Download Session 9 Introduction to national accounts

Module H5 Session 9
Session 9 Introduction to national accounts
Learning objectives
At the end of this session the students will be able to

describe in general terms the UN System of National Accounts



define the main transactions shown in the summary accounts
define GDP in terms of both value added and expenditure components
understand the difference between market prices and basic prices
Introduction
In this and subsequent sessions we cover national accounting, with particular emphasis on
the key economic concept of gross domestic product (GDP). The primary references are
listed in Annex A. In this session, we take a first look at the UN System of National
Accounts 1993, which is the international standard for national accounting. Following
this, we learn how GDP fits into the system.
The UN System of National Accounts (SNA93)
What is the SNA?
1.1 The System of National Accounts (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. It
provides a comprehensive accounting framework within which economic data can be
compiled and presented in a format that is designed for purposes of economic analysis,
decision-taking and policy-making.
Source: System of National Accounts 1993
Comment: The SNA, in its entirety, is a system designed for the detailed analysis of the
most complex economy in the world. It is an ideal system. No country has implemented
every aspect of it. Every country (or group of countries) must decide which elements of
the system to implement, according to the appropriate balance of the statistical resources
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available and the needs of users (cost and benefit). In many countries, the basic need is for
estimates of gross domestic product (GDP), its components and related aggregates.
National accounting is sometimes likened to cooking! To use this analogy, the SNA is like
a recipe book for preparing the most sumptuous banquet from the most sophisticated
ingredients. For most ordinary people, the result is likely to be indigestible . Nevertheless,
it is appropriate to follow the principles of the SNA to prepare a more limited yet satisfying
meal from everyday staple produce.
The accounts of the system
At its heart, the SNA consists of a (large) number of interlocking “accounts”. An account
records, for a given aspect of economic life, resources and their use, or (in other words)
income and expenditure. They may also record changes in both assets (physical and
financial) and liabilities (financial). Accounts usually have balancing items that equalise the
two sides of the account and are in themselves meaningful measures of economic
performance, often carried down into a subsequent account. The detailed accounts can be
consolidated into five major types.
There are three main types of accounts that follow one another in sequence. These are:



Production account (producing goods and services and generating income)
Distribution and use of income accounts (including consumption expenditure and
saving)
Accumulation accounts (about saving and investment)
These accounts are complemented by the following two special types:


Goods and services accounts (the supply and use of commodities)
Rest of the world account (balance of payments)
The system also provides for balance sheets that show stocks of assets and liabilities.
The accounts are described in more detail below, using a form of presentation known as
“T-accounts”, which show income on the right and expenditure on the left. It may be
noted that this form of presentation is rarely used in practice to present the data. It is
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however useful for understanding the concepts. In the SNA, every transaction has a code
and there are illustrative figures. These are shown in the summary accounts below.
The production account
The production account records the activity of producing goods and services (as defined in
the SNA). A production account may be compiled for a single producer, an industry (eg
manufacturing) or the whole economy. The balancing item is gross value added (GVA):
Code
P2
B1
Uses
Intermediate consumption
Gross value added (GVA)
Total use
1,883
1,721
3,604
Code
P1
Resources
Total output (at basic prices)
3,604
Total resource
3,604
The value of output is entered on the right hand side of the account, and the cost of inputs
(intermediate consumption) on the left hand side; the balancing item is GVA. The GVA
of a producer or an industry is a measure of its contribution to the gross domestic product.
This account is not dissimilar from a business profit and loss account, except that the latter
normally shows sales instead of output, total costs instead of just intermediate
consumption, and net profit (or loss) as the balancing item instead of value added.
Definitions: Production account
P1
Output consists of the value of goods or services that are produced within an
establishment that become available for use outside that establishment, plus any
goods and services produced for own final use.
P2
Intermediate consumption consists of the value of the goods and services consumed
as inputs by a process of production, excluding fixed assets whose consumption is
recorded as consumption of fixed capital; the goods or services may be either
transformed or used up by the production process.
B1
Gross value added is the value of output less the value of intermediate consumption.
Source: http://unstats.un.org/unsd/sna1993/glossary.asp?letter=G
In the SNA93, total output and gross value added (GVA) are usually measured at “basic”
prices, that is excluding any taxes (but including subsidies) on products. When taxes (less
subsidies) on products are added to total GVA, we get GDP at market prices:
Code
B1
B1
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Description
Gross value added (GVA)
Taxes (less subsidies) on products
Gross domestic product (GDP)
1,721
133
1,854
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Production can be seen as generating income in the form of compensation of employees,
taxes on production and imports, gross mixed income and gross operating surplus. These
are the income components of GDP. We return to the subject of GDP later in the session.
