Chapter 8 Gross Domestic Product

Introduction

8.1    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. This 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);
  • provision of knowledge-capturing products (the provision, storage, communication and dissemination of information, advice and entertainment) which the consuming unit can access repeatedly; and
  • illegal production, comprising the production of illegal goods and services (i.e. for which distribution or possession is banned by law), and production of legal goods and services by unauthorised producers (e.g. unlicensed medical practitioners).

8.2    Production is not only confined to goods and services that are of clear 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 (e.g. many goods and services produced by governments and non-profit organisations). They can also be 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 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

8.3    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 other organisations to make market-based macroeconomic policy decisions. This includes the analysis of markets and factors affecting market performance such as inflation and unemployment. In 2008 SNA (and the ASNA), the value of domestic services produced and consumed within households are excluded from production because such services are relatively isolated and independent from markets, and are difficult to value in an economically meaningful way. Examples include cleaning, decoration and maintenance of the dwelling, cleaning, servicing and repair of household durables or other goods, washing, preparing meals, and child and aged care. 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.

8.4    With the exception of own-account household services, 2008 SNA 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 2008 SNA 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.

8.5    2008 SNA states that to satisfy the definition of production in an economic sense:

There must be an institutional unit that assumes responsibility for the process of production and owns any resulting goods or knowledge-capturing products or is entitled to be paid, or otherwise compensated, for the change-effecting or margin services provided.⁴²

8.6    Institutional units are the basic units for which flows and stocks are recorded in the national accounts. The 2008 SNA description excludes from economic production natural processes without human involvement or direction, such as the unmanaged growth of fish stocks in international waters. However, the activities of fish farming and fishing for profit are considered economic production. 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.

8.7    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 2008 SNA (and the ASNA) such services are conventionally treated as consumed as soon as the assets are bought by a household. 2008 SNA 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.⁴³

8.8    The disadvantage of this treatment is that, in times of hardship, households may temporarily reduce their purchases of these goods to a low level without significantly reducing their consumption of the services they 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. Accounting for the services of consumer durables requires 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.

8.9    Units of the general government sector provide goods and services free of charge or at nominal prices that are below their cost of production. 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, 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.

8.10    In the ASNA, values are also imputed for production of some other goods and services that are not sold in the marketplace. Imputations are confined to a small number of cases where a reasonably satisfactory basis for the valuation of the implied transactions 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;
  • services provided by owner-builders in the construction of dwellings and major alterations and additions to dwellings; and
  • the non-observed economy.

Endnotes

  1. SNA, 2008, para.6.24.

  2. Ibid., para.6.38.

Basic, producers' and purchasers' prices

8.11    There is more than one set of prices that can be used to value outputs and inputs depending on how taxes and subsidies on products and transport charges are recorded. ASNA uses basic prices for the valuation of industry outputs, and purchasers' prices for valuation of intermediate inputs and of final demand. This is in line with the recommendations in 2008 SNA.

8.12    It is important to note the distinction between taxes (and subsidies) on products and other taxes (and subsidies) on production when discussing alternate price measures. Taxes on products are payable per unit of the product (i.e. a flat amount dependent on the physical quantity of the product, or a percentage of the value at which the product is sold). Other taxes on production are imposed on the producer regardless of the production of any product (e.g. land taxes).

Basic prices

8.13    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) plus any subsidy receivable, as a result 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 as recommended by 2008 SNA. The basic price therefore measures the amount retained by the producer in respect of the good or service that is produced as output.

8.14    Analysts who use Input-Output tables (I-O tables) have expressed a strong preference for the definition of basic prices in the 1968 version of the SNA, which excludes the transport component whether separately invoiced or not. This treatment has been implemented in the I-O tables. This results in changes to estimates of output and intermediate use by industry for series at basic prices, with no impact on gross value added, GDP or series at purchasers' prices.

Producers' prices

8.15    2008 SNA states output can also be measured using producers' prices. These are defined as the amount receivable by the producer, from the purchaser, for a unit of a good or service produced as output, minus any non-deductible GST invoiced to the purchaser and excluding any transport charges separately invoiced by the producer. This measure of output is not included within the ASNA.

Purchasers' prices

8.16    The purchaser's price is the amount paid by the purchaser in order to take delivery of goods 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. Value added taxes such as 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.

8.17    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'.

Measures of GDP

8.18    The conceptual underpinning of GDP is that it measures gross value added for all resident institutional units for the whole economy. Gross value added is the difference between output and intermediate consumption for each institutional unit and thereby measures the value created by production. Value added represents the contribution of labour and capital to the production process. This measure of GDP is commonly referred to as GDP measured by the production approach (GDP(P)).

8.19    GDP can also be derived from income and expenditure flows.

  • GDP measured by the income approach (GDP(I)): GDP is the source of income for the factors of production (labour and capital). Total factor income is derived by summing factor incomes (i.e. compensation of employees, gross operating surplus, gross mixed income). Adding taxes less subsidies on production and imports to total factor income gives GDP at purchasers' prices.
  • GDP measured by the expenditure approach (GDP(E)): GDP can be derived as the sum of all final expenditures on goods and services (i.e. final consumption expenditures and GFCF), 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.

8.20    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. In addition, 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.

8.21    GDP less consumption of fixed capital is called net domestic product (NDP). Consumption of fixed capital is a cost of production 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 the volume of assets' as part of accumulation.

8.22    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 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, where 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 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 consumption of fixed capital are derived in conjunction with estimates of capital services and net capital stock.

8.23    In most cases, when a distinction is drawn between ‘gross’ and ‘net’ recording, ‘gross’ means without deducting consumption of fixed capital and ‘net’ means after deducting consumption of fixed capital. In general, the gross figure is easier to estimate and therefore more reliable, however the net figure is usually the one that is conceptually more appropriate and relevant for analytical purposes.

8.24    The following three chapters outline the concepts, sources and methods used to compile annual and quarterly GDP by the production, expenditure and income approaches in the ASNA.