Download Annual GDP by expenditure approach in current and

Annual GDP by expenditure approach in
current and constant prices: Main
issues1
Introduction
This paper continues the series dedicated to extending the contents of the Handbook “Essential SNA:
Building the Basics”2. The aim of this paper is to provide some background to understand the
compilation of two tables included in the Minimum Requirement Data Set (MRDS), the first data set
that a country must have before it can claim to have implemented SNA:
 GDP by expenditure at current prices;
 GDP by expenditure at constant prices.
To understand how these tables are compiled and what data sources are required to do so, much of
the paper is used to outline the expenditure approach to GDP compilation. The relevant SNA
transactions that are discussed include: final consumption expenditure, gross capital formation and
net exports. For the constant prices table we will focus mainly on the deflation method, as applied to
the expenditure approach to GDP compilation. Finally, the relationship of the expenditure approach
tables with the MRDS tables on value added and GDP by industry (as discussed in previous papers)
will be explored.
The current paper will discuss the compilation of the two MRDS tables in general terms, highlighting
concepts and procedures at a high level of abstraction. The application to particular expenditure
categories (final consumption expenditure, gross capital formation and net exports) will follow in
subsequent papers.
From GDP by production to GDP by expenditures
In previous papers we explored the compilation of GDP (Gross Domestic Product) as calculated by
the output approach from transactions in the production account. The fundamental transaction in
this approach is output 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
transaction intermediate consumption. The difference between output and intermediate
consumption is known as value added:
Value Added = Output - Intermediate consumption
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”; references in this paper are to the second (2012) edition; it can be found at the
following link: http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?p_product_code=KS-RA12-001
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Value added can be compiled for each ISIC industry3. GDP can be constructed from value added by
industry as the sum of value added by industry for all industries and taxes minus subsidies on
products. The following table presents an example4.
B1n
K1
B1g
D21
D31
Value added, net
Consumption of Fixed Capital
Value added, gross
Taxes on products
Subsidies on products
Gross Domestic Product
1499
222
1721
141
-8
1854
Figure 1 GDP from the production account
Note that transactions are coded according to the transaction classification is given in Annex 1 of SNA
2008. Note also that in the example the code for the value added as calculated as the difference
between output and intermediate consumption is B1g. The code g stands for gross. This means
including consumption of fixed capital (CFC). This transaction (belonging the capital account) serves
to reflect the decline in the value of the fixed assets. When the amount for CFC is deducted from
gross value added we get net value added (B1n) which serves as starting point for yet another MRDS
table: value-added components by industry at current prices5.
There is another method for compiling the same GDP, which will be the focus of this paper. Here we
look at the expenditure categories on which income generated from value added is spent. Value
added created by production is used up either on final consumption or on gross capital formation,
with additional flows from and to ROW (Rest-of-the-World) supplying imports and using up exports.
Hence, adding these flows together will give us the same GDP again, as is illustrated in the next
example.
P3
P5g
P6
P7
Final consumption expenditure
Gross capital formation
Exports of goods and services
Imports of goods and services
Gross Domestic Product
1399
414
540
-499
1854
Figure 2 GDP by expenditure approach
This method is called GDP by the expenditure approach. Note that although the same GDP number is
compiled, entirely different data sources are used. The output approach GDP compiles value added
by industry, using data sources on output and intermediate consumption. The expenditure approach
GDP uses data sources on final demand categories. In practice, both compilations will give different
results, introducing a statistical discrepancy between both estimates. Minimizing this discrepancy is
an important aim for national accountants.
3
ISIC = International Standard Industrial Classification; on the output approach see the papers: Annual GDP by production
approach in current and constant prices: main issues; Agriculture in National Accounts: Value added in current and constant
prices; Industry and Construction in National Accounts: Value added in current and constant prices; Services in National
Accounts, part 1: Value added in current prices; part 2a: Value added in constant prices; part 2b: Value added in constant
prices.
4
The numbers in this example and the next correspond with those given in the various examples contained in SNA 2008.
5
We will explore this table in a future paper.
2
Background: Production, Distribution, Consumption and Saving
Let us explore the above concepts in somewhat more detail6. After the production account, which
results in value added7, the next account in the sequence shows how gross value added is distributed
to labor, capital, government and, where necessary, flows to and from ROW. This distribution
process is called the primary distribution of income (see figure 3). This process consists of two parts:
generation of income and allocation of income. The generation of income account shows how value
added is distributed to labor (compensation of employees) and government (taxes less subsidies).
