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APPENDIX 2 – THE STAGE OF PRODUCTION CONCEPT
For some analyses, the focus would be on the domestic economy, with exports treated as a leakage. For such purposes, the relevant Final (Stage 3) goods index would be exclusive of the Exports component of Domestic goods (that is, the Domestic Consumption plus Capital goods aggregate).
TRANSACTION FLOW APPROACH
The ABS has adopted a transaction flow approach in disaggregating output into the various production stages. This approach means that the assignment of a product to a stage is based on the proximity of its use in final demand.
Alternative degree of fabrication or principal destination approaches are employed by statistical agencies in some other countries (which, incidentally, tend to use the term Stage of Processing rather than Stage of Production as used in Australia).
The degree of fabrication and principal destination approaches result in the allocation of particular products to one, and only one, stage. This would present particular problems for Australia because of our very open economy in which exports (and imports) measure a large proportion of GDP. Products such as wheat, wool and iron ore are exported in large volumes as well as being further processed locally. The allocation of such products to a single stage would, by necessity, be very arbitrary.
While exports of agricultural and mining products constitute final demand from the perspective of the domestic economy, they are in fact intermediate inputs into other countries’ production. Adopting the transactions flow approach means, for example, that exported wheat and domestically used wheat are effectively treated as different products for index construction purposes. Certainly their prices relate to different classes of transactions with different price experiences in different markets.
Under this more flexible transaction flow approach, it is the transactions in a given product that are allocated to the relevant market within the production chain. Product transactions can therefore be allocated to more than one stage, as illustrated by the examples below.
Diagram 4: Expanded example of Stage of Production framework – allocation of products by stage
In the first example above, Bauxite as a Preliminary (Stage 1) product is an input into the production of Alumina. In turn Alumina is an Intermediate (Stage 2) product which is then used to produce Aluminium, a Final product (destined for final consumption, capital formation or the export market).
The next example shows Bauxite, as an Intermediate (Stage 2) product, used to produce Alumina which is subsequently exported as a Final (Stage 3) product.
Under the third example, Bauxite that is sold direct to the export market without further processing in Australia is a Final (Stage 3) product.
The other examples above show similar categorisation of different sugar and meat products.
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