57487 System of National Accounts 2008 European Commission International Monetary Fund Organisation for Economic United Nations World Bank Co-operation and Development System of National Accounts 2008 European Commission International Monetary Fund Organisation for Economic United Nations World Bank Co-operation and Development New York, 2009 European Commission International Monetary Fund Print stock code SNA EA 2008 001 Organisation for Economic Co-operation and Development OECD Code 302009191P1 United Nations Sales No. E.08.XVII.29, document symbol ST/ESA/STAT/SER.F/2/Rev.5 World Bank ISBN 978-92-1-161522-7 Copyright © 2009 European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations and World Bank All rights reserved Foreword The System of National Accounts, 2008 (2008 SNA) is a statistical framework that provides a comprehensive, consistent and flexible set of macroeconomic accounts for policymaking, analy- sis and research purposes. It has been produced and is released under the auspices of the United Nations, the European Commission, the Organisation for Economic Co-operation and Devel- opment, the International Monetary Fund and the World Bank Group. It represents an update, mandated by the United Nations Statistical Commission in 2003, of the System of National Accounts, 1993, which was produced under the joint responsibility of the same five organiza- tions. Like earlier editions, the 2008 SNA reflects the evolving needs of its users, new develop- ments in the economic environment and advances in methodological research. A working group, comprising representatives of each of our organizations, managed and coordinated the work. National statistical offices and central banks from countries through- out the world made valuable contributions. Expert groups carried out research on the issues being reviewed. An advisory expert group was established to provide expert opinions from a broad range of countries. During the update work, the recommendations and the updated text were posted on the website of the United Nations Statistics Division for worldwide comment, thereby achieving full transparency in the process. The 2008 SNA is intended for use by all countries, having been designed to accommodate the needs of countries at different stages of economic development. It also provides an overarching framework for standards in other domains of economic statistics, facilitating the integration of these statistical systems to achieve consistency with national accounts. At its fortieth session, the Statistical Commission unanimously adopted the 2008 SNA as the international statistical standard for national accounts. We encourage all countries to compile and report their national accounts on the basis of the 2008 SNA as soon as possible. BAN Ki-moon José Manuel Barroso Angel Gurría Secretary-General President Secretary-General United Nations European Commission Organisation for Economic Co-operation and Development Dominique Strauss-Kahn Robert B. Zoellick Managing Director President International Monetary Fund The World Bank Group Summary table of contents Foreword.................................................................................................................................................................................... iii Table of contents ..................................................................................................................................................................... vii List of tables............................................................................................................................................................................. xli List of figures .......................................................................................................................................................................... xlv Preface .................................................................................................................................................................................. xlvii List of abbreviations and acronyms .......................................................................................................................................... lv Chapter 1: Introduction ..............................................................................................................................................................1 Chapter 2: Overview ................................................................................................................................................................15 Chapter 3: Stocks, flows and accounting rules ........................................................................................................................39 Chapter 4: Institutional units and sectors .................................................................................................................................61 Chapter 5: Enterprises, establishments and industries ...........................................................................................................87 Chapter 6: The production account .........................................................................................................................................95 Annex to chapter 6: Separating output due to storage from holding gains and losses.......................................................... 127 Chapter 7: The distribution of income accounts ....................................................................................................................131 Chapter 8: The redistribution of income accounts .................................................................................................................157 Chapter 9: The use of income accounts ................................................................................................................................179 Chapter 10: The capital account ............................................................................................................................................195 Chapter 11: The financial account .........................................................................................................................................219 Chapter 12: The other changes in assets accounts ..............................................................................................................237 Chapter 13: The balance sheet .............................................................................................................................................257 Chapter 14: The supply and use tables and goods and services account ............................................................................271 Chapter 15: Price and volume measures ..............................................................................................................................295 Chapter 16: Summarizing and integrating the accounts ........................................................................................................325 Chapter 17: Cross-cutting and other special issues ..............................................................................................................341 Chapter 18: Elaborating and presenting the accounts ...........................................................................................................395 Chapter 19: Population and labour inputs .............................................................................................................................405 Chapter 20: Capital services and the national accounts ........................................................................................................415 Chapter 21: Measuring corporate activity ..............................................................................................................................427 Chapter 22: The general government and public sectors ......................................................................................................435 Chapter 23: Non-profit institutions .........................................................................................................................................455 Chapter 24: The households sector .......................................................................................................................................461 Chapter 25: Informal aspects of the economy .......................................................................................................................471 Chapter 26: The rest of the world accounts and links to the balance of payments ...............................................................483 Chapter 27: Links to monetary statistics and the flow of funds ..............................................................................................499 Chapter 28: Input-output and other matrix-based analyses ...................................................................................................507 Chapter 29: Satellite accounts and other extensions ............................................................................................................523 Annex 1:The classification hierarchies of the SNA and associated codes ............................................................................ 545 Annex 2: The sequence of accounts .....................................................................................................................................561 Annex 3: Changes from the 1993 System of National Accounts ..........................................................................................581 Annex 4: Research Agenda ...................................................................................................................................................603 References ............................................................................................................................................................................ 611 Glossary................................................................................................................................................................................. 617 Index ...................................................................................................................................................................................... 635 v vi Table of contents List of tables ...........................................................................................................................................................................xli List of figures ........................................................................................................................................................................xlv Preface .................................................................................................................................................................................xlvii List of abbreviations and acronyms .....................................................................................................................................lv Chapter 1: Introduction ............................................................................................................................................................1 A. What is the System of National Accounts? ..........................................................................................................1 B. The conceptual elements of the SNA ..................................................................................................................2 1. Activities and transactions ...................................................................................................................... 2 2. The institutional sectors of the economy .................................................................................................2 3. Accounts and their corresponding economic activities............................................................................2 The goods and services account ............................................................................................................................... 3 The sequence of accounts ......................................................................................................................................... 3 Current accounts ........................................................................................................................................... 3 Accumulation accounts ................................................................................................................................. 3 Balance sheets ............................................................................................................................................... 4 Other accounts of the SNA ....................................................................................................................................... 4 Supply and use tables.................................................................................................................................... 4 Accounts in volume terms............................................................................................................................. 4 C. Uses of the SNA ..................................................................................................................................................4 1. Monitoring the behaviour of the economy.............................................................................................. 4 2. Macroeconomic analysis..........................................................................................................................5 3. International comparisons ........................................................................................................................5 D. The boundaries of the SNA..................................................................................................................................6 1. Non-monetary transactions ..................................................................................................................... 6 2. The production boundary .........................................................................................................................6 Household production............................................................................................................................................... 6 Other production boundary problems....................................................................................................................... 7 3. The consumption boundary......................................................................................................................7 4. The asset boundary...................................................................................................................................7 5. National boundaries .................................................................................................................................7 6. Final consumption, intermediate consumption and gross fixed capital formation ..................................8 Human capital........................................................................................................................................................... 8 Repairs, maintenance and gross fixed capital formation .......................................................................................... 8 E. The SNA as a coordinating framework for statistics ............................................................................................9 1. Harmonization between different statistical systems.............................................................................. 