Transactions in products

This text presents the official definitions of transactions in products according to the European System of Accounts (ESA 1995).

Production and output

Definition:

Production is 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 goods and services. Production does not cover purely natural processes without any human involvement or direction, like the unmanaged growth of fish stocks in international waters (but fish farming is production).

Production includes:

• 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);
• the own-account production of all goods that are retained by their producers for their own final consumption or gross fixed capital formation. Own account production for gross fixed capital formation includes the production of fixed assets such as construction, the development of software and mineral exploration for own gross fixed capital formation .
  Own-account production of goods by households pertains in general to:
  • own-account construction of dwellings;
  • the production and storage of agricultural products;
  • the processing of agricultural products, like the production of flour by milling, the preservation of fruit by drying and bottling; the production of dairy products like butter and cheese and the production of beer, wine and spirits;
  • the production of other primary products, like mining salt, cutting peat and carrying water;
  • other kinds of processing, like weaving cloth, the production of pottery and making furniture.
  Own-account production of a good by households should be recorded if this type of production is significant, i.e. if it is believed to be quantitatively important in relation to the total supply of that good in a country.
  By convention, in the ESA, only own-account construction of dwellings and the production, storage and processing of agricultural products is included; all other own-account production of goods by households are deemed to be insignificant for European Union countries;
• the own-account production of housing services by owner-occupiers;
• domestic and personal services produced by employing paid domestic staff;
• volunteer activities that result in goods, e.g. the construction of a dwelling, church or other building are to be recorded as production. Volunteer activities that do not result in goods, e.g. caretaking and cleaning without payment, are excluded.

All such activities are included even if they are illegal or not-registered with tax, social security, statistical and other public authorities.

Definition:

Three types of output are distinguished in the ESA:

• market output (P.11);
• output produced for own final use (P.12);
• other non-market output (P.13).

Intermediate consumption

Definition:

Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods and services may be either transformed or used up by the production process.

Intermediate consumption includes the following borderline cases:

• the value of all the goods or services used as inputs into ancillary activities. Common examples are purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc. These goods and services are not distinguished from those consumed by the principal (or secondary) activities of a local KAU;
• the value of goods and services which are received from another local KAU of the same institutional unit;
• the costs of using rented fixed assets, e.g. the operational leasing of machines or cars;
• the subscriptions, contributions or dues paid to non-profit business associations;
• items not treated as gross capital formation, like:
  • small tools which are inexpensive and used for relatively simple operations, such as saws, hammers, screwdrivers and other hand tools; small devices, such as pocket calculators. By convention, in the ESA, all expenditure on such durables which does not exceed 500 ECU (at 1995 prices) per item (or, when bought in quantities, for the total amount bought), should be recorded as intermediate consumption;
  • the ordinary, regular maintenance and repair of fixed assets used in production;
  • military weapons of destruction and the equipment needed to deliver them (but not light weapons or armoured vehicles acquired by police and security forces, which are treated as gross fixed capital formation);
  • services of research and development, staff training, market research and similar activities, purchased from an outside agency or provided by a separate local KAU of the same institutional unit;
• payments for the use of intangible non-produced assets like patented assets, trademarks, etc. (excluding payments for the purchase of such property rights: these are treated as acquisitions of intangible nonproduced assets);
• expenditure by employees, reimbursed by the employer, on items necessary for the employers' production, like contractual obligations to purchase on own-account tools or safety-wear;
• expenditure by employers which is to their own benefit as well as to that of their employees, because it is necessary for the employers' production. Cases in point are:
  • reimbursement of employees for travelling, separation, removal and entertainment expenses incurred in the course of their duties;
  • providing amenities at the place of work;
• non-life insurance service charges paid by local KAUs: in order to record only the service charge as intermediate consumption the premiums paid should be discounted for, e.g. claims paid out and the net change in actuarial reserves. The latter can be allocated to local KAUs as a proportion of the premiums paid;
• only for the total economy: all financial intermediation services indirectly measured (Fisim) provided by resident producers.

