Lesson 2: Introduction to National Accounts II - Europa · Lesson 2: Introduction to National Accounts II Katri Soinne. ... direction,…” (ESA95 3.07) ... • Intermediate consumption

Eurostat

ESTP course on National Accounts – Introductory course

Statistics Finland, Helsinki,

7–10 April 2014

Lesson 2: Introduction to National Accounts II

Katri Soinne

Eurostat

The System of National Accounts...

• … describes all the economic activities in the economy

• … is based on the theory of economics

• … includes a lot of definitions and agreements

• … gives a possibility to comparisons between years and countries

• … does not describe well-being

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Eurostat

Content

• Production boundary

• Statistical units and their grouping

• Centre of economic interest; resident vs. non-resident

• Flows and stocks

• Basic equations

• Supply: GDP and three approaches for calculation

• Demand: consumption, investments, net exports

• Rules of accounting

• Sequence of accounts; balancing item

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Eurostat

4

The circular flow of income in a closed system

Production Primary income

Commodity Income

expenditures redistribution

Eurostat

Definition of Production

• “An activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital and goods and services to produce outputs of goods and services. Production does not cover purely natural processes without any human involvement or direction,…” (ESA95 3.07)

• Same definition in ESA 2010

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Eurostat

Production Boundary

• Includes all individual or collective goods and services that are supplied to the market as well as the own-account production of all goods for own final consumption or gross fixed capital formation

• Case: forests - trees and other products

• Case: housing

• Defines the activities which are counted in NA

• Hidden economy & illegal activities

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Eurostat

Exercise 1: Production or not in SNA (part I)

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YES NO

A) Growing potatoes to be sold to the factory…………

B) Growing potatoes for your own use..…………………

C) Natural growing of Baltic herrings at sea……………

D) Growing of trout at a trout farm.......……..…………

E) Selling beer at the restaurant with a receipt………

F) Selling beer at the restaurant without recording it…

G) Polluting the environment……………………………………

H) Gathering mushrooms in the woods……………………

I) Smuggling of alcohol or tobacco……………………………

Eurostat

Statistical units and their grouping: two types of units

• Institutional units and sectors in order to describe income, expenditure, financial flows and

balance sheets economic entities having certain rights and possibilities and

making their own decisions

• Local kind-of-activity units and industries in order to describe processes of production and for input-

output analysis; local KAUs are grouped into industries on the basis of their activity unit/ producer/ location/ activities and products

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Eurostat

Sector classification

• SNA 1993 and ESA 1995: identical hierarchy and numbering

• SNA 2008 and ESA 2010: more sub-sectors to financial corporations (S12) compared to previous versions

• ESA-classification = modified for the needs of the EU (for example sub-division of the rest of the world sector)

• Also a possibility to have sub-divisions for national needs

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Eurostat

Classification of institutional sectors

• S11 Non-financial corporations

• S12 Financial corporations

• S13 General government

• S14 Households

• S15 Non-profit institutions serving households

• S2 Rest of the world

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Eurostat

ISIC and NACE

• UN: ISIC (International Standard Industrial Classification)

• EU: NACE (European Classification of Economic Activities)

• National level: National versions of NACE

• Updates needed every now and then: latest from 2006-08

• The classification is hierarchical and coded (sections - divisions - groups - classes)

• Units having similar features make up an industry (production process, goods and services used in process, produced goods and services)

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Eurostat

Other classifications

• Classification of Products by Activity (CPA)

• Classification of individual consumption by purpose (COICOP)

• Classification of the functions of the government (COFOG)

• Classification of the Purposes of Non-Profit Institutions Serving Households (COPNI)

• Classification of assets (A)

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Eurostat

Links between statistical units and classifications

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• Institutional unit (company, bank, municipality, household, association,...)

