ST/ESA/STAT/SER.F/85
Department of Economic and Social Affairs
Statistics Division
Studies in Methods Series F, No.85
Hand...
ii
NOTE
Symbols of United Nations documents are composed of capital letters combined with figures.
The designations employ...
iii
Preface
National Accounts: A Practical Introduction has been prepared as part of a series being
developed by the membe...
iv
Quarterly National Accounts Statistics: Concepts, Data Sources and Compilation (IMF, 2001)
Handbook on Measurement of t...
v
CONTENTS
Introduction .....................................................................................................
vi
C. Gross saving ..........................................................................................................
vii
C. Sectoral balance of primary income....................................................................................
1
Introduction
SNA AND ECONOMIC ANALYSIS
1. The System of National Accounts (SNA) helps economists to measure the level of...
2
3
PART I
ACCOUNTS OF THE NATION
4
Chapter 1
Overview
A. INTRODUCTION
1.1. National accounts is the macroeconomic depiction of the national income cycle us...
5
1.5. The items intermediate consumption, final consumption and gross fixed capital formation on the
uses (right) side of...
6
(for example temporary and seasonal labour working abroad). Conversely, some production taking place
within a country ma...
7
Changes in net worth
1.17. Net worth is the difference between the total value of non-financial and financial assets and...
8
1.23. Changes in balance sheets due to changes in prices include holding gains or losses resulting
from the revaluation ...
9
Note: This simplified sequence of accounts eliminates other intermediate accounts, such as the generation
of income acco...
10
Goods and services account
1.28. The goods and services account has the following characteristics:
a) It brings togethe...
11
Figure F1.1: Sequence of accounts in a graphic presentation, with changes in the balance sheets
reflecting economic tra...
12
E. USES OF NATIONAL ACCOUNTS INDICATORS
1.32. National accounts time series provide most of the important data that are...
13
performing loan ratio and ratio of liability over asset are used as performance indicators of the banking
system. The b...
14
TABLE T1.4
ECONOMIC PERFFORMANCE INDICATORS
Indicators Interpretation
Group 1. General economic level and performance
G...
15
TABLE T1.4 (CONTINUED)
Indicators Interpretation
Group 7. Banking performance
Non-performing loan ratio (defined as loa...
16
Chapter 2
Production account and
goods and services account
A. OBJECTIVES
2.1. The production account aims to measure o...
17
2.5. Output is the value of the goods and services which are produced by an establishment in the
economy that become av...
18
TABLE T2.1. SUPPLY AND USES OF GOODS AND SERVICES IN THE ECONOMY
Supply (resources)
At purchasers' prices or equivalent...
19
Then:
(2.4) Gross value added + taxes less subsidies on products = gross capital
formation + final consumption + (expor...
20
and pensions that do not set up an independent fund, are also imputed to
compensation of employees;
b) Other taxes less...
21
c) The own-account production of housing services by owner-occupiers and personal
services produced by the employment o...
22
c) Consumption of fixed capital (which is the cost of produced fixed assets used in
providing services);
d) Other taxes...
23
3. VALUATION OF NATIONAL ACCOUNTS AGGREGATES
2.29. Goods and services may be valued differently, but the valuation shou...
24
2.34. Losses or wastage in production and distribution will not be counted as output. For example,
electricity produced...
25
2. DEFINITION OF INTERMEDIATE CONSUMPTION
2.40. Intermediate consumption includes goods and services which are entirely...
26
i) Explicit and imputed service charges on household uses of financial
intermediation services provided by banks, insur...
27
2.56. Owners of buildings and non-produced assets, such as land, sub-soil assets or legal constructs
(leases etc.), eve...
28
non-produced assets would not affect the value of investment in capital goods since the sale of a non-
produced asset b...
29
d) Goods for resale.
TABLE T2.3. CLASSIFICATION AND FORMATION OF NON-FINANCIAL
ASSETS
Changes in the balance sheets
Gro...
30
E. MEASUREMENT ISSUES
1. ESTIMATION OF MARKET OUTPUT FROM SALES
2.67. Output is valued as the product of the quantity o...
31
2. CROP OUTPUT
2.71. The output of a crop is simply the product of the quantity of output and the unit price at basic
p...
32
4. OUTPUT OF WHOLESALE AND RETAIL SERVICES
2.78. Output of wholesale and retail services, which is called trade margin,...
33
thus value added. When claims are too high, particularly when catastrophic accidents happen, output
may become negative...
National accounts a practical introduction
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National accounts a practical introduction

System of National Accounts1993 (United Nations publication, Sales No.E.94.XVII.4)
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Transcripts - National accounts a practical introduction

  • 1. ST/ESA/STAT/SER.F/85 Department of Economic and Social Affairs Statistics Division Studies in Methods Series F, No.85 Handbook of National Accounting NATIONAL ACCOUNTS: A PRACTICAL INTRODUCTION United Nations New York, 2003
  • 2. ii NOTE Symbols of United Nations documents are composed of capital letters combined with figures. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Where the designation “country or area” appears, it covers countries, territories or areas. LIST OF ABBREVIATIONS C.i.f. Cost, insurance and freight CPC Central Product Classification (United Nations) CPI Consumer price index FISIM Financial intermediation services indirectly measured F.o.b. Free on board GCF Gross capital formation GDP Gross domestic products GFCF Gross fixed capital formation GNDI Gross national disposable income GNI Gross national income IC Intermediate consumption ISIC International Standard Industrial Classification of All Economic Activities NCS Net capital stock NFC Non-financial corporation NPISHs Non-profit institutions serving households PIM Perpetual inventory method PPI Producer price index ST/ESA/STAT/SER.F/85 United Nations publication Sales No. ISBN Copyright ©United Nations 2004 All rights reserved Printed in United Nations, New York
  • 3. iii Preface National Accounts: A Practical Introduction has been prepared as part of a series being developed by the member organizations of the Intersecretariat Working Group on National Accounts (ISWGNA) to assist countries in the implementation of the System of National Accounts, 1993 (United Nations publication, Sales No.E.94.XVII.4). Its general objective is to provide an introduction to some basic concepts and structures of the System of National Accounts (SNA) to economists and policy makers who are not familiar with national accounts, as well as other newcomers to the field of national accounting. The text may serve as a guide to reading the SNA itself. In that sense, the text is written in as simple a style as possible, and therefore the detailed elaboration of concepts in both theory and practice is avoided. Simple exercises are included, whenever possible, to make concepts and structures clearer to readers. The handbook also provides an example of the complete system in Excel so that readers can trace the linkages in the system by looking at the formulas there. A compilation spreadsheet that can be used for compiling national accounts is also developed as part of the development of the handbook. It has been tested and used in many developing countries. Those supplements are posted on the web page of the United Nations Statistics Division as part of the series Handbook of National Accounting. The text is not intended to replace either SNA or other handbooks. Compilers are expected to read the details in SNA as well as practical applications and methods presented in the handbooks prepared either by the United Nations Statistics Division, the Organisation for Economic Cooperation and Development (OECD), The International Monetary Fund (IMF) or the Food and Agriculture Organization of the United Nations (FAO). Many of those handbooks are posted on the web pages of the organizations that published them and can be obtained free of charge. The following handbooks have already been prepared or published: Handbook on Non-profit Institutions in the System of National Accounts (United Nations publication, Sales No. E. 03.XVII.9) Use of the System of National Accounts in Economies in Transition (United Nations publication, Sales No. E. 96.XVII.121) Handbook of Input-Output Table Compilation and Analysis (United Nations publication, Sales No. E.99.XVII.9) Household Accounting: Experience in Concepts and Compilation (United Nations publication, Sales No. E.00.XVII.16, vols.1 and 2) Links between Business Accounting and National Accounting (United Nations publication, Sales No.E.00.XVII.13) A System Approach to National Accounts Compilation (United Nations publication, Sales No.E.99.XVII.10) Use of Macro Accounts in Policy Analysis (United Nations publication, Sales, No. E.02.XVII.5) Tourism Satellite Account: Recommended Methodological Framework (United Nations publication, Sales No. E.01.XVII.9) Balance of Payments Manual (IMF, 1993) Balance of Payments Compilation Guide (IMF, 1994) Government Finance Statistics Manual (IMF, 2001) A System of Economic Accounts for Food and Agriculture (FAO, 1996) Integrated Environmental and Economic Accounting (United Nations publication, Sales No. E.93.XVII.12) Handbook on Quarterly National Accounts, (Statistical Office of the European Communities (Eurostat) 1999)
  • 4. iv Quarterly National Accounts Statistics: Concepts, Data Sources and Compilation (IMF, 2001) Handbook on Measurement of the Non-Observed Economy (OECD, 2002) Measuring Capital: A Manual on the Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services (OECD, 2001) Handbook on Price and Volume Measures in National Accounts (Eurostat, 2001) The present handbook was prepared by Vu Quang Viet of the United Nations Statistics Division. Throughout the drafting of the handbook, valuable comments were provided by many experts in the field, particularly Cristina Hannig, Ivo Havinga, Karoly Kovacs, Mathias Reister and Mary Chamie of the United Nations Statistics Division, Brian Newson of Eurostat, Heidi Arboleda of the Economic and Social Commission for Asia and the Pacific, Estrella V. Dommingo of the National Statistical Coordinating Board of the Philippines and Yatimah bt. Sarjiman of the Department of Statistics of Malaysia. Ms. Arboleda provided a number of exercises for incorporation in the handbook. Mathias Reister reviewed the draft carefully, providing important inputs to the rewriting of many chapters. The compilation worksheets were the result of the work over many years of Jan van Tongeren, Stefan Schweinfest and Vu Quang Viet, all of the United Nations Statistics Division. The following are the web page addresses of various relevant international organizations and bodies: United Nations Statistics Division: http://unstats.un.org/unsd/ International Monetary Fund: http://www.imf.org Organization for Economic Cooperation and Development: http://www.oecd.org/std World Bank: http://www.worldbank.org Food and Agriculture Organization of the United Nations: http://www.fao.org Statistical Office of the European Communities: http://europa.int/comm/eurostat/
  • 5. v CONTENTS Introduction ...................................................................................................................................................................1 Part I: Accounts of the nation Chapter 1: Overview......................................................................................................................................................4 Chapter 2: Production account and goods and services account..................................................................................16 A. Objectives.................................................................................................................................................16 B. Basic concepts and relations of goofs and services in national accounts..................................................16 1. Gross domestic product (GDP) and value added ............................................................................16 2. Supply and uses of goods and services ...........................................................................................17 3. Basic relationships in national accounts..........................................................................................18 4. Overall approaches of calculating GDP..........................................................................................19 5. Components of value added............................................................................................................19 C. Production boundary and principles of valuation .....................................................................................20 1. Production boundary.......................................................................................................................20 2. Valuation of goods and services in the SNA...................................................................................21 3. Valuation of national accounts aggregates......................................................................................23 D. Basic definitions of other aggregates of goods and services in national accounts....................................23 1. Definition of output ........................................................................................................................23 2. Definition of intermediate consumption .........................................................................................25 3. Definition of final consumption......................................................................................................25 4. Definition of exports and imports of goods and services................................................................26 5. Definition of gross capital formation ..............................................................................................27 E. Measurement issues ..................................................................................................................................30 1. Estimation of market output from sales ..........................................................................................30 2. Crop output .....................................................................................................................................31 3. Livestock output..............................................................................................................................31 4. Output of wholesale and retail services...........................................................................................32 5. Output of financial intermediation services ....................................................................................32 6. Estimation of intermediate consumption from purchase of materials.............................................33 7. Estimation of output by production costs........................................................................................34 8. Estimation of consumption of fixed capital ....................................................................................34 9. Relationship between consumption of fixed capital, net capital formation, net saving and net value added...............................................................................................................................................36 Exercise on GDP by production and final expenditure .................................................................................37 Solutions........................................................................................................................................................39 Chapter 3: Income account of the nation ....................................................................................................................43 A. Objectives .......................................................................................................................................43 B. Important income concepts .............................................................................................................43 C. Primary income...............................................................................................................................43 D. Gross national income.....................................................................................................................44 E. Current transfers..............................................................................................................................45 F. Gross national disposable income...................................................................................................45 G. Relation between income of institutional sectors and the total economy........................................47 Exercise on gross national income, gross national disposable income and gross saving ..............................50 Solutions........................................................................................................................................................50 Chapter 4: Capital account of the nation .....................................................................................................................52 A. Objectives...............................................................................................................................................52 B. Investment in non-financial assets and sources of funds........................................................................54
  • 6. vi C. Gross saving ..........................................................................................................................................54 Chapter 5: Financial account of the nation A. Objectives...............................................................................................................................................55 B. Definition of assets and liabilities ..........................................................................................................56 C. Relation with capital account.................................................................................................................56 Exercise on classification of transactions......................................................................................................58 Solutions........................................................................................................................................................59 Chapter 6: Rest of the world account...........................................................................................................................60 A. Objectives...............................................................................................................................................60 B. Transactions with the rest of the world ..................................................................................................60 C. Balances in the rest of the world account...............................................................................................61 D. Relation between trade statistics and trade balance................................................................................61 Chapter 7: Balance sheet of the nation ........................................................................................................................63 A. Objectives...............................................................................................................................................63 B. Components of balance sheet.................................................................................................................63 C. Net worth................................................................................................................................................64 Chapter 8: SNA framework for the total economy......................................................................................................65 Exercise on setting up a full system of accounts of the nation......................................................................69 Solutions:.......................................................................................................................................................71 Part II: Integrated accounts by industries and institutional sectors Chapter 9: Industry and sector breakdown ..................................................................................................................74 A. Objectives...............................................................................................................................................74 B. What is an industry/establishment?........................................................................................................74 C. What is an institutional unit?..................................................................................................................75 D. Ancillary corporations/industries ...........................................................................................................75 E. Institutional sectors in the economy.......................................................................................................75 F. An example for the need of both industry and institution sectoring.......................................................76 G. Corporations...........................................................................................................................................77 H. Household sector....................................................................................................................................77 I. Non-profit institutions (NPIs) and non-profit institutions serving households (NPISHs)......................78 J. General government sector.....................................................................................................................78 K. What should be excluded from general government sector?..................................................................78 Exercise on accounts of the government sector.............................................................................................80 Solutions........................................................................................................................................................83 Chapter 10: Supply and use tables: integration of industry, products and sectors.......................................................84 A. Objectives of supply and use tables (SUT) ............................................................................................84 B. Organization of SUT..............................................................................................................................84 C. Balancing SUT.......................................................................................................................................85 D. Breakdown of final uses.........................................................................................................................86 E. Sectorization of value added ..................................................................................................................87 F. Data requirement for sectorization of production...................................................................................87 Exercise on setting up the supply and the use tables.....................................................................................88 Solution ........................................................................................................................................................89 Chapter 11: Institutional sector accounts.....................................................................................................................90 A. Objectives...............................................................................................................................................90 B. Types of income.....................................................................................................................................90
  • 7. vii C. Sectoral balance of primary income.......................................................................................................90 D. Sectoral entrepreneurial income.............................................................................................................91 E. Sectoral disposable income....................................................................................................................91 F. Sectoral gross saving..............................................................................................................................91 G. Sectoral net lending (+)/net borrowing (-) .............................................................................................92 H. Sectoral financial accounts.....................................................................................................................92 I. Sectoral balance sheets...........................................................................................................................92 Chapter 12: Other important issues in sector accounts................................................................................................93 A. Final consumption expenditure versus actual final consumption...........................................................93 1. Objectives .......................................................................................................................................93 2. Actual final consumption of households.........................................................................................93 3. Final consumption expenditure of general government..................................................................94 4. Final consumption expenditure of NPISHs.....................................................................................95 5. Classification of consumption expenditure.....................................................................................95 B. Business accounts versus national accounts ...........................................................................................96 1. Objectives .......................................................................................................................................96 2. Similarities between business accounts and national accounts .......................................................96 3. Differences between business accounts and national accounts.......................................................97 4. Uses of business accounts in national accounts ..............................................................................97 5. An example to contrast business accounts and national accounts...................................................97 Exercise on linking business accounts to national accounts..........................................................................99 Solutions:.....................................................................................................................................................102 Chapter 13: Price and volume measures in national accounts...................................................................................104 A. Objectives.............................................................................................................................................104 B. Types of price indexes .........................................................................................................................104 C. Types of volume indexes......................................................................................................................105 D. Methods of obtaining volume of GDP .................................................................................................108 Exercise on volume indexes and double deflation method .........................................................................113 Solution:......................................................................................................................................................115 Part III: Data collection and estimation methods in SNA Chapter 14: Data collection, compilation and estimation methods in SNA: a summary...........................................118 A. Objectives.............................................................................................................................................118 B. Data collection methods.......................................................................................................................118 C. Data from administrative records.........................................................................................................119 D. Data collected by statistical methods ...................................................................................................120 E. Estimation methods in the SNA...........................................................................................................122 Annex Explanation of the SNA supply and use tables and the integrated accounting framework: An example ..................125 SNA COMPILATION worksheets: A compilation framework.................................................................................138