Final consumption (P.3, P.4)

Two concepts of final consumption are used:

• final consumption expenditure (P.3);
• actual final consumption (P.4)

Final consumption expenditure is a concept that refers to a sector's expenditure on consumption goods and services. In contrast, actual final consumption refers to its acquisition of consumption goods and services. The difference between these concepts lies in the treatment of certain goods and services financed by the government or NPISHs but supplied to households as social transfers in kind.

Final consumption expenditure (P.3)

Definition:

Final consumption expenditure consists of expenditure incurred by resident institutional units on goods or services that are used for the direct satisfaction of individual needs or wants or the collective needs of members of the community. Final consumption expenditure may take place on the domestic territory or abroad.

Household final consumption expenditure includes the following borderline cases:

• services of owner-occupied dwellings;
• income in kind, like:
  • goods and services received as income in kind by employees;
  • goods or services produced as outputs of unincorporated enterprises owned by households that are retained for consumption by members of the household. Cases in point are food and other agricultural goods, housing services by owner-occupiers and household services produced by employing paid staff (servants, cooks, gardeners, chauffeurs, etc.);
• items not treated as intermediate consumption, like:
  • materials for small repairs to and interior decoration of dwellings of a kind typically carried out by tenants as well as owners;
  • materials for repairs and maintenance to consumer durables, including vehicles;
• items not treated as capital formation, in particular consumer durables, that continue to perform their function in several accounting periods; this includes the transfer of ownership of some durables from an enterprise to a household;
• financial services directly charged;
• insurance services by the amount of the implicit service charge;
• pension funding services by the amount of the implicit service charge;
• payments by households for licences, permits, etc. which are regarded as purchases of services;
• the purchase of output at not economically significant prices, e.g. entrance fees for a museum.

Final consumption expenditure of NPISHs includes two separate categories:

• the value of the goods and services produced by NPISHs other than own-account capital formation and other than expenditure made by households and other units;
• expenditures by NPISHs on goods or services produced by market producers that are supplied — without any transformation — to households for their consumption as social transfers in kind.

Final consumption expenditure (P.3) by government includes two categories of expenditures, similar to those by NPISHs:

• the value of the goods and services produced by general government itself (P.1) other than own-account capital formation (corresponding to P.12) and sales. Market output (P.11) and payments for the other non-market output (P.131);
• purchases by general government of goods and services produced by market producers that are supplied to households, without any transformation, as social transfers in kind (D.6311 + D.63121 + D.63131). This implies that general government just pays for goods and services that the sellers provide to households.

Corporations do not make final consumption expenditures. Their purchases of the same kind of goods or services as used by households for final consumption are either used for intermediate consumption or provided to employees as compensation of employees in kind, i.e. imputed household final consumption expenditure. Even where, for example through advertising, they finance individual consumption, this expenditure is treated as intermediate.

Actual final consumption (P.4)

Definition:

Actual final consumption consists of the goods or services that are acquired by resident institutional units for the direct satisfaction of human needs, whether individual or collective.

Definition:

Goods and services for individual consumption (‘individual goods and services’) are acquired by a household and used to satisfy the needs and wants of members of that household. Individual goods and services have the following characteristics:

• it must be possible to observe and record the acquisition of the good or services by an individual household or member thereof and also the time at which it took place;
• the household must have agreed to the provision of the good or service and take whatever action is necessary to make it possible, for example by attending a school or clinic;
• the good or service must be such that its acquisition by one household or person, or possibly by a small, restricted group of persons, precludes its acquisition by other households or persons.

Definition:

Services for collective consumption (‘collective services’) are provided simultaneously to all members of the community or all members of a particular section of the community, such as all households living in a particular region. Collective services have the following characteristics:

• they can be delivered simultaneously to every member of the community or to particular sections of the community, such as those in a particular region or locality;
• the use of such services is usually passive and does not require the explicit agreement or active participation of all the individuals concerned;
• the provision of a collective service to one individual does not reduce the amount available to others in the same community or section of the community. There is no rivalry in acquisition.

All household final consumption expenditure is individual. By convention, all goods and services provided by NPISHs are treated as individual.

For the goods and services provided by government units, the borderline between individual and collective goods and services is drawn on the basis of the Classification of the Functions of Government (COFOG).