• Local kind of activity unit (establishment)

• Product

• Sector classification

• Industrial classification Nace (Rev.2 )

• Product classification CPA

Eurostat

Institutional unit and local kind-of-activity unit (LKAU)

• One institutional unit contains one or more KAUs

• A local KAU belongs to one and only one institutional unit

• For theoretical purposes also so called homogenous unit

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Institutional unit A

LKAU 1 LKAU 2

Institutional unit B

LKAU 3

Eurostat

Examples of industries of LKAU(s) and Institutional Units

LKAU(s) IU

Amusement park (one location) =

Frozen French Fries Company + = (two locations)

Company producing shoes, motor bikes and + + = cleaning services

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932 932

103 103 103

152 (VA 45%)

291 (VA 40%)

960 (VA 15%)

152 (as IU)

Eurostat

Statistical units and their grouping: two types of units

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Industry/ Sector S11 S13 S14

014 Animal production X X

13 Manufacture of textiles X

41 Construction of buildings X X X

55 Accommodation X X

84 Public administration X

862 Medical and dental practice activities

X X X

97 Activities of households as employers of domestic personnel

X

Eurostat

Exercise 2: industries (LKAUs and institutional units)

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NACE (3-digit) of LKAU(s)

NACE (3-digit) of institutional unit

Unit 1: Potato farmer

Unit 2: Trout farmer

Unit 3: Company producing bikes and televisions (bikes 45% and televisions 55% of value added)

Unit 4: Gas-station with bakery (gas 25% and bakery 75% of value added)

Unit 5: Bank (part of bigger corporation)

Eurostat

Exercise 2: industries (LKAUs and institutional units)

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NACE (3-digit) of LKAU(s)

NACE (3-digit) of institutional unit

Unit 6: Insurance company

Unit 7: Embassy of Ever-Ever-land

Unit 8: University

Unit 9: Health care centre

Unit 10: Choir

Eurostat

Centre of Economic Interest

• One of the basic principles of the SNA and ESA defines whose activities are counted for the

national economy in a country

• Unit has a centre of economic interest in a country

• when a unit engages in economic activities for one year or more

OR

• when a unit carries out a construction activity in a country for a period of less than one year if the output is gross fixed

capital formation

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Eurostat

Resident - non-resident - notional resident

• A unit is resident in a country when it has a centre of economic interest on the territory of that country

• Some special cases: airplanes, international organisations, ...

• Also treated as institutional units (notional residents):

• those parts of non-resident units which have a centre of economic interest in a country

• non-resident units in their capacity as owners of land or buildings on the economic territory of the country

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Eurostat

Total economy and the rest of the world

• Total economy comprises of all resident units (incl. notional)

• Resident units engage in transactions with non-resident units external transactions in the rest-of-the world account

• The calculations are made from the point of view of the rest of the world (except for exports and imports)

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Eurostat

Exercise 3: resident/ non-resident/ notional resident

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Additional information R

esid

en

t

No

n-

resid

en

t

No

tion

al

resid

en

t

Unit 1: Potato farmer Travelling abroad one a year for vacation

Unit 2: Trout farmer Never-Never-landish, foreign trade with Ever-Ever-land

Unit 3: Company producing bikes and televisions (bikes 45% and televisions 55% of value added)

Foreign branch office (residency as a institutional unit)

Unit 4: Restaurant Gas-station with bakery (gas 25% and bakery 75% of value added)

Accepting all international credit cards

Unit 5: Bank (part of bigger corporation) Selling also foreign money

Eurostat

Additional information

Resid

ent

Non-

resid

ent

Notio

nal

resid

ent

Unit 6: Insurance company Selling also travel insurance

Unit 7: Embassy of Ever-Ever-land Based in Never-Never-land

Unit 8: University Having foreign students

Unit 9: Health care centre Serving tourists, too

Unit 10: Choir Performing also abroad

Unit 11: Household From Never-Never-land, owning a cottage in Ever-Ever-land

Exercise 3: resident/ non-resident/ notional resident

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Eurostat

Two basic kinds of information in the system:

• Stocks: holdings of assets and liabilities at a point of time --> recorded in balance sheets

• Flows: reflect creation, transformation, exchange, transfer or extinction of economic value --> recorded in all other accounts of the system --> two kinds of economic flows:

– transactions

– other changes in assets

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Eurostat

Different kind of transactions

• Transactions in goods and services (=products) (codes starting with P)

• Distributive transactions (codes starting with D)

• Transactions in financial instruments (codes starting with F)

• Other accumulation entries (codes starting with K)

=> Balancing items (codes starting with B)

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Eurostat

Basic equations

• The basic idea: supply and demand are equal GDP + M = C + G + I + X <=> GDP = C + G + I + (X - M)

• Also: output + import = IC + C + G + I + X

• Production = Income = Expenditure

• Definitional equations:

• transaction identity (for transactions between units): total uses = total resources

• budget identity (for sectors and units): total uses = total resources

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Eurostat

Gross domestic product (GDP)

• … describes the value of production (=value added)

• … includes the production of domestic production units

• … includes taxes and subsidies on production

• … also includes the hidden economy

• … should also include illegal activities

• … is counted both at current price and at fixed price

• … does not include household production

• … is one of the most important economic indicators and very widely used in comparisons (GDP/capita)

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Eurostat

Exercise 4: Production or not in SNA (part II)

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YES NO

J) You are eating at a restaurant……………...………….....

K) You are preparing a meal for your family.……………

L) You are cleaning your house…………………………........

M) You are hiring a cleaner for your house.………………

N) You are cleaning the house of your mother-in-law

O) You are hiring a cleaner for your mother-in-law...

P) You are painting the outside of your home…………..

Q) You are painting the inside of your home…………….

R) You are hanging wallpaper at your home…………….

Eurostat

Gross domestic product (GDP), cont’d

• Three methods for estimation A: production approach = output (P.1)- intermediate consumption (P.2) B: income approach = compensation of employees (D.1) + gross operating surplus (B.2G) (+ net taxes on production (D.29-D.39)) C: expenditure approach = final consumption expenditure (P.3)+ gross capital formation (P.5) + exports (P.6) – imports (P.7)

• Production inside one country

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Eurostat

Gross national income (GNI)

= gross domestic product

+ primary income received from the rest of the world - primary income paid to the rest of the world

• Primary income wages and salaries, social contributions (these together equal

compensation of employees)

interest, dividends

taxes on production and imports

subsidies

• Income one population

• Used in the EU context

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Eurostat

Exercise 5: From GDP to GNI

GDP of Ever-Ever-land for year X is 1155. • Compensation of employees paid to Never-Never-land: 20

• Wages and salaries received from Never-Never-land: 25

• Social contributions received from Never-Never-land: 5

• Interest, net (=received - paid): -8

• Dividends from Never-Never-land: 18

• Dividends, payable to the RoW: 9

• Subsidies, receivable: 6

• Subsidies, payable: 7

• Imports: 400

• Exports: 540

• Taxes on production and imports paid to the RoW: 5

Calculate the GNI of Ever-Ever-land:

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Eurostat

Output (P.1)

• Output = value of produced commodities (=goods and services) during the accounting period

• Types of output:

• market output (P.11)

• non-market output

output produced for own final use (P.12)

other non-market output (P.13)

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Eurostat

Intermediate consumption (P.2)

• Intermediate consumption = value of goods and services used as inputs in the production process (excluding fixed assets)

• Division: • FISIM (= Financial Intermediate Services Indirectly Measured)

(P.21)

• other intermediate consumption (P.22)

• Examples: raw materials, semi-finished goods, fuels and energy, small tools, purchased services, repairs and maintenance

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Eurostat

Value added (gross) (B.1G)

= difference between output and intermediate consumption

= income generated with production

= compensation of employees » wages and salaries

» social contributions

+ operating surplus and mixed income

+ consumption of fixed capital

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Eurostat

Consumption of Fixed Capital (CFC) (K.1)