  • 8. 1 Introduction SNA AND ECONOMIC ANALYSIS 1. The System of National Accounts (SNA) helps economists to measure the level of economic development and the rate of economic growth, the change in consumption, saving, investment, debts and wealth (or net worth) for not only the total economy but also each of its institutional sectors (such as government, public and private corporations, households and non-profit institutions serving households); 2. With data from SNA, economists can either forecast the future growth of the economy or study impacts on the economy and its sectors of alternative government policies. 3. SNA promotes the integration of economic and related statistics in a system that is based on consistent economic and statistical concepts and methods. As such, it allows domestic and international comparative analysis. SNA AS A SYSTEM 4. SNA consists of a coherent, consistent and integrated set of macroeconomic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules. 5. It provides a comprehensive and detailed record of the complex economic activities taking place within an economy and the interaction between different economic agents and groups of agents that takes place in markets or elsewhere. PRESENTATION IN THREE PARTS 6. The present handbook covers: The national economy as a whole vis-à-vis the rest of the world (part one) Integrated accounts by industries and institutional sectors (part two) Data collection and estimation methods in SNA (part three)
  • 9. 2
  • 10. 3 PART I ACCOUNTS OF THE NATION
  • 11. 4 Chapter 1 Overview A. INTRODUCTION 1.1. National accounts is the macroeconomic depiction of the national income cycle using the double- entry bookkeeping principle of business accounting and a sequence of accounts to show the relationship between the various economic variables. The present chapter introduces the macroeconomic concepts and economic accounting identities underlying national accounts. In the section C, those concepts are presented in a numerical example that utilizes the accounting framework developed in national accounts. Section D gives a graphical presentation of the numerical example. Section E discusses some uses of indicators provided by national accounts and other economic statistics. B. BASIC CONCEPTS AND VARIABLES OF NATIONAL ACCOUNTS Supply and use 1.2. For an economy, the total supply of goods and services must equal the total uses. Thus: (1.1) total supply of goods and services = total uses of goods and services 1.3. In an open economy engaging in foreign trade, the total supply of goods and services consists of domestically produced output and imports. The uses consist of intermediate consumption, final consumption, gross capital formation and exports. Intermediate consumption consists of the goods and services consumed in the production process (excluding the consumption of fixed assets), while final consumption consists of the goods and services provided to the benefit of final consumers. Thus: (1.2) output + imports = intermediate consumption + final consumption + gross capital formation + exports 1.4. A rearrangement of equation (1.2) allows for the identification of gross value added as output minus intermediate consumption. Leaving the issue of taxes and subsidies on goods and services aside, gross value added is the value of all goods and services produced during a production period but not immediately used up in the production process of that period. Hence, gross value added represents the value of all goods and services which are available for the different uses other than intermediate consumption. Thus: (1.3) gross value added = output – intermediate consumption (1.4) output – intermediate consumption = final consumption + gross capital formation + exports – imports
  • 12. 5 1.5. The items intermediate consumption, final consumption and gross fixed capital formation on the uses (right) side of equation (1.2) are measured from the perspective of the consumer or purchaser. Their values take into account the taxes and subsidies on goods and services. While taxes on products increase, subsidies on products lower the prices payable by consumers. Yet output is measured from the perspective of producers in terms of the receipts receivable by them, leaving all of the taxes on goods and services aside while including subsidies on goods and services. Therefore, taxes on goods and services have to be added to output and subsidies subtracted from output in order to arrive at a uniform valuation of supply and uses. (1.5) output + taxes – subsidies – intermediate consumption = final consumption + gross capital formation + exports – imports Gross domestic product 1.6. On the left side of equation (1.5), we find the value of all goods and services produced in a period minus the goods and services consumed in the production process during that period, which is called gross domestic product (GDP). GDP can be measured by having the values for output and intermediate consumption aggregated across the various industries of an economy: GDP by production approach. Thus: (1.6) GDP = output + taxes – subsidies – intermediate consumption 1.7. Output minus intermediate consumption can be replaced with gross value added. (1.7) GDP = gross value added + taxes – subsidies 1.8. Looking at the right side of equation (1.5), gross domestic product can also be viewed as the value of all goods and services available for different domestic final uses or for exports: GDP by expenditure approach. Thus: (1.8) GDP = final consumption + gross capital formation + exports – imports 1.9. The production process creates incomes for not only the owners of the inputs used in production but also for owners of capital and for the government. The value of those incomes is equal to gross domestic product. Hence, GDP can also be calculated as the sum of compensation of employees, taxes less subsidies and gross operating surplus/mixed income: GDP by income approach. Thus: (1.9) GDP = compensation of employees + taxes - subsidies + gross operating surplus / mixed income 1.10. The components of gross operating surplus or mixed income and taxes less subsidies will be explained in more detail later. But it needs to be noted that the taxes less subsidies of equation (1.9) include not only all taxes less subsidies on products (i.e., goods and services) but also other taxes less subsidies on production. Gross national income 1.11. As an aggregate measure of production, gross domestic product refers to production of all resident units within the borders of a country, which is not exactly the same as the production of all productive activities of residents. Some of the productive activities of residents may take place abroad
  • 13. 6 (for example temporary and seasonal labour working abroad). Conversely, some production taking place within a country may be attributed to temporary and seasonal foreign labour. The contribution of labour is accounted for through the compensation of employees paid to non-residents and received by the economy. In addition, some primary income generated within the country may go to non-resident units (for example, interest paid to providers of loans from abroad or dividends paid to non-resident owners of shares). Symmetrically, some primary incomes generated in the rest of the world may go to resident units. Thus, the concept of gross national income seeks to measure the net income due to their ownership of factors of production (labour, netnon-produced assets and capital) received by residents in a country. Residents are defined based on their centre of economic interest. 1.12. Hence, gross national income (GNI) is defined as follows: (1.10) GNI = GDP + compensation of employees and property income from the rest of the world – compensation of employees and property income to the rest of the world 1.13. All GNI is not available for final uses domestically since some of it is transferred to other countries without anything being received in exchange, such as money sent to support dependants living in another country. Such transfers are called current transfers, and taking them into account leads to the following concept of gross national disposable income: (1.11) gross national disposable income = GNI + current transfers from the rest of the world – current transfers to the rest of the world 1.14. Gross national disposable income is the income available for consumption and saving. Thus: (1.12) gross national disposable income = final consumption expenditure + gross saving Gross saving, gross capital formation and net lending 1.15. Gross saving is the difference between gross national disposable income and final consumption. Gross saving together with net capital transfers (capital transfers receivable less capital transfers payable) from the rest of the world provides the resources for investment in non-financial assets, which is called gross capital formation, i.e., for the net acquisition of fixed assets, such as residential and non-residential buildings, plants and equipments, the net acquisition of valuables and/or the increase in inventories. The difference between gross saving plus net capital transfers and gross capital formation is net borrowing or net lending from the rest of the world, depending whether uses exceed resources or vice versa: if it is negative it is net borrowing and if it is positive it is net lending. Thus: (1.13) gross saving = gross national disposable income – final consumption (1.14) net lending (+) / net borrowing (-) = gross saving + net capital transfers – gross capital formation Net borrowing / net lending in financial accounts 1.16. Net borrowing / net lending is also reflected in transactions in financial assets and liabilities with the rest of the world. It is equal to the difference between net acquisition of financial assets and net incurrence of liabilities (foreign exchange, bonds, loans etc.). Thus: (1.14) net lending (+) / net borrowing (-) = net acquisition of financial assets – net incurrence of liabilities
  • 14. 7 Changes in net worth 1.17. Net worth is the difference between the total value of non-financial and financial assets and the total value of liabilities of an economy. It is a measure of the net wealth of a nation. Change in net worth measures the change in wealth of a nation. It is equal to the difference between the change in the total value of assets and the change in the total value of liabilities. Besides the changes in net worth due to changes in prices that affect the valuation of assets and liabilities and natural incidents, such as discoveries or depletion of national resources and destruction due to natural calamities, the changes in net worth due to economic activities and transactions is the sum of gross saving and net capital transfers from abroad. The latter should also equal to gross capital formation less consumption of fixed capital and plus net lending (+)/net borrowing (-) from the rest of the world. C. INTRODUCTION TO THE ACCOUNTING FRAMEWORK Four basic accounting principles 1.18. The accounts are built on the basis of the following four simple accounting principles: a) All transactions are recorded on an accrual basis (i.e., payable and receivable), not on a cash basis (i.e., received and paid); b) Resources (receivables) are recorded on the right side and uses (payables) on the left side of the accounts. Liabilities are recorded on the right side and assets the left side of the accounts; c) The balancing or closing item, which is always the last item on the uses side of the accounts, closes (balances) the account; d) The balancing item is always the opening item of the next account, located as the first entry on the resources side of the account. Sequence of accounts for the total economy 1.19. The sequence of accounts for the total economy begins with the production accounts and moves to the primary distribution of income account, the secondary distribution of income account, the use of income account, the capital account, the financial account and finally the balance sheet (see table 1.1). 1.20. The balance sheet provides information on the total fixed assets, total financial assets and total financial liabilities, classified by types of assets and liabilities of the economy at the beginning and end of the accounting period. The balance sheet is affected by three types of changes that occur during the course of the accounting period: a) Changes in the balance sheet due to transactions; b) Other changes in the volume of assets due to appearance and disappearance of assets; c) Changes in balance sheets due to changes in prices. 1.21. Changes in the balance sheets due to transactions are the results of production activities and transactions with the rest of the world. Gross capital formation, after the consumption of fixed capital is deducted from it, adds to non-financial assets. Transactions in financial assets/liabilities change financial assets and liabilities. The difference in the total value of assets and total liabilities is change in net worth. 1.22. Other changes in the volume of assets are due to the appearance of resources, such as the discovery of sub-soil resources (oil or minerals, for example), or their disappearance due to depletion or natural calamities.
