Introduction to National Accounts II

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1 Lesson 2: Introduction to National Accounts II ESTP - European Statistical Training Programme National Accounts - Basic Course Helsinki April 2012 Katri Soinne Senior Statistician The System of National Accounts... describes all the economic activities iti in the economy is based on the theory of economics includes a lot of definitions and agreements gives a possibility to comparisons between years and countries does not describe well-being 2 1

2 Content Production boundary Statistical units and their grouping Centre of economic interest; resident vs. non-resident Flows and stocks Basic equations Supply: GDP and three approaches for calculation Demand: consumption, investments, net exports Rules of accounting Sequence of accounts; balancing item 3 The circular flow of income in a closed system Production Primary income Commodity expenditures Income redistribution ESTP National Accounts - Basic Course (Lesson 2) April

3 Definition of Production An activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital and goods and services to produce outputs of goods and services. Production does not cover purely natural processes without any human involvement or direction, (ESA ) Same definition in ESA Production Boundary Includes all individual or collective goods and services that are supplied to the market as well as the own-account production of all goods for own final consumption or gross fixed capital formation Case: forests - trees and other products Case: housing Defines the activities which are counted in NA Hidden economy & illegal activities 6 3

4 Exercise 1: Production or not in SNA (part I) YES A) Growing potatoes to be sold to the factory.... B) Growing potatoes for you own use... C) Natural growing of Baltic herrings at sea..... D) Growing of trout at a trout farm E) Selling bier at the restaurant with a receipt. F) Selling bier at the restaurant without recording it... G) Polluting the environment..... H) Gathering mushrooms in the woods.. I) Smuggling of alcohol or tobacco... NO 7 Statistical units and their grouping: two types of units Institutional units and sectors --> in order to describe income, expenditure, financial flows and balance sheets <-- economic entities having certain rights and possibilities and making their own decisions Local kind-of-activity units and industries --> in order to describe processes of production and for input-output analysis; local KAUs are grouped into industries on the basis of their activity <-- unit/ producer/ location/ activities and products 8 4

5 ISIC and NACE UN: ISIC (International ti Standard d Industrial Classification) EU: NACE (European Classification of Economic Activities) National level: National versions of NACE Updates needed every now and then: latest from The classification is hierarchical and coded (sections - divisions - groups - classes) Units having similar features make up an industry (production process, goods and services used in process, produced goods and services) 9 Institutional unit and local kind-of-activity unit (LKAU) One institutional unit contains one or more KAUs A local KAU belongs to one and only one institutional unit Institutional unit A Institutional unit B LKAU 1 LKAU 2 LKAU

6 Homogeneous unit An analytical unit of production, not observable in practice (except when a local KAU is producing only one product) Defined as covering no secondary activities Used in input-output tables 11 Statistical units and their grouping: two types of units Industry/ Sector S11 S13 S Animal production X X 13 Manufacture of textiles X 41 Construction of buildings X X X 55 Accomodation X X 84 Public administration X 862 Medical and dental practice activities 97 Activities of households as employers of domestic personnel X X X X 12 6

7 Exercise 2: industries (LKAUs and institutional units) Unit 1: Potato farmer Unit 2: Trout farmer Unit 3: Frozen French Fries Factory (in two different locations) Unit 4: Company producing bikes and televisions (bikes 45% and televisions 55% of value added) Unit 5: Restaurant Unit 6: Gas-station with cafe (gas 25% and cafe 75% of value added) NACE (3-digit) of LKAU(s) NACE (3-digit) of institutional unit / / Exercise 2: industries (LKAUs and institutional units) Unit 7: Bank (part of bigger corporation) Unit 8: Insurance company Unit 9: Embassy of Ever-Ever-land Unit 10: University Unit 11: Riding school Unit 12: Health care centre Unit 13: Choir NACE (3-digit) of LKAU(s) NACE (3-digit) of institutional unit

