VI. THE PRODUCTION ACCOUNT
B. Production
1. Production as an economic activity
| 6.6. | Production can be described in general terms as an activity in which an enterprise uses inputs to produce outputs. However, it is necessary to specify what is meant by "input" and "output" to make such a description more operational. The economic analysis of production is mainly concerned with activities that produce outputs of a kind that can be delivered or provided to other institutional units. Unless outputs are produced that can be supplied to other units, either individually or collectively, there can be no division of labour, no specialization of production and no gains from trading. There are two main kinds of output, namely goods and services, and it is necessary to examine their characteristics in order to be able to delineate activities that are productive in an economic sense from other activities. |
Goods and services
Goods
| 6.7. | Goods are physical objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets. They are in demand because they may be used to satisfy the needs or wants of households or the community or used to produce other goods or services. The production and exchange of goods are quite separate activities. Some goods may never be exchanged while others may be bought and sold numerous times. The separation of the production of a good from its subsequent sale or resale is an economically significant characteristic of a good that is not shared by a service. |
Services
| 6.8. | Services are not separate entities over which ownership rights can be established. They cannot be traded separately from their production. Services are heterogeneous outputs produced to order and typically consist of changes in the conditions of the consuming units realized by the activities of producers at the demand of the consumers. By the time their production is completed they must have been provided to the consumers. |
| 6.9. | The production of services must be confined to activities that are capable of being carried out by one unit for the benefit of another. Otherwise, service industries could not develop and there could be no markets for services. It is also possible for a unit to produce a service for its own consumption provided that the type of activity is such that it could have been carried out by another unit. |
| 6.10. | The changes that consumers of services engage the producers to bring about can take a variety of different forms - in particular:
(a) Changes in the condition of the consumer's goods: the producer works directly on goods owned by the consumer by transporting, cleaning, repairing or otherwise transforming them;
(b) Changes in the physical condition of persons: the producer transports the persons, provides them with accommodation,
provides them with medical or surgical treatments, improves their appearance, etc.;
(c) Changes in the mental condition of persons: the producer provides education, information, advice, entertainment or similar services;
(d) Changes in the general economic state of the institutional unit itself: the producer provides insurance, financial intermediation, protection, guarantees, etc. |
| 6.11. | The changes may be temporary or permanent. For example, medical or education services may result in permanent changes in the condition of the consumers from which benefits may be derived over many years. In general, the changes may be presumed to be improvements, as services are produced at the demand of the consumers. The improvements usually become embodied in the persons of the consumers or the goods they own and are not separate entities that belong to the producer. Such improvements cannot be held in inventory by the producer or traded separately from their production. |
| 6.12. | A single process of production may provide services to a group of persons, or units, simultaneously. For example, groups of persons or goods belonging to different institutional units may be transported together in the same plane, ship, train or other vehicle. People may be instructed or entertained in groups by attending the same class, lecture or performance. Certain services are provided collectively to the community as a whole, or large sections of the community: for example, the maintenance of law and order, and defence. |
| 6.13. | There is a group of industries generally classified as service industries that produce outputs that have many of the characteristics of goods, i.e., those industries concerned with the provision, storage, communication and dissemination of information, advice and entertainment in the broadest sense of those terms - the production of general or specialized information, news, consultancy reports, computer programs, movies, music, etc. The outputs of these industries, over which ownership rights may be established, are often stored on physical objects - paper, tapes, disks, etc. - that can be traded like ordinary goods. Whether characterized as goods or services, these products possess the essential common characteristic that they can be produced by one unit and supplied to another, thus making possible division of labour and the emergence of markets. |
2. The production boundary
| 6.14. | Given the general characteristics of the goods and services produced as outputs, it becomes possible to define production. A general definition of production is given first, followed by the rather more restricted definition that is used in the System. |
The general production boundary
| 6.15. | Economic production may be defined as an activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital, and goods and services to produce outputs of goods or services. There must be an institutional unit that assumes responsibility for the process and owns any goods produced as outputs or is entitled to be paid, or otherwise compensated, for the services provided. A purely natural process without any human involvement or direction is not production in an economic sense. For example, the unmanaged growth of fish stocks in international waters is not production, whereas the activity of fish farming is production. |