  • 15. 8 1.23. Changes in balance sheets due to changes in prices include holding gains or losses resulting from the revaluation of financial and non-financial assets. 1.24. For the sake of simplicity, other changes in the volume of assets and changes in the balance sheets due to changes in prices are not included in the sequence of accounts provided in table T 1.1. TABLE T1.1. SIMPLIFIED SEQUENCE OF ACCOUNTS OF THE DOMESTIC ECONOMY Uses Resources Production account Output of goods and services 100 Less Intermediate consumption 40 Equals Gross value added/GDP 60 Primary distribution of income account Gross value added/GDP 60 Plus Compensation of employees and property income receivable from the rest of the world (ROW) 4 Less Compensation of employees and property income payable to ROW 1 Equals Gross national income 63 Secondary distribution of income account Gross national income 63 Plus Current transfers receivable from ROW 1 Less Less current transfers payable to ROW 2 Equals Gross disposable income 62 Use of income account Gross disposable income 62 Less Final consumption 40 Equals Gross saving 22 Uses Resources Capital account Gross saving 22 Less Gross capital formation 15 Plus Capital transfers from ROW 1 Less Capital transfers to ROW 1 Equals Net lending to ROW 7 Financial account Changes in assets Changes in liabilities Net acquisition of financial assets Money 3 Loans 4 Less Net incurrence of liabilities 0 Equals Net lending to ROW 7 Changes in the balance sheet due to transactions Assets Liabilities Non-financial assets Gross capital formation 15 Consumption of fixed capital -1 Less Financial assets/financial liabilities 7 0 Equals Net worth 21
  • 16. 9 Note: This simplified sequence of accounts eliminates other intermediate accounts, such as the generation of income account and the breakdown of primary income accounts into two separate accounts; it also does not present the balance sheets. Account for the rest of the world 1.25. The rest of the world (ROW) account is structured according to two principles: a) The transactions with the domestic economy are recorded from the perspective of the rest of the world; b) All transactions between the domestic economy and the rest of the world are recorded twice, as receivable in the accounts of the domestic economy and as payable in the rest of the world account or vice versa. For example, current transfers receivable from the rest of the world in the accounts for the domestic economy is recorded as current transfers payable to the rest of the world in the rest of the world account. 1.26. Imports and exports are a special case. Thus: a) The item imports of the domestic economy in the rest of the world account is in fact the exports of the rest of the world and the item exports of the domestic economy are the imports of the rest of the world; b) The item imports in the rest of the world account represents the receivable created by the exports of goods and services from the rest of the world. Conversely, exports in the rest of the world account represents the payable created by the imports of the rest of the world. 1.27. Since the rest of the world account is a counterpart of the domestic economy, the net lending (+) of the domestic economy is the net borrowing (-) of the rest of the world and vice versa. TABLE T1.2. SIMPLIFIED ACCOUNT OF THE REST OF THE WORLD Uses Resources Imports 10 Less Exports 15 Plus Compensation of employees and property income receivable from ROW 4 Less Compensation of employees and property income payable to ROW 1 Plus Current transfers receivable from ROW 1 Less Less current transfers payable to ROW 2 Plus Capital transfers from ROW 1 Less Capital transfers to ROW 1 Equals Net borrowing of ROW - 7 Financial accounts Assets Liabilities Changes in financial assets 0 Less Changes in financial liabilities 7 Money 3 Loans 4 Equals Net borrowing of ROW - 7
  • 17. 10 Goods and services account 1.28. The goods and services account has the following characteristics: a) It brings together the total supply and total uses of goods and services; b) It is balanced in itself and does not have a balancing item; c) Resources are recorded on the right side and uses on the left. TABLE T1.3. GOODS AND SERVICES ACCOUNT Uses Resources Output of goods and services 100 Imports of goods and services 10 Intermediate consumption 40 Final consumption 40 Gross capital formation 15 Exports of goods and services 15 Total 110 110 D. GRAPHICAL PRESENTATION OF THE RELATIONSHIP OF BASIC CONCEPTS 1.29. Equation (1.3) can be modified to obtain the value of output as the sum of gross value added and intermediate consumption. Thus: (1.15) output = gross value added + intermediate consumption 1.30. Equation (1.4) can be modified to obtain the value of output as the sum of intermediate and final uses. Thus: (1.16) output = intermediate consumption + final consumption + gross capital formation + (exports – imports) 1.31. Figure 1.1 shows the current transactions accounts of the domestic economy, the rest of the world account and the balance sheets in a schematic presentation. Net capital formation refers to gross capital formation less consumption of fixed capital. The so-called “net” transactions refer to receivable less payable; for example, net primary income equals primary income receivable less primary income payable. The relationship of total supply and total uses of goods and services and the balance sheets are shown horizontally. The current transactions of the domestic economy and the rest of the world account are shown vertically. For the purpose of clarity in the presentation, changes in the balance sheets are restricted to reflect only changes due to transactions and not volume and revaluation.
  • 18. 11 Figure F1.1: Sequence of accounts in a graphic presentation, with changes in the balance sheets reflecting economic transactions only Opening balance sheet Current transactions accounts of the domestic economy Rest of the world account Ending balance sheet Total supply of goods and services 110 = Output 100 + Imports 10 +10 - + Total uses of goods and services 110 = Intermediate consumption 40 + Gross capital formation 15 + Final consumption 40 + Exports 15 -15 = Gross value added 60 + + Net primary income from rest of the world 3 -3 = GNI 63 + + Net current transfers from rest of the world -1 +1 = GNDI 62 - Final consumption 40 = Gross saving 22 + + Net capital transfers 0 0 - Gross capital formation 15 = = Net lending 7 -7 Opening balance sheet of non- financial assets 200 + Net capital formation 15-1 = Closing balance sheet of non- financial assets 214 Opening balance sheet of financial assets less liabilities 120 + Financial assets less financial liabilities = net lending 7 = Closing balance sheet of financial assets less liabilities 127 Opening balance sheet of the rest of the world a 100 + Financial assets less financial liabilities = net borrowing -7 = Closing balance sheet of the rest of the worlda 93 a The International Monetary Fund calls net worth of the rest of the world “the international financial position”; positive value means that the economy has a negative position since the international financial position is shown from the perspective of the rest of the world.
  • 19. 12 E. USES OF NATIONAL ACCOUNTS INDICATORS 1.32. National accounts time series provide most of the important data that are used in economic model building for the purposes of forecasting economic development, price analysis and estimating economic effects of government policies etc. The input-output table, which is derived from the supply and use tables in the system of national accounts, provides an important database for impact studies and productivity analysis at very detailed industrial and product levels. However, even without the support of sophisticated economic tools, indicators derived from aggregates in national accounts are already very useful for monitoring the overall performance of an economy, its strength as well as weakness. In some cases, those indicators need to be supplemented by other important indicators that are drawn from specialized statistics, such as monetary and government budget statistics. The discussion below does not pretend to be comprehensive but aims mainly to illustrate the importance of indicators that are derived from national accounts and specialized statistics in economic analysis. Indicators based on national account aggregates 1.33. Familiar indicators for monitoring the economy are real rate of growth in GDP, final consumption and gross capital formation (investment in fixed assets); saving rate (saving/GDP), investment rate (gross capital formation/GDP), government budget deficit / GDP, current external account balance / GDP, effective individual and corporate income tax rates etc. Those indicators can be derived directly from national accounts data. They not only show the performance of the economy over time but also allow comparison with other countries at the same level of development. Even without resorting to sophisticated modeling, the indicators derived from national accounts provide very useful information on the economy when evaluating them against stylized facts derived from the experiences in economic development studies. For example, in order to achieve a reasonable rate of growth, developing countries are expected to have an investment rate of at least 25 percent of GDP. A government budget deficit and a current external balance deficit over GDP of 3 percent and over would indicate trouble ahead if problems were not corrected. Another very useful aggregate in national accounts is change in inventories. The building up of inventories in relation to output in manufacturing industries is a signal for an economic slowdown and vice versa, assuming of course that change in inventories is not derived as a residual, as is the practice in some countries. 1.34. Other indicators are derived by combining items in national accounts. For example, debt payment in relation to export (debt payment includes both interest payment and payment principal) is used as an indicator of debt payment capability, while export of manufacturing goods as a percentage of total exports is used as an indicator of export-led industrialization. A high ratio of government budget deficit over GDP and a large external account deficit would signal the need for policy adjustment. Large budget deficit may either crowd out private investment or generate higher inflation if the deficit is met with money printing instead of government borrowing. Of course, the analyst has to take many other factors into account. A high foreign debt service ratio coupled with a slowdown of exports would be a clear warning of a foreign debt payment crisis. Simple economic indicators provide a good tool for recognizing economic problems when the indicators cross some critical ratios. Indicators based on specialized statistics 1.35. National accounts are not the only source for economic indicators. Indicators from specialized statistics are equally important. Among money and banking statistics are a few ratios that are closely monitored. The rate of change in money supply1 is used to monitor inflation prospects, while the non- 1 Money supply can be derived from the financial accounts and the balance sheet, but it is cumbersome to do so, especially when money and banking statistics are used in compiling national accounts.
  • 20. 13 performing loan ratio and ratio of liability over asset are used as performance indicators of the banking system. The balance of payments, besides providing indicators that have been discussed above, also provides information on foreign exchange reserves and the current short-term liability denominated in foreign currencies. Those indicators are extremely important in detecting possible problems in the financial market. 1.36. The financial crisis in East Asia and Association of South-East Asian Nations (ASEAN) countries in 1987 took place without warning since the performance ratios of the banking system and foreign exchange reserve were neither measured properly nor monitored closely. The economy seemed to be in good health before the impending crisis. Indicators on production, government budget and foreign trade balance looked favourable for almost all countries, except for the current external account deficits, which exceeded 6 percent of GDP. The shortfall, which was always expected to be met by capital inflow, turned out to be the reason for the devaluation of national currencies and deepening capital flight. 1.37. Non-performing loan ratio is in general defined as loan non-payment beyond 3 months. In Asia, however, before 1997 loan non-payment over one year was not classified as non-performing. In addition, banks’ liability over total asset is normally expected to be less than 1 in developed markets (meaning that net equity is zero), but in Asia the ratio of over 4 (meaning a great negative net equity) was commonly seen. 1.38. Forward-binding contracts to sell foreign currencies (financial derivatives) were also not taken into account in liabilities denominated in foreign currencies in 1997 (see table T1.4 for the operational definition of foreign exchange reserves and total current liabilities denominated in foreign currencies.) 1.39. General economic indicators are grouped into 11 groups and listed in table T1.4 for reference. The definition of the indicators and their possible uses are also indicated.