8 Centre of Economic Interest One of the basic principles i of the SNA and ESA --> defines whose activities are counted for the national economy in a country Unit has a centre of economic interest in a country when a unit engages in economic activities for one year or more OR when a unit carries out a construction activity in a country for a period of less than one year if the output is gross fixed capital formation 15 Resident - non-resident - notional resident A unit is resident in a country when it has a centre of economic interest on the territory of that country Special cases: airplanes, international organisations,... Also treated as institutional units (notional residents): those parts of non-resident units which have a centre of economic interest in a country non-resident units in their capacity as owners of land or buildings on the economic territory of the country 16 8

9 Total economy and the rest of the world Total economy comprises of all resident units (incl. notional) Resident units engage in transactions with non-resident units external transactions in the rest-of-the world account Made from the point of view of the rest of the world (except exports and imports) 17 Exercise 3: resident/ non-resident/ notional resident Additional information Res sident Non n- resid dent Noti ional resid dent Unit 1: Potato farmer Unit 2: Trout farmer Unit 3: Frozen French Fries Factory (in two different locations) Unit 4: Company producing bikes and televisions (bikes 45% and televisions 55% of value added) Unit 5: Restaurant Unit 6: Gas-station with cafe (gas 25% and cafe 75% of value added) Travelling abroad one a year for vacation Never-Never-landish, foreign trade with Ever-Ever-land Exporting to other countries Foreign affiliate (residency as a institutional unit) Employing immigrants Accepting all international credit cards 18 9

10 Exercise 3: resident/ non-resident/ notional resident Additional information Re esident No onsident re No otional re sident Unit 7: Bank (part of bigger corporation) Unit 8: Insurance company Unit 9: Embassy of Ever-Ever-land Unit 10: University Unit 11: Riding school Unit 12: Health care centre Unit 13: Choir Unit 14: Household Selling also foreign money Selling also travel insurance Based in Never-Never-land Having foreign students Some of the horses brought abroad Serving tourists, too Performing also abroad From Never-Never-land, owning a cottage in Ever-Ever-land 19 Flows and stocks Two basic kinds of information in the system: stocks: holdings of assets and liabilities at a point of time --> recorded in balance sheets flows: reflect creation, transformation, exchange, transfer or extinction of economic value --> recorded in all other accounts of the system --> two kinds of economic flows: transactions other changes in assets 20 10

11 Basic equations The basic idea: supply and demand are equal GDP + M = C + G + I + X <=> GDP = C + G + I + (X - M) Also: output + import = IC + C + G + I + X Production = Income = Expenditure Definitional equations: transaction ti identity (for transactions ti between units): total uses = total resources budget identity (for sectors and units): total uses = total resources 21 Gross domestic product (GDP) describes the value of production (=value added) d) includes the production of domestic production units includes taxes and subsidies on production also includes the hidden economy should also include illegal activities is counted both at current price and at fixed price does not include household production is one of the most important economic indicators and very widely used in comparisons (GDP/capita) 22 11

12 Gross domestic product (GDP), cont d Three methods for estimation A: production approach = output - intermediate consumption B: income approach = compensation of employees + gross operating surplus (+ net taxes on production) Production C: expenditure approach = final consumption expenditure + gross capital formation + exports - imports inside one country 23 Gross national income (GNI) = gross domestic product + primary income received from the rest of the world - primary income paid to the rest of the world Primary income wages and salaries, social contributions interest, dividends taxes on production and imports subsidies Income one population Used in the EU context 24 12

13 Output Output = value of produced commodities (=goods and services) during the accounting period Types of output: market output non-market output output produced for own final use other non-market output 25 Intermediate consumption Intermediate t consumption = value of goods and services used as inputs in the production process (excluding fixed assets) Division: FISIM other intermediate consumption Examples: raw materials, semi-finished goods, fuels and energy, small tools, purchased services, repairs and maintenance 26 13

