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4.3 Transactions for illegal products need to be recorded to obtain comprehensive measures of production and consumption, and to prevent errors appearing elsewhere in the accounts. 2008 SNA treats illegal actions that fit the characteristics of transactions (notably the characteristic that there is mutual agreement between the parties) in the same way as legal actions. Thus, although the production or consumption of certain goods such as narcotics may be illegal, market transactions in such goods should, in principle, be recorded in the national accounts. Due to the difficulty in identifying and valuing illegal transactions, no explicit estimates for such activities are made in the ASNA. However, some illegal transactions are likely to be included in the national accounts if they are reported as part of legal activities or as income for taxation purposes.
4.4 To evaluate new data sources experimental aggregates were developed to estimate size of the illegal drug economy relative to Australia's GDP. The illegal drug economy is defined as the market for transactions involving illegal drugs where there is mutual consent between parties, and is presumed to be the largest component of illegal production in Australia.
4.5 A general method for measuring the demand and supply of specific goods and services in the national accounts is to separately compile supply (production and imports) and demand (consumption and investment) source data from independent sources, and confront (compare, contrast and reconcile differences) the two estimates. This method usually exploits the best available data, and the confrontation results in a balanced outcome with less chance of measurement errors in the national accounts. Usually, in aggregate, supply side data from producers and importers is more reliable than demand side data from consumers, investors and exporters, as there are relatively few producers and importers compared to the number of consumers and investors for most products. In cases of disagreement between supply side and demand side data it is common for supply side estimates to be greater than demand side estimates, and for balancing adjustments to be made to final or intermediate consumption, or investment, depending on the nature of the product.
4.6 Unfortunately, supply side (production and imports) data are unavailable for illegal drugs. However, there are data sources that provide information on various aspects of the demand for illegal drugs. The principal source of data is the Australian Institute of Health and Welfare (AIHW) National Drug Strategy Household Survey (NDSHS). The current ABS study estimates final consumption by drug type, and then infers production and imports using supplementary data for prices, drug purity and production costs. The survey results use some assumptions about the nature of the Australian illegal drug market to simplify the estimation methodology. The rest of this section describes the estimation model and some of the methodological issues related to the model.
SCOPE OF THE EXPERIMENTAL AGGREGATES
4.7 In Australia, there is a wide range of illegal drugs consumed including cannabis, cocaine, 3,4–methylenedioxy–N–methylamphetamine (MDMA or ecstasy), Lysergic acid diethylamide (LSD), methamphetamines, amphetamines, heroin, 'magic mushrooms', and a range of illegally purchased pharmaceuticals. The clandestine nature of the drug market, and the subsequent data scarcity, has limited the experimental estimates to the most commonly used and economically significant drugs.
4.8 The first assumption is that the economically significant (footnote 1) illegal drugs are:
4.9 An annual time series of consumption has been derived for the seven calendar years from 2004 to 2010.
GDP measurement methods
4.10 The three methods of measuring GDP (expenditure method, GDP(E); production method, GDP(P); income method, GDP(I)) measure the same concept. Any differences that arise between the different methods, the "statistical discrepancy", should be interpreted as measurement error, not as a conceptual difference between the three methods. The illegal drugs estimation method exploits this equality, and thus:
4.11 This assumes that the statistical discrepancy for the study = 0
4.12 The principal sources of data are demand side, measured as expenditures.
GFCE = Government final consumption expenditure
Change_in_inventory = change in inventories
GFCF = Gross fixed capital formation
4.13 The study assumes that:
4.14 This leaves HFCE and Imports as the only components of GDP(E) to be estimated for illegal drugs.
Where id = illegal drugs
4.15 The methods and sources for estimating HFCE and Imports for each drug type are detailed in the section titled Methodology.
4.16 GDP(P) = Domestic_output – Intermediate_use + Net_taxes
4.17 The study assumes that:
4.18 From  and ,  can be expressed as
and rearranged as
Salesid = HFCEid –Importsid + Intermediate_useid ... 
