Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the System of National Accounts (SNA) Lesson 3 Production Boundary and Gross Output 1

Copyright 2010, The World Bank Group. All Rights Reserved. What is Production in the SNA? 1.Production of goods and services that are supplied to units other than their producers: motor cars and train rides. 2.Production of goods that are retained by the producer for consumption or capital formation: grow your own vegetables and build your own house 3.Own account production of “knowledge-capturing” products that are retained by the producer for consumption or gross capital formation: books, films and music. 4.Production of housing services by owner occupiers: living in your own house is production! 5.Production of domestic and personal services by employing paid domestic staff: butlers and body- guards. 2

Copyright 2010, The World Bank Group. All Rights Reserved. What is output? In the Supply and Use Table we referred to “domestic production”. The SNA prefers the term “output” Output is measured as the value of goods and services produced. This is not always the same as the value of sales. The difference is the increase in stocks of finished goods 3

Copyright 2010, The World Bank Group. All Rights Reserved. Output: some special cases For most kinds of activities it is easy to identify the output. But the SNA has some special rules: 1.Government 2.Non-profit institutions serving households 3.Trade 4.Banks 5.Insurance 6.Hidden and illegal output. 4

Copyright 2010, The World Bank Group. All Rights Reserved. 1. Government In the national accounts, governments are regarded as producing services which they sell to themselves. The problem here is “What is the value of these services?” The SNA answer is that government output is equal to the costs of producing them. These are: – Compensation of employees – Intermediate consumption – Consumption of fixed capital, – Net operating surplus – Taxes on production (less subsidies on production) 5

Copyright 2010, The World Bank Group. All Rights Reserved. 2. Non-profit institutions serving households These are usually referred to as NPISH (“enpish”) and include: – Religious organizations – Political parties – Trade unions – Sporting and recreational clubs – Unicef, Red Crescent, Médécins sans frontière, Handicap International. Their output is valued at cost – like government 6

Copyright 2010, The World Bank Group. All Rights Reserved. 3. Trade The output of retail and wholesale traders is not the value of the goods they sell. It is their margin. The trade margin is the value of sales minus the cost of goods purchased for resale and plus the increase in stocks of goods for resale. The increase in stocks may be + or - 7

Copyright 2010, The World Bank Group. All Rights Reserved. 4. Banks Banks make money in two ways: – They sell services like changing foreign currencies or transferring funds abroad – They earn interest and property income by investing their own funds and money that has been deposited with them. Sometimes they pay interest on money deposited with them but it is always much less than the property income they earn from loans and other investments. 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 from their investments (usually very large). 8

Copyright 2010, The World Bank Group. All Rights Reserved. 5. Insurance There are two kinds of insurance – life insurance and accident insurance. Life insurance is an investment scheme usually with the purpose of providing a pension. Here we are only talking about accident insurance – vehicle, theft, fire, travel, health and so on. The output of this kind of insurance is the “service charge”. This is what you pay for the companies’ work in arranging the insurance. This service charge has two components: – The difference between the premiums they receive and the claims they pay out; and – The property income they earn by investing the funds they keep in reserve to pay out claims (“contingency funds”) 9

Copyright 2010, The World Bank Group. All Rights Reserved. 6. Hidden Output The SNA requires estimates of all activities within the production boundary even if the producers try to hide their activities and even if they are illegal. In practice, activities may be “hidden” from the statistical office because their business registers are out of date but in other cases the producers try to hide what they are doing to avoid paying taxes. And some producers may complete statistical questionnaires or tax forms but overstate their costs or understate their receipts. 10

Copyright 2010, The World Bank Group. All Rights Reserved. 11

Copyright 2010, The World Bank Group. All Rights Reserved. Illegal Activities The SNA production boundary includes illegal activities where there are willing buyers and sellers. Protection rackets (“Pay me 50 Dollars a month or I will set fire to your kiosk”) are excluded because the “protection” service is bought under duress. But production and sale of goods and services which people buy freely are inside the production boundary even if they are illegal. 12

Copyright 2010, The World Bank Group. All Rights Reserved. Size of Value Added of Illegal Activities in GDP: Some Official Estimates CountryYear of Estimate Value Added of Illegal Activities as Percent of GDP Bulgaria1998/ Czech Republic Hungary Latvia Lithuania Poland Serbia Sweden Ukraine

Copyright 2010, The World Bank Group. All Rights Reserved. Data sources: Agriculture Periodic censuses of agriculture Annual surveys in some countries Crop marketing boards Agriculture ministry forecasts Household surveys Export and Import statistics 14

Copyright 2010, The World Bank Group. All Rights Reserved. Data sources: large enterprises Industry censuses every 5 or 10 years Annual surveys Company accounts Income tax statistics Exports 15

Copyright 2010, The World Bank Group. All Rights Reserved. Data Sources: Government and NPISH For government the data sources are the budget documents for the coming year and government accounts compiled after the end of the year For NPISH, countries need to keep a register of foreign and domestic NPISH. Foreign-based NPISH generally keep good accounts. 16

Copyright 2010, The World Bank Group. All Rights Reserved. Data sources for small enterprises Household labor force surveys Informal sector 1-2 surveys Living Standards Measurement Surveys (LSMS) Area surveys Innovative methods 17

Copyright 2010, The World Bank Group. All Rights Reserved. Innovative methods Some examples – Estimate total crop production from WHO data on daily age-specific calorie requirements, calorific content of major food crops and population statistics – Estimate the earnings of unlicensed taxi drivers from police statistics on prosecutions and information on the average earnings of licensed taxis. – Estimate the earnings of food sellers from the numbers counted in a few main cities and the average prices of the food sold. 18

Copyright 2010, The World Bank Group. All Rights Reserved. Key messages The SNA production boundary is wide. It covers hard- to-measure activities as well as those carried out by government and large enterprises. Regular data sources like government accounts, 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 19