The distribution to capital appears in the balancing item in this account, operating surplus or mixed
income.
Distribution of
income accounts;
Primary
distribution of
income accounts;
Secondary
distribution of
income account;
Generation of
income account;
Allocation of
primary income
account;
Figure 3 Distribution of income
The allocation of primary income account shows the remaining part of the primary distribution of
income. It adds to operating surplus / mixed income all other forms of received or paid income: for
labor (compensation of employees), for government (net taxes) and for all sectors the incomes
received from (or paid to) sources other than production (property income).
The secondary distribution of income account follows the conversion of primary income into
disposable income, which is the income available for final consumption. Primary and disposable
income are not the same because of the occurrence of redistribution of income. This takes place in
the form of the transactions such as current taxes on income and wealth, net social contributions,
etc.
The two primary distributions of income accounts and the secondary distribution of income account
together are known as the distribution of income accounts. The next (and final) current account
shows how the available disposable income is used up, mainly on final consumption expenditures.
These include expenditures by households and by government (corporations have no final
consumption). The closing balance for the domestic economy is Saving. It is that part of disposable
6
See the following papers for more details: Introduction to the SNA 2008 Accounts, part 1: Basics; Introduction to the SNA
2008 Accounts, part 2: Current Accounts; Introduction to the SNA 2008 Accounts, part 3: Accumulation Accounts.
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Value added is called the balancing item of the production account, since it ensures that the totals of both sides of the
account (uses and resources) are equal.
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income that is not consumed during the current accounting period. Note that ROW has its own
current accounts (the production account containing imports and exports) with a final closing
balance that is called the current external balance.
We have now completed our review of the current accounts. The adjective current refers to the fact
that the flows recorded in these accounts, from production (and imports and exports) to saving (and
the current external balance), will be used for the purpose of direct consumption within the
accounting period, so that there will be no impact on the next accounting period. Output is created
from inputs; the value added generated is the source of income for labor; this income is
redistributed, e.g. to the government in the form of taxes; income from other sources than
production is added and redistributed in the form of property income. Ultimately the balance of all
these current income flows is recorded as disposable income, which is then used for final
consumption in the accounting period. ROW absorbs some of the output as exports, and contributes
supply for domestic consumption (intermediate and final) as imports (see figure 4).
The closing current account balance for the domestic economy is Saving, that part of disposable
income that is not consumed during the current accounting period. Hence it is available for
transactions changing the stocks of assets and liabilities. Registering these changes is done in the two
accumulation accounts, the capital account (non-financial assets) and the financial account (financial
assets and liabilities).
Production: value added created
Distribution: income from value added
and other sources redistributed
Final use: income used in current period
by household and government
Saving: remaining income available for
capital formation
Figure 4 Domestic current accounts flows
In summary, value added and net imports (imports - exports) from the production account are used
up in the form of final consumption expenditures (by households and government) without changing
the stock of non-financial assets, and in the form of gross capital formation, which changes the stock
of non-financial assets8. An additional resource to the government are net product taxes (taxes –
subsidies)9. We therefore have:
Value added + Net imports + Net product taxes = Final consumption + Gross capital formation
8
All these flows in the real economy have counterpart flows in the monetary economy, which are recorded in
the financial accounts.
9
Remember that output is valued at basic prices, i.e. without net product taxes, so these have to be added as an additional
resource.
4
This can be rewritten as:
Value added + Net product taxes = Final consumption + Gross capital formation - Net imports
Remember from earlier papers that the left-hand side is equal to GDP. Also, net imports = imports –
exports = - (exports – imports) = - net exports. Therefore:
GDP = Final consumption + Gross capital formation + Net exports
This equation is the basis for the compilation of GDP by the expenditure approach as we introduced
it in the previous section.
Another way of looking at the same equation is by equating total supply by product with total use by
product. Supply can come from domestic output, from imports from ROW or from net product taxes.
Uses are intermediate consumption (IC), final consumption, gross capital formation and exports. We
therefore have:
Total supply by product = Total use by product
Or, in components:
Output + Imports + Net taxes = IC + Final consumption + Gross capital formation + Exports
(1)
Rearranging IC and imports gives:
Output – IC + Net taxes = Final consumption + Gross capital formation + Exports – Imports
Remembering that value added equals output minus IC and introducing net exports:
Value added + Net taxes = Final consumption + Gross capital formation + Net exports
The left-hand side is again equal to GDP:
GDP = Final consumption + Gross Capital Formation + Net exports
The confrontation by product between supply and use in equation (1) above is the starting point for
Supply Use table (SUT) compilation which also includes the confrontation by ISIC industries between
output on the supply side and IC and value added on the use side. We will explore the SUT in a future
paper.
