Download Compilation of GDP by income approach

II. Compilation of GDP by
income approach
Vu Quang Viet
Consultant to UNSD
GDP by income approach
• GDP by income approach looks very similar to GDP by production
approach, but they are different.
• Production approach derives GDP by subtracting intermediate
consumption (in purchasers’ prices from output (in basic prices).
GDP = Output – Intermediate consumption + Taxes less subsidies
on products
• Income approach adds components of value added to derive GDP.
Value added = Compensation of employees + Mixed income +
Other taxes less subsidies on production + Gross operating
surplus
GDP = Value added + taxes less subsidies on products
Types of accounts
Business
accounts (profit
and loss
statement and
balance sheet)
Revenue and
expenditure
account
Corporations
sector
Household
unincorporated
enterprises
sector
Yes
No
Government
sector / NPISHs
Yes
Value added by sectors by direct income
approach
COE
Mixed
income
Other net
taxes on
production
GOS or
CFC
Corporations
ð
ð
GOS
Households
ð
ð
CFC only
ð
ð
CFC only
Market
CFC only
Own
consumption
CFC only
Owneroccupied
housing
Government/
NPISHs
ð
ð
Cannot be directly estimated, must rely on
by production approach
CFC only
VA/GDP
Limit of income approach
• In principle, even though, income
approach adds components of value
added to derive GDP.
• In practice, only value added of
corporations and general government can
be derived directly.
– Operating surplus of corporations can be
derived from corporations profits after
adjustments for conceptual differences.
– Net operating surplus of government sector is
zero.
• It is not possible to derive operating
surplus of household unincorporated
enterprises as they do not keep business
accounts. Production approach must be
used for these cases.
Value added
at basic prices
=
Compensation
of employees
Other taxes
less subsidies
on production
Gross
operating
surplus
Corporate income statement
Sales or revenues
Sales or revenues
Other income (income from supplementary activities, capital
gains)
Less
Cost and expenses
Cost of goods sold
Operating expenses (Intermediate consumption, depreciation,
compensation of employees)
Other expenses (interest payable less interest receivable,
payment of rent and royalties, debt allowances, other current
transfers, etc.)
Equal
Net income before income taxes
Less
Income taxes
Equal
Net income (which is also called profits)
Less
Equal
Dividends payable
Addition to retained earnings
Compile gross operating surplus for
corporations (preliminary)
Depreciation
Plus
Addition to retained earnings
Plus
Dividends payable
Less
Property income receivable
Plus
Property income payable
Less
Current transfer receivable (Non-life insurance claims, etc.)
Plus
Current transfer payable (Non-life insurance premium, etc.)
Less
Net capital gain from selling financial and non-financial
assets
Plus
Depletion, write-down of inventory, bad debt allowance
Adjustment of preliminary GOS for capitalized cost
•
•
Adjustments of own-account research and
development (R&D) and own construction, etc.
which are treated as capital expenditures by both
business accounting and national accounting
(SNA2008 only).
– In national accounting, these expenditures must
also treated as output from which value added are
generated.
– In business accounting, capitalized costs are
recorded only in the balance sheet as the concept
of output is non-existent.
Adjustments for SNA:
– Add in output for R&D as sum of costs
(IC+COE+COF), thus add in value added for this
component.
– Add in consumption of fixed capital (COF) for this
addition value of capital for the current and future
periods.
Cost capitalization
Depreciation in 10 years
No capitalized
Capitalized
Revenues
100
Revenues
R&D
20
R&D depreciation 2
Other cost
60
Other cost
60
Net income
20
Net income
38
SNA treats this as output which is then
consumed as GCF when capitalized
100
Higher income allows for
the purchase of R&D as assets
Adjustment to treat bank and
insurance service charges as IC
• These adjustments are similar in GDP by
production approach: fisim on interest and
service charges on insurance are estimated
and imputed as intermediate consumption
•
Lower Operating surplus
Summary of approaches
• Gross operating surplus and value added of
corporations can be estimated directly by using
information from business accounts.
• Gross operating surplus and value added for
nonmarket producers are similar for production
and income approaches as net operating
surplus are zeros.
• Gross operating surplus and value added for
households must be derived by production
approach as households by definition do not
keep business accounts.
Data sources on corporations
• For the corporations sector, annual surveys of
enterprises are needed to get compensation of
employees and additional information to compile gross
operating surplus.
• For quarterly accounts, COE can be estimated by data
on employment and wage rates collected by monthly
labor force survey, corporate profits of all corporations
are available from tax returns to tax authority.
• Up-to-date information but limited in scope on
corporations whose shares are traded in the stock
exchanges are available from their income statements,
which can be used as indexes for quick and preliminary
estimation of profits.
Advantages of income approach for
policy formulation
• Corporations as indication of development: Although
every sector is important to the economy but the growth
in the contribution to GDP of the corporations signifies
especially for developing countries the growing
modernization of the economy.
• Tax base expansion together with corporate growth:
Compensation of employees in the corporate sector and
corporate profits can be easily subject to taxation than in
the incorporated enterprises, thus the growth of this
sector expands the tax base of the economy.
• Social policy expansion made possible with increase in
labor employed in corporations: growth of compensation
of employees also allows for the introduction or
expansion of social policy with respect to health
insurance, pension and contribution to social security.
Disadvantages of income approach
• GDP by income approach is applied only
at the total economy level.
• It does not provide value added by
industry for structural and productivity
analysis like the production approach.
Conclusion
• For monitoring economic development and development
of tax and social policy, it is recommended that countries
should prepare value added and its components by
institutional sectors which include:
–
–
–
–
Corporations
Households
Government
NPISHs
• The income approach that distinguish clearly institutional
sources of income would also allow policy makers to
have a better view of business profits within the context
of national accounting.