Sales can be estimated residually, given derivation of HFCE, Imports and Intermediate use.
The study assumes that all cannabis consumed in Australia was grown in Australia, in accordance with seizures and other drug intelligence information. Deriving production (Sales) information therefore requires estimates of costs of production (Intermediate use). Estimates have to account for two production methods: "bush" cultivation, and hydroponic cultivation. The two methods of production have different cost structures, and the estimation methods and sources for each production method are detailed in the Methodology section below.
Laboratory manufacture of amphetamines and MDMA, including refining from imported precursors
Only a proportion of final consumption of these drugs is sourced from domestic manufacture. The methods and sources for dissecting the market into imports and domestic production, and the production costs (Intermediate use), are detailed in the Methodology section below.
Irrespective of whether the drugs are produced domestically or imported, they are distributed to final consumers by a network of dealers. By convention in the 2008 SNA, goods distributed through wholesale and retail activity that are not elaborately transformed earn a margin for their owners, measured as the sale value less the cost of goods sold. For the Australian drug market, a characteristic of the distribution network is that most drugs except cannabis are "cut" (diluted) with various substances, to some degree, as they pass through the chain. Two questions arise out of this practice. Firstly, the study assumes that "cutting" of drugs does not constitute elaborate transformation sufficient to classify the activity as manufacturing, rather than retailing or wholesaling. Secondly, differences between prices and purities at the start of the wholesale distribution chain, and those at the "street" end of the supply chain, provide an insight into the estimation of margins. This is detailed in the Methodology section below.
A risk that drug producers and distributors must take into account is discovery and consequent seizure of crops or inventory. The study assumes that such seizures represent an expected loss of inventory, and are therefore a cost of production (Intermediate use) rather than an uncompensated seizure (a non–transaction "other change" in volume). Valuation and purity analysis of seizures by law enforcement agencies at various distribution stages provide insight into wholesale and street markets. See the Methodology section for details of seizure information.
4.20 GDP(I) = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income
4.21 The study assumes that:
4.22 Therefore all income accrued from illegal drugs is Gross Mixed Income.
4.23 From ,  and :
Prices and Volumes
4.24 One of the features of the Australian drug market is the relative stability of prices in retail (or "street") terms. However, as noted above, the quality of the drugs on offer is variable, being "cut" to a greater or lesser degree in response to changes in demand and supply conditions. Although estimates have been made in physical units as well as monetary terms, both of these are "nominal" and do not take into account quality variability. An estimate of monetary volumes has been attempted using purity estimates to adjust prices to take into account quality change. See the Methodology section for details.
Integration of Estimates into the Core Accounts
4.25 This section of the review has attempted to estimate the magnitude of the illegal drug production in Australia and its proportion of GDP. However, the ABS will not include estimates for illegal drug production in the core national accounts. The current estimate is ad hoc in nature, and estimates could only be incorporated if more reliable and regular data sources became available.
4.26 Setting aside statistical quality questions, some further methodological steps would be required to effect integration. The model described above is designed to estimate demand and supply data for the illegal drugs market. However, the estimates overlap to some extent estimates already included in the national accounts. The study has not attempted to assess the impacts. Some examples follow:
4.27 To calculate the GDPid identities, estimates are required for HFCEid, Intermediate useid and importsid.
Illegal drug household final consumption expenditure, by drug type
4.28 Household final consumption expenditure for illegal drugs (HFCEid) may be calculated as the product of the quantities of drugs consumed (Quantity_consumed) and related illegal drug retail prices (footnote 2) (Retail_price) during a reference period (which in this case is a year).
4.29 The Retail_price component of  may be found in Australian Crime Commission (ACC) publications. The Quantity_consumed component of , on any one day, is a product of the percentage of the population (expressed as numbers of people) who engage in the consumption of illegal drugs, that is, the number of users on any one day (Users) and quantity consumed per user on any one day (Quantity_used) in kilograms, see .