GDP by expenditure approach in current prices
Compilation of GDP by expenditure approach in current prices involves the compilation of all its
components. As we have seen the three major components are: final consumption expenditure,
gross capital formation, and net exports. Each of these consists of a number of subcomponents, see
figure 5 below. We will not go into any detail here. Each of the next three papers in this series will be
dedicated to one of the subcomponents. We will then see how these subcomponents are defined,
what the relevant classifications are and what typical data sources may be used for their compilation.
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GDP by
expenditures
Final
consumption
Gross Capital
Formation
Net exports
Household Final
Consumption
Expenditures
Gross Fixed
Capital Formation
Exports
NPISH Final
Consumption
Expenditures
Changes in
inventories
Imports
Government Final
Consumption
Expenditures
Figure 5 Expenditure categories (Note: NPISH = Non-profit Institution Serving Households)
We have already mentioned that the GDP obtained by the expenditure approach compilation should
be similar to GDP by output approach, the difference between the two being the statistical
discrepancy, i.e. the discrepancy due the statistical measurement errors. However, although the
resulting GDP is similar, the two approaches differ considerably in terms of institutional sectors
addressed. For the output approach the focus is typically on market output of non-financial and
financial corporations, together with non-market output of government and output for own final use
of households (including imputed rent for owner-occupiers of dwellings). For the expenditure
approach the focus is on final consumption for households and government, on net exports for ROW
and on gross capital formation for non-financial corporations. There are both overlaps and
differences between these two institutional sector perspectives.
With overlap is meant for example that data for non-financial enterprises is used both for value
added compilation as part of the output approach and for the compilation of gross fixed capital
formation as part of the expenditure approach. Such data could even come from the same data
source (e.g. a structural business survey) although different data sources are also possible (e.g. data
on gross fixed capital formation from a separate investment survey). The overlap is especially evident
for output data for construction of dwellings, which are typically used for gross fixed capital
formation in dwellings as well. Another example of overlap is non-market output of government,
which is used for the compilation of value added for ISIC sections N – O. But the same output data
are typically used to compile government final consumption expenditures for the expenditure
approach as well, as we will see in a future paper.
In spite of this overlap there are many important differences between the approaches. Compiling
GDP by output approach requires a proper system of business statistics to be set up, including a
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business register10 and a cycle of annual business surveys, in which information on intermediate
consumption is also collected. Lack of quality of the business register may result in insufficient
coverage of productive units contributing to market output. Also, market output by small units and
by households (the informal sector11) may be insufficiently covered or not covered at all, leading to a
GDP by output approach that could be seriously underestimated. In this respect the GDP by
expenditure approach may offer a valuable second estimate. This approach requires administrative
data for the compilation of government final consumption (government finance data) and for the
compilation of net exports (external trade data for goods and Balance-of-Payments data for services),
which most countries will have in a relatively early phase of deployment of the statistical system.
Apart from these sources the main data source to be set up is a household survey to obtain data on
household final consumption expenditures. Such a survey is typically carried out in an earlier phase
of development than a business survey, making the expenditure approach perhaps preferable to the
output approach in this case. Note that for gross capital formation data on investments and
inventories are needed, which usually come from business statistics again, making the expenditure
approach less feasible as main approach. But if a country imports most of its investment goods, the
investment in machinery and equipment may be approximated quite well using only external trade
data on imports. Then only a proper output estimate for dwellings is needed to come to a rough
estimate of gross capital formation (assuming the contribution for inventories is small) and hence for
overall GDP (assuming the contribution for NPISH is small)12.
GDP by expenditure approach in constant prices
The concepts behind constant price estimation have been outlined in an earlier paper in this series13.
Comparing annual GDP estimates in current prices between years is complicated by the fact that
changes in GDP can occur because of volume changes or because of price changes in the transactions
that make up GDP, in this case the expenditure transactions. In order to measure economic growth
we want to eliminate the price changes and come to estimates at fixed prices of a previous period,
e.g. last year’s prices or prices of some other reference year. By comparing these constant price
values with the current price values of the reference year, we automatically obtain the volume
changes in the expenditure categories and in overall GDP, which is a measure for economic growth.