  • 21. 14 TABLE T1.4 ECONOMIC PERFFORMANCE INDICATORS Indicators Interpretation Group 1. General economic level and performance GDP per capita GDP rate of growth The level of economic development in comparison to other countries The performance of the economy Group 2. Labour productivity and labour cost Gross value added per worker per work hour (manufacturing) Compensation of employees per work hour Labour productivity Labour cost Group 3. Income distribution Compensation of employees / gross value added Operating surplus / gross value added Income share of employees in GDP Income share of capital in GDP Group 4. Investment Gross fixed capital formation / GDP Gross produced fixed assets / GDP Gross fixed capital formation / change in GDP Gross fixed assets/ output by types of industries Share of investment in capital goods in GDP Ratio used in estimating produced capital goods requirement for a given rate of growth in GDP. An approximation of capital/GDP ratio above (applicable only for the years with stable positive growth, commonly called ICOR) Capital – output ratios necessary for industry development planning Group 5. Saving Saving / GDP Saving / gross fixed capital formation Saving of an institutional sector / total saving Saving of households / disposable income of households Saving rate of the nation Domestic funding of investment Contribution of each sector to total saving Saving rate of households Group 6. Performance of government Government deficit / GDP Revenue / expense (excluding payment on principal or incurrence of debt) Fixed capital formation / total expenditure Interest payment / total expenditure Taxes / GDP Corporate taxes / corporate primary income balance Individual income taxes / gross national income of household Government deficit rate If less than 1, government policy on budgeting needs to be seriously reviewed as recurrent revenue does not cover recurrent expense Share of investment in capital goods over total expenditure Indicator of pressure of debt payment on government expenditure Government effort or tax burden Government effort or tax burden on corporations (right, fair, too high) Government factor on households (right, fair, too high)
  • 22. 15 TABLE T1.4 (CONTINUED) Indicators Interpretation Group 7. Banking performance Non-performing loan ratio (defined as loan non- payment beyond 3 months) Liabilities / assets Possibility of default Banks’ bill of health (to be healthy, the ratio is expected to be is lower than 1, which means that net equity is greater than zero) Group 8. Foreign trade performance Imports / GDP, import rate of growth Exports / GDP, export rate of growth (Exports + imports) / GDP (Exports less imports) / GDP Import reliance, growth factor Export effort Degree of openness of the economy Export / import gap Group 9. Balance of payment Current external account deficit / GDP (Exports less imports) / GDP Debt payment (interest + principal) / export Ability to service imports and current rate of economic growth (warning signal if over 3%) Same as above Ability to service foreign debt (expected to be lower than 30%) Group 10. Foreign exchange reserve Ability to finance imports and prevent foreign exchange crisis Group 11. Prices Producer price index, consumer price index, import price index and export price index Interest rate Foreign exchange rates Stock exchange price index Wage rate index
  • 23. 16 Chapter 2 Production account and goods and services account A. OBJECTIVES 2.1. The production account aims to measure output, intermediate consumption and ultimately the gross value added of every economic activity and every institutional sector in the economy. The sum of gross value added generated by different economic activities in the domestic economy is gross domestic product (GDP). GDP is the most important aggregate derived from the production account. GDP reflects the aggregate production of an economy. The growth rate in the volume of GDP summarizes the growth rate of the economy. Growth in GDP would allow for increases in either final consumption of the population and the government or investment in capital goods. The latter is expected to accelerate the growth rate of the economy. 2.2. The present chapter covers the following topics: a) Definition of gross value added; b) Supply and uses of all goods and services in the economy: the balance of the supply and uses of goods and services describes the relationships of important aggregates in national accounts; c) The production boundary of national accounts, i.e., what are the activities that are covered or not covered in national accounting; d) The valuation principles in national accounts, i.e., how output and uses are valued; e) The definition of the basic concepts in production accounting, such as output, intermediate consumption, final consumption, gross capital formation, exports and imports; f) The measurement in practice of some important aggregates. B. BASIC CONCEPTS AND RELATIONS OF GOODS AND SERVICES IN NATIONAL ACCOUNTS 1. GROSS DOMESTIC PRODUCT AND GROSS VALUE ADDED 2.3. The System of National Accounts (SNA) defines GDP and gross value added operationally, i.e., how they are calculated. In the present section, GDP and value added are used interchangeably since they describe the same economic concept. Yet, as will be explained below, due to taxes and subsidies their valuation are not identical. What do gross value added and gross domestic product measure? 2.4. Gross value added and GDP measure the additional value of goods and services that are newly created in the economy and are available for domestic final uses or for exports.
  • 24. 17 2.5. Output is the value of the goods and services which are produced by an establishment in the economy that become available for use outside that establishment. They are valued at market or equivalent market prices. 2.6. Intermediate consumption is the cost of goods and services used in production. 2.7. GDP is equal to the value of all goods and services produced in the economy (i.e., output) less the value of all goods and services used in the production processes (i.e., intermediate consumption). GDP is sometimes called in economic textbooks "output" or "net output". However, output has a different meaning in national accounts. 2.8. Gross value added is calculated for every economic activity and then summed up to obtain the total gross value added for the whole economy. The total gross value added after some minor adjustment for taxes and subsidies is gross domestic product. Thus: Given Output 100 Material costs 30 Service costs 10 Then Output 100 Less: Intermediate consumption 40 Equals: Gross value added/GDP 60 2. SUPPLY AND USES OF GOODS AND SERVICES 2.9. Gross value added can be more meaningfully interpreted within the context of supply and uses of goods and services in the economy. For the economy as a whole or for any product, the total supply must equal the total use. 2.10. The total supply includes output and imports, while the total use includes final consumption, intermediate consumption, gross capital formation and exports. One may ask what happens to the goods that are not consumed? Those goods are in fact recorded as increase in inventories, which is a part of gross capital formation. 2.11. Output is normally measured from the perspective of the producers, i.e., from the revenue received by them; that value, called output at basic prices, does not include product taxes that are collected on behalf of the government and includes subsidies provided by the latter. Thus, in order to balance the supply and use of goods and services paid by consumers at purchasers' prices, product taxes less subsidies must be added to the supply side (see table T2.1 and figure F2.1). Intermediate consumption = 40
  • 25. 18 TABLE T2.1. SUPPLY AND USES OF GOODS AND SERVICES IN THE ECONOMY Supply (resources) At purchasers' prices or equivalents Uses At purchasers' prices or equivalents Imports of goods f.o.b. and services 10 Exports of goods f.o.b. and services 15 Output at basic prices 95 Intermediate consumption at purchasers' prices 40 Taxes less subsidies on products 5 Gross capital formation at purchasers' prices 15 Final consumption at purchasers' prices 40 FIGURE F2.1. SUPPLY AND USES OF GOODS AND SERVICES 3. BASIC RELATIONSHIPS IN NATIONAL ACCOUNTS 2.12. The manipulation of the equality of the total supply and the total use allows for the derivation of the following basic relationships in the total economy: (2.1) (output + taxes less subsides on products) + import = intermediate consumption + gross capital formation + final consumption + exports Or: (2.2) (output - intermediate consumption) + taxes less subsidies on products = gross capital formation + final consumption + (exports - imports) By definition: (2.3) gross value added = output – intermediate consumption Output + taxes less subsidies on products 100=95+5 Supply of goods and services 110 Imports 10 Intermediate consumption 40 Final consumption 40 Gross capital formation 15 Exports 15 Gross value added / GDP 60 Final consumption 40 Gross capital formation 15 Net exports 5 + == - = + + - Uses of goods and
  • 26. 19 Then: (2.4) Gross value added + taxes less subsidies on products = gross capital formation + final consumption + (exports - imports) By definition: (2.6) gross domestic product (GDP) = gross value added + taxes less subsidies on products Then: (2.7) GDP = gross capital formation + final consumption + exports – imports GDP is an output concept 2.13. Equation (2.7) above, when reorganized as set out below, would allow for an interesting interpretation of output. It shows the uses of GDP as "final uses", consisting of domestic uses and exports. Thus, GDP is clearly a concept based on output and its uses and is not an income concept. (2.8) GDP = (final consumption + gross capital formation – imports) + exports (2.9) GDP = domestic final uses + exports 4. OVERALL APPROACHES TO CALCULATING GDP 2.14. Production approach: GDP can be calculated by adding taxes less subsidies on products to the total value added, which is derived by subtracting intermediate consumption from output in equation (2.3). 2.15. Final expenditure approach: GDP can also be obtained by adding final uses (domestic plus the rest of the world) together. 2.16. Income approach: GDP can also be obtained by adding together the income components that make up value added (value added is elaborated below). GDP by income approach covers only the incomes generated within the domestic economy. 5. COMPONENTS OF VALUE ADDED 2.17. In principle, GDP can be computed by adding together the components of value added and taxes less subsidies on products. 2.18. Value added includes: a) Compensation of employees: Compensation of employees is the total remuneration in cash or in kind payable by employers to employees for the work done. Direct social transfers from employers to their employees or retired employees and their family, such as payments for sickness, educational grants
