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# Chapter 9 Gross Domestic Product - Production approach (GDP(P))

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

## Components of GDP(P)

9.1    GDP is the national accounting measure of production occurring in a whole economy during an accounting period (e.g. a quarter or a year). GDP is based on the concept of value added, which is the unduplicated value of goods and services produced in any given period. Gross value added at basic prices is equal to the total value of outputs at basic prices less the total intermediate consumption at purchasers' prices. GDP at purchasers' prices is equal to the sum of the gross value added at basic prices of all resident producers plus taxes on products payable less subsidies on products receivable. This measure is commonly referred to as GDP(P); that is:

 GDP(P) = Gross value added + Taxes on products - Subsidies on products = Output - Intermediate consumption + Taxes on products - Subsidies on products

9.2    The following describes the components of GDP(P) and how they are valued in concept.

## Output

9.3    Output consists of the value of goods and services produced within a type of activity unit (TAU). Output includes production that is completed in the accounting period as well as production in the accounting period that remains incomplete at the end of that accounting period. Goods and services produced as outputs may be:

• sold at 'economically significant' prices (i.e. prices which have a significant influence on both the amounts producers are willing to supply and the amounts purchasers wish to buy);
• bartered in exchange for other goods, services or assets that are provided to employees as compensation in kind, or used for other payments in kind;
• held as unsold 'finished' goods in the producers' inventories for subsequent sale, or held as work-in-progress in producers' inventories;
• supplied to another TAU belonging to the same enterprise as intermediate inputs into the latter's production;
• retained by the producers for own final consumption or gross fixed capital formation; and
• supplied free, or sold at prices that are not economically significant, to other institutional units (including households), as often occurs in the case of output of general government units and non-profit institutions.

9.4    The output of a TAU is defined as the value of total sales or other uses of goods (including capital work done on own account) and services produced as outputs plus the value of changes in the inventories of work-in-progress and finished goods produced as outputs. Three categories of output are recognised for national accounting purposes: market output, output produced for own final use and non-market output. The distinction is necessary to obtain an accurate valuation of output for each. The determining factor for market and non-market output is whether or not the unit sets economically significant prices.

## Market output

9.5    Market output is output that is sold at economically significant prices or otherwise disposed of on the market, or output that is intended for sale or disposal on the market. Market output includes the value of goods or services bartered, supplied by one establishment to another in the same institutional unit for use as intermediate consumption, used for payments in kind, or margins on the supply of goods and services (including transport and financial services). Market output also includes the value of changes in inventories of finished goods and work-in-progress intended for disposal on the market.

9.6    Sales of goods are to be recorded when the ownership of the goods passes from the producer to the purchaser or when the services are provided to the purchaser. The valuation is at basic prices.

9.7    The valuation of changes in inventories poses special problems in a national accounting context. Changes in the valuation of inventories held at particular points in time can include the effects of price changes, as well as additions to and subtractions from inventories. As such, holding gains or losses are not the result of production, they are excluded from the value of output in the national accounts. Accordingly, values of inventories used in measuring changes in inventories need to be adjusted to exclude them. In the ASNA, this adjustment is known as the inventory valuation adjustment (IVA).

## Output for own final use

9.8    Output for own final use includes output for own final consumption and output for own gross fixed capital formation.

• Output for own final consumption
• Consists of goods and services that are produced for final use by the owners of the enterprises in which they are produced. Corporations have no final consumption (only intermediate consumption used in producing their outputs), and output for own final consumption is produced only by unincorporated enterprises. Two examples of such output are agricultural goods produced and consumed by members of the same household and rent of owner-occupied dwellings.
• Output used for own gross fixed capital formation
• Goods or services used for own gross fixed capital formation can be produced by any kind of unit, whether incorporated or unincorporated. Examples are machinery or equipment produced by an establishment for use in the same establishment and the construction, extension, or alteration of an establishment's building by the enterprise owning the establishment. In the ASNA, imputations are made of the value added by owner-builders in the construction, alteration, or extension of their dwellings and for significant own-account construction carried out by private and public enterprises. An imputation is also made for computer software and research and development made on own account.