14 Value added (gross) = difference between output t and intermediate t consumption = income generated with production = compensation of employees wages and salaries social contributions + operating surplus and mixed income + consumption of fixed capital 27 Consumption of Fixed Capital (CFC) In the system most of the time the difference between gross and net concepts is the consumption of fixed capital CFC is a cost for using fixed capital CFC is a cost in production account and a resource in accumulation account CFC has an impact on value added in the production accounts of non-market producers CFC has an impact on operating surplus/ mixed income of market producers CFC is an imputed transaction 28 14

15 Stiglitz-Sen Commission: Net Concepts NDP instead of GDP: difference is the depreciation of capital goods (CFC) Changes in the structure of production CFC does not inclued running out of scarce natural resources nor degradation in quality of the environment Net national disposable income there might be a big difference between income of the citizens and measures of domestic production 29 Exercise 4: Production or not in SNA (part II) YES J) You are eating at a restaurant.... K) You are preparing a meal for your family.. L) You are cleaning your house.. M) You are hiring a cleaner for your house. N) You are cleaning the house of your mother-in-law.. O) You are hiring a cleaner for your mother-in-law... P) You are painting the outside of your home. Q) You are painting the inside of your home... R) You are hanging wallpaper at your home.. NO 30 15

16 Market producers Price of sold products covers the production costs (50% rule) => market output by market producers Counting from top to bottom - starting with output, ending with operating surplus/ mixed income: output - intermediate consumption = value added (gross) -CFC = value added (net) - compensation of employees - taxes + subsidies = operating surplus/ mixed income 31 Market producer: example Output = 120 Market output 100 Output for own final use 20 Intermediate consumption 55 Value added, gross = 65 Cosumption of fixed capital 5 Value added, net 65 5 = 60 Wages and salaries 40 Operating surplus/ mixed income =

17 Non-market producers Products are free or the price does not cover the expenses Different valuations Counting from bottom to top: output = sum of costs (no operating surplus/ mixed income) compensation of employees + taxes - subsidies = value added (net) + CFC = value added (gross) + intermediate consumption = output General government and non-profit institutions 33 Non-market producers: example Output = 100 Market output/ t/ sales of non-market ouput 15 Output for own final use 5 Other non-market output = 80 Intermediate consumption 40 Value added, gross = 60 Consumption of fixed capital 10 Value added, net = 50 Wages and salaries 50 Operating surplus/ mixed income

18 Final expenditure: Consumption (C + G) Final consumption expenditure: Private consumption Actual final consumption: Individual consumption Government consumption Collective consumption Final consumption expenditure = Actual final consumption Actual individual consumption is used for international comparisons 35 Final expenditure: Gross capital formation (I) Gross fixed capital formation (investments) t acquisition less disposals of fixed assets SNA2008/ ESA2010: military equipment special attention: delineation with intermediate consumption Private/ government Changes in inventories Valuables 36 18

19 Final expenditure: Net exports = export - imports (X - M) Transactions in goods and services exports: from residents to non-residents imports: from non-residents to residents Criterion: change of ownership (not crossing the border) Some agreed specialities: goods and services while travelling significant processing 37 Exercise 5: IC or GFCF or consumption? Action Intermediate Final Gross fixed consumption consumption capital formation Potato farmer buys pesticides Mr Smith buys pesticides for his garden Restaurant buys potatoes Mrs Smith buys potatoes for her family Ms Williams buys a car for herself A restaurant buys a car for the company Mr Brown drives the car owned by restaurant, restaurant pays Police keeps an eye on demonstration 38 19

20 Exercise 5: IC or GFCF or consumption? Company buys tickets to a concert for it s customers You buy tickets to the same concert for the rest of your family Government is building a library Library is buying books to be borrowed You are buying old, removed books from library sale You are buying materials to paint your home (inside) Company is buying materials to paint inside of the building Company is buying materials to paint outside the building Intermediate Final Gross fixed consumption consumption capital formation 39 Exercise 6: GDP in three approaches Four different industries i in Ever-Ever-landE Amount of units in each industry: Industry A: ten units Industry C: two units Industry O: five units Industry P: one unit Figures are given as average per unit in each industry (so first calculate the figures for different industries and then for the whole economy) 40 20