9 2. The use of microdata for macroeconomic accounting .............................................................................9 F. Links with business accounting..........................................................................................................................10 1. International accounting standards........................................................................................................ 11 G. Expanding the scope of the SNA .......................................................................................................................11 H. The SNA and measures of welfare ....................................................................................................................12 1. Qualifications to treating expenditure as a welfare measure ................................................................ 12 2. Unpaid services and welfare ..................................................................................................................12 3. The impact of external events on welfare ..............................................................................................12 4. The impact of externalities on welfare...................................................................................................12 vii System of National Accounts 5. Non-economic impacts on welfare.........................................................................................................13 6. Welfare indicators and macroeconomic aggregates...............................................................................13 Chapter 2: Overview ...............................................................................................................................................................15 A. Introduction ........................................................................................................................................................15 1. Analysing flows and stocks....................................................................................................................15 2. Recording flows and stocks....................................................................................................................16 B. The conceptual elements of the SNA.................................................................................................................17 1. Institutional units and sectors................................................................................................................ 17 Institutional sectors ................................................................................................................................................ 17 Delimitation of the total economy and the rest of the world ................................................................................. 17 2. Transactions and other flows..................................................................................................................17 Main types of transactions and other flows ........................................................................................................... 18 Characteristics of transactions in the SNA ............................................................................................................ 19 3. Assets and liabilities...............................................................................................................................19 4. Products and producing units .................................................................................................................19 Products.................................................................................................................................................................. 19 Producing units ...................................................................................................................................................... 19 5. Purposes .................................................................................................................................................20 C. Rules of accounting............................................................................................................................................20 1. Introduction ........................................................................................................................................... 20 Terminology for the two sides of the accounts...................................................................................................... 20 Change of ownership and the recording of transactions in goods and services..................................................... 20 Double entry or quadruple entry accounting ......................................................................................................... 21 2. Time of recording...................................................................................................................................21 3. Valuation ................................................................................................................................................21 General principles .................................................................................................................................................. 21 Methods of valuation ............................................................................................................................................. 22 Volume measures and measures in real terms ....................................................................................................... 22 4. Consolidation and netting.......................................................................................................................22 Consolidation ......................................................................................................................................................... 22 Netting.................................................................................................................................................................... 23 The use of "net".......................................................................................................................................... 23 D. The accounts......................................................................................................................................................23 1. Introduction ............................................................................................................................................23 2. The full sequence of accounts ................................................................................................................23 The three sections of the sequence of accounts ..................................................................................................... 24 The production account.......................................................................................................................................... 24 The distribution of income accounts...................................................................................................................... 25 The primary distribution of income account .............................................................................................. 25 The secondary distribution of income account .......................................................................................... 25 The redistribution of income in kind account ............................................................................................ 25 The use of income accounts ....................................................................................................................... 26 The accumulation accounts.................................................................................................................................... 27 The capital account..................................................................................................................................... 27 The financial account ................................................................................................................................. 28 The other changes in the volume of assets account ................................................................................... 28 The revaluation account ............................................................................................................................. 28 Balance sheets........................................................................................................................................................ 29 3. An integrated presentation of the accounts ............................................................................................29 The rest of the world accounts ............................................................................................................................... 30 The goods and services account............................................................................................................................. 30 The aggregates ....................................................................................................................................................... 34 Gross domestic product (GDP) .................................................................................................................. 34 Net and gross measures .............................................................................................................................. 34 Gross national income (GNI) ..................................................................................................................... 34 viii National disposable income ........................................................................................................................ 35 Accounts in volume terms........................................................................................................................... 35 4. The other parts of the accounting structure............................................................................................35 The central supply and use table and other input-output tables.............................................................................. 35 The tables of financial transactions and financial assets and liabilities.................................................................. 36 Complete balance sheets and assets and liabilities accounts .................................................................................. 36 Functional analysis ................................................................................................................................................. 36 Population and labour inputs tables........................................................................................................................ 36 E. The integrated central framework and flexibility.................................................................................................37 1. Applying the central framework in a flexible way ............................................................................... 37 2. Introducing social accounting matrices..................................................................................................37 3. Introducing satellite accounts.................................................................................................................37 Chapter 3: Stocks, flows and accounting rules...................................................................................................................39 A. Introduction ........................................................................................................................................................39 1. Stocks and flows ................................................................................................................................... 39 2. Balancing items......................................................................................................................................39 3. Grouping stocks and flows into accounts ..............................................................................................40 4. Accounting rules ....................................................................................................................................40 B. Stocks ................................................................................................................................................................41 1. Benefits ................................................................................................................................................. 41 2. Ownership ..............................................................................................................................................41 3. The definition of an asset .......................................................................................................................42 4. Financial assets and liabilities................................................................................................................42 5. The asset boundary and the first-level classification of assets...............................................................42 Contingent liabilities and provisions ...................................................................................................................... 42 6. Entry and exit of assets from the balance sheet .....................................................................................43 7. Exclusions from the asset boundary.......................................................................................................43 C. Flows..................................................................................................................................................................43 1. Transactions .......................................................................................................................................... 43 Monetary transactions............................................................................................................................................. 44 Transactions with and without a recompense ............................................................................................. 44 Rearrangements of transactions .................................................................................................................. 44 Rerouting transactions................................................................................................................................. 44 Partitioning transactions.............................................................................................................................. 45 Units facilitating a transaction on behalf of other parties ........................................................................... 45 Non-monetary transactions..................................................................................................................................... 46 Barter transactions....................................................................................................................................... 46 Remuneration in kind.................................................................................................................................. 46 Payments in kind other than remuneration in kind ..................................................................................... 