9.9    Output for own final use should be valued at the basic price at which the goods or services could be sold on the market; that is, the price that would prevail between a willing buyer and willing seller at the time and place the goods and services are produced. In the case of agricultural produce, the nearest equivalent price is likely to be the 'farm-gate' price; that is, the price the farmer could receive by selling the produce to a purchaser who comes to the farm to collect the produce.

9.10    When reliable market prices cannot be obtained, the value of output for own final use is the sum of costs of production; that is, the sum of intermediate consumption; compensation of employees; consumption of fixed capital; a net return to fixed capital; and other taxes (less subsidies) on production. Where the own-account production is undertaken by a non-market producer, net return to fixed capital is not included.

9.11    The ASNA also includes limited examples of output for own intermediate use in both the value of output and intermediate consumption. The two examples include the use of brown coal by electricity producers (where that coal is mined on-site and not charged for) and own-account production of electricity, where TAUs generate electricity which they use themselves. The choice to include these values was driven by a desire to fully reflect the input structure of the industries in question, and as the same values are added to both output and intermediate consumption, the inclusion does not affect gross value added.

## Non-market output

9.12    Non-market output consists of goods and services produced by non-profit institutions serving households (NPISH) or general government units and supplied free, or at prices that are not economically significant, to other institutional units or to the community as a whole. For general government output, economically significant prices may not be charged to users. The reasons are that the consumption of the goods or services cannot be monitored or controlled, as is the case with public administration and defence, or that governments make policy decisions not to charge the full cost, as with education and health services. Likewise, NPISH often do not fully charge for their services because such institutions are formed to provide services to members or the needy.

9.13    The non-market output of general government units and NPISH is valued at the costs of producing the outputs, comprising compensation of employees, the cost of purchased goods and services used in production (intermediate consumption), other taxes (less subsidies) on production and consumption of fixed capital. These units therefore do not generate a net operating surplus from their non-market production.

## Output of particular industries

9.14    The general rules governing the recording and valuation of output require elaboration regarding their application to the output of certain industries, mostly service industries such as transport and storage, wholesale trade and retail trade, and finance and insurance industries. Also included is a description of how to value the activities of research and development and the production of originals and copies.

## Transport and storage

9.15    The output of transport services is measured by the amounts receivable for transporting goods or persons. A good in one location is considered to be a different quality from the same good in another location, so the transporting from one location to another is a process of production.

9.16    The activity of storage is important in the production process whereby goods are 're-transported' from one point-in-time to another (as opposed to locations in the instance of transport services). For example, the inventories of goods have to be physically stored until sold and may require storage in a properly controlled environment. The increase in the price of a product is due to storage; storage costs incurred represents a production process. It is important to note that this increase is clearly distinguished from holding gains and losses, which are excluded from production.

9.17    There can be an increase in the value of a product other than a simple price rise as a result of being held in storage, that is, there can be an increase in value which is construed as a further stage in production. For example:

• the production process is sufficiently long that discounting factors should be applied to work put in place significantly long before delivery;
• the quality of the good may improve with the passage of time (such as wine); and
• there may be seasonal factors affecting the supply or the demand for the good that lead to regular, predictable variations in its price over the year, even though its physical qualities may not have changed.

9.18    Therefore, in principle, the values of additions to inventories include not only the values of the goods at the time they are stored but also the value of the additional output produced while the goods are held in store.

9.19    The major output of the wholesale and retail trade industries is the value of the service provided in selling goods (i.e. goods purchased and resold are not treated as part of intermediate consumption). The value of the service is equal to the trade margins realised on the goods sold. The measurement of this service at basic prices is analogous to that for goods producing industries: output at basic prices is the value of the trade margins, including the value of any subsidies received by the wholesaler or retailer, and excluding taxes on production of the service.

9.20    A trade margin is the difference between the actual or imputed price realised on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of. Margins can be negative if prices have to be marked down or the goods are never sold because they go to waste or are stolen.

9.21    It is important to note:

• goods sold are valued at the price they are actually sold (excluding GST);
• goods provided to employees as remuneration in kind are valued at the current purchasers' prices payable by the traders to replace them, therefore zero margin;
• additions to inventories of goods for resale are valued at the prices prevailing at the time of entry into inventories; and
• goods on withdrawal from inventories are valued at the cost to the wholesaler or retailer at the time of the withdrawal of acquiring similar replacement goods for later sale, unless the goods were acquired with the intention of making a real holding gain over the storage period, in which case the value of the holding gain is excluded.

