Download SNA production boundary

There are many human activities that can be seen as economic in some sense. For example
growing your own potatoes can be seen as an economic activity even though there is no cash
transaction involved. Or again, travelling to work can be seen as an economic activity since it
is a necessary prelude to earning one’s living. The so-called « production boundary » defines
which of these and other economic-type activities are to be included in the GDP.
As it happens, the first of the two examples above is inside the production boundaqry while
the second is outside it. The first part of this lesson gives more detail about the SNA
production boundary.
The second part of this lesson then considers how the outputs of the various activities
included within the production boundeary are defined. Output was the first column of the
SUT we looked at in lesson 1.
In many cases it is clear what the output of an economic activity consists of: coal is the output
of a coal-mine and sausages are the output of a sausage factory. But there are several
activities included in the production boundary where the nature of the output is not so clear.
The SNA Production Boundary covers five kinds of activities:
1.The first of these is by far the most important. It covers the production of goods and
services for sale – crops, livestock, minerals, manufactured goods, business services for
example. Note that it also includes government services. Some of the services produced by
government are collective services provided to the community at large, such as law and
order, national defense and statistics. Others are provided to individual households such as
education and health services.
2.The second of these is particularly important in countries with a large agricultural sector.
Farmers usually produce for the market but also keep back enough of what they grow to feed
the family. All this produce is included as agricultural output, whether sold or not. Building
your own house or a storage shed also counts as production.
3.Authors, film producers and musicians are also producers. The SNA treats their output as a
kind of capital asset. The original manuscript or piece of music will go on producing an
income for the producer over several years.
4.When you live in a flat or house that you own, the SNA considers that you are an
entrepreneur selling housing services to yourself.
5.Finally, households can produce domestic services which they “sell” to themselves by
employing cooks, butlers, gardeners and body-guards.
2
Output is not always the same as sales.
For services, output and sales are always the same. A restaurant's output is what it
gets from its customers for the meals it serves: the output of an airline is the tickets it
sells.
But for goods, some of what is produced may not be sold immediately. It goes into
stocks. This means that goods output may be smaller or greater than its sales. It will
be smaller if it is running down its stocks of finished goods and larger if it is
accumulating more stocks of goods for sale at a later date.
Output can be calculated as sales plus the increase in stocks of finished goods, where
the increase can be either positive or negative.
3
For certain producers, the national accounts have adopted special rules for defining
output. Here we will look at the most important cases.
A special word about Non-Profit Institutions Serving Households- NPISH or “enpish”.
To keep it simple, we ignored enpish in the SUT, but they are both producers
supplying some of the services that make up the total supply of goods and services
and they are also treated as consumers of the services they produce. They should
have had a column to themselves in the Uses side of the SUT. The reason we ignored
them is that they are relatively insignificant in many countries, but this is not always
the case. We give more details about enpish in a later slide.
4
We value the output of “market” producers using the prices at which their goods and services are sold.
As governments sell very few of their services we have to value their output as the “costs of
production”:
• Compensation of employees is the biggest item. It consists of wages and salaries and
allowances in cash and the value of any income in kind – free or subsidized housing, food and
meals, transport to and from work. An important point to notice here is that wages and
salaries include employer’s contributions for social security – health care, unemployment
insurance and pensions for example. Mostly governments provide these social benefits
without making actual contributions to a social security fund. In this case the national
accountant has to estimate what the government should have paid into a fund in order to
finance the benefits that employees actually receive. This amount is then added to wages and
salaries to obtain compensation of employees.
• Intermediate consumption includes office stationery, electricity, rent and other current cost
of running government offices, hospitals, schools, police forces and armies.
• Consumption of fixed capital (CFC) is the decline in the value of government fixed assets
through wear and tear and obsolescence. Government computers, vehicles and office
buildings, hospital and school equipment and so on are being used up in the process of
producing government services. The national accountant must include this “using up of
capital” in the cost of producing government services even if governments themselves do not
always show it in their accounts.
• Operating surplus is usually zero or negligible. It may include the operating surplus of
restaurants or bookshops in museums.
•Taxes and subsidies on production are also usually zero. Governments do not tax
themselves!
5
There are several kinds of non-profit institutions. Chambers of commerce and business
associations are often “non-profit” organizations. In some countries government hospitals
and schools are operated as “non-profit” institutions.
In deciding where to classify them, we ask the question “Who finances their operations?” If
they are financed by enterprises, they are treated like enterprises and are not shown
separately. If they are financed by government they are included together with other unit-s
of general government. If they are financed by households they are Non-Profit Institutions
Serving Households - or “Enpish” - and they are shown as a separate kind of producer.
Religious organizations may run hospitals, clinic and schools in addition to mosques and
churches. Their output must be included in the national accounts.