4.30 The User component in  may be expressed as:
Users = (%Daily_users * Recent_users) + (%Weekly_users * Recent_users*1.5 / 7) + (%Monthly_users * Recent_users / 30.42) + (%Quarterly_users * Recent_users / 91.25) + (%Yearly_users * Recent_users / 365) ... 
%Daily_users = percentage of recent users using daily,
%Weekly_users = percentage of recent users using weekly,
%Monthly_users = percentage of recent users using monthly,
%Quarterly_users = percentage of recent users using quarterly, and
%Yearly_users = percentage of recent users using once a year.
4.31 Estimates on the prevalence and frequency of illicit drug use were provided by the National Drug Strategy household survey (NDSHS) (footnote 3) (footnote 4) (footnote 5) (footnote 6), the 2009 NSW Inmate Health Survey (IHS) (footnote 7) (footnote 8), the Illicit Drug Reporting System (IDRS), the National Drug and Alcohol Research Centre (NDARC 2005) paper "The Sydney methamphetamine market" and the academic papers "Homelessness and Substance use: Which comes first?" (Johnson 2007) and "High and Dry: Homelessness and Alcohol and other Drug use". (footnote 9)
4.32 Population estimates were obtained from the ABS publications: Population by Age and Sex, Australian States and Territories June 2010, (cat. no. 3201.0) (footnote 10); Prisoners in Australia, 2011 (cat. no. 4517.0); and Census of Population and Housing: Estimating homelessness, 2006 (ABS cat. no. 2049.0).
4.33 The calculation of the Quantity_used component of  is dependent on the availability of data on each drug type. For the majority of illegal drugs, Quantity_used per user on any one day may be found in the reference material.
4.34 The annual Ecstasy and Related Drugs Reporting System (EDRS), Illicit Drug Reporting System (IDRS) and NDSHS provided consumption information on five illegal drug types (footnote 11)
4.35 Cannabis and Amphetamines group (footnote 12) data sourced from the academic paper Assessing the economic consequences of two cannabis policy options (Shanahan, 2011) and AIHW/NDSHS 2010 publication: Data on the consumption and usage of drugs in Australia, allowed consumption estimates to incorporate regular (Regular_user) and occasional user (Occasional_user) behaviour, see .
4.36 The components of  may be expressed as:
Occasional_user = Units_consumed * Unit_amount ... 
Unit_amount = average amount of drug per unit consumed.
4.37 Intermediate use for illegal drugs (Intermediate_useid) may be calculated as the domestic production costs over the reference period, which in this case is a year.
4.38 The calculation of Intermediate_useid is dependent on the availability of data on each drug type.
4.39 Intermediate_useid for the amphetamines group and MDMA (footnote 13) (Intermediate_useam), over the year, is a product of the production costs per unit (Unit_cost), quantity consumed per annum (Quantity_consumed)  and the percentage of the drug produced domestically (Domestic_share_total) plus domestic drug seizures (Domestic_seizures), see .
4.40 Production and import percentages are outlined in table 4 below.
Intemediate_useam = Unit_cost * ((Quantity_consumed * Domestic_share_total) + Domestic_seizures) ... 
4.41 The Unit_cost component  for the amphetamines group and MDMA may be found in reference material supplied by ACC and in the academic paper 'The Economics of Meth'(footnote 14). The AIC, AFP and NDARC also provided domestic production and import costs.
4.42 Intermediate_useid for cannabis (Intermediate_usec) over the year is a product of the production costs per unit (Unit_cost) by production method (hydroponic or agriculture), quantity consumed per annum (Quantity_consumed) , the share of domestic production (Domestic_production_share) plus domestic drug seizures (footnote 15) (Domestic_seizures), see .
4.43 Data availability allows the calculation of the cannabis Unit_cost component of  for hydroponic and farmed domestic production.
