An Introduction to System of National Accounts - Basic Concepts

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1 An Introduction to System of National Accounts - Basic Concepts Lesson I: Lecture 1 Introduction Lesson I Fifth Basic e-learning Course on 2008 System of National Accounts September - November 2014 e 2008 System of National Accounts May 2014 July

2 Contents 2 Introduction System of National Accounts Economic Assets Economic Flows Accounting Structure Transactions

3 Lesson Objectives 3 At the end of this lesson the participant will be able to: Apply the SNA2008 in the compilation of economic statistics Describe all accounts of the SNA 2008 and respective balancing items Distinguish various economic transactions and their valuation

4 Introduction System of National Accounts SNA provides a framework for systematic presentation of estimates of macroeconomic aggregates relating to national income and wealth. National accounts consist of a systematic presentation of estimated money value of these and other such macroeconomic aggregates relating to national income and wealth. 4 4

5 Introduction Framework The SNA is founded on the macro-economic framework that gives a set of identities relationships between different flow and stock variables. These identities form the basis of the SNA sequence of accounts consisting of measures of economic flows and stocks in monetary values. A set of standard procedures of valuation is recommended for attributing monetary values to flows and stocks. 5 5

6 Introduction System of National Accounts- Features Fully integrated accounting system with accounting rules The total economy Institutional sectors Sub-sectors Transaction accounts Balance sheets Transaction accounts and balance sheets are integrated, together they constitute a closed system 6 6

7 SNA: Main Features Transactions Production Income distribution Use of income Stocks Saving + Capital transfers Other Flows Stocks Opening balance sheet Capital formation Revaluatio n Closing balance sheet Nonfinancial assets Net lending Nonfinancial assets Financial assets and liabilities Financial transactions Other volume changes Financial assets and liabilities

8 Introduction SNA - coordinating conceptual framework 8 8

9 Introduction SNA Main Uses and Users Economic policy makers Monitoring the economy Forecasting and simulation International comparisons, contributions to international organizations, foreign aid Business Financial markets Market research Scientific researchers, teachers General public Statisticians 9 9

10 Introduction System of National Accounts-More than GDP GDP and so much more! All flows within a time period between the economic agents constituting the national economy and their stocks. Framework for many economic statistics System of concepts, definitions, classifications, and accounting rules used as standards, or framework, for economic statistics in general 10 10

11 Introduction National Accounts scope and coverage National Accounts cover all economic flows like all sales and purchases of goods and services for consumption investment for further production purchase of services of labour and assets like land, buildings, machinery and equipment. all other transactions involving monetary/non-monetary payment, including transfers and purchase and sale of financial assets. and stocks of (economic) assets and liabilities

12 Presentation of National Accounts National accounts data can be presented as: Monetary values, Indices and Growth rates T-accounts and matrix presentation of accounts - Supply and use tables and Input-output tables Tables with time series Graphs PFTAC NAS/L-1: 12

13 Economic Assets Economic Assets In national accounts only the stocks of economic assets are included. National accounts considers only those resources that have money value. Human resources is not considered economic assets. National accounts do not encompass all natural resources it includes only those which have ownership rights. 13

14 Economic Assets Economic Assets - Definition Store of value (money value or exchange value) over which ownership rights are enforced, individually or collectively (like by government or community) and from which economic benefits can be derived by holding it or using it in a production process. 14

15 Economic Assets Economic Assets - Classification 15

16 Economic Assets Household durables - Excluded Goods held for consumption by the households are not treated as economic assets. Though with well-defined ownership, these assets do not generate economic benefits are not used for productive purposes. Thus, these do not qualify as economic assets. For example, refrigerators, other electrical equipments, furniture and automobiles held by the households for their own use are not treated as economic assets in the SNA. Whereas automobiles owned by a company or refrigerators used by restaurants are treated as assets in the SNA. 16

17 Economic Assets Examples Stock of grains held by households for its own consumption is not treated as assets, since no economic benefit is derived by using it in a production process. Stock of grains held by a trader or rice milling factory is treated as produced assets, since it is used for further production. 17

18 Economic Flows Economic Flows All that bring about changes in stock of economic assets are considered as economic flows An economic flow reflects a) creation, transformation, exchange, transfer or b) extinction or emergence of economic value or c) change in composition or value of stock of economic assets/liabilities. The flows in category (a) are called transactions ; those in category (b) volume change and those in category (c) are caused by changes in level and structure of prices 18 18

19 Circular Flow of Income

20 Economic Flows Economic Flows - classification Economic flows transactions other economic flows exchange: with counter part receipts for payments transfers: without counter part reciepts due to change in level and structure of prices other changes in volume 20

21 Economic Flows Two Main classes of Economic Flows Transactions interaction by mutual agreement in involving goods and services of economic value between institutional units Two kinds: a. With counterpart exchange b. Without counterpart transfers within institutional unit operating in different capacities Other flows change in value of assets and liabilities without transaction caused by volume change level and structure of price 21 21

Economic Flows Links between Flows and Stocks All economic flows bring about changes in the stocks of assets & liabilities. The SNA provides for recording aggregates of all the flows in the accounts.

