An example of why contract manufacturing affects Irish GDP figures

In national accounts the main way to decide whether a transaction took place was a transfer of ownership. Though with ESA 95 there were some exceptions.

Suppose I made a table, but it needs to be professionally painted. Suppose I live on the French side of the French/Belgian border, but the painter is in Belgium. If I bring my table to the painter in Belgium there is no change of ownership (I still own the table). However with ESA 95 a change of ownership was imputed. The statistics agency pretend I sold the table to the Belgian painter (an export) and then bought back the table (an import). Under ESA 95 I manufactured a table, and then pretend that I sold it to a Belgian firm, and bought it again when it was painted.

Under ESA 2010 such changes of ownership are no longer imputed. Instead I am not considered to have exported the table, but just to have imported the painting service.

Assuming there is no transfer pricing there should be no change to GDP from the new classification.

As a more extreme example, now assume that instead of making the table myself I buy the wood and screws (I own them) and send them Belgium to be made into a table (following my design). As there is no change in ownership of the wood and screws, under ESA 2010 there is no transaction. So I began with raw materials, ended with a finished table, and merely imported some services from Belgium (though of course in reality the services are the manufacture of an entire table). The table is considered French output (though with a considerable service input from Belgium).

Again, assuming no transfer pricing this should not affect aggregate GDP, just it’s break down.

Now, instead of asking the Belgians to return the table to me, I ask them to deliver it to someone in Germany. I have arranged the sale of the table to someone in Germany. Only now is there a change in ownership. So the finished table is recorded as the export from France of the finished table. (It is just as though the table was transiting in a lorry through Belgium).

If there is no transfer pricing then French GDP would only increase by the value added of managing the contracts with the Belgians and Germans.

But of course there may be some transfer pricing going on in Ireland. Also, the increase in firms re-domiciling themselves as Irish further muddies the waters.

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