4.44 The Unit_cost component for the hydroponic production cannabis represents inputs such as materials, lighting, labour and rent (see Caulkins, 2010). The Unit_cost component for the production of farmed cannabis represents inputs such as tillage and planting, seed, irrigation, loading and trucking, operating capital interest, land rent and equipment (see Caulkins, 2010).
Illegal drug imports, by drug type
4.45 Illegal drug Imports (footnote 16) = Import_Costid
4.46 The Import_costid value over the year is a product of the imported volume (Import_volume) and wholesale nominal price (Wholesale_nominal_price), see .
4.47 The Wholesale_nominal_price component of  is available from the referenced sources below. The Import_volume component of  is expressed as:
4.48 Estimates of purity are essential to reflect realistic illegal drug market behaviour. For example, if 100kg of cocaine is imported, it will be diluted before it is sold onto the next distributor. This process will be repeated by multiple distributors before reaching the final consumer. While the original import volume was 100kg of undiluted cocaine, consumers may have access to 250kg of diluted cocaine. The changes in purity (between importation and final sale) allows for the calculation of import volume estimates. Imported volumes are derived from consumption volumes adjusted by a purity factor (see equation  above).
4.49 Information on illegal drug prices and purities (footnote 19) at retail, wholesale and border levels was provided by the Illicit Drug Data Reports (IDDR) of the ACC, the Australian Institute of Criminology (AIC) and the Australian Federal Police (AFP).
4.50 Graph 1 below illustrates declining estimates of illegal drug HFCEid over the period 2004 to 2010, with HFCEid falling by just under two billion dollars over the reference period. This fall can be attributed to the estimated reduction in cannabis and heroin expenditure. Note that the physical quantity of cannabis consumed increased over the latter period to 2010, but declines in street prices more than offset this quantity increase, and resulted in a lower overall expenditure on cannabis during that period.
GRAPH 1 – HFCE BY DRUG TYPE ($m) – CALENDAR YEAR
4.51 Table 5 illustrates total Gross Value Added from the illegal drug economy (GVAid) over the reference period. The illegal drug contribution to GVAid reduced by $0.9b, from $6.3b in 2004 to $5.4b in 2010. The fall is largely driven by the reductions in cannabis and heroin consumption. The value of cocaine, amphetamines (non–crystal), amphetamines (crystal), and MDMA has been reasonably stable over the seven years.
4.52. The ABS compiles Supply and Use (SU) tables to generate balanced annual estimates of GDP. The Supply table measures the production of goods and services by Australian resident units and imports, while the Use table measures the use of goods and services for intermediate consumption, final consumption, gross fixed capital formation, changes in inventories and exports. Domestic supply and intermediate consumption are cross classified by industry and product categories, while the other components are simply classified by a product category. The Use table also provides information on the generation of income by each industry.
4.53 Table 6 below shows the industries and sectors impacted by the inclusion of the illegal drug economy. The drugs market will contribute to the agriculture, manufacturing, and retail industries. (Note, the wholesale industry has been included in retail owing to the lack of information to separate these two industries). The capture of household spending on illegal drugs will increase HFCE, and the rest of the world sector will reflect the importation of illegal drugs. Intermediate use is the domestic production costs incurred by illegal drug producers (footnote 20).
Total GVA (nominal prices) for illegal drugs as a percentage of 2009–10 Australian GDP is 0.4% (footnote 21) where Australian GDP (nominal) for 2009–10 was equal to $1,293 billion. Total HFCE (nominal prices) on illegal drugs as a percentage of 2009–10 Australian HFCE is 0.8% where Australian HFCE (nominal) was equal to $712 billion. Total Imports (nominal prices) from illegal drugs as a percentage of 2009–10 Australian imports is less than 0.2% where Australian Imports (nominal) were equal to $258 billion. Additional results are available in appendix 1.