46 Transfers in kind ......................................................................................................................................... 46 Internal transactions .................................................................................................................................... 47 Externalities and illegal actions .............................................................................................................................. 47 Externalities ................................................................................................................................................ 47 Illegal actions .............................................................................................................................................. 48 2. Other flows.............................................................................................................................................48 Other changes in the volume of assets.................................................................................................................... 48 Holding gains and losses ........................................................................................................................................ 49 D. Balancing items..................................................................................................................................................49 Balancing items in the flow accounts ..................................................................................................................... 49 Balancing items in the balance sheets .................................................................................................................... 49 E. Accounting rules ................................................................................................................................................49 1. Quadruple-entry accounting.................................................................................................................. 49 2. Valuation ................................................................................................................................................50 General rules........................................................................................................................................................... 50 ix System of National Accounts Valuation of transactions ....................................................................................................................................... 50 Agricultural products sold from the farm................................................................................................... 51 Barter .......................................................................................................................................................... 51 Quotation prices ......................................................................................................................................... 51 Valuation of transfers inkind...................................................................................................................... 51 Transfer pricing .......................................................................................................................................... 51 Concessional pricing .................................................................................................................................. 52 Valuation at cost......................................................................................................................................... 52 Valuation of assets ..................................................................................................................................... 52 Business accounting valuation ................................................................................................................... 53 Valuation of partitioned flows ............................................................................................................................... 53 Special valuations concerning products................................................................................................................. 53 Valuation of other flows ........................................................................................................................................ 54 Other changes in the volumes of assets...................................................................................................... 54 Holding gains and losses ............................................................................................................................ 54 Valuation of positions of financial assets and liabilities........................................................................................ 54 3. Time of recording...................................................................................................................................55 Choice of time of recording ................................................................................................................................... 55 Choice for recording on an accrual basis............................................................................................................... 55 Time of recording of acquisitions of goods and services ...................................................................................... 56 Time of recording of redistributive transactions.................................................................................................... 56 Time of recording of transactions in financial assets and liabilities...................................................................... 56 Time of recording of output and intermediate consumption ................................................................................. 56 Time of recording of changes in inventories and consumption of fixed capital.................................................... 57 Time of recording of composite transactions and balancing items........................................................................ 57 Time of recording of other flows ........................................................................................................................... 57 Time of recording of holding gains and losses ...................................................................................................... 57 Timing adjustments for international transactions................................................................................................. 57 Balance sheet items................................................................................................................................................ 58 4. Aggregation, netting, consolidation .......................................................................................................58 Aggregation............................................................................................................................................................ 58 Netting.................................................................................................................................................................... 58 Consolidation ......................................................................................................................................................... 58 Chapter 4: Institutional units and sectors ............................................................................................................................61 A. Introduction ........................................................................................................................................................61 1. Institutional units................................................................................................................................... 61 2. Residence ...............................................................................................................................................62 3. Sectoring and economic behaviour ........................................................................................................63 4. The total economy..................................................................................................................................63 5. An overview of institutional sectors.......................................................................................................65 6. Subsectors...............................................................................................................................................65 Public and foreign control...................................................................................................................................... 65 Non-profit institutions............................................................................................................................................ 66 Other subsectoring ................................................................................................................................................. 66 7. The rest of the world ..............................................................................................................................66 B. Corporations in the SNA ....................................................................................................................................66 1. Types of corporations.............................................................................................................................66 Legally constituted corporations............................................................................................................................ 66 Cooperatives, limited liability partnerships, etc. ................................................................................................... 67 Quasi-corporations................................................................................................................................................. 67 Branches ..................................................................................................................................................... 67 Notional resident units ........................................................................................................................................... 68 2. Special cases...........................................................................................................................................68 Groups of corporations .......................................................................................................................................... 68 Head offices and holding companies ..................................................................................................................... 68 Special purpose entities.......................................................................................................................................... 69 Captive financial institutions...................................................................................................................... 69 x Artificial subsidiaries of corporations......................................................................................................... 69 Special purpose units of general government ............................................................................................. 70 3. Ownership and control of corporations..................................................................................................70 Subsidiary and associate corporations .................................................................................................................... 70 Subsidiary corporations............................................................................................................................... 70 Associate corporations ................................................................................................................................ 70 Government control of corporations....................................................................................................................... 71 Control by a non-resident unit ................................................................................................................................ 72 C. Non-profit institutions .........................................................................................................................................72 1. The characteristics of NPIs ................................................................................................................... 72 2. NPIs engaged in market production.......................................................................................................73 Market NPIs serving enterprises............................................................................................................................. 73 3. NPIs engaged in non-market production ...............................................................................................73 Government control of non-profit institutions........................................................................................................ 73 NPIs serving households (NPISHs)........................................................................................................................ 74 D. The non-financial corporations sector and its subsectors ..................................................................................74 E. The financial corporations sector and its subsectors .........................................................................................75 1. Central bank ...........................................................................................................................................76 2. Deposit-taking corporations except the central bank .............................................................................76 3. Money market funds (MMFs)................................................................................................................76 4. Non-MMF investment funds..................................................................................................................76 5. Other financial intermediaries, except insurance corporations and pension funds (ICPFs) ..................77 6. Financial auxiliaries ...............................................................................................................................77 7. Captive financial institutions and money lenders ..................................................................................77 8. Insurance corporations (ICs) ..................................................................................................................78 9. Pension funds (PFs) ...............................................................................................................................78 F. The general government sector and its subsectors ...........................................................................................78 1. Government units as institutional units..................................................................................................78 Government units as producers .............................................................................................................................. 