This lesson uses a «Supply and Use Table», or SUT, to show how GDP can be derived
either as the sum of value added by producers or as the sum of final expenditures.
The first of these is called «GDP from the production side» and the second is «GDP
from the expenditure side». We will use the terms GDP(P) and GDP(E), respectively.
Many countries derive their estimates of GDP from a Supply and Use Table. By using
an SUT, they obtain GDP(P) and GDP(E) simultaneously and the two estimates of GDP
will always be equal. But for most countries that is not feasible. They start by
estimating GDP from the production side and only later start to estimate GDP from
the expenditure side. But even for these countries the SUT is a useful framework for
thinking about the national accounts.
In this lesson we will also see how GDP estimates are used by policy makers and we
will see why GDP(E) is more useful for policy purposes than GDP(P).
Finally, we look at the two kinds of prices most commonly used in the national
accounts – Basic Prices and Producers’ Prices – and show how these are reconciled in
the SUT.
This is a “Supply and Use Table” or SUT.
The two left hand columns show where goods and services come from – either from
imports or domestic production.
Domestic production comes mainly from:
•large enterprises in agriculture, mining, manufacturing, construction, retail trade,
banks, etc.;
•small informal producers called “’household unincorporated enterprises” in
agriculture, manufacturing, service industries etc.; and
•government ministries including ministries of finance, education, health and
statistics. The army, the head of state and parliament are also regarded as producing
services.
Imports include both merchandise imports (i.e. goods) as well as services like
transport, insurance and computer services bought from abroad. When you use the
internet you are probably paying a foreign enterprise for the use of its satellites and
relay stations: you are importing a communication service.
Together these make up the total supply of goods and services available to the
economy.
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Now look at how the total supply of goods and services is used. The pink columns on the right hand
side show six different kinds of uses.
• The first two are “uses in production.” Some of the total supply of goods and services will used to
produce other goods and services. For example:
 a manufacturing firm may buy water, electricity, raw materials and computer or legal
services. All that is shown under “intermediate consumption”.
 the manufacturing firm may also buy machinery and equipment or a new office building.
That is shown under “gross fixed capital formation”
• The next two uses are usually called “final consumption”. These are:
 the goods and services bought by households – food, clothing, motor cars, school lessons,
medicines and so on;
 the goods and services “bought” by government. We pretend that the government buys
the services it produces and we value them at their costs of production. So in this column we
show the costs of the ministries of agriculture, planning, finance and so on, the costs of
running schools and hospitals, of producing statistics, and of paying the army and police to
maintain law and order.
• The fifth column is “change in inventories”. (“inventories” are called “inventories” in the SNA. The
two words mean the same thing but I use “inventories here because .) The change in inventories is the
increase or decrease in the value of both finished goods – motor cars produced but not yet sold – and
goods for intermediate consumption – building materials held by a construction company or stationery
supplies held by the government.
• Finally, some of the goods and services shown as being produced or imported on the left-hand side
of the table will be sold abroad as exports.
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Now look at the column in green – “Total supply and uses”.
This column is equal to the totals of both the two left-hand columns and the six righthand columns. But how can we be sure of that?
“Change in inventories” provides the answer. If things are shown as being produced
or imported on the left hand side but have not yet been bought by anybody or used
up in production, they all go into “change in inventories”. You can think of it as an
accounting trick that makes it certain that the two sides will always be identical.
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Now we are going to do some simple algebra.
Think of the supply and use table as an equation. The two supply columns equal the
six uses columns
We will subtract imports and intermediate consumption from both sides of the
equation.
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Now the column in red has become GDP
•On the left hand side we have Domestic production minus Intermediate
consumption or “value-added”.
• This is referred to as “GDP from the production side”
• or GDP (P).
•On the right hand side we have GDP as the sum of “final expenditures”. We call
them “final” because we have removed intermediate consumption from this side of
the table.
• This is called “GDP from the expenditure side”
• or GDP (E).
Now you can see why GDP (P) and GDP (E) must always be equal!