1 Scope excludes the illegal use of legal drugs. <back
2 Evidence suggests there are non–cash purchases and price discounting on large transactions in the illegal drug market. Limited empirical evidence on these practices prevented the development of adjustments for the estimates. <back
3 Survey estimates of illicit drug use are likely to underestimate actual practice due to non–sampling errors. The ABS did not apply any adjustments due to a lack of data. <back
4 The triennial collection frequency of the NDSHS required regression modelling to interpolate data points outside of the survey cycle. A linear model was chosen for simplicity. Modelled data should be treated with caution. <back
5 Two NDSHS categories require assumptions to aid interpretation. The categories 'once a week or more' and 'every few months' are assumed to mean an average of one and half a week and once a quarter respectively. <back
6 A 'recent user' has consumed an illegal substance within the last 12 months. <back
7 IHS relates to NSW prisons only, providing a proxy for the inmate drug use across Australia. Drug disaggregation is available exclusively for the 2009 reference period. <back
8 It is assumed that the IHS term 'ever used' equates to the NDSHS term 'recent use'. <back
9 A limitation of the NDSHS is the exclusion of institutional settings (such as hospitals, other clinical settings such as drug and alcohol rehabilitation centres, prisons) and homeless persons. This experimental series has adjusted the NDSHS for drug use among prisoners and homeless people. <back
10 The population estimate used to calculate the experimental aggregates assumes no illegal drug users under the age of 14. The inclusion of the entire Australian population is unrealistic. <back
11 Poly–drug use was taken into consideration. <back
12 Amphetamines group product price and purity differences at the wholesale and retail levels necessitated further disaggregation into crystal and non–crystal varieties where there is greater price/purity homogeneity. <back
13 There is evidence of minimal MDMA production in Australia and the number of MDMA precursor detections remains low. The import rate of 95% for finished MDMA tablets was assumed. MDMA prices are given per 1000 tablets. 1 tablet = 0.29 grams. <back
14 Expert advice suggests unit production cost data for the amphetamines group and MDMA is unreliable. Production complexity of pharmaceutically produced drugs prevents alternative intermediate cost estimate calculation. <back
15 It is assumed that state police seizures are made at the Australian production (wholesale) level. The seizure data includes only those seizures for which a drug weight was recorded. Consequently, the number of seizures and the amount of drug seized for all drug types is under–counted. Amphetamine and cannabis data are most likely to be effected by the variety of measurement methods and these figures should be treated with caution. Seizure data may exclude seizures which are the subject of ongoing investigations. <back
16 It is assumed that Australian importers have pre–paid the international distributor, therefore the value of seized imports are incorporated in the import cost calculation. <back
17 Purity data represents seizures analysed at a forensic laboratory. The timing between seizure and laboratory analysis may vary from a days to months and occasionally years. In order to build national estimates, state data was collected and aggregated. The ABS generally uses the mean of state sourced data to calculate Australian estimates, however, data collected on illegal activities is sparse and prone to volatility. In this case, given the variability in the data, the experimental aggregates at a national level are calculated using median prices and purities. <back
18 It is assumed that AFP seizures are made at the national border. One exception is the AFP MDMA seizure data. MDMA data is apportioned equally across imported and domestic seizures. <back
19 Purity and price data is provided in financial year format, although used for calculations relating to usage data based on a calendar year. For example, estimates for 2004 are calculated using data for 2003/04. For any imported drug, the import price is assumed to equal the Nominal Australian wholesale price. Cannabis is not considered for purity adjustment as the quality is assumed to be consistent. Cannabis price data is selected using hydroponic production prices. <back
20 Intermediate use for the illegal drug production is thought to be understated due to a lack data. However a certain proportion of intermediate use would already be captured in the National Accounts through HFCE. Drug producers use electricity and water which is captured as final consumption. If illegal drugs were to be included in ABS National Accounts, intermediate use for producing drugs would need to be reallocated from HFCE. <back
21 The estimates for illegal drug production and annual GDP are on different reporting bases. Illegal drug production estimates represent a calendar year, while annual GDP represents a financial year. <back
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