22 Economic Flows Links between Flows and Stocks All economic flows bring about changes in the stocks of assets & liabilities. The SNA provides for recording aggregates of all the flows in the accounts. The stocks are recorded in the balance sheets. The net effect of all the flows are reflected as changes between the closing balance sheet and opening balance sheet. Stock of assets and liabilities (1 January 2008) Economic flows: Transactions Other flows (1 Jan - 31 December 2008) Stock of assets and liabilities (31 December 2008) 22 22

23 The Main Structure of the Accounts Current Accounts Accumulation Accounts Balance Sheets Also: Several sub-accounts Goods and Services Account Rest of the World Accounts PFTAC NAS/L-1: 23

24 Current Accounts I Production Account Describes production process II Distribution and Use of Income Accounts II.1 II.2 Generation of Income Account Describes components of value added Allocation of Primary Income Account Describes income allocation on the basis of claims II.3 Secondary Distribution of Income Account Describes reallocation through govt. and insurance II.4 Use of Disposable Income Account Describes use of disposable income/saving II.4.b Use of Adjusted Disposable Income Account Describes use of adjusted disposable income/saving

25 Accumulation Accounts III.1 Capital Account Describes capital formation III.2 Financial Account Describes financial transactions III.3.1 Other Changes in Volume of Assets Describes impact of non-economic events III.3.2 Revaluation Account Describes changes in value resulting from price changes PFTAC NAS/L-1: 25

26 Balance Sheets Balance Sheets Show the value of the stock of assets and liabilities at the beginning and end of an accounting period Balancing item: Net Worth PFTAC NAS/L-1: 26

27 Accounts and Balancing Items Production Account Generation of Income Account Allocation of Primary Income Account Secondary Distribution of Income Account Use of Disposable Income Account Capital Account Financial Account Value Added/GDP Operating Surplus and Mixed Income Balance of Primary Incomes National Income Disposable Income National Disposable Income Saving Net lending/net Borrowing Net Lending/Net Borrowing

28 Economic Agents National accounts comprise all transactions within a time period between the economic agents constituting the national economy and their stocks.. Grouped by: Institutional Units and Sectors, Establishment and Kind of Activity Units, and Industry/Economic Activities PFTAC NAS/L-1: 28

29 Main Institutional Sectors Non-financial corporations Financial corporations General government Non-profit institutions serving households Households And the Rest of the World (ROW)

30 Market Non-market Distinction Market Producers Non-market Producers Market Production Non-market Production Production for Own Consumption Other Nonmarket Production 30

31 National Economy National accounts comprise all transactions within a time period between the economic agents constituting the national economy and their stocks. The residency principle decides what agents belong to the national economy! PFTAC NAS/L-1: 31

32 Domestic Economy How do we distinguish the national economy from the Rest of the World? on the basis of the residence of institutional units, Not on currency or nationality Therefore, a Resident unit is: An institutional unit with a center of economic interest in the economic territory of the country PFTAC NAS/L-1: 32

33 Domestic Economy Economic territory: The most commonly used concept of economic territory is the geographic area under the effective control of a single government. Center of economic interest indicated by: place of production activity for a long or indefinite period of time, generally over one year dwelling SNA 2008 update: center of predominant economic interest PFTAC NAS/L-1: 33

34 Flows and Stocks FLOWS Creation, transformation, exchange, transfer, extinction of economic value due to transactions other events Refer to a period of time Are recorded in the accounts PFTAC NAS/L-1: 34

35 Flows and Stocks Economic Flows - classification Economic flows transactions other economic flows exchange: with counter part receipts for payments transfers: without counter part reciepts due to change in level and structure of prices other changes in volume 35 35

36 Most flows arise from transactions Transactions can be: Supply (domestic production, imports) Use (consumption, capital formation, exports) Distributive (e.g., compensation of employees, interest, dividends) Redistributive (e.g., taxes on income & wealth, social security payments) Financial (e.g., deposits, shares, loans) PFTAC NAS/L-1: 36

37 But some flows do not derive from transactions Other flows can affect: Volume (e.g., economic appearance of assets, depletion of natural assets, catastrophic losses) Prices (e.g., nominal holding gains or losses) Classification (e.g., demonetizing gold) PFTAC NAS/L-1: 37

38 Flows and Stocks STOCKS: Positions in, or holdings of assets and liabilities Refer to a point in time Are recorded on the balance sheets PFTAC NAS/L-1: 38

39 Stocks: Assets and Liabilities ASSETS: An entity functioning as a store of value over which ownership rights are enforced, and from which economic benefits may be derived by its owner by holding it, or using it, over a period of time. PFTAC NAS/L-1: 39

40 Stocks: Assets and Liabilities Include Computer software and databases Known workable mineral deposits (used in economic activity, created through mineral exploration) Research and development (as capitalized intellectual property products or IC) Exclude: Human capital Environmental assets not used in economic activity PFTAC NAS/L-1: 40

