Introduction to the SNA 2008 Accounts, part 1: Basics 1

Introduction to the SNA 2008 Accounts, part 1: Basics 1 Introduction This paper continues the series dedicated to extending the contents of the Handbook Essential SNA: Building the Basics 2. The aim of the series is to treat topics in the Handbook in more detail. Also, it can include topics not in the Handbook, but related to it. The choice of such topics will be based on feedback from users of the Handbook, if available. The aim of this paper is to introduce the main sequence of accounts of SNA 2008. Even countries in the pre-sna phase will need to have a good understanding of this accounting system, since it will be an important guiding factor in the design and implementation of the statistical infrastructure on which the following SNA implementation milestones will be based 3. Also, the task of compiling accounts for the country and for the Rest-of-the-World (ROW) is part of the Minimum Requirement Data Set (MRDS), the first data set that a country must have before it can claim to have implemented SNA 4. Another reason for devoting this paper on the SNA sequence of accounts is that it provides a suitable vantage point for exploring some of the main national accounts aggregates, such as Gross Domestic Product (GDP). GDP tables form another essential ingredient of the MRDS, and countries in the pre- SNA phase will to a large extent be occupied with setting up compilation procedures for GDP. The review given here builds on the material on the SNA accounts presented in the Handbook, in particular section IV.2. The numerical data given are based on the example in SNA 2008 5. Since the review will exceed the intended length of papers in the series, we will distribute its content over three parts, of which the current document is the first 6. Here we will introduce the basic accounting terminology and the concept of GDP. Our end point will be the full presentation of the production account. The next parts (separately distributed documents) will contain an exploration of the other accounts, the other current accounts in part 2 and the accumulation accounts in part 3. To keep the text to manageable size we will be very brief on elaboration of concepts. Many of the concepts introduced are foreseen to come back in later papers in this series, where they will be properly introduced and defined. The current review is meant to serve as an exploration of the SNA structure as a whole, without be overly concerned with the individual parts out of which the whole is constructed. We will, however, try to be precise, and this is achieved by centering this paper around 1 This paper has been prepared with the technical assistance of DevStat Servicios de Consultoría Estadística in consortium with ICON Institute. 2 Henceforth called the Handbook ; it can be found at the following link: http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?p_product_code=ks-ra-11-002 3 The six milestones as set forward by the UN Statistical Commission; these have been formulated to facilitate countries implementing the SNA for the first time. 4 Report of the Task Force on National Accounts, UN Economic and Social Council, March 2001 (E/CN.3/2001/7). 5 See Annex 2 of SNA 2008. 6 The other parts are: Introduction to the SNA 2008 Accounts, part 2: Current Accounts; Introduction to the SNA 2008 Accounts, part 3: Accumulation Accounts 1

one integrated numerical example. Since the numbers in this example correspond fully with those given in the various examples contained in SNA 2008, the reader should also find it easier to work through the relevant sections of SNA 2008. Accounting for Production National accounting is all about classifying source data into a system of specific national accounts classifications 7. Here we will be concerned with two classification: for institutions and for transactions. Institutions, or institutional sectors, are collections of institutional units, which are economic entities that are capable of owning assets, incurring in liabilities and engaging in economic activities and in transactions with other units 8. We will distinguish four such institutional sectors in our simplified presentation of the accounts: Non-financial and financial corporations, abbreviated as ; ernment, abbreviated as ; Households and Non-Profit Institutions Serving Households (NPISH), abbreviated as ; Rest-of-the-World, abbreviated as ROW. Transactions are economic flows that result from interactions between institutional units. The full transaction classification is given in SNA 2008 9. For our purpose transactions can be classified into five main groups: Productive transactions (P); Distributive transactions (D); Capital transactions (K); Financial transactions (F); Balancing transactions (B). Since classifications are international, they are specified in terms of coding systems, employing codes that are made out of letters (usually in combination with numbers), such as P for productive transactions. Each of the major categories is further subdivided into smaller items. Productive transactions consist of output (P1), intermediate consumption (P2), etc. Similarly, at the next level, items are further subdivided, e.g. P1 consists of P11, P12, P13 for different kinds of output. Let us now apply transaction coding to the case of production of goods and services. The relevant transaction is output (P1) 10 which measures the amount of goods and services produced during the accounting period. In order to generate this output by a particular production process, inputs are required, such as raw materials, energy etc. The costs of these inputs are measured by the 7 We looked at the ISIC industry classification is some detail in other papers in this series: The Statistical Business Register from the National Accounts Perspective and ISIC 4 and its application rules, including the example of outsourcing. 8 See section Handbook IV.1.1; a discussion on institutional units can also be found in another paper in this series: The Statistical Business Register from the National Accounts Perspective; the full institutional classification can be found in Annex 1 of SNA 2008. 9 Also in Annex 1 of SNA 2008. 10 There are various types of output, market output (P11), non-market output (P12) and output for own final use (P13); we have already discussed issues related to the output boundary in another paper in this series: Main SNA 2008 recommendations with impact on the level of GDP. 2