In many low income countries the last of kind of enpish listed here – Unicef, Red Crescent etc
– may be quite important. They employ both expatriate and locally-recruited staff and
provide a range of services from health care, reproductive advice for women, mineclearance, disaster relief and so on.
The output of NPISH is not sold and so we have to value their output in the same way as for
government. That is we add up the costs of producing their services – intermediate
consumption, compensation of employees, consumption of fixed capital and other taxes on
production.
6
Trade output is the margin. This measures the value of the service that the retailer or
wholesaler adds to the value of the goods sold by storing them, keeping them in good
condition, displaying them in an attractive fashion and providing advice to customers.
Some examples of how we calculate gross output of trade:
• A trader buys goods for resale for 50 and has sales of 75. Assuming there is no
change in stocks of goods for resale, the gross output will be 75 minus 50 = 25.
Twenty five is the margin on the goods sold.
• A trader does not buy any goods for resale but sells 100 this year. Those sales must
have come out of the stock purchased in an earlier year. In this case the increase in
stocks for resale will be a minus figure - minus 60 for example. The gross output is
then 100 + (minus 60) = 40. Forty is the margin on the goods bought for resale that
were actually sold.
• A trader buys goods for resale for 70 and over the year the stock of goods for resale
increases by 10. If sales are 80, gross output equals 80 minus 70 plus 10 = 20.
Twenty is the margin on the goods bought for resale that were actually sold.
7
Bank output is the value of services sold (usually quite small) plus the difference between the
interest paid to depositors and the property income earned by banks (usually very big).
The difference between interest and other property income received and interest
paid to depositors is now called FISIM – financial intermediation services indirectly
measured. In the older versions of the SNA it was called “Imputed Bank Service
Charges” and was calculated in the same way as FISIM. FISIM is not new. It is just a
new name.
However, the 1993 SNA made an important change to the way in which FISIM is
treated in the accounts. In the 1968 SNA all FISIM – or imputed bank service charges were treated as the intermediate consumption of an imaginary financial institution.
The 1993 SNA went back to the original idea of the first(1952) SNA and said that
FISIM should be treated as consumption of the unit that actually consumes it. The
consuming units may consist of enterprises, government, NPISH, households and
non-residents.
The 1993 SNA suggests that the best way to allocate FISIM among consuming units is
to use a “reference” rate of interest. This has proved difficult for many countries but
the SNA also suggests that FISIM could be allocated according to the shares of each
sector’s bank deposits, bank loans or the sum of deposits and loans. The 1993 SNA
recognizes that even this may not be possible for some countries and in this case they
may continue to follow the 1968 SNA and treat all FISIM as the intermediate
consumption of a financial institution.
Note that if FISIM is allocated to consuming units, that part which is not consumed by
8
Note that there are two kinds of life insurance. The commonest kind is where you
invest a fixed amount each month in return for a pension in later life. The other kind
is an accident insurance. The client makes a bet with the insurance company that he
will die before a certain age – 60 years old for example. If he dies before that he wins
and the insurance company pays out to his widow or other beneficiary. If he lives
beyond 60 the client loses and the insurance company pays out nothing. This is often
called “term insurance”.
Here we are only talking about accident insurance. This includes term insurance but
also, more important, insurance against road accidents, unemployment, ill health,
death while abroad, and any of the other misadventures that may befall you.
In the 1968 SNA the output of insurance was only the difference between premiums
and claims. The SNA 1993 added “premium supplements” which are equal to the
interest earned on the contingency funds which are held by insurance company and
from which claims are paid. The reasoning behind “premium supplements” is that the
contingency funds really belong to the customers and not to the insurance
companies. It is as though the customers earn interest and other property income
from investing those funds and then pay it to the insurance companies as an
additional, or “supplementary”, premium.
9
If business registers are not kept up to date many enterprises will slip below the
radar. The statistical office has no record of them and they are omitted from GDP. In
other cases, businesses may hide what they are doing or only declare part of their
income to avoid paying taxes.
Whether they are hidden by accident or by design these activites are included in the
production boundary . Most often hidden activites will involve thingts like:
•Repair services (vehicles and household equipment).
•Trade (street traders and small shops).
•Selling food and drinks (especially on the street).
•Personal services (haircutting and beauty salons).
•Transport (taxis and minibuses)
10
An OECD/Eurostat/EFTA study in the Balkans showed that the hidden economy can
be quite large. Special studies were made to fill the hidden gaps in the GDP for the
countries in this slide. These ranged from about 5% in Montenegro to nearly 30% in
Albania.
A few years ago the European Union asked all member states to examine their GDP
estimates to make sure that hidden, underground, informal activities were all
properly covered. This resulted in quite large increases in GDP for several countries
including an increase of 16% for Italy.