Given the volume changes and the value changes the price changes of the expenditure categories
and of overall GDP can be derived as implicit deflators.
It is important to note that constant price values of the expenditure components of GDP cannot be
derived from direct compilation on the basis of source data as was the case for current prices
estimates. Data sources yield only value data, and the decomposition of value changes into volume
and price changes is made analytically. Two methods are available to do this: the deflation method
and the extrapolation method14. Both methods rely on indexes. The deflation method uses price
indexes to deflate current period values. The extrapolation method uses volume indexes to
extrapolate current values of an earlier period. To apply these methods additional data need to be
collected, either on price indexes or on volume indexes. Note that such indexes are usually compiled
10
See the paper The Statistical Business Register from the National Accounts Perspective.
11
See Handbook, chapter 6.
12
There are other components of investments which are assumed to be small as well, and with which we will deal in a
future paper.
13
See the papers: National Accounts in Constant Prices, part 1: Elementary Indexes and part 2: Aggregated Indexes.
14
These methods and the required theory on indexes are explored in the papers mentioned in footnote 13.
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at monthly or quarterly frequency. The indexes need to be aggregated over time into yearly indexes
to apply them to annual estimates of the expenditure components.
It should also be noted that deflation methods are generally preferred to extrapolation methods.
One of the reasons for this is the need to properly account for quality changes of products. Over
time, products often change in quality, e.g. because of new technological developments. This may
happen without a significant price effect. Volume indexes tend to exclude such quality change, e.g.
when based on changes in numerical quantities. Hence, constant prices measures based on
extrapolation with such volume indexes will also exclude such quality change effects and might
therefore lead to biased results. Any implicit price changes based on such volume changes may then
be biased as well.
For the output approach, GDP in constant prices (CP) is compiled by calculating for each ISIC sector
value added in CP, which in turn is calculated as output in CP minus intermediate consumption (IC) in
CP (when the deflation method is used this is the double deflation method). The CP compilations for
agriculture, industry, construction and services have been covered by earlier papers in this series15.
As final step in the compilation of GDP in CP, net taxes in CP need to be added, which will be covered
in the next section.
To come to GDP in CP the expenditure approach is easier to implement than the output approach,
since we only have single expenditure transactions to address, instead of the value added consisting
of two transactions (output and IC). Also, deflators for household final consumption are easily
available in the form of consumer price indexes (CPI). For net exports, export and import unit values
can easily be compiled as well, as we will see in a future paper. For government expenditures a
combination of CPI and volume indicator extrapolation based on employment will come a good way
towards reasonable CP estimates. This leaves only gross capital formation. But if we use the above
simplification that investment goods are imported and inventories are negligible, than this
component can be roughly estimated as well if construction output in dwellings can be compiled in
CP16.
If GDP in CP is compiled by both the output and the expenditure method, we will again have a
statistical discrepancy between the two GDP estimates, just as for the current prices compilation.
However, in this situation many countries opt to forego on the compilation of inventories in CP, since
this calculation is difficult and assumes good inventory data which are often not available. If this is
the case then the statistical discrepancy will include these inventories in CP as well. This will make
the GDP estimate by the output approach the only independent estimate on which the economic
growth estimate is based. The expenditure approach compilation then serves to come to growth
rates and implicit deflators for all individual expenditure components (excluding changes in
inventories) only.
Product taxes in constant prices
In this final section we will deal with one issue related to the output approach in CP that we have not
explored earlier: how to express product taxes and subsidies in CP. Since we can treat product
15
16
See footnote 3.
See the paper Industry and Construction in National Accounts: Value added in current and constant prices.
8
subsidies as negative product taxes, we will not deal with subsidies separately. The proper treatment
is best illustrated with some examples.
First, recall the following identity: value change = volume change x price change. The following table
introduces the symbolism and terminology we will use in this section17.
Prices
T
T+1
Values
T
Cur (T)
T+1
Con (T+1 / T)
Cur (T+1)
Vidx = Cur(T+1) / Cur (T) (value index)
Qidx = Con (T+1/T) / Cur (T) (volume index)
Pidx = Cur (T+1) / Con (T+1/T) (price index)
Table 1 Symbolism constant price compilation
The first example involves two goods (A and B), two periods (T, T+1) and a tax related to quantities
(taxes based on values are treated similarly). To obtain the tax, we multiply the quantity with the tax
rate, e.g. for good A the tax is 100 * 10 = 1000. If a new tax is introduced, or the scope of a tax is
extended to include more products, this is recorded as a price effect (measured by Pidx) rather than
a volume effect (measured by Qidx), as is illustrated by the following table18.