By convention, all government final consumption expenditure under each of the following headings should be treated as expenditures on individual consumption:

• Medical products, appliances and equipment
• Outpatient services
• Hospital services
• Public health services
• Recreational and sporting services
• Cultural services
• Pre-primary and primary education
• Secondary education
• Post-secondary non-tertiary education
• Tertiary education
• Education not definable by level
• Subsidiary services to education
• Sickness and disability
• Old age
• Survivors
• Family and children
• Unemployment
• Housing
• Social exclusion n.e.c.

Alternatively individual consumption expenditure of general government corresponds to division 14 of the COICOP, which includes the following groups:

• Housing (equivalent to COFOG group 10.6)
• Health (equivalent to COFOG groups 7.1 to 7.4)
• Recreation and culture (equivalent to COFOG groups 8.1 and 8.2)
• Education (equivalent to COFOG groups 9.1 to 9.6)
• Social protection (equivalent to COFOG groups 10.1 to 10.5 and group 10.7).

The collective consumption expenditure is the remainder of the government final consumption expenditure.

According to COFOG, it consists in particular of:

• General public services (division 1)
• Defence (division 2)
• Public order and safety (division 3)
• Economic affairs (division 4)
• Environmental protection (division 5)
• Housing and community amenities (division 6)
• General administration, regulation, dissemination of general information and statistics (all divisions)
• Research and development (all divisions).

Final consumption expenditure of NPISHs is by convention all individual. As a consequence, total actual final consumption is equal to the sum of households actual final consumption and actual final consumption of general government.

By convention, there are no social transfers in kind with the rest of the world (though there are such transfers in monetary terms). As a consequence, total actual final consumption is equal to total final consumption expenditure.

Gross capital formation (P.5)

Gross capital formation consists of:

• gross fixed capital formation (P.51);
• changes in inventories (P.52);
• acquisitions less disposals of valuables (P.53).

Gross capital formation means gross of consumption of fixed capital. Net capital formation is arrived at by deducting consumption of fixed capital from gross capital formation.

Gross fixed capital formation (P.51)

Definition:

Gross fixed capital formation (P.51) consists of resident producers' acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets realized by the productive activity of producer or institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year.

Gross fixed capital formation consists of both positive and negative values:

• positive values:
  • new or existing fixed assets purchased;
  • fixed assets produced and retained for producers' own use (including own account production of fixed assets not yet completed or fully mature);
  • new or existing fixed assets acquired through barter;
  • new or existing fixed assets received as capital transfers in kind;
  • new or existing fixed assets acquired by the user under a financial lease;
  • major improvements to fixed assets and existing historic monuments;
  • natural growth of those natural assets that yield repeat products;
• negative values, i.e. disposals of fixed assets recorded as negative acquisitions:
  • existing fixed assets sold;
  • existing fixed assets surrendered in barter;
  • existing fixed assets surrendered as capital transfers in kind.

The disposals components of fixed assets exclude:

• consumption of fixed capital (which includes anticipated normal accidental damage);
• exceptional losses, such as those due to drought or other natural disasters (recorded as another change in the volume of assets).

The following types of gross fixed capital formation may be distinguished:

• acquisitions, less disposals, of tangible fixed assets:
  • dwellings;
  • other buildings and structures;
  • machinery and equipment;
  • and cultivated assets, e.g. trees and livestock;
• acquisitions, less disposals, of intangible fixed assets:
  • mineral exploration;
  • computer software;
  • entertainment, literary or artistic originals;
  • other intangible fixed assets;
• major improvements to tangible non-produced assets, in particular those pertaining to land (though the acquisition of non-produced assets is not included);
• costs associated with the transfers of ownership of non-produced assets, like land and patented assets (though the acquisition of these assets themselves is not included).