## Financial intermediaries (except insurance and pension funds)

9.22    Banks and other financial intermediaries incur liabilities on financial markets by borrowing funds (for example, in the form of deposits) which they lend, on different terms and conditions, to other institutional units, such as households, governments and corporations. Such institutions intermediate between lenders and borrowers by channelling funds from one to the other, incurring risk in the process.

9.23    Although financial intermediaries make explicit charges for a number of financial services, the charges do not cover the cost of all services provided. If receipts from the charges were the only measure of output, financial intermediaries would invariably appear to be running at a loss. However, financial intermediaries are able to provide services for which they do not charge explicitly, through charging higher rates of interest to borrowers than they pay to lenders. The resulting 'interest margin' is used to defray expenses. The interest-rate differential therefore includes an implicit charge to customers for services provided and plays a part in determining the level of interest rates observed in practice.

9.24    In the ASNA, interest is treated as property income and is not recorded as either output or intermediate input. However, in effect, interest receivable by financial intermediaries excludes payments by borrowers for the services provided by the financial institutions, and interest payable by financial intermediaries is lower than it would otherwise be to cover the costs of financial services provided to depositors.

9.25    Accordingly, interest flows are adjusted to take account of the service charges that form part of the output of financial intermediaries. In effect, the interest paid by borrowers can be regarded as comprising two components, a service charge and a 'pure' interest flow. Likewise, the interest paid to depositors can be viewed as a 'pure' interest flow from which a service charge has been deducted. The 2008 SNA refers to the pure interest as 'SNA interest'. As these service charges cannot be measured directly, the imputed charges are accordingly referred to as financial intermediation services indirectly measured (FISIM).

9.26    The method for calculating FISIM has been refined in 2008 SNA. This refinement is consistent with the existing ASNA treatment. FISIM payable by both depositors and borrowers will be calculated by using the concept of a 'reference' rate of interest. The reference rate should contain no service element and reflect the risk and maturity structure of deposits and loans, and could be determined as being equal to a particular market rate of interest. The ASNA uses a practical approach to estimating the reference rate of interest as the mid-point between the average interest rate on loans and the average interest rate on deposits. The long-term bond rate is used as the reference rate for institutions that are not deposit taking institutions. For domestic transactions, the reference rates applied are in the domestic currency, whereas for exports and imports of FISIM different reference rates are applied for loans and deposits in other currencies.

9.27    In the ASNA, FISIM is an output of the following financial intermediaries: banks, other depository corporations, central borrowing authorities and securitisers. For banks and other depository corporations it is the sum of the imputed service charges for both borrowers and depositors while, for central borrowing authorities and securitisers, it is the sum of the imputed service charge for borrowers.

9.28    The FISIM calculation is based on stock levels of loans and deposits; that is:

$$\large[(Loan\:rate\:–\:reference\:rate) * Stock\:of\:loans] + [(reference\:rate\:–\:deposit\:rate)\:* \\ \large Stock\:of\:deposits]$$

9.29    As FISIM forms part of the output of financial intermediaries, it must also be recorded as part of consumption by the intermediaries' customers. FISIM is therefore shown as consumption by individual industries, government units and households, for both depositors and borrowers. Exports and imports of FISIM are also estimated.

9.30    Exports and imports of FISIM are calculated on reported income flows rather than reported asset and liability levels to ensure that calculated FISIM is consistent with reported income flows. The methodology for calculating FISIM by income flows is:

$$\large[(Loan\:rate\:–\:reference\:rate) * interest\:flow\:on\:loans/loan\:rate] + [(reference\:rate\:–\\ \large deposit\:rate) * interest\:flow\:on\:deposits/deposit\:rate]$$

9.31    Exports of FISIM are generated through two transactions:

• interest income earned by resident financial intermediaries (providing services) on loans to non-resident non-financial entities;
• interest income payable by resident financial intermediaries (specifically depository corporations) on deposits (providing services) to non-resident non-depository corporations. The non-resident is paying for the service component provided by the resident; therefore, it is recorded as an export of a service.

