DEFINING AND MEASURING GDP

Australia's national accounts are compiled in accordance with international statistical standards contained in the 2008 System of National Accounts. Australia's application of these standards is described in Australian System of National Accounts: Concepts, Sources and Methods (5216.0).

The main output from the national accounts is a measure of the overall value of economic production in Australia in a given period, but without any double counting of the goods and services being produced. Many goods and services are bought by businesses for use in their own productive activities (e.g. steel is bought by car manufacturers). If the value of all goods and services produced were simply added together, there would be serious duplication because some goods and services would be added in several times at various stages of production. The overall measure of production, excluding double counting, is called 'gross domestic product', which is commonly referred to as GDP. It is defined in the Australian System of National Accounts as:

The total market value of goods and services produced in Australia after deducting the cost of goods and services used up (intermediate consumption) in the process of production, but before deducting allowances for the consumption of fixed capital (depreciation).

The performance of the Australian economy is represented in the national accounts by such measures as growth in GDP. While movements in the volume measure of GDP (from which the direct effects of price changes have been removed) are an important indicator of economic growth, there is no single measure that can describe all aspects of the wellbeing of Australians. Measures of Australia's Progress: Summary Indicators 2011 (1370.0.55.001) looks beyond GDP and provides a set of indicators relating to aspects of Australian life across the economy, the environment and society. Within these broad areas, dimensions of progress encompass national income, wealth and productivity, the quality of the environment, the wellbeing of the population in terms of health, education, work, housing and economic resources, and the way people live together in society.

The national accounts provide important information for a range of purposes. The System of National Accounts also provides a framework or structure that can be, and has been, adapted and extended to facilitate the examination of many economic, environmental and social policy issues.

There are three ways of measuring GDP.

• Income approach – Measures income generated by the economy: compensation of employees (wages and salaries, and employers' social contributions), gross operating surplus (profits), gross mixed income (income from unincorporated businesses) and taxes less subsidies.
• Expenditure approach – Measures final expenditures on goods and services (i.e. those goods and services that are not processed any further), adding on the contributions of changes in inventories and the value of exports, and deducting the value of imports.
• Production approach – Calculates the sum of the value of goods and services produced by each industry and deducts the cost of goods and services used up by the industry in the production process (i.e. intermediate consumption). This leaves the 'value added' by the industry, to which is added taxes less subsidies on products if output is valued at basic prices. For more information on the distinction between taxes and subsidies on products and taxes and subsidies on production, see Australian System of National Accounts: Concepts, Sources and Methods (5216.0).

While each approach should, conceptually, deliver the same estimate of GDP, if the three measures are compiled independently using different data sources, then different estimates of GDP result. However, the Australian national income, expenditure and product estimates have been integrated within annual balanced supply and use tables that are produced for 1994–95 to 2009–10. Integration with balanced supply and use tables ensures that the GDP estimates obtained from the three approaches are balanced, and thus annual estimates using the income, expenditure and production approaches are identical for the years for which supply and use tables are produced.

Prior to 1994–95, and for the latest financial year, the estimates using each approach are based on independent sources, and there are differences between the income, expenditure and production estimates. Nevertheless, for these periods, a single estimate of GDP has been compiled by averaging the three independent measures.

The volume measure (see Volume or ‘real’ GDP below) of GDP increased by 2.1% in 2010–11, following an increase of 2.3% in 2009–10. For some analytical purposes, it is important to allow for the impact of population growth on movements in GDP. Annual growth in real GDP per person has been about one to two percentage points lower than that for GDP volumes since the mid 1970s and was negative in 1971–72, 1974–75, 1977–78, 1982–83, 1990–91, 1991–92 and 2008–09 (graph 30.1). In 2010–11, real GDP per person increased by 0.6%.




VOLUME OR 'REAL' GDP

The reason for having volume estimates in the national accounts is to provide time series of expenditure and production aggregates that are free of the direct effects of price change. All the current price aggregates of expenditure and production appearing in the national accounts are estimates of the sums of the values of individual transactions. Each of these transactions has two components – a price and a quantity. From one period to another, the quantities and prices comprising the transactions change. This means that when the current price value of an aggregate, such as GDP, in one period is compared with the current price value in another period, the difference between them usually reflects both changes in quantity and changes in price of the constituent transactions. In order to estimate by how much the 'volume' of GDP has changed between the two periods we need to measure the value of GDP in each period using the same unit prices.

For many years, the Australian Bureau of Statistics (ABS) derived constant price estimates as a means of measuring changes in the volumes of aggregates. Constant price estimates are derived by fixing the unit prices of goods and services to those of some base year. These base year unit prices are effectively the weights used to combine the quantities of the different goods and services purchased or produced. The unit prices of different goods and services tend to grow at different rates – some at dramatically different rates. For example, the prices of computer and other electronic equipment are estimated to have declined by about 88% between September 1989 and September 2011, while the prices of most other goods and services have increased. Therefore, over time, the price relativities of some goods and services change appreciably. This adversely affects the usefulness of constant price estimates for periods distant from the base year, and implies that the base year used to derive constant price estimates needs to be changed from time to time. It was ABS practice prior to 1998, in common with many other national statistical agencies, to change the base year every five years. However, it has been found that rebasing every five years is insufficient, and hence the international standards now recommend rebasing every year and linking the resulting indexes to form annually reweighted chain volume measures. These recommendations were first introduced by the ABS into the September quarter 1988 issue of the Australian National Accounts: National Income, Expenditure and Product (5206.0).

Volume estimates formed through annual reweighting are not generally additive. In other words, component volume estimates do not usually sum to a total in the way that original current price components do. In order to minimise the impact of this characteristic, the ABS uses the latest base year as the reference year (i.e. the year when the annual volume estimate equals the current price value). Re-referencing changes the level of the volume estimates, but does not of itself change the growth rates. By adopting this approach, non-additivity does not apply to the reference year or the following year.


CHAIN PRICE INDEXES AND IMPLICIT PRICE DEFLATORS

A by-product of the calculation of volume measures is the implicit price deflator (IPD). An IPD is the price index obtained when a current price estimate is divided by the corresponding volume measure. The ABS publishes a time series of IPDs for each of the expenditure components of GDP (excluding the changes in inventories).

Chain price indexes are also published for the major expenditure aggregates. They are the prices equivalent of chain volume estimates. Quarterly chain price indexes are generally superior to IPDs for measuring price change, because the quarter-to-quarter growth rates calculated from the IPDs reflect changes in composition of the expenditure aggregate as well as pure price change. For example, it is possible for an IPD to increase or decrease from one quarter to another because of compositional changes without there being any change in price. Changes in chain price indexes, on the other hand, only reflect pure price change.