Distribution and use of income accounts
The detailed distribution and use of income accounts show the types of income generated
from production, how they are distributed and re-distributed, and finally how they are used
by consumers for expenditure on goods and services. The detailed accounts show the
transactions between the institutional sectors of the economy (see Annex B for the
definitions of the sectors). These accounts are known as sector accounts.
At national level the consolidated account shows how GDP (regarded as income) is
supplemented by primary income from abroad (less any paid abroad) and by current
transfers from abroad (less any sent abroad) to finance final consumption and saving.
Optionally, consumption of fixed capital may be deducted to obtain net national
disposable income: Definitions of the transactions in these accounts are given in Annex
C. The balancing item on this account is net saving.
Code
P3/4
B8
Uses
Final consumption
Net saving
1,399
233
Code
B1
D4
D7
K1
Net national disposable income
1,632
Resources
Gross domestic product
Primary income from abroad
less income paid abroad
Current transfers from abroad
less transfers sent abroad
less Consumption of fixed capital
Net national disposable income
1,854
70
-40
9
-39
-222
1,632
Accumulation accounts
The accumulation accounts (a summary version is given here) show how net saving,
capital transfers and net borrowing/lending from the rest of the world, are used to
finance net domestic investment (capital formation):
Code
P5
K1
Uses
Gross fixed capital formation
Change in inventories
Consumption of fixed capital
Net domestic investment
386
28
-222
Code
B8
B9
192
Resources
Net saving
Capital transfers (net)
Net borrowing from rest of world
233
-3
-38
Net domestic investment
192
This completes the main sequence of SNA accounts.
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Goods and services account
The goods and services accounts (sometimes called commodity flow accounts) are very
different. They show, for every product (or group of products), the total value of supplies
and the total value of demand. Because every product that is imported or locally produced
is used somehow, the two sides of the account must balance.
At national level, combining all goods and services, the account looks like this:
Code
P7
P1
D21
D31
Supply
Imports of goods & services
Total output at basic prices
Taxes on products
(less subsidies)
499
3,604
141
-8
Code
P2
P3/4
P5
P6
Total supply
4,236
Demand
Intermediate consumption
Final consumption
Fixed capital formation
Change in inventories
Exports of goods & services
Total use
1,883
1,399
386
28
540
4,236
On the left hand side, the values of imports and the total output (local production) of
goods and services represent the supply. However, to arrive at the market value of the
products, taxes on products have to be added (and any subsidies subtracted).
On the right hand side is what happens to the available goods and services. First, they may
be brought by other businesses (intermediate consumption). Alternatively, they may be
consumed by households and also by government and non-profit institutions serving
households (final consumption). Or they may be capital goods (buildings, machinery and
equipment: fixed capital formation); this category may also include intangible assets such as
software systems. If products are not used immediately, they will be temporarily added to
inventories and subtracted again later (changes in inventories). Finally some goods and
services are sold to non-residents (exports).
These accounts differ from the production accounts in an important way. Whereas the
figures in the production account can come – in theory at least – from each producer, the
data for each element in the goods and services account have to come from a variety of
sources. When estimates are made using the different sources, there are very likely to be
discrepancies between the supply and demand as well as some gaps, because of limitations
in the data. Such discrepancies are statistical, not real. To balance the accounts, national
accountants have to fill the gaps and adjust those figures judged to be less reliable.
Compiling such balanced accounts is therefore a key tool for ensuring consistency and
coherence in the estimates of GDP.
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Rest of the world account
The remaining flow account of the SNA is the rest of the world (RoW) account. This
account brings together all “external” transactions included in the previous accounts. It is
essentially the same as the balance of payments, seen from the viewpoint of the RoW.
Code
P6
D4
D7
D9
Uses by RoW
Exports
Primary income from abroad
Current transfers from abroad
Capital transfers from abroad
Total
540
70
9
1
620
Code
P7
D4
D7
D9
B9
Resources of RoW
Imports
Primary income paid abroad
Current transfers sent abroad
Capital transfers sent abroad
Net lending to rest of world
Total
499
40
39
4
38
620
Accounting identities
One of the most fascinating aspects of national accounting is the way the accounts have to
balance. If you look at all four of the above accounts, taken together, you will see that
every entry appears twice: once on the left and once on the right (or once negative, if on
the same side). If all the accounts are “consolidated”, there will be nothing left!
The accounting structure of the SNA thus provides a comprehensive framework for
compiling and presenting economic activity in a way that, if fully exploited, ensures the
coherence and consistency that are important attributes of a quality dataset.
