up (e.g. electricity and most services) in the process of producing outputs.

4.27 In addition to goods and services used directly in the production process, intermediate consumption includes the value of all goods and services used as inputs into ancillary activities. Ancillary activities are undertaken within an enterprise for the sole purpose of supporting the production process. Ancillary activities include purchasing, sales, marketing, accounting, data processing, transportation, storage, and security. The output of an ancillary activity is not intended for use outside the enterprise. (Ancillary services are explained more fully in Chapter 6).

4.28 Intermediate consumption does not include valuables consisting of works of art, precious metals and stones and articles made out of them, that are acquired as stores of value and are not used up in the process of production. However, intermediate consumption does include precious stones and metals used in the production of jewellery and similar items. Intermediate consumption excludes the costs incurred by the gradual using up of fixed assets; which is recorded as consumption of fixed capital in the income and capital accounts (see Chapter 16). However, rentals paid on fixed assets that are leased from other institutional units under operating leases (see next paragraph) are included as part of intermediate consumption, along with fees, commissions, royalties, etc., payable under licensing arrangements.

Distinction between operating leases and financial leases

4.29 Operating leases are leases that provide for the renting of machinery or equipment for specified periods of time that are substantially shorter than the total expected service lives of the machinery or equipment. Operating leasing is a form of production in which the owner of the machinery or equipment (the lessor) provides a service to the user (or lessee). The lessor is usually responsible for the maintenance and repair of the equipment as part of the service provided to the lessee. Rentals are treated as payment for the total service provided, and are included in the intermediate consumption of producers. For operating leases, consumption of fixed capital is charged to the lessor. Under a financial lease, a change of ownership from the lessor to the lessee is deemed to have taken place, even though the leased goods legally remain the property of the lessor, at least until the lease expires. Financial leasing is an alternative to lending as a method of financing the acquisition of machinery and equipment, in which the lessor effectively makes a loan to the lessee to enable the latter to finance the acquisition of the equipment. Rentals under financial leases are therefore treated as a combination of loan repayments and interest payments and not as part of intermediate consumption. Under a financial lease, consumption of fixed capital is charged to the lessee.

Boundary between intermediate consumption and compensation of employees

4.30 Certain goods and services used up by producers do not enter directly into the production process but are consumed by employees working on that process. Where goods and services are provided to employees and are used by the employees in their own time and at their own discretion, the goods and services constitute remuneration in kind rather than intermediate consumption. Fringe benefits, such as the private use of company cars, airline lounge memberships, telephones and rent subsidies, fall into this category. This distinction is important, because the inclusion of remuneration in kind in compensation of employees, rather than in intermediate consumption, increases labour income and GDP.

Boundary between intermediate consumption and gross fixed capital formation

4.31 This boundary is not always clear cut. For example, expenditure on large items of machinery and equipment is recorded as gross fixed capital formation while regular expenditure on small durables, such as hand tools, is normally regarded as intermediate consumption.

4.32 There are also difficult choices to be made in relation to repairs and maintenance. SNA93 recommends that ordinary maintenance and repairs of fixed assets used in production constitute intermediate consumption and that major renovations, reconstructions or enlargements of fixed assets are to be treated as gross fixed capital formation. Ordinary maintenance and repairs are necessary to ensure effective utilisation of assets over their expected service lives. Such maintenance and repairs do not change the asset or its usual level of performance. Major renovations, reconstructions or enlargements increase the performance capacity of existing assets or significantly extend their previously expected service lives. Examples are extending or enlarging existing buildings or structures and refitting or restructuring the interior of a building or ship. These and other issues relating to the boundary between intermediate consumption and gross fixed capital formation are discussed in Chapter 15.

Research and development

4.33 SNA93 recognises that, because the purpose of research and development is to improve efficiency or productivity or to produce other future benefits, it is inherently more of an investment than a consumption activity. However, because of the difficulty of identifying and valuing the assets produced by research and development activities, such activities, along with staff training, market research and similar activities, are to be treated as intermediate consumption.