79 Social security schemes and social security funds ................................................................................................. 79 2. The general government sector ..............................................................................................................80 3. Subsectors of the general government sector.........................................................................................80 Central government ................................................................................................................................................ 80 State government .................................................................................................................................................... 81 Local government ................................................................................................................................................... 81 Social security funds............................................................................................................................................... 82 4. The alternative method of subsectoring .................................................................................................82 G. The households sector and its subsectors.........................................................................................................82 1. Households as institutional units............................................................................................................82 2. Unincorporated enterprises within households ......................................................................................83 3. The household sector and its subsectors ................................................................................................83 Subsectoring according to income.......................................................................................................................... 83 Subsectoring according to characteristics of a reference person ............................................................................ 84 Subsectoring according to household size and location ......................................................................................... 84 H. The non-profit institutions serving households sector ........................................................................................84 I. The rest of the world ..........................................................................................................................................85 1. International organizations.....................................................................................................................85 2. Central banks of currency unions...........................................................................................................85 Chapter 5: Enterprises, establishments and industries .....................................................................................................87 A. Introduction ........................................................................................................................................................87 B. Productive activities ...........................................................................................................................................87 1. The classification of activities in the SNA............................................................................................ 88 2. Principal and secondary activities..........................................................................................................88 xi System of National Accounts Principal activities.................................................................................................................................................. 88 Secondary activities ............................................................................................................................................... 88 3. Ancillary activities .................................................................................................................................88 C. Partitioning enterprises into more homogeneous units ......................................................................................88 1. Types of production units...................................................................................................................... 88 Kind-of-activity units............................................................................................................................................. 88 Local units.............................................................................................................................................................. 89 Establishments ....................................................................................................................................................... 89 2. Data and accounts for establishments ....................................................................................................89 3. Application of the principles in specific situations ................................................................................89 Establishments within integrated enterprises......................................................................................................... 89 Establishments owned by general government...................................................................................................... 90 D. Ancillary activities...............................................................................................................................................91 Recording (or not) the output of ancillary activities.............................................................................................. 91 The role of ancillary activities in the SNA ............................................................................................................ 92 E. Industries............................................................................................................................................................92 1. Market, own account and non-market producers .................................................................................. 92 2. Industries and products...........................................................................................................................92 F. Units of homogeneous production .....................................................................................................................93 Chapter 6: The production account ......................................................................................................................................95 A. Introduction ........................................................................................................................................................95 B. The concept of production..................................................................................................................................96 1. Production as an economic activity....................................................................................................... 96 Goods ..................................................................................................................................................................... 96 Services .................................................................................................................................................................. 96 Knowledge-capturing products.............................................................................................................................. 97 2. The production boundary .......................................................................................................................97 The general production boundary .......................................................................................................................... 97 The production boundary in the SNA.................................................................................................................... 98 The production boundary within households......................................................................................................... 98 The exclusion of most services produced for own use by households....................................................... 98 Own-account production of goods ............................................................................................................. 99 Services of owner-occupied dwellings....................................................................................................... 99 Production of domestic and personal services by employing paid domestic staff..................................... 99 "Do-it-yourself" decoration, maintenance and small repairs ................................................................... 100 The use of consumption goods................................................................................................................. 100 The "non-observed" economy.................................................................................................................. 100 C. Basic, producers' and purchasers' prices ........................................................................................................101 1. Basic and producers' prices................................................................................................................. 101 VAT and similar deductible taxes ............................................................................................................ 101 Gross and net recording of VAT .............................................................................................................. 102 2. Purchasers' prices.................................................................................................................................102 3. Basic, producers' and purchasers' prices ­ a summary .......................................................................103 D. Value added and GDP .....................................................................................................................................103 1. Gross and net value added................................................................................................................... 103 2. Alternative measures of value added ...................................................................................................104 Gross value added at basic prices ........................................................................................................................ 104 Gross value added at producers' prices ............................................................................................................... 104 Gross value added at factor cost .......................................................................................................................... 104 3. Gross domestic product (GDP) ............................................................................................................104 4. Domestic production ............................................................................................................................105 E. The measurement of output .............................................................................................................................105 1. Production versus output..................................................................................................................... 105 2. Time of recording.................................................................................................................................106 xii 3. Valuation of output ..............................................................................................................................106 4. Market output, output for own final use and non-market output .........................................................106 Market output........................................................................................................................................................ 107 Recording of sales ........................................................................................................................ 107 Recording of barter....................................................................................................................... 107 Recording of compensation in kind or other payments in kind.................................................... 107 Recording of intra-enterprise deliveries ....................................................................................... 107 Changes in inventories of finished goods..................................................................................... 108 Changes in inventories of work-in-progress ............................................................................................. 108 Output for own final use ....................................................................................................................................... 109 Goods produced by households ................................................................................................................ 109 Services of domestic staff ......................................................................................................................... 109 Services of owner-occupied dwellings...................................................................................................... 109 Own gross fixed capital formation............................................................................................................ 109 Changes in inventories .............................................................................................................................. 109 Own intermediate consumption ................................................................................................................ 109 Valuation of output for own final use ....................................................................................................... 110 Non-market output................................................................................................................................................ 110 Market and non-market producers........................................................................................................................ 111 F. The output of particular industries....................................................................................................................111 1. Introduction ......................................................................................................................................... 111 2. Agriculture, forestry and fishing ..........................................................................................................111 3. Machinery, equipment and construction ..............................................................................................112 4. Transportation and storage...................................................................................................................112 Transportation....................................................................................................................................................... 112 Storage .................................................................................................................................................................. 