Major improvements to land include:

• reclamation of land from sea by the construction of dikes, sea walls or dams for this purpose;
• clearance of forests, rocks, etc. to enable land to be used in production for the first time;
• draining of marshes or the irrigation of deserts by the construction of dikes, ditches and irrigation channels;
• prevention of flooding or erosion by the sea or rivers by the construction of breakwaters, sea walls or flood barriers. These activities may lead to the creation of substantial new structures such as sea walls, flood barriers and dams but these are not themselves used directly to produce other goods and services in the way that most structures are. Their construction is undertaken to obtain more or better land, and it is the land, a non-produced asset, that is needed for production. For example, a dam built to produce electricity serves quite a different purpose from a dam built to keep out the sea. Only building the latter type of dam should be classified as an improvement to land.

Gross fixed capital formation includes borderline cases like:

• acquisitions of houseboats, barges, mobile homes and caravans used as residences of households and any associated structures such as garages;
• structures and equipment used by the military (similar to those utilised by civilian producers) such as airfields, docks, roads and hospitals;
• light weapons and armoured vehicles used by non-military units;
• changes in livestock used in production year after year, such as breeding stock, dairy cattle, sheep reared for wool and draught animals;
• changes in trees that are cultivated year after year, such as fruit trees, vines, rubber trees, palm trees, etc.;
• improvements to existing fixed assets that go well beyond the requirements of ordinary maintenance and repairs;
• the acquisition of fixed assets by financial leasing.

Gross fixed capital formation in the form of improvements to existing fixed assets is to be classified with acquisitions of new fixed assets of the same kind.

Intangible fixed assets typically consist of new information, specialized knowledge, etc. and comprise:

• mineral exploration comprising costs of actual test drilling, aerial or other surveys, transportation costs, etc.;
• computer software and large data bases to be used in production for more than one year;
• literary and artistic originals of manuscripts, renderings, models, films, sound recordings, etc.

For both fixed assets and non-produced non-financial assets, the costs of ownership transfer incurred by their new owner consist of:

• charges incurred in taking delivery of the asset (new or existing asset) at the required location and time, such as transport charges, installation charges, erection charges, etc.;
• professional charges or commissions incurred, such as fees paid to surveyors, engineers, lawyers, valuers, etc., and commissions paid to estate agents, auctioneers, etc.;
• taxes payable by the new owner on the transfer of ownership of the asset.

All these costs are to be recorded as gross fixed capital formation by the new owner. Note that the taxes are to be treated as taxes on the services of intermediaries and not as taxes on the asset bought.

Changes in inventories (P.52)

Definition:

Changes in inventories are measured by the value of the entries into inventories less the value of withdrawals and the value of any recurrent losses of goods held in inventories.

Due to physical deterioration, or accidental damage or pilfering, recurrent losses may occur to all kinds of goods in inventories, such as:

• losses of materials and supplies;
• losses in the case of work-in-progress;
• losses of finished goods;
• losses of goods for resale (e.g. shoplifting).

Inventories consists of the following categories:

• materials and supplies: materials and supplies consist of all commodities held in stock with the intention of using them as intermediate inputs in production; this includes commodities held in stock by the government. Items such as gold, diamonds, etc. are included when intended for industrial use or other production;
• work-in-progress: work-in-progress consists of output produced that is not yet finished. It is recorded in the inventories of its producer. It can take a variety of different forms, e.g.:
  • growing crops;
  • maturing trees and livestock;
  • uncompleted structures (except those produced under a contract of sale agreed in advance or on own-account which are treated as fixed capital formation);
  • uncompleted other fixed assets, e.g. ships and oil rigs;
  • partially completed research for a legal or consultant's dossier;
  • partially completed film productions;
  • partially completed computer programs.
Work-in-progress must be recorded for any production process that is not finished at the end of the given period. In particular, this is significant in quarterly accounts, e.g. agricultural crops not being completed within a quarter of a year.
Reductions in work-in-progress take place when the production process is completed. At that point, all work-in-progress is transformed into a finished product;
• finished goods: finished goods as part of inventories consist of outputs that their producer does not intend to process further before supplying them (also when supplied for intermediate input into other processes of production);
• goods for resale: goods for resale are goods acquired for the purpose of reselling them in their present state.

Acquisitions less disposals of valuables (P.53)

Definition:

Valuables are non-financial goods that are not used primarily for production or consumption, do not deteriorate (physically) over time under normal conditions and that are acquired and held primarily as stores of value.