  • 27. 20 and pensions that do not set up an independent fund, are also imputed to compensation of employees; b) Other taxes less subsidies on production: Other taxes less subsidies on production are taxes payable by employers to carry out production, irrespective of sales or profitability. They may be payable as license fees or as taxes on the ownership or use of land, buildings or other assets used in production or on the labour employed or on the compensation of employees paid. They are not taxes paid on values of sales or produced outputs, which are called taxes on products; c) Consumption of fixed capital: Consumption of fixed capital is the cost of fixed assets used up in production in the accounting period; d) Gross operating surplus: Gross operating surplus is the residual obtained by deducting the above components from value added. Thus, gross operating surplus includes interest payable to lenders of financial assets, or rent payable to rentiers of non-produced assets, such as land and sub-soil assets. 2.19. Gross operating surplus of corporate enterprises can also be estimated by summing over: a) Additions to retained earnings; b) Depreciation and depletion; c) Bad debt allowance; d) Property income payable; e) (-) Property income receivable; f) Current transfers payable; g) (-) Current transfers receivable; h) (-) Gains (net of loss) on sales on fixed assets and securities. 2.20. In practice, value added from corporations may be obtained by the income approach, but value added from unincorporated activities, when no formal accounts are available, must be obtained by the production approach. 2.21. Explanations of the above concepts may be obtained by consulting the handbook Links between Business Accounting and National Accounting (United Nations publication, Sales No. E.00.XVII.13) C. PRODUCTION BOUNDARY AND PRINCIPLES OF VALUATION 1. PRODUCTION BOUNDARY 2.22. Not all economic activities are treated as economic activities and included in the production boundary of the System of National Accounts. Except for the services of owner-occupied housing and paid domestic staff, all personal and domestic services that are produced and consumed within the same households, such as cleaning, decoration, cooking, caring for and educating children, caring for sick and old people, maintenance and repair of dwellings and durables, transportation of household members etc. are excluded. 2.23. Included in the production boundary of SNA are: a) The production of all individual or collective goods and services that are supplied or intended to be supplied to production units other than themselves; b) The own-account production of all goods that are retained by their producers for their own final consumption or gross capital formation;
  • 28. 21 c) The own-account production of housing services by owner-occupiers and personal services produced by the employment of paid domestic staff; d) The production of all agricultural goods for sale or own final use and their subsequent storage; the gathering of uncultivated crops; forestry; wood-cutting; the collection of firewood; hunting and fishing; carrying of water; the processing (threshing, milling, preserving etc.) of agricultural and other food products; the weaving of cloth, dress-making and tailoring, the production of footwear, pottery, utensils, furnishings etc. 2.24. Also included in the production boundary are illegal and hidden goods and services: a) Production and distribution of goods and services whose sale, distribution or possession is forbidden by law, such as narcotics, smuggling of goods and prostitution; b) Production of goods and services which are deliberately concealed from public authorities in order to avoid the payment of taxes, the meeting of legal standards or compliance with administrative procedures. 2.25. The SNA production boundary has been extended to include natural growth of cultivated forests, the development of entertainment, literary or artistic originals and the leasing of the right to exploit those assets. Also included is the development of software on own account that can be used for more than one year. 2. VALUATION OF GOODS AND SERVICES IN SNA 2.26. Outputs, whether or not sold, are valued at market or equivalent market prices. Market prices are the actual and economically significant prices agreed upon by the transactors. SNA does not set a standard for economically significant price, but most countries decide that it must cover at least half of production costs. There are three types of market prices of the same good due to taxes and subsidies. The reason for different kinds of prices is that what the purchaser pays and the seller receives is not identical (see figure F2.2 for their relationships): a) Basic price is the amount receivable by the producer from the purchasers for a unit of output. Thus, it should exclude any tax assessed on the output (i.e., taxes on products) and include any subsidies on the output that the producer receives. It also excludes any transport charges invoiced separately by the producer. The measurement of output at basic prices makes value reflect better volume; b) Producer price is the basic price plus taxes on the output invoiced to the purchaser less subsidies receivable by the producer from the government; c) Purchasers’ price is the amount paid by the buyer for a unit of output less any taxes invoiced by the seller but deductible by the purchaser. It should be equal to the producer price plus transport costs and trade margins on products, which are not separately invoiced.2 2.27 Output at production costs. Output is recommended to be measured at production costs when products have no market price. Output at production costs is the sum of the following items: a) Intermediate consumption; b) Compensation of employees; 2 Separately invoiced transport costs are treated as a separate purchase of transport service.
  • 29. 22 c) Consumption of fixed capital (which is the cost of produced fixed assets used in providing services); d) Other taxes on production. 2.28. Figure F2.2 shows the relationship between basic price, producer price and purchasers’ price of a product in the market when it moves from the producer to the consumer at the end of the circulation process, either directly or through wholesale and retail channels. The basic price is the value of a product unit receivable by the producer, including subsidies on the product, but excluding the taxes paid on the product to be transferred to the government. The producer price is the price the producer charges at the time when it leaves the production unit (which includes taxes but less subsidies on the product). The purchasers’ price may go up as the product passes through many stages of circulation; each stage may incur taxes, subsidies, transport and trade margins. At each stage, a product has a different purchaser price from the point of view of the purchasers. Figure F2.3 illustrates the circulation of products from the producer to the consumer and the taxes and costs involved. FIGURE F2.2. RELATIONSHIPS BETWEEN BASIC, PRODUCER AND PURCHASERS’ PRICES Taxes less subsidies on products (including non-deductible value added taxes) on consumers Transport and trade margins Taxes less subsidies on products (including non- deductible value added taxes) on producers BASIC PRICE BASIC PRICE PRODUCER PRICE Basic price Producer price Purchasers’ price FIGURE F2.3. PROCESS OF GOODS CIRCULATION ON THE MARKET Producers of goods Wholesalers and retailers Consumers: other producers and final users. Government The payment of taxes, subsidies on products Transport and trade margins added Sphere where basic and producer prices apply Sphere where purchasers’ prices apply
  • 30. 23 3. VALUATION OF NATIONAL ACCOUNTS AGGREGATES 2.29. Goods and services may be valued differently, but the valuation should satisfy three principles: a) Uniformity in the elements when they have to be aggregated; b) Avoidance of double counting; c) Purchasers’ price = basic price + trade margins + taxes less subsidies on products. 2.30. In the equality of supply and uses of goods and services (see equation (2.1)), the total supply and the total uses are in purchasers’ prices and each aggregate is in purchasers’ prices or equivalents. The category “output + taxes less subsidies on products” is in fact output in purchasers’ prices, although the element “output” is in basic prices. “Output” in basic prices already includes the output of trade services, so that trade margins need not be included again in order to avoid double counting. However, taxes less subsidies on products must be added to obtain output in purchasers’ prices. 2.31. To conform with valuation principles, when output is measured at basic prices equations (2.3) and (2.6) can be specified more clearly as follows: (2.10) gross value added at basic prices = output at basic prices – intermediate consumption at purchasers’ prices (2.11) GDP = gross value added at basic prices + taxes less subsidies on products 2.32. To conform with valuation principles, when output is measured at producer prices equations (2.3) and (2.6) can be specified as follows: (2.12) gross value added at producer prices = output at producer prices – intermediate consumption at purchasers’ prices (2.13) GDP = gross value added at producer prices + import duties3 D. BASIC DEFINITIONS OF OTHER AGGREGATES OF GOODS AND SERVICES IN NATIONAL ACCOUNTS 1. DEFINITION OF OUTPUT 2.33. Output is the value of the goods and services which are produced by an establishment in the economy that become available for use outside that establishment4 (see table T.2.2, for type of producer and output in terms of market, non-market and for own final use). 3 Import duties have to be added since output at producer prices includes taxes on products only for domestic output and does not include import duties. 4 An establishment is a production unit of an enterprise, which is normally identified by the kind of product it produces and the ability to account for its cost of production. An enterprise may have more than one establishment. Products which are produced for intermediate consumption in the same establishment are not counted as products. Only those that are supplied to another establishment (even of the same enterprise) are counted as products.