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Almost all countries find it is easier to estimate GDP (P) than GDP (E). For that reason
countries start their GDP estimates by compiling tables showing value added by
industry - or by “kind of activity” to use the SNA term.
Information on the output of each kind of activity can come from many sources but
most countries have some kind of “industry survey” that asks businesses about their
output and sales and about the goods and services they buy to produce that output.
Usually these “industry surveys” only cover business over a certain size – “more than
10 employee”, or “sales over 20,000” for example. This means that smaller producers
have to be covered by other means we will discuss later.
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When they are confident about their estimates of GDP (P) countries next try to
estimate GDP (E).
• Government consumption expenditure can usually be taken from the government
accounts;
• Trade balance comes from foreign trade statistics and the Balance of Payments;
• Household consumption comes from household expenditure surveys or retail trade
statistics;
• Gross fixed capital formation comes from surveys of industries or is estimated by
“commodity flow” methods
If GDP(P) and GDP(E) are estimated separately and not derived simultaneously from a
SUT there is usually a difference between GDP (P) and GDP (E). The difference is
called a “statistical discrepancy” and is usually shown under GDP(E). The national
accounts compilers are telling you that they have more faith in their GDP(P) estimate
and the error is most likely to b on the side of GDP(E).
The problem though, is that while GDP(P) is easier to estimate, GDP (E) is more useful
than GDP (P) for your customers in the ministry of finance or at the central bank.
They are more interested in the expenditure side than the production side. Why is
that?
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Governments everywhere are concerned about GDP. They want it to keep growing so
that people continue to become better off.
The people who try to “manage the economy” work in ministries of planning or
finance and at the central bank. They manage the economy by influencing
consumption, capital formation and, sometimes, the trade balance.
Let’s look at what governments did during the latest economic crisis.
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A first thing that many governments did was to keep the levels of government
employment high.
Even though tax revenues were falling they did not lay off their staff even if this
meant running large deficits. Some of them even increased the number of
government employees.
Central and federal governments tried to help state and local governments so that
they did not have to sack their employees either.
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Governments also tried to keep household consumption at high levels. For example:
• Value added taxes were reduced on consumer goods – either across the board or
just on few things like clothing and restaurant meals;
• Many countries encouraged people to trade in their old motor cars by paying high
prices for cars over a certain age. The Americans called this “cash for clunkers”.
• Other countries reduced income taxes so that households would have more to
spend in the shops.
• Central banks acted to keep interest rates low so that households could afford to
buy on credit.
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Several countries launched ambitious programs to upgrade their infrastructure –
bridges, road, sewage and water systems, for example.
Central banks kept interest rates low to help fixed investment by the business sector.
In some countries government subsidized loans to encourage more people to buy
flats and houses.
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Finally some countries tried to manipulate their exchange rates to make their exports
cheaper and to make imports more expensive.
China and the United States were among those accused of trying to manipulate their
exchange rates in this way. (Countries that belong to the International Monetary Fund
are not supposed to do this.)
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The Supply and Use Table we have been looking at so far is a very simplified one and
it is now time to introduce a refinement.
Now we will see how to reconcile the prices used in the left-hand side (Supply) with
the prices used in the right-hand (Uses) side.
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When we ask producers for the value of their output, they will report “factory-gate” or
“farm-gate” values. This is what they sell their output for and in the national accounts we say
that these goods are being valued at “Basic Prices”.
Basic Prices are what the producers receive for their output and do not include:
• Wholesale and retail trade margins if output is not bought directly by the end-user but goes
through trade channels;
• “Product Taxes” that the purchaser has to pay, such as sales taxes or value-added taxes;
• Transport costs to take the goods from where they have been produced to where they will
be used.
However, if the producer pays for the delivery of goods to the purchaser, the transport
charges are usually included in the Basic Price so only transport costs invoiced to the
purchaser will be excluded from the Basic Price.
Note that in the case of services there are no transport costs or wholesale/retail trade
margins. The producer and consumer of services interact directly with each other – doctor
and patient, teacher and pupil, vehicle repairer and vehicle owner.
