2.9 Production boundary

The system of national accounts includes within the production boundary all production that is sold in the market, regardless of whether the products are exchanged for money or bartered. Goods and services produced not only by business firms but also non-profit institutions serving households, are defined as belonging within the production boundary.

Households are a rather awkward category with respect to the production boundary in that the goods produced by households for their own use are included in the national accounts, but services are not. Housework and the provision of personal services for consumption within the same household (preparing meals, child care, cleaning, etc.) certainly qualify as production in an economic sense, but it has been agreed that they shall be excluded from the production boundary in the national accounts. It would of course be possible to put a price tag on cleaning done at home by using the price list of a specialised cleaning firm, for instance, but since the output is consumed at the same time as it is produced, that imputed income cannot be used for any other purposes. The imputed value of housework is also based on estimates (how much housework is actually done and what kind of value should be put on this work). The inclusion of the imputed value of housework detracts from the utility of the national accounts as a tool of economic analysis because this is a major item and independent of the market, making it much harder to monitor cyclical trends, for instance.

Various natural processes can be either included in or excluded from production, depending on the circumstances. A key condition for the definition of a natural process as production is that it is initiated and controlled by some legal institutional unit. For example, the growth of fish stocks in open waters does not count as production because there is no institutional unit in charge of this production and the fish are not owned by any such unit; on the other hand, the growing of fish at fish farms does count as production in the same way as cattle farming. In the same way, the growth of natural forests and wild berries is not production, whereas the cultivation of harvest-yielding trees is counted as production. In Finland the forest yield is counted on the basis of total felling volumes: this is based on the view that even though they are managed, forests in Finland are not cultivated (as they are in central Europe) but grow naturally. Even though the growth of uncultivated forests is not production, planned felling in natural-growth forests and the collection of berries and firewood is counted as production. Rainfall and the flow of water in natural water sources does not qualify as production, whereas the storage of water in reservoirs, dams or pipelines and the transportation of water are production.

As the examples above go to show, many of those activities or processes that are useful to institutional units as both producers and consumers do not qualify as production processes in an economic sense. Rain is vital to agricultural production, but it is not a production process that is included in GDP figures.

Next lesson: The supply side of the national economy