  • 31. 24 2.34. Losses or wastage in production and distribution will not be counted as output. For example, electricity produced and lost in distribution is not part of output. 2.35. The output of goods and services is normally recorded when their production is completed. However, if it takes more than one accounting period to produce a unit of output, then work-in- progress must be recorded at the end of the accounting period. 2.36. Output of trade services is the margin realized from a good purchased for resale. It is equal to sale less the cost to repurchase the good sold at the time it is sold. 2.37. Output of a bank is its implicit and explicit service charges, which are only a small part of interest charges (see detailed definition in paras. 2.79-2.87 below) 2.38. Output of insurance or pension funds is the service charge, which is a small part of premiums or contributions paid (see detailed definition in paras. 2.79-2.87 below) 2.39. Non-market output, which is provided free or sold at economically insignificant prices, is measured at production costs (see paras. 2.29-2.32 above for a definition of how non-market output is valued). Non-market output includes those of the following: a) General government; b) Non-profit institutions serving households; c) Own-account construction (own account production means production for own use); d) Own-account research and development; e) Own-account software development. TABLE T2.2. TYPES OF PRODUCERS AND OUTPUT Market producers Producers for own final use Other non-market producers Include establishments in: Large corporations and Small unincorporated enterprises (may be owned by households) most of whose products is marketed Household unincorporated enterprises, which includes: Subsistence farmers etc. Households engaged in the construction of their own dwellings and other goods for own consumption) Include: General government Non-profit institutions serving households Market output Mostly Some (e.g., grains, vegetables, etc.) Some (e.g., fees paid for government services, sales of government’s publications) Output for own final use Some, e.g.: Own-account capital formation Own-account software development Research and development Output retained for final consumption by owners of unincorporated enterprises Mostly (e.g., produce of subsistence farmers) Some (e.g., government’s own capital formation) Typeofoutputproduced Other non- market output None None Mostly (e.g., free services provided by government and non-profit institutions serving households)
  • 32. 25 2. DEFINITION OF INTERMEDIATE CONSUMPTION 2.40. Intermediate consumption includes goods and services which are entirely used up by producers in the course of production to produce output of goods and services during the accounting period. 2.41. Durable goods which may be classified as capital goods since they are used as the tools of production over a number of years (saws, spades, knives, axes, hammers and screwdrivers etc.) may be included in intermediate consumption if their prices are below a certain low value. The criterion is normally decided by statistical office or tax authority, depending on the stage of economic development of the country. 2.42. Intermediate consumption excludes other production costs, such as labour cost, financial costs and production taxes. 2.43. The labour and financial costs and production taxes are costs to business firms but are treated in SNA as incomes generated for the economy in the production process. 3. DEFINITION OF FINAL CONSUMPTION 2.44. Final consumption includes goods and services which are used by households or the community to satisfy their individual wants and social needs. Thus, final consumption is broken down into: a) Final consumption expenditure of households; b) Final consumption expenditure of general government; c) Final consumption expenditure of non-profit institutions serving households. 2.45. For households, all consumed goods, whether durable (cars, refrigerators, air-conditioners etc.) or non-durable (food, clothes), are part of final consumption, with the exception of purchases for own-construction or improvements of residential housing, which are treated as part of gross capital formation. 2.46. Included in final consumption expenditure of households are: a) All goods and services bought for final consumption by households; b) All goods produced for own final consumption by households, including those goods and c) services produced by household enterprises and retained for final consumption; Domestic services produced for own final consumption by employing paid staff, such as servants, cooks, gardeners and chauffeurs; d) Services of owner-occupied dwellings (whose imputed values are equivalent market rentals); e) All goods and services acquired by households in barter transactions for final consumption; f) All goods and services received by households as payment in kind from producers; g) Expenditures incurred in “do-it-yourself” decoration, maintenance and routine repairs of own dwellings and personal goods; h) Payment to government units to obtain various kinds of licenses, permits, certificates, passports etc.
  • 33. 26 i) Explicit and imputed service charges on household uses of financial intermediation services provided by banks, insurance companies, pension funds etc. 2.47. Included in the final consumption expenditure of general government and non-profit institutions serving households are: a) Non-market output other than own-account capital formation, which is measured by production costs less incidental sales of government output; b) Expenditure on market goods and services that are supplied without transformation and free of charge to households (referred to by SNA as social transfers in kind). 4. DEFINITION OF EXPORTS AND IMPORTS OF GOODS AND SERVICES 2.48. Exports and imports between the domestic economy and the rest of the world are transactions between residents and non-residents of an economic territory (see figure F2.4). 2.49. A transaction of goods and services (sales, barter, gifts) from residents to non-residents is an export and from non-residents to residents is an import. A transfer of income of the same value must also be imputed. 2.50. Exports and imports exclude all transactions in land, buildings and non-movable non- produced assets, and in financial assets (stocks, bonds, money, monetary gold etc.) SNA takes an exception rule on land, buildings and non-movable non-produced assets since they are still used for production purposes in the domestic economy. Financial assets are neither goods nor services. 2.51. Exports and imports occur when there are changes of ownership between residents and non- residents, regardless of whether there are corresponding physical movements of goods across borders. However, there are three exceptions that require imputation of changes of ownership: (a) financial leasing, (b) deliveries between affiliated enterprises and (c) goods sent for significant processing to order or repairs. Goods bought from non-residents and sold to non-residents by commodity dealers within the same accounting period are not recorded as exports or imports. Residents and non-residents 2.52. An institutional unit, (a household, an enterprise, a non-profit unit etc.) is a resident unit when it has a centre of economic interest in the economic territory in question. To have a centre of economic interest in a territory is to have ownership of land or ownership of structures or to engage in production in a territory for a long period of time (at least one year). 2.53. Military personnel and civil servants, including diplomats employed abroad by an economic territory, are residents of the territory that employs them. 2.54. Students are residents of their country of origin, however long they study abroad. 2.55. International organizations are not considered residents of any national economy, but their workers are residents of the economy in which they are expected to have their abode for at least one year.
  • 34. 27 2.56. Owners of buildings and non-produced assets, such as land, sub-soil assets or legal constructs (leases etc.), even if they are not actually residents, are treated as residents of the economy since such assets remain in the economy and serve the production activities of the economy. Transactions involving them are not part of exports and imports. FIGURE F2.4. EXPORTS AND IMPORTS AS TRANSACTIONS BETWEEN RESIDENTS AND NON-RESIDENTS Valuation of exports and imports 2.57. Exports are valued free on board (f.o.b.) i.e., at the prices at the domestic customs frontier before being shipped out. They should by definition be equivalent to purchasers' prices since they include domestic transport and trade costs to bring the good to the ports, and also include taxes less subsidies on products paid by the purchasers or received by the producers. 2.58. Imports must also be valued f.o.b. but are valued at the prices at the foreign custom frontier. 2.59. Imports are normally valued cost, insurance, freight (c.i.f.), at the domestic custom frontier by customs. To derive imports f.o.b., cost of freight and insurance services between the two borders must be estimated and deducted from imports c.i.f. Freight and insurance services on imports may be provided by either residents or non-residents. Those provided by non-residents are imports but those provided by residents are domestic output. Imports f.o.b. avoid counting domestic output as imports and avoid double counting imported freight and insurance services since they are already included in data on imports of services. 5. DEFINITION OF GROSS CAPITAL FORMATION 2.60. Gross capital formation in SNA is the same as the concept of investment in capital goods used by economists. It includes only produced capital goods (machinery, buildings, roads, artistic originals etc.) and improvements to non-produced assets. Gross capital formation measures the additions to the capital stock of buildings, equipment and inventories, i.e., the additions to the capacity to produce more goods and income in the future. 2.61. Non-produced assets, such as land, natural resources and patented entities, may also be used as capital in an establishment or enterprise or the whole economy but are not part of the gross capital formation in SNA. 2.62. In business accounting, investment in capital goods may include acquisitions less disposals of non-produced assets (land, mineral resources etc.). At the national level, the inclusion or exclusion of Residents Non- residents Exports of goods and services Imports of goods and services
  • 35. 28 non-produced assets would not affect the value of investment in capital goods since the sale of a non- produced asset by one economic entity will be offset by a purchase of the same asset by another economic entity. Common usage of the term "investment" 2.63. In common usage (business and households), the concept of investment is very broad. It includes: a) Investment in produced and non-produced assets (i.e., patents, goodwill, natural resources); b) Investment in financial assets. Components of gross capital formation 2.64. Gross capital formation, which is a major factor in changing the values of non-financial assets in the economy, includes (see table T2.3 for the classification of assets and the effects of gross capital formation on assets): a) Gross fixed capital formation; b) Changes in inventories; c) Acquisition less disposals of valuables (such as jewelry and works of art). Gross fixed capital formation 2.65. Gross fixed capital formation includes: a) Acquisition less disposal of new or existing produced assets, such as dwellings, other building structures, machinery and equipment, cultivated assets (e.g., trees and livestock), mineral exploration, computer software, entertainment, literary or artistic originals, and other intangible fixed assets; b) Costs of ownership transfers on non-produced, non-financial assets, such as land and patented assets; c) Major improvements to produced and non-produced, non-financial assets that extend the lives of assets (e.g. reclamation of land from sea, clearance of forests, rock etc., draining of marches or irrigation of forests, and prevention of flooding or erosion); d) Acquisition can be in terms of purchase, own-account production, barter, capital transfer in kind, financial leasing, natural growth of cultivated assets and major repairs of produced assets; e) Disposal can be in terms of sale, barter, capital transfer in kind or financial lease. Exceptional losses, such as those due to natural disasters (fire, drought etc.) are not recorded as disposal. Changes in inventories 2.66. Inventories include: a) Materials and supplies; b) Work-in-progress (growing crops, maturing trees and livestock, uncompleted structures, uncompleted other fixed assets, partially completed film productions and software); c) Finished goods;