41 CLASSIFICATION OF ASSETS Non-financial assets Produced assets Fixed assets Tangible fixed assets Cost of ownership transfer of non-produced assets Intellectual property products Inventories Valuables Non-produced assets Natural resources Contracts, leases and licences Goodwill and marketing assets Financial Assets PFTAC NAS/L-1: 41

42 LINKS BETWEEN STOCKS AND FLOWS For any transaction that involves assets or liabilities an entry in the accumulation accounts must be made. Accumulation entries plus the entries made for the other flows fully explain the differences between the opening and closing balance sheets. PFTAC NAS/L-1: 42

43 LINKS BETWEEN STOCKS AND FLOWS Capital account transactions affect non-financial assets Financial account records the creation, exchange, and extinction of financial assets Other changes in assets Other changes in volume of assets accounts Revaluation accounts PFTAC NAS/L-1: 43

44 Links between Flows and Stocks All economic flows bring about changes in the stocks of assets & liabilities. The SNA provides for recording aggregates of all the flows in the accounts. The stocks are recorded in the balance sheets. The net effect of all the flows are reflected as changes between the closing balance sheet and opening balance sheet. Stock of assets and liabilities (1 January 2013 Economic flows: Transactions Other flows (1 Jan - 31 December 2013) Stock of assets and liabilities (31 December 2013) 44 44

45 Accounting Rules: Accounting rules are needed to decide: What transactions and stocks are included How they are included Accounting rules are governed by Economic relevance Consistency International and inter-temporal comparability Not by Feasibility, moral considerations or laws PFTAC NAS/L-1: 45

46 Nature of Accounting Rules: What flows and stocks to include Types of transactions Classification of assets How entries are made in the accounts Time and basis of recording Consolidation Netting PFTAC NAS/L-1: 46

47 What stocks and flows are included in the national accounts? Main guidance for transactions is the PRODUCTION boundary, which includes in the national accounts All goods Services supplied to other units Own-account services employing paid domestic staff Services of owner-occupied dwellings PFTAC NAS/L-1: 47

48 What stocks and flows are included in the national accounts? Main guidance for stocks is the ASSET boundary, which includes holdings that Are owned (individually or collectively) From which economic benefits are derived by using or holding them over a period of time The production boundary and the asset boundary are closely linked PFTAC NAS/L-1: 48

49 Valuation of Transactions 49

50 Types of Transactions Transactions can be: Monetary versus non-monetary Internal versus external Bilateral versus unilateral PFTAC NAS/L-1: 50

51 Time and Basis of Recording Cash Due for payment / Accrual PFTAC NAS/L-1: 51

52 Valuation: In General General principle is market price Amount that a willing seller will accept from a willing buyer If no market price is available: Price comparable product Cost (plus) Discounted future earnings PFTAC NAS/L-1: 52

53 Valuation: Changes in Assets and Liabilities Replacement cost Historic prices Value of Transactions to Exclude Holding Gains and Losses! PFTAC NAS/L-1: 53

54 WHAT ARE MARKET PRICES? Different perception of prices for same transactions between users and producers Differences relate to Trade and transport margins Taxes and subsidies on products In 2008 SNA two main prices Basic prices Purchasers' prices And to meet data problems also Producers' prices PFTAC NAS/L-1: 54

55 Valuation: Taxes and Subsidies on Production and Imports Taxes and subsidies on products Value added type taxes (V.A.T.) Taxes on imports/exports (duties) Other (e.g. excise, sales tax) Other taxes and subsidies on production PFTAC NAS/L-1: 55

56 Valuation: Definitions of Market Prices The basic price: Is the amount receivable by the producer from the purchaser For a unit of a good or service produced Less any tax payable, plus any subsidy receivable on that unit As a consequence of its production or sale It excludes any transport charges invoiced separately by the producer PFTAC NAS/L-1: 56

57 Valuation: Definitions of Market Prices (continued) The producers price (net of deductible V.A.T.): is the amount receivable by the producer from the purchaser for a unit of a good or service produced less any V.A.T. invoiced to the purchaser Excludes any transport charges invoiced separately by the producer Excludes taxes (other than V.A.T.) on products payable/receivable by wholesalers and retailers) Includes taxes (other than V.A.T.) less subsidies on products payable/receivable by their producers PFTAC NAS/L-1: 57

58 Valuation: Definitions of Market Prices (continued) The purchasers price (net of deductible V.A.T.): is the amount paid by the purchaser excluding any deductible V.A.T. (or similar deductible tax) The purchasers price includes any transport charges paid separately by the purchaser to take delivery at the required time and place PFTAC NAS/L-1: 58

59 59 End of Lesson I

14 October 2013 Rev 25 SNA BASIC CONCEPTS (BASED ON SNA 2008)

14 October 2013 Rev 25 SNA BASIC CONCEPTS (BASED ON SNA 2008) CONCEPT Accumulation Asset Assets (produced) Assets (nonproduced) Asset (fixed) goods and services are used for the three economic activities