112 5. Wholesale and retail distribution .........................................................................................................113 6. Output of the central bank....................................................................................................................114 Borderline cases such as supervisory services...................................................................................................... 114 Provision of non-market output ............................................................................................................................ 114 Provision of market output ................................................................................................................................... 114 7. Financial services other than those associated with insurance and pension funds ..............................114 Financial services provided in return for explicit charges.................................................................................... 115 Financial services provided in association with interest charges on loans and deposits ...................................... 115 Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets ........................................................................................................................................................... 116 8. Financial services associated with insurance and pension schemes. ...................................................117 Non-life insurance ................................................................................................................................................ 117 Life insurance ....................................................................................................................................................... 118 Reinsurance........................................................................................................................................................... 119 Social insurance schemes ..................................................................................................................................... 119 Standardized guarantee schemes .......................................................................................................................... 119 9. Research and development...................................................................................................................119 10. The production of originals and copies................................................................................................119 G. Intermediate consumption ...............................................................................................................................120 1. Coverage of intermediate consumption .............................................................................................. 120 2. The timing and valuation of intermediate consumption ......................................................................120 3. The boundary between intermediate consumption and compensation of employees ..........................121 4. The boundary between intermediate consumption and gross fixed capital formation.........................121 Small tools ............................................................................................................................................................ 121 Maintenance and repairs ....................................................................................................................................... 122 Research and development ................................................................................................................................... 122 Mineral exploration and evaluation ...................................................................................................................... 122 Military equipment ............................................................................................................................................... 122 5. Services provided by government to producers ...................................................................................122 6. Social transfers in kind.........................................................................................................................122 7. Services of business associations .........................................................................................................122 8. Outsourcing ..........................................................................................................................................123 xiii System of National Accounts 9. Leasing fixed assets..............................................................................................................................123 H. Consumption of fixed capital ............................................................................................................................123 1. The coverage of consumption of fixed capital .....................................................................................123 2. Consumption of fixed capital and rentals on fixed assets ....................................................................124 3. The calculation of consumption of fixed capital..................................................................................124 4. The perpetual inventory method ..........................................................................................................125 Calculation of the gross capital stock .................................................................................................................. 125 Relative efficiencies............................................................................................................................................. 125 Rates of consumption of fixed capital ................................................................................................................. 125 Values of consumption of fixed capital ............................................................................................................... 125 Annex to chapter 6: Separating output due to storage from holding gains and losses ...............................................127 A. Introduction ......................................................................................................................................................127 1. Storage costs and holding gains and losses......................................................................................... 127 B. Goods whose real value changes over time ....................................................................................................127 1. Goods with a long production period.................................................................................................. 127 2. Goods whose physical characteristics change......................................................................................128 3. Goods with seasonal patterns of supply and demand...........................................................................128 4. Who benefits from the increase in value of goods in storage?.............................................................129 5. When is output due to storage recorded? .............................................................................................129 1. Some examples.................................................................................................................................... 129 Example 1 ............................................................................................................................................................ 129 Example 2 ............................................................................................................................................................ 129 Example 3 ............................................................................................................................................................ 129 Chapter 7: The distribution of income accounts ...............................................................................................................131 A. Introduction ......................................................................................................................................................131 1. The generation of income account ...................................................................................................... 131 Operating surplus and mixed income .................................................................................................................. 132 2. The allocation of primary income account...........................................................................................133 The balancing items and national income............................................................................................................ 134 Net national income and gross national income .................................................................................................. 134 3. The entrepreneurial income account ....................................................................................................135 4. The allocation of other primary income account .................................................................................135 B. Compensation of employees............................................................................................................................136 1. Identifying employees ......................................................................................................................... 136 The employment relationship .............................................................................................................................. 136 Employers and own-account workers ...................................................................................................... 138 Outworkers ............................................................................................................................................... 138 2. The components of compensation of employees .................................................................................139 Wages and salaries............................................................................................................................................... 140 Wages and salaries in cash ....................................................................................................................... 140 Wages and salaries in kind ....................................................................................................................... 140 Stock options ............................................................................................................................................ 141 Employers' social contributions .......................................................................................................................... 141 Employers' actual contributions to social insurance schemes ................................................................. 142 Employers' imputed contribution to social insurance schemes ............................................................... 142 Employers' imputed pension contributions ................................................................................. 142 Employers' imputed non-pension contributions.......................................................................... 142 C. Taxes on production and on imports................................................................................................................143 1. Recording of taxes on production and on imports .............................................................................. 143 The recording of taxes on production and on imports in the accounts ................................................................ 143 Taxes versus fees ................................................................................................................................................. 144 Links with the IMF and OECD tax classifications .................................................................................. 144 The accrual basis of recording ............................................................................................................................. 145 xiv Interest, fines or other penalties............................................................................................................................ 145 Taxes and subsidies within the primary distribution of income accounts ............................................................ 146 2. Taxes on products ................................................................................................................................146 Value added type taxes ......................................................................................................................................... 146 Taxes and duties on imports, excluding VAT ...................................................................................................... 146 Import duties ............................................................................................................................................. 146 Taxes on imports, excluding VAT and duties........................................................................................... 146 Export taxes .......................................................................................................................................................... 147 Taxes on products, excluding VAT, import and export taxes .............................................................................. 147 3. Other taxes on production ....................................................................................................................147 D. Subsidies .........................................................................................................................................................148 1. Subsidies on products.......................................................................................................................... 148 Import subsidies.................................................................................................................................................... 148 Export subsidies.................................................................................................................................................... 149 Exclusions from export subsidies ............................................................................................................. 149 Other subsidies on products.................................................................................................................................. 149 2. Other subsidies on production..............................................................................................................149 E. Property incomes .............................................................................................................................................150 1. Defining property income ................................................................................................................... 150 2. Interest..................................................................................................................................................151 The accrual basis of recording.............................................................................................................................. 151 Interest payable and receivable on loans and deposits ......................................................................................... 