• In the system most of the time the difference between gross and net concepts is the consumption of fixed capital

• CFC is a cost for using fixed capital

• CFC is a cost in production account and a resource in accumulation account

• CFC has an impact on value added in the production accounts of non-market producers

• CFC has an impact on operating surplus/ mixed income of market producers

• CFC is an imputed transaction

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Eurostat

Stiglitz-Sen Commission: Net Concepts

• NDP instead of GDP: difference is the depreciation of capital goods (CFC)

• Changes in the structure of production

• CFC does not include running out of scarce natural resources nor degradation in quality of the environment

• Net national disposable income – there might be a big difference between income of the citizens and measures of domestic production

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Eurostat

Final expenditure: Consumption (C + G)

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Final consumption expenditure (P.3):

Actual final consumption (P.4):

• In the economy as total: final consumption expenditure = actual final consumption

• Actual individual consumption is used for international comparisons

Private consumption Government consumption

Individual consumption Collective

consumption

Eurostat

Final expenditure: Gross capital formation (I) (P.5)

• Gross fixed capital formation (investments)

• acquisition less disposals of fixed assets

• SNA2008/ ESA2010: military equipment

• special attention: delineation with intermediate consumption

• Division: private/ government

• Changes in inventories

• Valuables

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Eurostat

Final expenditure: Net exports (X-M) = export (P.6) – imports (P.7)

• Transactions in goods and services

exports: from residents to non-residents

imports: from non-residents to residents

• Criterion: change of ownership (not crossing the border)

• Some agreed specialities:

• goods and services while travelling

• significant processing

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Eurostat

Exercise 6: final consumption or IC or GFCF?

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Action Final consumption

Intermediate consumption

Gross fixed capital formation

Potato farmer buys pesticides

Mr Smith buys pesticides for his garden

Restaurant buys potatoes

Mrs Smith buys potatoes for her family

Ms Williams buys a car for herself

A restaurant buys a car for the company

Mr Brown drives the car owned by restaurant, restaurant pays

Police keeps an eye on demonstration

Police works as security officer in a concert

Company buys tickets to a concert for it’s customers

Eurostat

Final consumption


Gross fixed capital formation

You buy tickets to the same concert (as the company) for the rest of your family

Government is building a library

Library is buying books to be borrowed

You are buying old, removed books from library sale

You are buying materials to paint your home (inside)

Company providing cleaning services is buying materials to paint inside of the building

Company providing cleaning services is buying materials to paint outside the building

Company providing painting services is buying materials to paint outside of the library

Exercise 6: final consumption or IC or GFCF?

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Eurostat

Market producers

• Price of sold products covers the production costs (50% rule) => market output by market producers

• Counting from top to bottom - starting with output, ending with operating surplus/ mixed income:

output - intermediate consumption

= value added (gross) - CFC

= value added (net) - compensation of employees

- taxes + subsidies

= operating surplus/ mixed income

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Eurostat

Market producer: example

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Output

Market output

Output for own final use


Value added, gross

Cosumption of fixed capital

Value added, net

Wages and salaries

Operating surplus/ mixed income

100

20

55

5

40

Eurostat

Non-market producers

• Products are free or the price does not cover the expenses

• Different valuations

• Counting from bottom to top: output = sum of costs (no operating surplus/ mixed income)

compensation of employees + taxes - subsidies

= value added (net) + CFC

= value added (gross) + intermediate consumption

= output

• General government and non-profit institutions

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Eurostat

Non-market producers: example

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Output

Market output/ sales of non-market ouput

Output for own final use

Other non-market output


Value added, gross

Consumption of fixed capital

Value added, net

Wages and salaries

Operating surplus/ mixed income

50

10

40

15

5

Eurostat

Exercise 7: GDP in three approaches

• Four different industries in Ever-Ever-land (figures are given per industry)