Defence equipment

4.34 SNA93 distinguishes between expenditure on defence equipment that is used in the same way in both military and civil applications, and on equipment that is never used or does not have, and cannot have, civilian applications. The former class of defence equipment includes buildings, roads, bridges, airfields and docks; vehicles, ships or aircraft used for the transport of people; and computers and office machinery. Acquisition of all such goods is classified as gross fixed capital formation.

4.35 On the other hand, weapons or their delivery systems are not and cannot be used for civilian purposes. SNA93 recommends that acquisition of such goods should be classified as intermediate consumption and therefore also as government final consumption expenditure. Thus, acquisitions of rockets, and of missiles and their warheads, is treated as consumption, rather than as capital formation. Furthermore, goods that are designed to deliver weapons, such as warships, submarines, fighter aircraft, bombers and tanks, are also classified as consumption expenditure.

Consumption of fixed capital

4.36 Consumption of fixed capital is a cost of production, which is recorded in the income and capital accounts. It may be defined in general terms as the cost, in the accounting period, of the decline in the current value of the producer's stock of fixed assets as a result of physical deterioration, foreseen obsolescence or normal accidental damage. It excludes losses associated with damage caused by war or natural disasters. Such losses are classified as capital losses and are recorded under 'Other changes in volume of assets' as part of accumulation, which is discussed in paragraphs 4.82, 4.98 and 4.115.

4.37 To be consistent with other entries in the accounts, consumption of fixed capital must be valued at the prices prevailing during the current accounting period. Although the consumption of fixed capital is analogous to the measure of depreciation used by businesses, business depreciation measures are generally not suitable for national accounting purposes. This is because businesses generally account for depreciation according to the standards of historical cost accounting in which the original purchase cost of an asset is allocated over the estimated life span of the asset. In periods of rising prices, historical cost accounting will understate the real (current) cost of replacing the asset and will therefore result in an overstatement of business income and saving. Therefore, in the ASNA, the book value of depreciation is not used and estimates are substituted that reflect changes in the market value of assets. Estimates of the consumption of fixed capital are derived in conjunction with estimates of capital services and net capital stock. The concepts and methods are discussed in detail in Chapter 16.

Valuation of industry output and value added

4.38 SNA93 recommends use of basic prices for the valuation of industry outputs, and purchasers' prices for valuation of intermediate inputs and of final demand (discussed in paragraph 4.73).

Basic prices

4.39 The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service, minus any tax payable (including deductible value added taxes), and plus any subsidy receivable, as a consequence of production or sale of the unit. Subsidies artificially reduce the sale price, so they are included in the basic price to obtain a measure of the true value of the goods or services produced. Taxes on products, if included, would artificially increase the price, and so are excluded. The basic price also excludes any transport charges invoiced separately by the producer. The basic price therefore measures the amount retained by the producer in respect of the good or service that is produced as output.

4.40 The major output of the wholesale and retail trade industries is the value of the service provided in selling goods (i.e. goods purchased and resold are not treated as part of intermediate consumption). The value of the service is equal to the trade margins realised on the goods sold. The measurement of this service at basic prices is analogous to that for goods producing industries: output at basic prices is the value of the trade margins, including the value of any subsidies received by the wholesaler or retailer, and excluding taxes on production of the service.

Purchasers' prices

4.41 The purchaser's price is the amount paid by the purchaser in order to take delivery of good or services. Purchasers' prices include any taxes payable (less any subsidies receivable) on production and imports, and any transport charges paid separately by the purchaser to take delivery of goods. Value added taxes such as the Goods and Services Tax (GST) are included in purchasers' prices unless they are allowable as deductions from the purchaser's value-added tax liability. Purchasers' prices are also referred to as market prices.

4.42 In the derivation of industry value added, outputs are valued at basic prices and intermediate consumption is valued at purchasers' prices. By convention, the resulting estimates of industry value added are described as being 'at basic prices'.


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