transaction intermediate consumption (P2), abbreviated henceforth as IC. The difference between output and IC is known as value added (B1). This definition constitutes one of the fundamental identities of national accounts: Value Added = Output - Intermediate consumption (AP1) We can also look at this identity from the accounting point of view. To do so we must collect for each institutional unit resources (representing incoming money flows) and uses (representing outgoing money flows) and present these in a T-account, listing transactions involving resources on the right side and those involving uses on the left side 11. Seen in this perspective it will come as no surprise that output is a resource and IC is a use. Hence we can draw up our first account for production as follows, here for all units taken together: P2 Intermediate Consumption 1883 P1 Output 3604 1883 3604 Figure 1 Simple T-Account for output and intermediate consumption In an account like this, the numbers are money values in a particular currency for a particular accounting year, typically a calendar year. Next, we want to include value added in the account. Since it is defined as that part of output not spent on IC it is obviously also a use item and we can add it to the left of the account as follows: P2 Intermediate Consumption 1883 B1g Value added 1721 P1 Output 3604 3604 3604 Figure 2 Production Account with value added Note that both sides of the account now have equal totals. This is an important first accounting rule AR1: Account totals on the uses side = Account totals on the resources side (AR1*) Given this rule we also get another perspective on value added: it is the transaction that ensures equality of resources and uses. Such a transaction is called a balancing transaction (classified with a B code). Properly speaking, value added is the balancing item of the production account. Since this account has only output as resource and IC as use, this implies the earlier identity AP1*. Note that in the above account the code for value added is B1g. The code g stands for gross. This means including consumption of fixed capital (CFC). This transaction (belonging to another account, the capital account) serves to reflect the decline in the value of the fixed assets. This is similar to depreciation as used in business accounting. However, CFC in national accounts is not a method for 11 There is no particular reason for these right / left assignments; they are conventions, universally followed. 3

allocating the costs of past expenditures on fixed assets over subsequent accounting periods. Rather, it is the decline in the future benefits of the assets due to their use in the production process. Gross value added is the balancing transaction for which the difference between output and IC includes an amount for CFC. When the amount for CFC is deducted from gross value added we get net value added (B1n). We can introduce this breakdown in the account as follows: P2 Intermediate Consumption 1883 K1 Consumption of Fixed Capital 222 B1n Value added 1499 P1 Output 3604 3604 3604 Figure 3 Production Account with net value added Towards the SNA Production Account The production account in figure 3 represents for a particular accounting period the total values for the included transactions for the total economy, which is defined as the entire set of resident institutional units. Residency of each institutional unit is determined by the economic territory where its centre of predominant economic interest lies. The concept of residence is not based on citizenship or legal criteria. Having a centre of predominant economic interest in a territory implies being engaged for an extended period (usually one year or more) in economic activities in this territory. Next, we can split up the total economy into the three institutional sectors we introduced earlier. We will now slightly change the format of the T-account of the previous section by enumerating the transaction codes and descriptions in the middle of the account, with the uses on the left and resources on the right. The resulting production account now looks as follows: Production Account P1 Output 302 348 2954 3604 1883 1529 222 132 P2 Intermediate Consumption 222 169 27 26 K1 Consumption of Fixed Capital 1499 1256 99 144 B1n Value added, net 3604 2954 348 302 302 348 2954 3604 Figure 4 Production account with domestic sectors Note that the institutions on the header are given in mirror image form. The amounts in the total columns are for the total economy, and are identical to the account in figure 3. Note further that the accounting rule AR1* on the equality of left and right totals now applies to each pair of mirror image columns, but only for the last, totals row. Hence we can generalize this rule on the equality of uses and resources as follows: For each sector: Account totals on the uses side = Account totals on the resources side (AR1) 4