Valuables encompass the following types of goods:

(a) precious stones and metals, such as diamonds, non-monetary gold, platinum, silver, etc.; (b) antiques and other art objects, such as paintings, sculptures, etc.; (c) other valuables, such as jewellery fashioned out of precious stones and metals and collectors items.

These types of goods are to be recorded as acquisition or disposal of valuables in case of:

• the acquisition or disposal of non-monetary gold, silver, etc. by (central) banks and other financial intermediaries;
• the acquisition or disposal of these goods by enterprises whose principal or secondary activity does not involve the production or trade in such types of goods; as a consequence, this acquisition or disposal is not included in the intermediate consumption or fixed capital formation of these enterprises;
• the acquisition or disposal of such goods by households; as a consequence, such acquisitions are not included in final consumption expenditure by households.

In the ESA, by convention also the following cases are recorded as acquisition or disposal of valuables:

• the acquisition or disposal of these goods by jewellers and art dealers (following the general definition of valuables the acquisition of these goods by jewellers and art dealers should be recorded as changes in inventories);
• the acquisition or disposal of these goods by museums (following the general definition of valuables the acquisition by a museum of these goods should be recorded as fixed capital formation).

This convention avoids frequent reclassification between the three main types of capital formation, i.e. between acquisition less disposal of valuables, fixed capital formation and changes in inventories, e.g. in the case of transactions of such goods between households and art dealers.

Imports and exports of goods and services (P.6 and P.7)

Definition:

Exports of goods and services consist of transctions in goods and services (sales, barter, gifts or grants) from residents to non-residents.

Definition:

Imports of goods and services consist of transactions in goods and services (purchases, barter, gifts or grants) from non-residents to residents.

Imports and exports of goods (P.61 and P.71)

Imports and exports of goods occur when there are changes of ownership of goods between residents and non-residents (whether or not there are also corresponding physical movements of goods across frontiers).

However, in four instances the change of ownership principle is modified in recording imports and exports of goods:

• financial leasing: a change of ownership from lessor to lessee is to be imputed for goods under a financial lease; it is to be recorded when the lessee takes possession of the good;
• deliveries between affiliated enterprises (branch or subsidiary, or foreign affiliate): a change of ownership is to be imputed whenever goods are delivered between affiliated enterprises;
• goods for significant processing to order or repair are recorded both in imports and exports although no change of ownership occurs;
• merchanting: no import or export is recorded when merchants or commodity dealers buy from non-residents and then sell again to non-residents within the same accounting period. A similar treatment is to be employed for merchanting by non-residents.

In the following cases exports of goods occur without the goods ever crossing the country's frontier.

• goods produced by resident units operating in international waters are sold directly to non-residents in foreign countries (oil, natural gas, fishery products, maritime salvage, etc.);
• transportation equipment or other movable equipment not tied to a fixed location need not cross the frontier of the exporting country as a result of being sold by a resident to a non-resident.
• goods are lost or destroyed after changing ownership before they have crossed the frontier of the exporting country.

Imports and exports of goods include transactions between residents and non-residents in:

• non-monetary gold, i.e. gold not used for the purposes of monetary policy;
• silver bullion, diamonds and other precious metals and stones;
• paper money and coins not in circulation and unissued securities (valued as goods, not at face value);
• electricity, gas and water;
• livestock driven across frontiers;
• parcel post;
• government exports including goods financed by grants and loans;
• goods transferred to or from the ownership of a buffer stock organization;
• goods delivered by a resident enterprise to its non-resident affiliates;
• goods received by a resident enterprise from its non-resident affiliates;
• smuggled goods;
• other unrecorded shipments, such as gifts and those of less than a stated minimum value;
• goods processed to order abroad when a substantial physical change in the goods is involved. Similar goods processed on the domestic territory on behalf of non-residents;
• investment goods repaired abroad when a substantial amount of reconstruction work or manufacturing is involved. Similar goods repaired on the domestic territory on behalf of non-residents.

