VI. THE PRODUCTION ACCOUNT
M. The main aggregates associated with value added
1. Introduction
| 6.233. | The underlying rationale behind the concept of gross domestic product (GDP) for the economy as a whole is that it should measure the total gross values added produced by all institutional units resident in the economy. However, while the concept of GDP is based on this principle, GDP as defined in the System may include not only the sum of the gross values added of all resident producers but also various taxes on products, depending upon the precise ways in which outputs, inputs and imports are valued. |
| 6.234. | Assume initially that there is no VAT and that production accounts are compiled at "market prices", i.e., with outputs valued at producers' prices and intermediate inputs at purchasers' prices. Suppose further that the production accounts for all resident producers are aggregated and consolidated, thereby eliminating intermediate sales and purchases. It follows that the sum of the gross values added must be identical with the sum of final expenditures on consumption, gross capital formation and exports less imports. This is, of course, the basic identity of national accounting. The identity must hold provided final expenditures and imports are valued consistently with the inputs and outputs in the production accounts. The identity makes it possible to calculate GDP directly from data on final expenditures and imports without utilizing production (or income) data. Total GDP can therefore be estimated from production accounts - the production approach - or quite independently from final expenditures and imports - the expenditure approach. |
| 6.235. | In the System, however, GDP at market prices is defined from the expenditure side as total final expenditures at purchasers' prices less total imports valued free on board (f.o.b.) (and not at purchasers' prices including taxes less subsidies on imports). Thus, although imports valued f.o.b. are valued in the same way as exports, they are not valued consistently with other final expenditures nor with the entries in the production account, so that the identity between GDP from the expenditure side and GDP from the production side breaks down. As import taxes are not deducted along with total imports f.o.b. when calculating GDP from the expenditure side, it follows that import taxes must be added to GDP from the production side in order to restore the identity. Thus, GDP at market prices as defined in the System is the sum of the gross values added of all resident producers at market prices plus taxes less subsides on imports. |
| 6.236. | The situation is more complicated when a system of VAT, or similar deductible taxes, is in operation. As explained above, the net system of recording VAT is used in the System: i.e., the sales of producers are recorded excluding invoiced VAT while purchases are recorded including VAT which is not deductible by the purchaser. In consequence, the total value of purchases throughout the economy exceeds the value of the corresponding sales by the amount of non-deductible VAT. It follows that not only import taxes but all non-deductible VAT (or similar taxes) must be added to the sum of the gross values added of all resident producers in order to arrive at GDP as defined from the expenditure side. |
2. A resume of the main identities
| 6.237. | Given the general explanations of the previous section, the main identities connecting the aggregates of the System are summarized in this section GDP at market prices is defined from the expenditure side as:
Household final consumption expenditure at purchasers' prices
+ NPI final consumption expenditure at purchasers' prices
+ Government final consumption expenditure at purchasers' prices
+ Gross fixed capital formation at purchasers' prices
+ Acquisition less disposals of valuables at purchasers' prices
+ Changes in inventories
+ Exports at purchasers' prices at the frontier (f.o.b.)
- Imports valued f.o.b.
Given this definition of GDP, the following identities hold when the summations are taken over all resident producers:
(a) GDP =
the sum of the gross values added at producers' prices
+ taxes, less subsidies, on imports
+ non-deductible VAT;
(b) GDP =
the sum of the gross values added at basic prices
+ all taxes, less subsidies, on products
(c) GDP =
the sum of the gross values added at factor cost
+ all taxes, less subsidies, on products
+ all other taxes, less subsidies, on production.
In cases (b) and (c) the item taxes, less subsidies, on products includes taxes and subsidies on imports as well as on outputs. |
3. Domestic production
| 6.238. | GDP is intended to be a measure of the value created by the productive activity of resident institutional units. Although for the kinds of technical reasons just given, it may not be identical with the sum of the gross values added of resident producers it nevertheless consists mainly of the latter. |
| 6.239. | It should be noted, however, that GDP is not intended to measure the production taking place within the geographical boundary of the economic territory. Some of the production of a resident producer may take place abroad, while some of the production taking place within the geographical boundary of the economy may be carried out by non-resident producer units. For example, a resident producer may have teams of employees working abroad temporarily on the installation, repair or servicing of equipment. This output is an export of a resident producer and the productive activity does not contribute to the GDP of the country in which it takes places. Thus, the distinction between resident and non-resident institutional units is crucial to the definition and coverage of GDP. In practice, of course, most of the productive activity of resident producers takes place within the country in which they are resident. However, producers in service industries which typically have to deliver their outputs directly to their clients wherever they are located are increasingly tending to engage in production in more than one country, a practice which is encouraged by rapid transportation and instantaneous communication facilities. Geographical boundaries between adjacent countries are becoming less significant for mobile service producers, especially in small countries bordered by several other countries. |
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