| 6.16. | While production processes that produce goods can be identified without difficulty, it is not always so easy to distinguish the production of services from other activities that may be both important and beneficial. Activities that are not productive in an economic sense include basic human activities such as eating, drinking, sleeping, taking exercise, etc., that it is impossible for one person to obtain another person to perform instead. Paying someone else to take exercise is no way to keep fit. On the other hand, activities such as washing, preparing meals, caring for children, the sick or aged are all activities that can be provided by other units and, therefore, fall within the general production boundary. Many households employ paid domestic staff to carry out these activities for them. |
The production boundary in the System
| 6.17. | The production boundary in the System is more restricted than the general production boundary. For reasons explained below, production accounts are not compiled for household activities that produce domestic or personal services for own final consumption within the same household, except for services produced by employing paid domestic staff. Otherwise, the production boundary in the System is the same as the more general one given in the previous section. |
| 6.18. | Activities that fall within the production boundary of the System may, therefore, be summarized as follows:
(a) The production of all individual or collective goods or services that are supplied to units other than their producers, or intended to be so supplied, including the production of goods or services used up in the process of producing such goods or services;
(b) The own-account production of all goods that are retained by their producers for their own final consumption or gross capital formation;
(c) The own-account production of housing services by owner-occupiers and of domestic and personal services produced by employing paid domestic staff. |
Domestic and personal services produced for own final consumption within households
| 6.19. | The own-account production of domestic and personal services by members of the household for their own final consumption has traditionally been excluded from measured production in national accounts and it is worth explaining briefly why this is so. |
| 6.20. | First, it is useful to list those domestic and personal services for which no entries are recorded in the accounts when they are produced and consumed within the same household:
(a) The cleaning, decoration and maintenance of the dwelling occupied by the household, including small repairs of a kind usually carried out by tenants as well as owners;
(b) The cleaning, servicing and repair of household durables or other goods, including vehicles used for household purposes;
(c) The preparation and serving of meals;
(d) The care, training and instruction of children;
(e) The care of sick, infirm or old people;
(f) The transportation of members of the household or their goods. |
| 6.21. | In most countries a considerable amount of labour is devoted to the production of these domestic and personal services, while their consumption makes an important contribution to economic welfare. However, national accounts serve a variety of analytical and policy purposes and are not compiled simply to produce indicators of welfare. The reasons for not imputing values for unpaid domestic or personal services produced and consumed within households may be summarized as follows:
(a) The own-account production of services within households is a self-contained activity with limited repercussions on the rest of the economy. The decision to produce a household service entails a simultaneous decision to consume that service. This is not true for goods. For example, if a household engages in the production of agricultural goods, it does not follow that it intends to consume them all. Once the crop has been harvested, the producer has a choice about how much to consume, how much to store for future consumption or production, and how much to offer for sale or barter on the market. Indeed, although it is customary to refer to the own-account production of goods, it is not possible to determine at the time the production takes place how much of it will eventually be consumed. For example, if an agricultural crop turns out to be better than expected, the household may dispose of some of it on the market even though it may have been originally intended all for own consumption. This kind of possibility is non-existent for services;
(b) As the vast majority of household domestic and personal services are not produced for the market, there are typically no suitable market prices that can be used to value such services. It is therefore extremely difficult to estimate values not only for the outputs of the services but also for the associated incomes and expenditures which can be meaningfully added to the values of the monetary transactions on which most of the entries in the accounts are based;
(c) Imputed values have a different economic significance from monetary values. The imputed incomes generated by the imputed production would be difficult to tax in practice. They would have to be shown as being all spent on the same services. However, if the incomes were to be available in cash, the resulting expenditures might be quite different. For example, if a household member were offered the choice between producing services for own consumption and producing the same services for another household in return for remuneration in cash, the paid employment would likely be preferred because of the greater range of consumption possibilities it affords. Thus, imputing values for the own-account production of services would not only be very difficult, but would yield values which would not be equivalent to monetary values for analytic or policy purposes. |