Imports and exports of goods exclude the following goods which nevertheless may cross the national frontier:

• goods in transit through a country;
• goods shipped to or from a country's own embassies, military bases or other enclaves inside the national frontiers of another country;
• transportation equipment and other movable kinds of equipment which leave a country temporarily, without any change of ownership (e.g. construction equipment for installation or construction purposes abroad);
• equipment and other goods which are sent abroad for minor processing, maintenance, servicing or repair;
• other goods which leave a country temporarily, being generally returned within a year in their original State and without change of ownership (e.g. goods sent abroad for exhibition and entertainment purposes, goods under an operating lease, including leases for several years, goods returned because expected sales did not materialize);
• goods on consignment lost or destroyed after crossing a frontier before change of ownership occurs.

In principle, imports and exports of goods should be recorded when the ownership of the goods is transferred. In practice, a change of ownership is considered to occur at the time the parties to the transaction record it in their books or accounts. This may not coincide with the various stages of the contractual process, like:

• the time of commitment (contract date);
• the time of provision of goods and services and acquisition of a claim for payment (transfer date);
• the time of settlement of that claim (payment date).

Imports and exports of services (P.62 and P.72)

Definition:

Exports of services consist of all services rendered by residents to non-residents.

Definition:

Imports of services consist of all services rendered by non-residents to residents.

Exports of services include the following borderline cases:

• transportation of exported goods after they have left the frontier of the exporting country when provided by a resident carrier;
• transportation of imported goods by a resident carrier:
  • up to the frontier of the exporting country when goods are valued fob to offset the transportation value included in the fob-value;
  • up to the frontier of the importing country when goods are valued cif to offset the transportation value included in the cif-value;
• transportation of goods by residents on behalf of non-residents which does not involve imports or exports of the goods (e.g. the transport of goods that do not leave the country as exports or the transport of goods outside the domestic territory);
• international or national passenger transportation on behalf of nonresidents by resident carriers;
• minor processing and repair activities on behalf of non-residents;
• construction services when a construction site office abroad is not treated as a quasi-corporation. This applies to construction projects lasting less than a year and whose output is not gross fixed capital formation;
• installation of equipment abroad when a project is of limited duration by its nature;
• financial services by the amount of the explicit commissions and fees;
• insurance services by the amount of the service charge; (j) expenditure by non-resident tourists and business travellers (by convention classified as services; however, for the purposes of the supply and use and symmetric input-output tables, a global breakdown by products may be necessary);
• expenditure by non-residents on health and education services provided by residents; this includes the provision of these services on the domestic territory as well as abroad;
• royalties and licence fees, receipts of which are associated with the authorized use of intangible non-produced non-financial assets and property rights, such as patents, copyrights, trademarks, industrial processes, franchises, etc., and with the use through licensing agreements of produced originals or prototypes, such as manuscripts, paintings, etc.

For imports of services most borderline cases are the mirror-image of those for exports of services; therefore, only a limited number of specific clarifications are necessary for imports of services.

Imports of transport services include the following borderline cases:

• transportation of exported goods up to the frontier of the exporting country when provided by a non-resident carrier to offset the transportation value included in the fob-value of the exported goods;
• transportation of imported goods by a non-resident carrier:
  • from the frontier of the exporting country as a separate transportation service when imported goods are valued fob;
  • from the frontier of the importing country as a separate transportation service when imported goods are valued cif (in this case the value of the transportation service between the frontiers of the exporting and the importing country is already included in the cif-value of the good;);
• transportation of goods by non-residents on behalf of residents which does not involve imports or exports of goods (e.g. transport of goods in transit or transport outside the domestic territory);
• international or national passenger transportation on behalf of residents by non-resident carriers.

Imports of transport services do not include transportation of exported goods after they have left the frontier of the exporting country when provided by a non-resident carrier (cases 5 and 6 in table 3.4). Exports of goods are valued fob and all such transport services are thus to be regarded as transactions between non-residents, i.e. between a nonresident carrier and a non-resident importer. This applies even when these transportation services are paid under export-cif-contracts by the exporter.

Imports in respect of direct purchases abroad by residents cover all purchases of goods and services made by residents while travelling abroad for business or personal purposes. Two categories must be distinguished because they require different treatment:

• expenditures by business travellers are intermediate consumption;
• expenditures by other travellers on personal trips are household final consumption expenditure.