In a later lesson we will examine the methods used by the European Union countries
as they can also be used by countries in other regions.
11
People who earn their incomes illegally will spend most of it on goods and services
that are quite legal. Since their consumption expenditure will therefore be correctly
recorded along with the consumption expenditure of those who earn their livings
legally, we need to cover their production as well. Otherwise GDP(P) will not equal
GDP(E).
Several countries have recently made attempts to estimate the value added of illegal
activities such as production and trade in narcotics, prostitution and counterfeit
manufactures like fake watches and DVDs.
In most cases value added from illegal activities is not more than 1 or 2% of GDP.
12
The average for these ten countries is about 0.9% of GDP. The percentage is higher
for Ukraine because it includes a lot of income from producing and selling counterfeit
goods including DVD for films, music and computer software.
Most countries have concluded that it is not really worth the effort. The estimates
are all very weak and it is time consuming to make them.
13
Agriculture may account for 50% or more of GDP in many African countries. These are
some of the data source for measuring output:
• Most countries try to carry out an agricultural census once every five or ten years.
• Some countries have annual surveys with “crop-cutting” to measure output of
major crops like rice or maize.
• “Farmers marketing boards” are another source of data in many countries.
Marketing boards usually offer to buy all of a farmer’s output at a fixed price which is
announced before the growing season.
• Sometimes ministries of agriculture have extension workers who make forecasts for
the major crops grown in their areas.
• Household surveys carried out in rural areas may collect information on income
from sales of crops and livestock.
• Import and export statistics will show if crop output is more or less than enough to
feed the population.
14
In most countries a relatively small number of large enterprises account for a large
part of total out put. For example:
• Companies running plantations (coffee, rubber, coca and tea),
• Mining and timber extraction,
• Coca cola and soft drinks producers,
• Breweries, cold-storage, and food processing,
• Electricity generation.
These companies are generally covered by regular industry surveys and also publish
annual accounts.
Income tax record can also be a good data source in countries where legislation
allows tax data to be shared with the statistical office.
15
Government budget documents and annual accounts are often detailed but do not
always follow economic concepts. For example, they may combine compensation of
employees with other current expenditures in a single line.
In many countries the IMF provides training for finance ministry officials to help them
provide data according to the IMF Government Finance Statistics rules. Talk to the
Ministry of Finance. They may have reworked the government accounts into the right
format for the national accounts.
Foreign-funded NPISH are easy to identify and they can be included in regular
surveys. They will also usually keep good accounting records.
16
Now we come to the difficult part. How do we estimate output of small enterprises which are not
included in the business register but which may account for a large part of total output? Mostly they
will be in trade, transport, catering, repair services and personal care services.
Household labor force surveys are carried out in an increasing number of countries. They discover how
many people are gainfully employed and what they are working at. These data can be compared with
employment estimates from enterprise surveys to find out how many are working in the informal,
hidden economy.
The United Nations Statistical Office and Regional Commissions including the Economic Commission
for Africa are helping countries to go one step further with “1-2 survey”. The labor force survey
identifies households that are operating a small enterprise of some kind, and a second survey uses this
list as a sample frame to collect data on output, sales, employment, and intermediate consumption.
Several Franco-phone African countries have carried out these surveys.
The World Bank’s Living Standards Measurement Study – LSMS - provide a great deal of information
on sources of income, including earnings from small household enterprises.
Area surveys are used to discover the numbers and types of enterprises operating in a given city block
or rural area. If the city blocks and rural areas are randomly selected the total numbers of street
traders, carpenters, plumbers, shoe-shiners, food sellers, etc. can be calculated. Follow-up surveys
can then measure their output and incomes.
But national accountants also need to use “innovative” methods.
17
It is certain that the regular statistical sources available to the national accountant
will never cover all the economic activities known to be carried out in a country.
Be bold in making estimates of the output of people you see each day earning a living
from an “informal” activity of some kind.
If people regularly selling apples on street corners and you do not try to estimate the
total output of the apple-selling business, you are actually making an estimate for it.
Your estimate of their output is zero. But that cannot be right. Almost any rough
guess you make will be closer to the truth.
These and other techniques for ensuring that GDP estimates are “exhaustive” – that
is, they cover everything within the production boundary - are discussed in more
detail in later lessons.
18
The SNA production boundary is wide. It covers hard-to-measure, «non-observed»
activities as well as production by large-scale private and public producers. Regular
data sources like enterprise and household surveys will provide much of the
information you need, but there will always be gaps that have to be filled by
innovative methods.
Remember, if you know that an economic activity is taking place and you ignore it,
you are actually making an estimate for it. Your estimate of its production and value
added is ZERO. That must be wrong. Almost any etimate, however weak, will be
better!