9.32    Imports of FISIM are generated through two transactions:

• interest income receivable by resident non-depository corporations on deposits held with non-resident financial intermediaries (specifically depository corporations) providing the service. The resident is paying for the service component provided by the non-resident, therefore it is recorded as an import of a service.; and
• interest payable by resident non-financial entities on loans from non-resident financial intermediaries (providing services).

9.33    A basket of international interest rates which are common to each major currency are monitored quarterly for deposits and loans. A mid-point between the average interest rate on loans and the average interest rates on deposits is used as the reference rate for each currency. FISIM is calculated for each currency and then aggregated to give a total figure for exports and imports of FISIM.

## Insurance and pension funds

9.34    Insurance is a form of financial intermediation in which funds are paid by policyholders and invested in financial or other assets, which represent technical reserves to meet future claims arising from the events specified in insurance policies. Typically, insurance enterprises do not make a separate charge for the service of arranging the financial protection or security which insurance is intended to provide. This is known as the insurance service charge (ISC).The value of the ISC, which forms part of the output of insurance and pension funds, has to be estimated indirectly from the total receivables and payables of insurance enterprises, including the income accruing from the investment of technical reserves.

9.35    The value of output of the services is produced by:

• non-life insurance corporations – estimated as premiums earned and investment income on the technical reserves less expected claims;
• life insurance corporations – the sum of administrative costs incurred (including investment and labour costs) plus a profit margin; and
• pension funds – the sum of administrative costs incurred (including investment and labour costs).

## Research and development

9.36    Research and development (R&D) is creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and to enable this stock of knowledge to be used to devise new applications. A major change in 2008 SNA is the recognition of expenditure on R&D as capital formation, whereas 1993 SNA treated it as intermediate consumption where purchased and ancillary production (which is not recorded) if performed in-house. The 2008 SNA treatment has been implemented in ASNA.

9.37    In principle, R&D output is valued at market prices if purchased (or outsourced) or as the sum of total production costs plus an appropriate mark-up representing the costs of fixed assets used in production if undertaken on own account. Survey data indicate that over 90 per cent of R&D activity in Australia is undertaken on own account and representative market price data for R&D products are not available. Therefore R&D output is valued by the total production costs incurred.

9.38    Own account R&D is derived from the ABS Survey of Research and Experimental Development, published in Research and Experimental Development, Businesses, Australia. This dataset collects expenditure on the production of research and experimental development classified by both sector and type of research undertaken.

9.39    Survey aggregates are adjusted during S-U balancing to ensure alignment with other datasets used in the compilation of the ASNA.

9.40    With the exception of Ownership of dwellings, all industry divisions produce own account research and development.

9.41    The current price estimates are deflated using the Wage Price Index (WPI). The resulting estimates are used to construct chain volume measures.

## The production of originals and copies

9.42    The production of books, recordings, films, software, tapes, disks, etc. is a two-stage process where the first is the production of the original and the second is the production and use of the copies. 2008 SNA (and 1993 SNA) recommended the capitalisation of the production of entertainment, literary and artistic originals as well as computer software. Prior to this it was treated as intermediate consumption. The ASNA complies with the 2008 SNA treatment.

9.43    2008 SNA clarified that 'licences to use' should be treated as capital formation if they are to be used for more than one year, regardless of payment arrangements. The ABS does not have information on the duration of 'licences to use' and assumes that most software is purchased with the intention to be used beyond one year and so should be treated as capital formation.

9.44    If the original is sold when it has been produced, the value of the output of the original producer is given by the price paid. If it is not sold, its value could be estimated on the basis of its production costs with a mark-up.

9.45    An estimation for computer software (consisting of packaged software, customised software and own account software) is included in the value of output. It is valued at market prices if purchased, while software developed in-house is valued at its estimated basic price or at its cost of production if it is not possible to estimate the basic price.

9.46    Estimates from the 2002-03 Information and Communication Technology (ICT) Satellite Account were incorporated into the ASNA for financial year 2002-03. Estimates for subsequent financial years are derived as follows:

• customised software and own account software are extrapolated using estimates from the Economic Activity Survey (EAS); and
• packaged software is derived from the level of imports of computer software as an indicator.

9.47    Estimates for own account software are added to output where a proportion of other own account capital formation is considered computer software and allocated to industry and sector.

9.48    Current price estimates are deflated using mainly relevant Producer Price Indexes (PPIs).