| 6.22. | Thus, the reluctance of national accountants to impute values for the outputs, incomes and expenditures associated with the production and consumption of domestic and personal services within households is explained by a combination of factors, namely the relative isolation and independence of these activities from markets, the extreme difficulty of making economically meaningful estimates of their values, and the adverse effects it would have on the usefulness of the accounts for policy purposes and the analysis of markets and market disequilibria - the analysis of inflation, unemployment, etc. It could also have unacceptable consequences for labour force and employment statistics. According to International Labour Organisation (ILO) guidelines, economically active persons are persons engaged in production included within the boundary of production of the System. If that boundary were to be extended to include the production of own-account household services, virtually the whole adult population would be economically active and unemployment eliminated. In practice, it would be necessary to revert to the existing boundary of production in the System, if only to obtain meaningful employment statistics. |
The production boundary within households
| 6.23. | Although personal and domestic services produced for own consumption within households fall outside the boundary of production used in the System, it is nevertheless useful to give further guidance with respect to the treatment of certain kinds of household activities which may be particularly important in some developing countries. |
Own-account production of goods
| 6.24. | The System includes the production of all goods within the production boundary. At the time the production takes place it may not even be known whether, or in what proportions, the goods produced are destined for the market or for own use. The following types of production by households are, therefore, included whether intended for own final consumption or not:
(a) The production of agricultural products and their subsequent storage; the gathering of berries or other uncultivated crops; forestry; wood-cutting and the collection of firewood; hunting and fishing;
(b) The production of other primary products such as mining salt, cutting peat, the supply of water, etc.;
(c) The processing of agricultural products; the production of grain by threshing; the production of flour by milling; the curing of skins and the production of leather; the production and preservation of meat and fish products; the preservation of fruit by drying, bottling, etc.; the production of dairy products such as butter or cheese; the production of beer, wine, or spirits; the production of baskets or mats; etc.;
(d) Other kinds of processing such as weaving cloth; dress making and tailoring; the production of footwear; the production of pottery, utensils or durables; making furniture or furnishings; etc.
The storage of agricultural goods produced by households is included within the production boundary as an extension of the goods-producing process. The supply of water is also considered a goods-producing activity in this context. In principle, supplying water is a similar kind of activity to extracting and piping crude oil. |
| 6.25. | It is not feasible to draw up a complete, exhaustive list of all possible productive activities but the above list covers the most common types. When the amount of a good produced within households is believed to be quantitatively important in relation to the total supply of that good in a country, its production should be recorded. Otherwise, it is not worthwhile trying to estimate it in practice. |
"Do-it-yourself" decoration, maintenance and small repairs
| 6.26. | "Do-it-yourself" repairs and maintenance to consumer durables and dwellings carried out by members of the household constitute the own-account production of services and are, therefore, excluded from the production boundary of the System. The materials purchased are treated as final consumption expenditure. |
| 6.27. | In the case of dwellings, "do-it-yourself" activities cover decoration, maintenance and small repairs, including repairs to fittings, of types which are commonly carried out by tenants as well as by owners. On the other hand, more substantial repairs, such as replastering walls or repairing roofs, carried out by owners, are essentially intermediate inputs into the production of housing services. However, the production of such repairs by an owner-occupier is only a secondary activity of the owner in his capacity as a producer of housing services. The production accounts for the two activities may be consolidated so that, in practice, the purchases of materials for repairs become intermediate expenditures incurred in the production of housing services. Major renovations or extensions to dwellings are fixed capital formation and recorded separately. |
The use of consumption goods
| 6.28. | In general, the use of goods within the household for the direct satisfaction of human needs or wants cannot be treated as production. This applies not only to materials or equipment purchased for use in leisure or recreational activities but also to foodstuffs purchased for the preparation of meals. The preparation of a meal for immediate consumption is a service type activity and is treated as such in the System and in International Standard Industrial Classification (ISIC). It therefore falls outside the production boundary when the meal is prepared for own consumption within the household. The use of a durable good, such as a vehicle, by persons or households for their own personal benefit or satisfaction is intrinsically a consumption activity and should not be treated as if it were an extension, or continuation, of production. |