Exercise 1
In which other accounts do these external transactions appear?
Code
External transaction
P6/7
Imports and exports
D4
Primary income
D7
Current transfers
D9
Capital transfers
B9
Net lending
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More about GDP
When, at national level, total output in the goods and services account is replaced by its
components from the production account, we have the following:
Code
P7
P2
B1
D21
D31
Supply
Imports of goods/services
Intermediate consumption
Gross value added
Taxes on products
(less subsidies)
499
1,883
1,721
133
Total supply
4,236
Code
P2
P3/4
P5
P6
Demand
Intermediate consumption
Household final consumption
NPISH final consumption
Government final consumption
Fixed capital formation
Change in inventories
Exports of goods & services
Total use
1,883
1,399
386
28
540
4,236
Now, intermediate consumption on both sides of the account are identical and can be
cancelled, while imports can be moved from the left-hand side to be subtracted from the
right hand side. The result of this process of “consolidation” is the following:
Code
B1
D21
D31
Production
Gross value added
Taxes on products
(less subsidies)
1,721
133
Code
P3/4
P5
P6
P7
Total GDP
1,854
Expenditure
Final consumption
Gross fixed capital formation
Change in inventories
Exports of goods & services
less Imports of g&s
Total GDP
1,399
386
28
540
-499
1,854
This account shows GDP as measured from the production (or income) approach on the
left-hand side, and GDP as measured from the “expenditure” approach on the right-hand
side of the account.
Definitions: GDP (at market prices)
GDP (expenditure) is the sum of the value of final consumption, gross capital formation
and exports of goods and services, less the value of imports of goods and services.
GDP (output) is the sum of the gross value added of all resident producers, measured at
basic prices, plus taxes (less subsidies) on products.
GDP (income) is the sum of compensation of employees, taxes (less subsidies) on
production and imports, gross mixed income and gross operating surplus.
Source http://unstats.un.org/unsd/sna1993/glossary.asp?letter=G
Although there are various possible valuations of GDP, in order to avoid confusion it is
recommended that GDP be always quoted “at market prices”. Gross value added is
usually valued at basic prices.
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Definitions: Market prices and basic prices
Market prices for transactions are the amounts of money willing buyers pay to acquire
something from willing sellers.
The basic price is the amount receivable by the producer from the purchaser for a unit of a
good or service produced as output minus any tax payable, and plus any subsidy
receivable, on that unit as a consequence of its production or sale.
Source as above
Examples of these taxes on products are import duties, excise duties and (non-deductible)
value added tax (VAT). If no taxes are payable (or subsidies receivable) on a sale, which is
often the case, then the basic price and the market price are the same.
For marketed goods, there is another difference between basic prices and market prices,
resulting from the treatment of trade and transport margins. While these margins are part
of the market price of the goods, at basic prices they are not. Instead, they are treated as
the separate output (at basic prices) of trade and/or transport services. At market prices,
the value of this separate output is considered to be zero, with the result that this difference
disappears from the total value of all goods and services.
GDP and the SNA
1.68
The SNA consists of a coherent, consistent set of macroeconomic accounts and
tables designed for a variety of analytical and policy purposes. Nevertheless, certain key
aggregates of the System, such as GDP and GDP per head of population, have acquired an
identity of their own and are widely used by analysts, politicians, the press, the business
community and the public at large as summary, global indicators of economic activity and
welfare. Movements of such aggregates, and their associated price and volume measures,
are used to evaluate the overall performance of the economy and hence to judge the relative
success or failure of economic policies pursued by Governments.
Source: System of National Accounts 1993 §1.68
The SNA goes on to point out that GDP is a measure of production, which is
“…important because it largely determines how much a country can afford to consume
and it also affects the level of employment. The consumption of goods and services, both
individually and collectively, is one of the most important factors influencing the welfare of
a community…” But, obviously, other things can also affect wellbeing.
Comment: In some countries, the GDP itself may be significantly affected in the short
term by factors over which the government has little or no control. A severe drought, for
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instance, may cause the GDP to decrease in real terms (negative growth), but this would
normally be followed by a larger than usual increase if the next year was a good one.
Exercise 2:
Obtain a copy of the Budget Speech to see what was said in Parliament about the GDP last
year. Write down the main points.
Annex A: Primary references
The primary references used in the sessions on the GDP and national accounts more
generally are:
System of National Accounts 1993, United Nations (et al), New York, 1993
This is the “Blue Book”, the bible of national accountants. It is describes the current
international standards for compiling national accounts in the most sophisticated
economy. As such it is the key reference for expert national accountants.