A
#
T
T+1
100
100
Vidx
Pidx
280
B
#
Tax/#
10
10
Tax
CP
Tax/#
200
180
0
10
1000
2800
1000
1000
Qidx
280
100
Table 2 Introduction of a new tax
The total tax revenue (as measured by Vidx) has increased by 180% between from year T to year T+1.
This is caused entirely by the extension of the tax to product B. Because the tax rate of year T is
applied to the quantities of year T+1 the volume measure of the tax remains unchanged and the
entire rise in tax revenue is attributed to a price effect. The tax for users of the products has
increased: first they had a tax-free product, now they have to pay tax.
The next example gives the calculation for the introduction of a new product, which is subject to an
existing product tax of 10 per unit.
A
#
T
T+1
Tax/#
100
100
Vidx
Pidx
280
B
#
10
10
Tax
CP
Tax/#
180
10
1000
2800
1000
2800
Qidx
100
280
Table 3 Introduction of a new product
As in the previous example, the tax revenue has increased by 180%. In this case however the rise in
tax revenue is entirely attributed to a volume effect.
17
18
See footnote 13.
The example comes from the Handbook of Price and Volume Measures in National Accounts, p.54
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Let us conclude by pointing out that for VAT (Value added tax) the treatment is no different than in
the above cases. An example:
#
Price
T
T+1
100
120
Vidx
Pidx
180
VAT %
VAT
Taxation price part CP
10 %rate20
200
12
25
360
300
240
Qidx
150
120
Table 4 Change in VAT rate
In the above example VAT in period T is 100 * 10 * 0.20 = 200. Similarly, VAT for period T+1 is 360, so
the change in value is 80 %. Based on the volumes only, VAT in period T+1 is 120 * 10 * 0.25 = 300,
which can be interpreted as the change in “taxation price”, in this case of 50 %. We can derive the
volume change of 20 % indirectly by dividing the value change by the price change (180 / 150 *100).
Applying this volume change to VAT for period T gives us the CP estimate: 240 = 200 * 120 / 100.
This treatment is no different when the VAT rate is changed at a particular time during T+1 instead of
applying during the whole year. For example, if the VAT rate change starts at midyear:
#
Mnth 1-6
Mnth 7-12
T+1
T+1
P
60
60
VAT %
12 %%rate
20
12
25
VAT
144
180
324
Vidx
taxation price part
120
150
270
Pidx
162
135
Qidx
120
Table 5 Change in VAT rate in the middle of the year
Of course VAT in current values changes, and hence the “taxation price” part changes as well.
However, the volume change is still the same (20%), as in the previous example.
VAT has one extra attribute that is not present for other product taxes: it can be deducted in some
cases, especially for intermediate consumption (IC as opposed to FC = final consumption). The
following table gives a simple example where only FC is taxed, and the full volume change in FC
translates a similar volume change in VAT.
T
IC
FC
150
50
VAT %
Sales
VAT
20
3000 %rate 0
0
20
1000
20
200
T+1
IC
FC
100
100
20
20
Vidx
Pidx
200 #
200
P
2000
2000
Qidx
0
200
Table 6 Treatment of VAT for IC as opposed to FC
10
0
20
0
400
Concluding remarks
This paper set out to provide some background on the methodology of compiling the MRDS tables on
GDP by expenditures in current and constant prices. The main expenditure categories are final
consumption expenditure, gross capital formation and net exports. By studying the structure of the
main institutional sector accounts we learned why the sum of these expenditure categories is in fact
equal to GDP obtained by adding together total value added over all ISIC industries and net product
taxes. Because this is true in both current and constant prices the national accountant has a powerful
tool to indirectly estimate particular transactions for which data are missing, for example changes in
inventories. We will explore the three main expenditure categories in the next papers in this series.
To find out more …,



Essential SNA: Building the Basics (2012 edition), Chapter 7
The 2008 SNA, European Commission, IMF, OECD, UN, World Bank, 2009, Chapter 15 –
Price and volume measures
Handbook on price and volume measures – Eurostat, Luxembourg 2001
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