ROW ROW There is one institutional sector missing: the Rest-of-the-World, or ROW. Transactions between domestic units and ROW related to goods and services are exports and imports. We can add these transactions, and the ROW sector, to the production account of figure 4 as follows: Production Account P7 Imports of goods and services 499 499 540 540 P6 Exports of goods and services P1 Output 302 348 2954 3604 3604 1883 1883 1529 222 132 P2 Intermediate Consumption 222 222 169 27 26 K1 Consumption of Fixed Capital 1499 1499 1256 99 144 B1n Value added, net External balance of goods and -41-41 B11 services 4103 499 3604 2954 348 302 302 348 2954 3604 499 4103 Figure 5 Production account with ROW included Note that imports constitute a resource from the perspective of the economy, with money incoming to the ROW (and money outgoing for the economy). Similarly, exports constitute a use item. Note also that there is a second balancing item for ROW, the External Balance of Goods and Services (B11). As for value added, we introduce it to ensure that accounting rule AR1 is met for ROW: B11 = Imports (P7) Exports (P6) The rule AR2 for introducing a balancing item B for a particular institutional sector S can now be made explicit: Let R stand for the total resources for the sector; Let U stand for the total uses for the sector, excluding the balancing item B; Add to the use column for the sector: B = R U; Hence, total use for the sector is: U + B, or U + (R U) = R which is the total resource for the sector; we therefore have verified that our construction of the balancing item respects accounting rule AR1. (AR2) Note that balancing items are always introduced on the use side. From the Production Account to GDP We have now analyzed the first account of the SNA sequence of accounts in detail. Two further steps are required: 5

The specification of institutional sectors in more details: e.g. split up the column into separate columns for non-financial and financial corporations, or the column into separate columns for households and for NPISH. The further specification of transactions: e.g. split up P1 into P11, P12 and P13, the different types of output. Also, exports and imports can be split up into separate rows for goods and for services. In this paper we will refrain from such detail and focus on institutions and transactions at a high level of aggregation. GDP can be constructed from gross value added as follows: B1n Value added, net 1499 K1 Consumption of Fixed Capital 222 B1g Value added, gross 1721 D21 Taxes on products 141 D31 Subsidies on products -8 Gross Domestic Product 1854 Figure 6 GDP from the production account As can be seen from figure 6, GDP consists of the sum for the total economy of gross value added and taxes minus subsidies on products 12. Note that the GDP derivation only applies to the total economy, not to individual sectors. Also, strictly speaking GDP is not a transaction, it does not have a transaction code. It is a macroeconomic aggregate, consisting of different individual transactions. In practice, this procedure of compiling GDP is achieved by splitting up the total economy into ISIC industries 13. The following table gives a breakdown at the highest level of ISIC aggregation. A Agriculture, forestry and fishing B Mining and quarrying C Manufacturing D Electricity, gas, steam and air conditioning supply E Water supply; sewerage, waste management and remediation activities F Construction G Wholesale and retail trade; repair of motor vehicles and motorcycles H Transportation and storage I Accommodation and food service activities J Information and communication K Financial and insurance activities L Real estate activities M Professional, scientific and technical activities N Administrative and support service activities O Public administration and defense; compulsory social security P Education Q Human health and social work activities R Arts, entertainment and recreation S Other service activities T Activities of households as employers; undifferentiated goods and services producing activities of households for own use U Activities of extraterritorial organizations and bodies Table 1 ISIC 4 Industries at section level 12 There are also taxes and subsidies on production; these are not included in the derivation of GDP. 13 See for more details on this classification the following paper in this series: ISIC 4 and its application rules, including the example of outsourcing. 6

For each industry output and IC are compiled 14. Gross value added can then be calculated using equation AP1. Next, gross value added for the total economy can be compiled as the sum of value added for each industry. Adding to this the net product taxes (i.e. taxes minus subsidies 15 ) will give GDP 16. This method of compiling GDP is known as GDP by output approach. We will encounter other methods for calculating the same GDP in part 2 of this paper. Concluding remarks In this first part of the paper we explored the first current account the production account - in the SNA sequence. In part 2 of the paper we will continue our exploration and introduce the following other current accounts: Generation of income account; Allocation of primary income account; Secondary distribution of income account; Use of disposable income account; In part 3 we will look at the accumulation accounts, consisting of: Capital account; Financial account. Each of these accounts is similarly structured as the production account reviewed here: on the left; resources on the right (for the capital and financial accounts assets / liabilities are used instead of uses / resources); Balancing items are introduced on the left according to rule AR2; Account totals are added for each sector on both left and right; Rule AR1 must be met for each sector: column total left side = column total right side for each pair of institutional sector columns. There is one remaining question: how do we link separate accounts, so that the balancing item of the first account will have an impact on the second? The answer to this question will come in part 2 of this paper. To find out more Essential SNA: Building the Basics (2010 edition), Sections IV.1-IV.3 SNA 2008: Chapter 2, Chapter 6, Annex 2 14 This is far from easy, and will be the topic of future papers, where we will go into some details for particular industries. 15 Note that the meaning of the word net is here completely different from the one given earlier as in net value added - where it denoted the exclusion of CFC; here it means the difference between two items, here taxes and subsidies. 16 Note that we do not have separate production accounts for the industries yet, because there is no institutional sector breakdown for each industry. Cross classifying industries by institutional sector is also possible, but will require additional effort. 7