System of National Accounts 1993 Training Manual, SADC, Gaborone, 1999
This manual provides an introduction to the Blue Book. It is designed for those
wishing to study the theory of national accounting in greater detail than is possible in
this course.
A systems approach to national accounts compilation, United Nations, New York, 1999
This national accounting handbook provides guidance on how to develop national
accounts in a systematic way. However it tends to assume the availability of
statistical resources far beyond those of most SADC countries.
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Annex B: Institutional units and sectors
An institutional unit is an economic entity capable, in its own right, of owning assets,
incurring liabilities and engaging in economic transactions with other entities. These
institutional units are grouped together to form institutional sectors, on the basis of their
principal functions, behaviour, and objectives:
Institutional sectors
Non-financial corporations:
institutional units which are principally engaged in the production of market goods and
non-financial services
Financial corporations:
institutional units which are principally engaged in financial intermediation or in auxiliary
financial activities
General government:
institutional units which, in addition to fulfilling their political responsibilities and their
role of economic regulation, produce principally non-market services (possibly goods) for
individual or collective consumption and redistribute income and wealth
Households:
all physical persons in the economy, with the institutional unit in the household sector
consisting of one individual or a group of individuals. According to the criteria given for
defining the institutional unit, the household of the owner of an unincorporated enterprise
in general includes this enterprise, which is not considered an institutional unit (except
under certain conditions). The principal functions of households are the supply of labour,
final consumption and, as entrepreneurs, the production of market goods and non-financial
(possibly financial) services
Non-profit institutions serving households (NPISHs):
legal entities which are principally engaged in the production of non-market services for
households and whose main resources are voluntary contributions by households
Source; System of National Accounts 1993
Although not used directly in the context of GDP, these sectors have a fundamental role in
the SNA, especially when it comes to disaggregating the distribution and use of income, the
accumulation accounts and balance sheets.
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Annex C: Main transactions
Some of the following definitions have been edited to make them more accessible.
Primary income from abroad
consists of the compensation of employees who are residents but work abroad and
property income receivable by residents from abroad
Primary income paid abroad
consists of the compensation of employees who are non-resident but work for a resident
enterprise and property income payable to non-residents.
Compensation of employees is the total remuneration, in cash or in kind, payable by
an enterprise to an employee in return for work done.
Property income consists mainly of interest, dividends and the like, including
reinvested earnings on direct foreign investment.
National income (not shown in the summary accounts)
may be derived from domestic product by adding primary income from abroad and
subtracting primary income paid abroad
Current transfers
A transfer is a transaction in which one institutional unit provides a good, service or asset
to another unit without receiving from the latter any good, service or asset in return as
counterpart. Current transfers consist of all transfers that are not transfers of capital (see
below).
National disposable income
may be derived from national income by adding current transfers from abroad and
subtracting current transfers paid abroad
Consumption of fixed capital
represents the reduction in the value of the fixed assets used in production during the
accounting period resulting from physical deterioration, normal obsolescence or normal
accidental damage. This flow may be subtracted from gross domestic product, gross
national income, gross national disposable income and gross saving to give net domestic
product, net national income, net national disposable income and net saving.
Final consumption
consists of goods and services used up by individual households or the community to
satisfy their individual or collective needs or wants.
Saving
Saving is disposable income less final consumption.
Capital transfers
First, a transfer in kind is a capital transfer when it consists of
(i) the transfer of ownership of a fixed asset or
(ii) the forgiveness of a liability by a creditor when no counterpart is received in return.
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Second, a transfer of cash is a capital transfer when it is linked to, or conditional on, the
acquisition or disposal of a fixed asset (for example, an investment grant) by one or
both parties to the transaction. Capital transfers also may be distinguished by being
large and infrequent, but they cannot be defined in terms of size or frequency.
Gross capital formation (not shown)
is measured by the total value of the gross fixed capital formation and changes in
inventories. (It also includes acquisitions less disposals of valuables – negligible at
national level).
Gross fixed capital formation
is the total value of a producer’s acquisitions, less disposals, of fixed assets during the
accounting period.
Fixed assets are tangible or intangible assets produced as outputs from processes of
production that are themselves used repeatedly or continuously in other processes of
production for more than one year.
Changes in inventories (including work-in-progress)
consist of changes in: (a) stocks of outputs that are still held by the units that produced
them prior to their being further processed, sold, delivered to other units or used in other
ways; and (b) stocks of products acquired from other units that are intended to be used for
intermediate consumption or for resale without further processing.
Net lending (to the rest of the world)
is the balancing item in the accumulation account and in the rest of the world account.
Negative net lending may also be described as "net borrowing".
Main source: http://unstats.un.org/unsd/sna1993/glossary.asp?letter=G
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