151 Interest payable on debt securities........................................................................................................................ 152 Further elaboration................................................................................................................................................ 152 Nominal and real interest...................................................................................................................................... 152 The special case of interest rates set by the central bank ..................................................................................... 152 Below market rates on reserve deposits .................................................................................................... 152 Above market rates for currency support.................................................................................................. 153 Below market rates to priority industries .................................................................................................. 153 3. Distributed income of corporations......................................................................................................153 Dividends.............................................................................................................................................................. 153 Time of recording...................................................................................................................................... 153 Super-dividends ........................................................................................................................................ 153 Withdrawals of income from quasi-corporations ................................................................................................. 154 Reinvested earnings on foreign direct investment................................................................................................ 154 Retained earnings of domestic enterprises................................................................................................ 154 4. Investment income disbursements .......................................................................................................154 Investment income attributed to insurance policyholders .................................................................................... 154 Investment income payable on pension entitlements ........................................................................................... 155 Investment income attributed to investment fund shareholders ........................................................................... 155 5. Rent ......................................................................................................................................................156 Rent distinguished from rentals ............................................................................................................................ 156 Rent on natural resources...................................................................................................................................... 156 Rent on land.......................................................................................................................................................... 156 Rent on subsoil assets ........................................................................................................................................... 156 Chapter 8: The redistribution of income accounts............................................................................................................157 A. Introduction ......................................................................................................................................................157 1. The secondary distribution of income account ................................................................................... 157 Current taxes on income, wealth, etc.................................................................................................................... 158 Social contributions and benefits.......................................................................................................................... 158 Other current transfers .......................................................................................................................................... 159 2. Disposable income ...............................................................................................................................159 Links with economic theoretical concepts of income........................................................................................... 160 National disposable income.................................................................................................................................. 160 3. The redistribution of income in kind account ......................................................................................160 4. Adjusted disposable income.................................................................................................................161 xv System of National Accounts B. Current transfers ..............................................................................................................................................161 1. The distinction between current and capital transfers......................................................................... 162 2. The recording of transfers ....................................................................................................................162 Transfers in cash .................................................................................................................................................. 162 Provisions of goods and services by enterprises.................................................................................................. 163 Social transfers in kind......................................................................................................................................... 163 C. Current taxes on income, wealth, etc...............................................................................................................164 1. Taxes in general .................................................................................................................................. 164 Taxes versus fees ................................................................................................................................................. 164 Links with the IMF and OECD tax classifications .............................................................................................. 165 The accrual basis of recording ............................................................................................................................. 165 Interest, fines or other penalties ........................................................................................................................... 165 2. Taxes on income...................................................................................................................................165 3. Other current taxes ...............................................................................................................................166 Current taxes on capital ....................................................................................................................................... 166 Miscellaneous current taxes................................................................................................................................. 166 D. Social insurance schemes ...............................................................................................................................167 1. The extent of social benefits................................................................................................................ 167 2. The organization of social insurance schemes .....................................................................................168 Social security schemes ...................................................................................................................................... 170 Other employment-related social insurance schemes .......................................................................................... 170 E. Net social contributions ....................................................................................................................................170 1. Components of social contributions.................................................................................................... 171 2. Employers' actual social contributions ................................................................................................171 3. Employers' imputed social contributions.............................................................................................171 4. Households' actual social contributions...............................................................................................171 5. Households' social contribution supplements......................................................................................171 F. Social benefits other than social transfers in kind ............................................................................................172 1. Institutional arrangements ................................................................................................................... 172 Social insurance schemes or social assistance ..................................................................................................... 172 Social security and social assistance.................................................................................................................... 172 2. Types of social benefits........................................................................................................................172 Pensions ............................................................................................................................................................... 172 Non-pension benefits payable in cash.................................................................................................................. 172 Receivables by households that are not social benefits............................................................................ 173 Non-pension benefits payable in kind.................................................................................................................. 173 Benefits provided in kind by government............................................................................................................ 173 3. Social benefits recorded in the secondary distribution of income account ..........................................174 G. Other current transfers .....................................................................................................................................174 1. Insurance-related transactions ............................................................................................................. 175 Net non-life insurance premiums......................................................................................................................... 175 Non-life insurance claims .................................................................................................................................... 175 Net reinsurance premiums and claims ................................................................................................................. 176 Fees and calls under standardized guarantees...................................................................................................... 176 2. Current transfers within general government.......................................................................................176 3. Current international cooperation.........................................................................................................176 4. Miscellaneous current transfers............................................................................................................176 Current transfers between the central bank and general government .................................................................. 176 Current transfers to NPISHs ................................................................................................................................ 177 Current transfers between households ................................................................................................................. 177 Fines and penalties............................................................................................................................................... 177 Lotteries and gambling ........................................................................................................................................ 177 Payments of compensation .................................................................................................................................. 177 H. Social transfers in kind .....................................................................................................................................178 1. The redistribution of income in kind account ..................................................................................... 178 2. Social transfers in kind paid to non-residents ......................................................................................178 xvi Chapter 9: The use of income accounts.............................................................................................................................179 A. Introduction ......................................................................................................................................................179 1. The use of disposable income account................................................................................................ 180 2. The use of adjusted disposable income account ..................................................................................181 3. The relationship between the two versions of the use of income account ...........................................181 4. Adjustment for the change in pension entitlements .............................................................................181 5. Saving...................................................................................................................................................182 6. Calculating savings ratios ....................................................................................................................183 B. Expenditures, acquisitions and consumption of goods and services...............................................................183 1. Expenditures........................................................................................................................................ 183 The timing of expenditures on goods and services............................................................................................... 183 2. Acquisitions .........................................................................................................................................184 3. Consumption of goods and services.....................................................................................................184 Durable versus non-durable goods ....................................................................................................................... 