21 Exercise 6: GDP in three approaches Market output/producer: income covers at least 50% of costs, calculated from the top to the bottom Non-market output/producer: income does not cover costs, calculated from the bottom to the top (value of output = sum of costs) Based on an assumption: non-market producers do not have any operating surplus/ mixed income Other non-market production (= output - market production - production for own final use - sales of non-market products) is final consumption Final expenditure includes net exports 41 Exercise 6: GDP in three approaches Industry A Per Per in- Industry C Per Per in- unit dustry unit dustry Imports of raw materials 40 Purchase from industry A 210 Wages and salaries 12 Wages and salaries 400 Sales of products to industry C Sales of products to industry O Sales of products to industry O Sales of products to industry P Sales to consumers 150 Export

22 Exercise 6: GDP in three approaches Industry O Per Per in- Industry P Per Per in- unit dustry unit dustry Purchase from industry A 22 Purchase from industry C Purchase from industry C 40 Purchase from industry O Wages and salaries 15 Wages and salaries Sales of products to industry P Exercise 6: GDP in three approaches Industry A Uses Resources Imports 400 Sales to industry C 420 Wages and salaries 120 Sales to industry O 110 Profits 10 Total 530 Total

23 Exercise 6: GDP in three approaches Industry C Uses Resources Purchase from industry A 420 Sales to consumers 300 Wages and salaries 800 Sales to industry O 200 Profits 100 Sales to industry P 280 Exports 540 Total Total Exercise 6: GDP in three approaches Industry O Uses Resources Purchase from industry A 110 Sales to industry P 80 Purchase from industry C Wages and salaries Other non-market production 305 Profits -- Total 385 Total

24 Exercise 6: GDP in three approaches Industry P Uses Resources Purchase from industry C 280 Other non-market production 410 Purchase from industry O 80 Wages and salaries 50 Profits -- Total 410 Total Exercise 6: GDP in three approaches Approach A: Production Industry A Industry C Industry O Industry P = = = = 50 GDP =

25 Exercise 6: GDP in three approaches Approach B: Income Industry A Industry C Industry O Industry P = = = = 50 GDP = Exercise 6: GDP in three approaches Approach C: Expenditure Industry A Industry C Industry O Industry P = = GDP =

26 Rules of accounting of the system Double entry / quadruple entry: each transaction ti must be recorded twice - in practice recorded four times! Valuation: flows and stocks are measured at their exchange value, i.e. the value at which they are, or could be, exchanged for cash Imputing: the system includes both actual and imputed transactions 51 Rules of accounting, cont d Time of recording: accrual basis = when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled Consolidating: elimination of transactions between units in the same (sub)sector from both uses and resources or from assets and liabilities Netting: elimination of the same kinds of transactions for a unit (sales and acquisitions, etc.) 52 26

27 Sequence of Accounts Basic accounts the national accounts: Production account Distribution and use of income accounts Accumulation accounts Balance of payments account (rest of the world) 53 The Balancing Item Accounts balance out, either because of the definitions iti used or because of the balancing item Balancing item is calculated based on existing information and the theory of economics carries the system forward is an interesting indicator as such 54 27

28 Uses Account X: X = Account X+1: 20 Y = Resources Account X: Account X+1: X = The quality of the national accounts? Meaningful aggregation Proper level of consolidation Double-entry bookkeeping Cross-checking the source statistics Well-being Delineation with reality? 56 28

Jean Monnet Chair. Small Area Methods for Monitoring of Poverty and Living conditions in EU (SAMPL-EU)

Jean Monnet Chair. Small Area Methods for Monitoring of Poverty and Living conditions in EU (SAMPL-EU) Jean Monnet Chair Small Area Methods for Monitoring of Poverty and Living conditions in EU (SAMPL-EU) II.1. Income, Consumption and Poverty in the European Statistical System Luigi Biggeri Outline 1. Some