• Market output/producer: income covers at least 50% of costs, calculated from the top to the bottom

• Non-market output/producer: income does not cover costs, calculated from the bottom to the top (value of output = sum of costs)

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Eurostat


• Based on an assumption: non-market producers do not have any operating surplus/ mixed income

• Other non-market production (= output - market production - production for own final use - sales of non-market products) is final consumption

• Final expenditure includes net exports (=export – import)

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Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

8.3.2013

1(1)

Industry A Per indus-try

Industry C Per in-dustry

Imports of raw materials 400 Purchase from industry A 420

Wages and salaries 120 Wages and salaries 800

Sales of products to industry C 420 Sales of products to industry O 200

Sales of products to industry O 110 Sales of products to industry P 280

Sales to consumers 300

Export 540


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Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

26.4.2012

1(1)

Industry O Per in-dustry

Industry P Per in-dustry

Purchase from industry A 110 Purchase from industry C 280

Purchase from industry C 200 Purchase from industry O 80

Wages and salaries 75 Wages and salaries 50

Sales of products to industry P 80


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Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

26.4.2012

1(1)

Industry A

Uses Resources

Imports Sales to industry C

Wages and salaries Sales to industry O

Profits / operating surplus

Total Total


50

Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

26.4.2012

1(1)

Industry C

Uses Resources

Purchase from industry A Sales to consumers

Wages and salaries Sales to industry O

Profits / operating surplus Sales to industry P

Exports

Total Total


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Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

26.4.2012

1(1)

Industry O

Uses Resources

Purchase from industry A Sales to industry P

Purchase from industry C Other non-market production

Wages and salaries


Total Total


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Eurostat

YKSIKKÖ

Nimi

Yhteystiedot

MUISTIO

26.4.2012

1(1)

Industry P

Uses Resources

Purchase from industry C Other non-market production

Purchase from industry O

Wages and salaries


Total Total


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Eurostat


54

Approach A: Production

Industry A

Industry C

Industry O

Industry P

GDP

Eurostat


55

Approach B: Income

Industry A

Industry C

Industry O

Industry P

GDP

Eurostat


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Approach C: Expenditure

Industry A

Industry C

Industry O

Industry P

GDP

Eurostat

Rules of accounting of the system

• Double entry / quadruple entry: each transaction must be recorded twice - in practice recorded four times!

• Valuation: flows and stocks are measured at their exchange value, i.e. the value at which they are, or could be, exchanged for cash

• Imputing: the system includes both actual and imputed transactions

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Eurostat

Rules of accounting, cont’d

• Time of recording: accrual basis = when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled

• Consolidating: elimination of transactions between units in the same (sub)sector from both uses and resources or from assets and liabilities

• Netting: elimination of the same kinds of transactions for a unit (sales and acquisitions, etc.)

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Eurostat

Sequence of Accounts

Basic accounts the national accounts:

• Production account

• Distribution and use of income accounts

• Accumulation accounts

• Balance of payments account (rest of the world)

Balance sheets

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Eurostat

The Balancing Item

• Accounts balance out, either because of the definitions used or because of the balancing item

• Balancing item is calculated based on existing information and the theory of economics

carries the system forward

is an interesting indicator as such

• The balancing item of the previous account is the opening resource of the next account

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Eurostat

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Uses

Account X:

45

10

X

-----------------------

Account X+1:

20

Y

-----------------------

Resources

Account X:

50

30

--------------------------

Account X+1:

X

15

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Eurostat

The quality of the national accounts?

• Meaningful aggregation

• Proper level of consolidation

• Double-entry bookkeeping

• Cross-checking the source statistics

• Well-being

• Delineation with reality?

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Documents

Lesson 2: Introduction to National Accounts II - Europa · Lesson 2: Introduction to National Accounts II Katri Soinne. ... direction,…” (ESA95 3.07) ... • Intermediate consumption