Services of owner-occupied dwellings
| 6.29. | The production of housing services for their own final consumption by owner-occupiers has always been included within the production boundary in national accounts, although it constitutes an exception to the general exclusion of own-account service production. The ratio of owner-occupied to rented dwellings can vary significantly between countries and even over short periods of time within a single country, so that both international and intertemporal comparisons of the production and consumption of housing services could be distorted if no imputation were made for the value of own-account housing services. The imputed value of the income generated by such production is taxed in some countries. |
Illegal production
| 6.30. | Despite the obvious practical difficulties in obtaining data on illegal production, it is included within the production boundary of the System. There are two kinds of illegal production:
(a) The production of goods or services whose sale, distribution or possession is forbidden by law;
(b) Production activities which are usually legal but which become illegal when carried out by unauthorized producers; e.g., unlicensed medical practitioners. |
| 6.31. | Both kinds of production are included within the production boundary of the System provided they are genuine production processes whose outputs consist of goods or services for which there is an effective market demand. The units who purchase such outputs may not be involved in any kind of illegal activities other than the illegal transactions themselves. Transactions in which illegal goods or services are bought and sold need to be recorded not simply to obtain comprehensive measures of production and consumption but also to prevent errors appearing elsewhere in the accounts if the funds exchanged in illegal transactions are presumed to be used for other purposes. The incomes generated by illegal production may be disposed of quite legally, while conversely, expenditures on illegal goods and services may be made out of funds obtained quite legally. The failure to record illegal transactions may lead to significant errors in the financial account and also the external account of some countries. |
| 6.32. | Examples of activities which may be illegal but productive in an economic sense include the manufacture and distribution of narcotics, illegal transportation in the form of smuggling (often a form of own-account illegal production) and services such as prostitution. |
| 6.33. | Illegal production does not refer to the generation of externalities such as the discharge of pollutants. Externalities may result from production processes which are themselves quite legal. Externalities are created without the consent of the units affected, and no values are imputed for them in the System. Illegal production also does not refer to stolen output. The theft of legally produced output by employees or others needs to be clearly distinguished from illegally produced output which is sold to willing buyers on the market. |
Concealed production and the underground economy
| 6.34. | Certain activities may be both productive in an economic sense and also quite legal (provided certain standards or regulations are complied with) but deliberately concealed from public authorities for the following kinds of reasons:
(a) To avoid the payment of income, value added or other taxes;
(b) To avoid the payment of social security contributions;
(c) To avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards, etc.;
(d) To avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms.
All such activities clearly fall within the production boundary of the System provided that they are genuine processes of production. Producers engaged in this type of production may be described as belonging to the "underground economy". The underground economy may account for a substantial proportion of the total output of certain industries - for example, construction or certain service industries where small enterprises predominate. |
| 6.35. | There may be no clear borderline between the underground economy and illegal production. For example, production which does not comply with certain safety, health or other standards could be described as illegal. Similarly, the evasion of taxes is itself usually a criminal offence. However, it is not necessary for the purposes of the System to try to fix the precise borderline between underground and illegal production as both are included within the production boundary in any case. It follows that transactions on unofficial markets which exist in parallel with official markets (e.g., for foreign exchange or goods subject to official price controls) must also be included in the accounts, whether or not such markets are actually legal or illegal. |
| 6.36. | Because certain kinds of producers try to conceal their activities from public authorities, it does not follow that they are not included in national accounts in practice. Many countries have had considerable success in compiling estimates of production which cover the underground economy as well as the ordinary economy. In some industries, such as agriculture or construction, it may be possible by using various kinds of surveys and the commodity flow method to make satisfactory estimates of the total output of industry without being able to identify or measure that part of it which is underground (or indeed illegal). Because the underground economy may account for a significant part of the total economy of some countries, it is particularly important to try to make estimates of total production which include it, even if it cannot always be separately identified as such. |
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