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# Overview of Gross State Product

Australian System of National Accounts: Concepts, Sources and Methods
Reference period
2020-21 financial year

## Introduction

21.18    Gross State Product is the aggregate which details the total economic production of a state economy and is the state equivalent to GDP. In the ASNA XE  , GSP for the eight state and territories add to GDP in current prices, in line with the top-down approach.

21.19     As with GDP, there are three approaches to measuring GSP.  The major difference between compilation of GDP and GSP is that the income and expenditure approaches are combined to overcome measurement issues for Gross State Product:

• Income approach (GSP(I));
• expenditure approach (GSP(E));
• combined income/expenditure measure (GSP(I/E)); and
• production approach (GSP(P)).

## GSP(I)

21.20    GSP(I) is derived by summing the income flows accruing to factors of production, plus taxes less subsidies on production and imports:

 GSP(I)              =              Compensation of employees +              Gross operating surplus +              Gross mixed income +              Taxes on production and imports –              Subsidies on production and imports

21.21    In the state accounts, GSP(I) is published in current price terms only as its components cannot be divided into price and quantity elements. GSP(I) is the basis for measurement of GSP as it is the only complete measure of current price GSP in the state accounts. As such it is a starting point for producing volume estimates of GSP(I/E) and GSP(P).

## GSP(E)

21.22    GSP(E) is derived as the sum of all final expenditures on goods and services:

 GSP(E)                 =              Final consumption expenditure +              Gross fixed capital formation +              Changes in inventories +              Exports –              Imports

21.23    At the state level the expenditure measure must include both international trade and trade between states, as well as changes in inventories. Currently there is no data source available to produce interstate trade or change in inventories on a state basis.

21.24    The inability to measure interstate trade and state level changes in inventories is overcome by assuming that GSP(E) is equal to GSP(I), forming what is known as the GSP(I/E) measure. This is discussed in more detail below. Items of GSP(E) which can be measured are defined as the known components of GSP(E).

## Combined GSP(I/E) measure

21.25    GSP(I/E) is a single measure of GSP produced by assuming GSP(E) is equal to the GSP(I) measure. It is used to overcome the inability to derive all components of the GSP(E) measure. The process is to first produce a current price GSP(I/E) using the GSP(I) measure to allocate to states the average of the GSP(I) and GSP(E) measures.

21.26    A chain volume GSP(I/E) is then produced by deflating current price GSP(I/E) with a deflator produced with known components of GSP(E), which are state final demand and international trade.

21.27    Known components of GSP(I/E) are published. The difference between the known components of expenditure and the total GSP(I/E) is published as the balancing item. The balancing item, in theory, consists of interstate trade and changes in inventories.

## GSP(P)

21.28    GSP(P) is the sum of value added for all industries. Conceptually, GSP(P) is as follows:

 GSP(P) =         Gross value added  +  Taxes on products  –  Subsidies on products =         Output – Intermediate consumption + Taxes on products – Subsidies on products

21.29    Gross value added (GVA) is the difference between output and intermediate consumption at basic prices 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. In the state accounts, estimates for intermediate consumption are not available, meaning calculation of current price and volume GVA requires alternative estimation methods.

21.30    Current price GVA is calculated using income components, using the assumption that GSP(I) = GSP(P).

21.31    The output indicator method is used to produce chain volume (CVM) estimates of GVA. This involves extrapolating reference year estimates of current price GVA using movements of indicators of output volumes.

## Published GSP

21.32    In the state accounts, the published GSP is the average of the GSP(I/E) and GSP(P) measures. This is represented algebraically as:

$$\text {GSP}=\frac{\large\text(GSP(P)+GSP(I⁄E))}{\large2}$$

21.33    This measure maximises the use of information about state economic activity and is more stable over time than either the GSP(P) or the GSP(I/E) measure. Individual measures of GSP(P) and GSP(I/E) are not separately published in the state accounts.

## Statistical discrepancy

21.34    To reconcile the sum of the components of the various measures of GSP with the published GSP a statistical discrepancy is derived. This ensures additivity for current price estimates as well as chain volume estimates in the reference year and beyond.

21.35    The statistical discrepancy is calculated as:

$$Statistical \space discrepancy(P)=GSP-\sum components \space of \space GSP(P)$$

$$Statistical \space discrepancy(I/E)=GSP-\sum components \space of \space GSP(I/E)$$

$$Statistical \space discrepancy(I)=GSP-\sum components \space of \space GSP(I)$$

21.36    Ideally the statistical discrepancy should equal zero as all measures of GSP should be equal in concept. This is not the case in the state accounts due the lower quality of data sources at state level as well as other measurement issues.

21.37    It should be noted that the statistical discrepancy is conceptually different to the balancing item. The balancing item is representative of economic transactions such as interstate trade and inventories. As such changes in the value of the balancing items are representative of economic events and are not a reflection on the quality of the state accounts.

## GSP compilation

21.38    The process of compiling GSP in the state accounts is sequential with GSP measures for current prices and volumes interrelated. The process for compiling GSP includes the following steps:

1. Create current price GSP(I);
2. Create known components of GSP(E);
3. Combine GSP(I) and known components of GSP(E) to produce current price and volume measures of GSP(I/E);
4. Create current price GSP(P) using components of GSP(I);
5. Create volume GSP(P) using the output indicator approach;
6. Create volume GSP as an average of GSP(P) and GSP(I/E).

21.39    Current price income GSP(I) is the starting point for volume GSP(P) and GSP(I/E) measures as it is the only measure which is independently produced for current price estimates. Compilation of GSP(P) and GSP(I/E) therefore use the assumption that:

•  GSP(I) = GSP(E) for current price GSP(I/E); and
•  GSP(I) = GSP(P) for current price GSP(P).

21.40    Volume estimates of GSP(I/E) and GSP(P) can then be calculated, as it is not possible to produce volume estimates without a current price base.  More detail on the individual steps of GSP compilation are included in following sections.