In the case of imports we take the c.i.f. price as the Basic Price. C.i.f. means the Cost of the
goods in the country where they were produce plus international Insurance and Freight
charges to bring them to the arrival point in the importing country. From that point on there
will usually be transport costs, trade margins and customs duties that the purchaser will have
to pay.
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When we go shopping the prices we pay are “Purchasers’ Prices”. They start with
what the producer is paid (the Basic Price) but in addition we usually also have to pay
sales taxes or value added taxes, the costs of transporting the goods from where they
were produced to the shop where we buy them and the margins charged by the
retailers and wholesalers.
The same applies to goods and services purchased by governments and producers.
To make the Supply side of the SUT equal the Uses side we need to add the
differences between Basic Prices and Purchasers’ Prices. We do that by adding extra
columns to the supply side of the SUT. Here is what it looks like;
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Starting with Domestic Production at Basic prices and Imports at C.i.f. we add three
more columns so that we arrive at “Total supply at Purchaser’s Prices.” That will now
be equal to the sum of the Uses on the right hand side.
As we noted earlier, sometimes a producer will sell goods at prices that include the
costs of delivering the goods to the customers. In this case the usual practice is to
include these transport costs in the Basic Price. The transport costs column in the
SUT will then include only transport charges paid by the purchaser.
Notice that the fifth column is “product taxes (minus subsidies)”. In the national
accounts we think of subsidies as “negative taxes”. In some countries basic foodstuffs
– rice or bread, for example – are subsidized by government. The retailer or the
producer is paid a subsidy per unit of production or sales so that the consumer can
buy it more cheaply. These product subsidies are subtracted from product taxes in
column five.
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So far we have been looking at Basic prices and Purchasers prices in the SUT. Now we will
think about ordinary tables of GDP(E) and GDP(P).
A first rule to remember is that GDP in the SNA is always shown at Purchasers’ Prices.
There is no problem with GDP(E) because each of the expenditure components is naturally
valued at Purchasers’ Prices. Product taxes (less subsidies), transport costs and trade margins
are already included in the prices of goods and services bought for consumption or capital
formation. They are also included in the f.o.b. values of exports since these include all the
costs that may be incurred to get the goods from the farm or factory to the place from which
they are to be exported.
In the case of GDP(P), however, the value added of each producer is at Basic Prices. To
convert this to Purchasers’ prices we will need to add product taxes (less product subsidies).
This is usually done in a single line at the end of the GDP(P) table.
Notice that we do not have to bother about transport costs and trade margins in a Table
showing GDP(P) because the value added of the transport companies and of the wholesale
and retail traders is already included in GDP at Basic Prices. We only need to add net product
taxes to convert GDP at Basic Prices to GDP at Purchasers’ Prices.
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In the SUT we need to show 1) transport costs 2) trade margins and 3) product taxes
less subsidies in separate columns to convert from basic to purchasers prices.
In a standard GDP(P) table we only need to add product taxes less subsidies to
convert value added by domestic producers from basic prices to purchasers prices.
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Although GDP(P) and GDP(E) are equal by definition, in practice there will always be a
difference if all the components of GDP(E) are explicitly estimated. Some countries do
not do that but instead they estimate either the change in inventories or household
consumption expenditure as a balancing item. This is to be strongly discouraged.
Each component of GDP(E) should be separately estimated using the best
information available and the difference between GDP(P) and GDP(E) should be
shown as a statistical discrepancy.
While most countries find it easier to estimate GDP(P) than GDP(E) it is the latter
estimate that most users really want. The components of GDP(E) are “policy
variables”. Policy-makers try to influence the level of total GDP through “policy
instruments” aimed mainly at government and household consumption and gross
fixed capital formation. Sometimes they also try to influence exchange rates to
increase exports and reduce imports.
Both GDP(P) and GDP(E) are always shown at Purchasers’ Prices. Because the value
added of each kind of activity is calculated at Basic Prices we need to add product
taxes and subtract product subsidies so that GDP(P) is at Purchasers’ Prices.
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