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.