  • 36. 29 d) Goods for resale. TABLE T2.3. CLASSIFICATION AND FORMATION OF NON-FINANCIAL ASSETS Changes in the balance sheets Gross capital formation Types of non-financial assets Opening balance sheet Acquisition less disposal, cost of major improvements Cost of ownership transfers Consumption of fixed capital Other changes in balance sheet Closing balance sheet (1) (2) (3) (4) (5) (1)+(2)+(3) -(4)+ (5) Produced assets Produced fixed assets Tangible fixed assets Dwellings Other buildings and structures Non-residential buildings Other structures Machinery and equipment Transport equipment Other machinery and equipment Cultivated assets Livestock for breeding, dairy, etc. Vineyards, orchards and other plantations Intangible fixed assets Mineral exploration Computer software Entertainment, literary or artistic originals Other non-tangible fixed assets Inventories Materials and supplies Work in progress Finished goods Goods for resale Valuables Non-produced assets Not applicable Not applicable Tangible non-produced assets Land Subsoil assets Coal, oil and natural gas reserves Metallic mineral reserves Non-metallic mineral reserves Non-cultivated biological resources Water resources Intangible non-produced assets Patented entities Leases and other transferable contracts Purchased goodwill Other intangible non-produced assets
  • 37. 30 E. MEASUREMENT ISSUES 1. ESTIMATION OF MARKET OUTPUT FROM SALES 2.67. Output is valued as the product of the quantity of output and the price of one unit of the product at basic prices (excluding all product taxes and trade and transport costs to deliver the goods from producers to buyers). This method is applied to many crops or livestock. 2.68. However, quantity output normally cannot be directly obtained by asking producers, particularly in manufacturing and service industries, since they are only familiar with sales and cost of sales, which are recorded in their business accounts and normally called financial statements. 2.69. Output at basic prices is, in theory, computed as follows: a) Output = sales less sale taxes plus subsidies + change in inventory of finished and semi-finished goods; b) Change in inventory = closing inventory - opening inventory; c) Addition to inventory must be valued at the market prices at the time goods entered inventory; d) Withdrawal from inventory must be valued at the market prices at the time goods are withdrawn. TABLE T2.4. ESTIMATION OF OUTPUT FROM SALES: AN EXAMPLE Calculating operations T0 T1 T2 T3 Information given 1. Sales net of taxes and plus subsidies 80 120 272 2. Price index 100 125 200 3. Value of inventory at end of period (book value) 0 40 30 16 4. Change in inventory (book value) = (Ti – Ti-1) applied to line (3) 40 -10 -14 Derived data 5. Value of inventory at constant prices = Line (3)*100/ line (2) 0 40 24 8 6. Change in inventory at constant prices = (Ti – Ti-1) from line (5) 40 -16 -16 7. Change in inventory at current prices = Line (6) * line (2)/100 40 -20 -32 8. Output at basic price = Line (1) + line (7) 120 100 240 In the example, the estimation method provides an exact value of output, which is possible because the stock of physical inventory is assumed taken at the end of each period and revalued at the same time (line 3). In general, inventories are valued differently in business, accounting either by LIFO, FIFO or as above. Therefore, this Canadian method is only an approximation. See Links between Business Accounting and National Accounting, (United Nations publication, Sales No. E.00.XVII.13), chap. III. 2.70. The following approximate formula can be used to estimate change in inventory at current prices for computing output (see example in table T2.4): a) Deflate ending inventory by its appropriate price index; b) Calculate change in inventory at the base year price; c) Calculate change in inventory in current price by inflating the inventory at the base year price with the same price index.
  • 38. 31 2. CROP OUTPUT 2.71. The output of a crop is simply the product of the quantity of output and the unit price at basic prices when the growing and harvesting of crops occur during the same accounting period. 2.72. The output of a crop (or natural growth of cultivated assets) may be generated for the entire time span covering more than one accounting period from the time the crop is sown to the time it is harvested. To obtain the output for every accounting period, the harvested products less losses and wastes (i.e., finished products) must be allocated to each period on the basis of the share of actual costs (i.e., materials, services and labour) incurred during the period. Assuming that the costs incurred equally each month during the crop season and the total value of finished products is 100 for the case shown in table T2.5, the first year will be allocated 4/11 and the second year 7/11 of the finished products. The example assumes that prices do not change; otherwise, work-in-progress has to be revalued to current market prices. 2.73. The output of the first year is treated as work-in-progress to be entered into inventory (a part of gross capital formation). That inventory will have to be withdrawn after the crop is harvested the following year (negative change in inventory in gross capital formation). This example assumes there is no change in price. 2.74. The principle described above is not yet widely practiced. Most countries assign output and its associated costs to the time when crop is harvested. This latter practice is particularly common in the compilation of quarterly accounts. TABLE T2.5. ESTIMATION OF CROP OUTPUT: AN EXAMPLE First accounting year Second accounting year Crop sown Crop harvested -4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 Output (last 4 months) = 36.4 Change in inventory = 36.4 Output (first 7 months) = 63.6 Change in inventory = -36.4 3. LIVESTOCK OUTPUT 2.75. The formula for estimating the output of livestock in general is based on the following relationship: Output of live animals + imports = animals slaughtered or died of natural causes + exports + change in animal stock 2.76. Animals have to be divided into two major types: a) Those that are treated as fixed assets; such as adult dairy animals, animals raised for their wool, breeding animals or draught animals more than one year old; b) Those that are treated as work-in-progress, such as those reared for slaughter or young animals (one year old and less) reared to be used as fixed assets; c) Output can be first estimated in terms of number and weight and then valued at basic prices. 2.77. For more detail, see 1993 SNA, paras. 6.94-6.100; and Food and Agriculture Organization of the United Nations, A System of Economic Accounts for Food and Agriculture (Rome, 1996).
  • 39. 32 4. OUTPUT OF WHOLESALE AND RETAIL SERVICES 2.78. Output of wholesale and retail services, which is called trade margin, is the difference between sale less the cost to repurchase the good sold at the time it is sold (see table T2.6). TABLE T2.6. OUTPUT OF WHOLESALE AND RETAIL SERVICES: AN EXAMPLE T-3 T-2 T-1 T Product A was bought at 100 Product A was sold at 120 Market value if the product sold is to be restocked: 110 In theory: output at basic price = trade margin = 120 – 110 = 10; output is at basic price since sale is normally recorded net of taxes on products invoiced to purchasers. In practice: trade margin = 120 – 100 = 20 if inventories are not properly valued (see paras. 2.67-2.70 above on estimation of market output from sales; the difference of 10 is called holding gain, which is not part of output. 5. OUTPUT OF FINANCIAL INTERMEDIATION SERVICES 2.79. Output of financial intermediation companies in banking, insurance services and pension fund services cannot be directly measured since such companies do not normally charge their customers for their services except for some minor incidental services. Banks earn their main source of income by the difference between the interest earned by providing loans and the interest paid on deposits. Pension funds and insurance companies accept contributions and invest them in order to pay their customers. Their output has to be measured indirectly. Output of banking services 2.80. Output of banking services is measured as follows: output = explicit service charges + implicit service charges = explicit service charges + property income receivable (excluding those receivable on own funds) – interest payments. 2.81. The output of central bank may be calculated by production costs if the output calculated by the above formula fluctuates unreasonably as a result of its monetary policy. Output of insurance services 2.82. Output of insurance services is measured as follows: Output = total actual premiums earned (excluding prepayments of premiums) plus total premium supplements (equal to the income gained from the investment of the insurance technical reserves, which also include prepayments, reserves for pending and unexpected claims) minus total claims due (including outstanding claims that are not yet paid) plus change in the actuarial reserves and reserves for with-profits insurance 2.83. The output of insurance services is very likely to fluctuate widely over the years due to the movement of claim payment. Some countries have introduced the five-year moving average, taking the average of the current year and the preceding four years to reduce the up-and-down of output and
  • 40. 33 thus value added. When claims are too high, particularly when catastrophic accidents happen, output may become negative and claims may have to be spread to future years in the calculation of output and value added. The international organizations are studying the issues in order to come up with a more appropriate solution. However, one possibility is to measure output of only catastrophic accidents by production costs. Output of pension fund services 2.84. Output of pension fund services is measured as follows: output = total actual pension contributions plus total supplementary contributions (equal to the income from the investment of the pension funds technical reserves minus benefits due plus change in the actuarial reserves Output of other financial services 2.85. Output of foreign exchange and securities dealers is measured by trade margins (the difference between the purchasers’ price of the dealer less the purchasers’ price for the buyer), but holding gains due to price fluctuation must be excluded (see output of wholesale and retail trade services). 2.86. Output of other financial intermediation services, such as security, loan and insurance brokers and advisers on investment, is measured by fees or commissions charged to customers. 2.87. Moneylenders who lend their own funds do not generate output since they do not engage in financial intermediation. 6. ESTIMATION OF INTERMEDIATE CONSUMPTION FROM PURCHASE OF MATERIALS 2.88. The use of goods in production, which is part of intermediate consumption, cannot be obtained directly by asking producers. Business accounts kept by the producers record only purchases of materials and inventories of materials. The uses of goods in production can be obtained by the following formula: uses of materials = purchases of materials - change in inventory of materials 2.88. For approximating change in inventory, the method used for output should be applied. 2.90. For a detailed discussion of the treatment of inventories in SNA see Handbook of Input-Output Table Compilation and Analysis (United Nations publications, Sales No. E.99.XVII.9) chap. V, appendix A.

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