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# Annual benchmarks - Supply and use approach

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

## Product flow method or product balance method

7.20    When S-U tables are first prepared during their compilation, they are unlikely to balance and until they are brought into balance, GDP measures from the production, income and expenditure approaches will differ. Only S-U tables provide a sufficiently rigorous framework to eliminate discrepancies in the measured flows of goods and services throughout the economy, in order to ensure the alternative measures of GDP converge to the same value. The technique that enables this convergence is referred to as the 'product flow' or 'product balance' method.

7.21    The amount of a product available for use within the economy must have been supplied either by domestic production or by imports. The same amount of the product entering an economy in an accounting period must be used for intermediate consumption; final consumption; capital formation (including changes in inventories); or exports. These two statements can be combined to give a statement of a product balance:

$$\small {Output{\rm{ }} + {\rm{ }}imports{\rm{ }} = \\ {\rm{ }}Intermediate{\rm{ }}\:consumption{\rm{ }} + {\rm{ }}final{\rm{ }}\:consumption{\rm{ }} + {\rm{ }}capital{\rm{ }}formation{\rm{ }} + {\rm{ }}exports}$$

7.22    The uses of products are usually valued at purchasers' prices and supply at basic prices, given the accounting and valuation rules that underpin the national accounts. It is therefore necessary to add trade and transport margins, and taxes on products less subsidies on products to the left-hand (or supply) side of the identity, so that both sides are expressed in purchasers' prices. A fuller articulation of the product balance for any product thus recognises that the sum of output at basic prices plus imports plus trade and transport margins plus taxes on products less subsidies on products is equal to the sum of intermediate consumption, final consumption and capital formation — all expressed at purchasers’ prices — plus exports.

7.23    Since the figures for output and intermediate consumption correspond to the entries for output and intermediate consumption in the production account, the identity of the sum of all product balances may be rearranged to become:

$$\small {Output{\rm{ }}-{\rm{ }}intermediate{\rm{ }}\:consumption{\rm{ }} + {\rm{ }}taxes{\rm{ }}\:on{\rm{ }}\:products{\rm{ }}-{\rm{ }}subsidies{\rm{ }}\:on{\rm{ }}\:products{\rm{ }} = \\ {\rm{ }}Final{\rm{ }}\:consumption{\rm{ }} + {\rm{ }}capital{\rm{ }}\:formation{\rm{ }} + {\rm{ }}exports{\rm{ }}-{\rm{ }}imports}$$

7.24    The left-hand side of this identity is equivalent to GDP at market prices, also known as the ''production approach'' to GDP. The right-hand side is also equal to GDP at market prices and is known as GDP measured by the ''expenditure approach''.

7.25    Value added can be disaggregated to show all the components of the generation of income account which is commonly referred as GDP measured by the income approach. That is:

$$\small {Output{\rm{ }}-{\rm{ }}intermediate{\rm{ }}\:consumption{\rm{ }} + {\rm{ }}taxes{\rm{ }}\:on{\rm{ }}\:products{\rm{ }}-{\rm{ }}subsidies{\rm{ }}\:on{\rm{ }}\:products{\rm{ }} = \\ {\rm{ }}Compensation{\rm{ }\:}of{\rm{ }}\:employees{\rm{ }} + {\rm{ }}gross{\rm{ }}\:operating{\rm{ }}\:surplus{\rm{ }} + {\rm{ }}gross{\rm{ }}\:mixed{\rm{ }}\:income{\rm{ }}\\ + {\rm{ }}taxes{\rm{ }}\:on{\rm{ }}\:production{\rm{ }}\:and{\rm{ }}\:imports{\rm{ }}-{\rm{ }}subsidies{\rm{ }}\:on{\rm{ }}\:production{\rm{ }}\:and{\rm{ }}\:imports}$$

7.26    The S-U current price balancing process is undertaken through both manual and automated balancing, where significant discrepancies are resolved through evidence based balancing decisions, and small, remaining differences are resolved using a constrained optimisation tool. Balancing decisions are based on a variety of data sources and supporting evidence such as industry annual reports; industry body commentary; industry events news articles; and state of industry profiles.

## Goods and services account

7.27    The goods and services account shows that all output from within the production boundary, plus imports (output from abroad), must be accounted for in one of the other two basic activities of the SNA, consumption of goods and services or accumulation of goods and services (or exported, implying either consumption or accumulation abroad).

7.28    The whole sequence of accounts can be viewed as built around the goods and services account by adding transactions relating to the generation, distribution and redistribution of income and saving. When these transactions are aggregated across all sectors and the rest of the world, total resources are equal to total uses. If these were to be ''consolidated'' out of the sequence of accounts, only the goods and services account would be left.