184 Consumption as the using up of goods and services ............................................................................................ 184 C. Measuring the value of non-monetary transactions indirectly ..........................................................................185 1. Barter transactions............................................................................................................................... 185 2. Expenditures on goods and services received as income in kind ........................................................185 3. Expenditure on goods and services produced on own account............................................................185 D. Household final consumption expenditure .......................................................................................................186 1. Introduction ......................................................................................................................................... 186 2. Expenditures by households owning unincorporated enterprises ........................................................186 3. Expenditures on particular types of goods and services ......................................................................187 Expenditures on financial services ....................................................................................................................... 187 Financial services, except insurance and pension fund services............................................................... 187 Insurance and pension fund services......................................................................................................... 187 Services of dwellings, repairs and improvements ................................................................................................ 187 Services of owner-occupied dwellings...................................................................................................... 187 Decoration, minor repairs and maintenance.............................................................................................. 187 Major improvements ................................................................................................................................. 187 The repair and maintenance of durables............................................................................................................... 187 Licences and fees.................................................................................................................................................. 187 4. Classification of household final consumption expenditure ................................................................188 5. Timing and valuation of household final consumption expenditure....................................................188 Timing................................................................................................................................................................... 188 Valuation............................................................................................................................................................... 188 Valuation of purchases on credit............................................................................................................... 188 6. Expenditures by resident and non-resident households .......................................................................188 E. Household actual final consumption ................................................................................................................189 F. Consumption expenditures incurred by general government ..........................................................................189 1. Expenditures on the outputs of market and non-market producers .................................................... 189 Expenditures on the outputs of non-market producers ......................................................................................... 189 Expenditures on consumption goods and services produced by market producers.............................................. 190 Government output and final consumption expenditure ...................................................................................... 190 2. Expenditures on individual and collective goods and services............................................................190 Individual goods and services............................................................................................................................... 190 Individual consumption by type of producer ............................................................................................ 190 Collective services ................................................................................................................................................ 190 The borderline between individual and collective services.................................................................................. 191 The classification of individual and collective government expenditures............................................................ 191 Non-market services to enterprises....................................................................................................................... 191 G. Actual final consumption of general government .............................................................................................191 H. Consumption expenditures incurred by NPISHs..............................................................................................192 Individual consumption by type of producer ............................................................................................ 192 I. Actual final consumption of NPISHs ................................................................................................................192 xvii System of National Accounts J. Final consumption expenditure and actual final consumption: summary.........................................................193 1. Final consumption expenditure ........................................................................................................... 193 2. Actual final consumption .....................................................................................................................193 3. Total final consumption in the economy..............................................................................................193 Chapter 10: The capital account..........................................................................................................................................195 A. Introduction ......................................................................................................................................................195 1. The definitions of ownership and assets ............................................................................................. 195 2. Non-financial assets .............................................................................................................................195 Produced assets .................................................................................................................................................... 195 Non-produced assets ............................................................................................................................................ 196 3. The structure of the capital account .....................................................................................................197 Saving .................................................................................................................................................................. 197 Capital transfers ................................................................................................................................................... 197 Changes in net worth due to saving and capital transfers.................................................................................... 197 Acquisitions less disposals of non-financial assets.............................................................................................. 197 Net lending........................................................................................................................................................... 198 B. Gross capital formation ....................................................................................................................................198 1. Gross fixed capital formation.............................................................................................................. 198 The asset boundary .............................................................................................................................................. 198 Existing fixed assets ................................................................................................................................. 199 Improvements to existing assets............................................................................................................... 199 Costs incurred on acquisition and disposal of assets................................................................................ 200 Time of recording ................................................................................................................................................ 201 Ownership of assets ............................................................................................................................................. 201 Valuation.............................................................................................................................................................. 201 Transactions in fixed assets ................................................................................................................................. 202 Dwellings ................................................................................................................................................. 202 Other buildings and structures.................................................................................................................. 202 Buildings other than dwellings .................................................................................................... 203 Other structures............................................................................................................................ 203 Land improvements ..................................................................................................................... 204 Machinery and equipment ........................................................................................................................ 204 Transport equipment.................................................................................................................... 204 ICT equipment ............................................................................................................................. 204 Other machinery and equipment.................................................................................................. 204 Weapons systems ..................................................................................................................................... 204 Cultivated biological resources ................................................................................................................ 205 Animal resources yielding repeat products.................................................................................. 205 Tree, crop and plant resources yielding repeat products ............................................................. 205 Costs of ownership transfer on non-produced assets ............................................................................... 205 Intellectual property products................................................................................................................... 205 Research and development .......................................................................................................... 206 Mineral exploration and evaluation ............................................................................................. 206 Computer software and databases ............................................................................................... 207 Computer software.................................................................................................................. 207 Databases ................................................................................................................................ 207 Entertainment, literary and artistic originals ............................................................................... 207 Other intellectual property products ............................................................................................ 207 2. Changes in inventories .........................................................................................................................207 Storage and stocks of inventories ........................................................................................................................ 208 Valuation.............................................................................................................................................................. 208 Valuation of work-in-progress ................................................................................................................. 209 Transactions in inventories .................................................................................................................................. 209 Materials and supplies .............................................................................................................................. 209 Work-in-progress ..................................................................................................................................... 209 Work-in-progress on cultivated biological resources .................................................................. 210 Other work-in-progress................................................................................................................ 210 xviii Finished goods ...................................................................................................................................................... 210 Military inventories .............................................................................................................................................. 210 Goods for resale.................................................................................................................................................... 210 3. Acquisitions less disposals of valuables ..............................................................................................211 The asset boundary ............................................................................................................................................... 211 Valuation............................................................................................................................................................... 211 Transactions in valuables...................................................................................................................................... 211 Precious metals and stones........................................................................................................................ 211 Antiques and other art objects................................................................................................................... 211 Other valuables ......................................................................................................................................... 211 C. Consumption of fixed capital............................................................................................................................211 1. Costs of ownership transfer..................................................................................................................211 2. Terminal costs ......................................................................................................................................212 D. Acquisitions less disposals of non-produced non-financial assets ..................................................................212 1. Natural resources................................................................................................................................. 212 The asset boundary ............................................................................................................................................... 212 Ownership............................................................................................................................................................. 213 Valuation............................................................................................................................................................... 213 Transactions in natural resources .............................................................................................................. 214 Land.............................................................................................................................................. 214 Mineral and energy resources....................................................................................................... 214 Non-cultivated biological resources ............................................................................................. 214 Water resources ............................................................................................................................ 214 Other natural resources................................................................................................................. 215 2. Contracts, leases and licences ..............................................................................................................215 The asset boundary ............................................................................................................................................... 215 Types of assets included in contracts, leases and licences ................................................................................... 215 Marketable operating leases...................................................................................................................... 215 Permits to use natural resources................................................................................................................ 215 Permits to undertake specific activities..................................................................................................... 215 Entitlement to future goods and services on an exclusive basis ............................................................... 215 3. Goodwill and marketing assets ............................................................................................................216 E. Capital transfers...............................................................................................................................................216 1. Capital versus current transfers........................................................................................................... 216 2. Transfers in cash and in kind ...............................................................................................................217 Valuation............................................................................................................................................................... 217 3. Capital taxes .........................................................................................................................................217 4. Investment grants .................................................................................................................................217 5. Other capital transfers ..........................................................................................................................218 Chapter 11: The financial account ......................................................................................................................................219 A. Introduction ......................................................................................................................................................219 1. Financial assets and liabilities............................................................................................................. 219 2. Quadruple-entry accounting.................................................................................................................219 3. Counterparts of non-financial transactions ..........................................................................................220 4. Exchanges of financial assets and liabilities ........................................................................................220 5. Net lending ...........................................................................................................................................220 6. Contingencies.......................................................................................................................................221 B. Transactions in financial assets and liabilities .................................................................................................222 1. The classification of financial assets and liabilities ............................................................................ 222 2. Negotiability.........................................................................................................................................223 3. Valuation of transactions .....................................................................................................................223 4. Time of recording.................................................................................................................................223 5. Netting and consolidation ....................................................................................................................224 Netting .................................................................................................................................................................. 224 Consolidation........................................................................................................................................................ 224 xix System of National Accounts C. Recording of individual financial instruments ...................................................................................................225 1. Monetary gold and SDRs .................................................................................................................... 225 Monetary gold...................................................................................................................................................... 225 SDRs .................................................................................................................................................................... 225 2. Currency and deposits ..........................................................................................................................225 Currency............................................................................................................................................................... 225 Transferable deposits ........................................................................................................................................... 226 Inter-bank positions.................................................................................................................................. 226 Other transferable deposits....................................................................................................................... 227 Other deposits ...................................................................................................................................................... 228 3. Debt securities ......................................................................................................................................228 Supplementary classifications of debt securities ................................................................................................. 229 4. Loans ....................................................................................................................................................229 Supplementary classifications of loans................................................................................................................ 230 5. Equity and investment fund shares.......................................................................................................230 Equity................................................................................................................................................................... 230 Investment fund shares or units ........................................................................................................................... 231 Money market fund shares or units .......................................................................................................... 231 Other investment fund shares or units...................................................................................................... 232 Supplementary classifications of investment fund shares ................................................................................... 232 6. Insurance, pension and standardized guarantee schemes.....................................................................232 Non-life insurance technical reserves .................................................................................................................. 232 Life insurance and annuities entitlements............................................................................................................ 232 Pension entitlements ............................................................................................................................................ 232 Claims of pension funds on pension manager ..................................................................................................... 232 Provisions for calls under standardized guarantees ............................................................................................. 232 7. Financial derivatives and employee stock options...............................................................................233 Financial derivatives ............................................................................................................................................ 233 Options ..................................................................................................................................................... 233 Forwards................................................................................................................................................... 234 Credit derivatives ..................................................................................................................................... 234 Margins..................................................................................................................................................... 234 Employee stock options (ESOs) .......................................................................................................................... 235 8. Other accounts receivable or payable..................................................................................................235 Trade credit and advances ........................................................................................................................ 235 Other......................................................................................................................................................... 235 9. Memorandum items..............................................................................................................................235 Foreign direct investment......................................................................................................................... 235 Non-performing loans .............................................................................................................................. 235 Chapter 12: The other changes in assets accounts ..........................................................................................................237 A. Introduction ......................................................................................................................................................237 B. The other changes in the volume of assets account........................................................................................237 1. Functions of the other changes in the volume of assets account......................................................... 237 2. Appearance and disappearance of assets other than by transactions ...................................................238 Economic recognition of produced assets............................................................................................................ 238 Public monuments .................................................................................................................................... 238 Valuables .................................................................................................................................................. 239 Entry of natural resources into the asset boundary .............................................................................................. 239 Discoveries and upwards reappraisals of subsoil resources..................................................................... 239 Natural growth of uncultivated biological resources ............................................................................... 239 Transfers of other natural resources to economic activity ....................................................................... 239 Quality changes in natural resources due to changes in economic uses .................................................. 240 Exit of natural resources from the asset boundary............................................................................................... 240 Extractions and downwards reappraisals of subsoil resources................................................................. 240 Harvesting of uncultivated biological resources ...................................................................................... 241 Transfers of other natural resources out of economic activity ................................................................. 241 Quality changes in natural resources due to changes in economic uses .................................................. 241 xx Initiation and cancellation of contracts, leases and licences................................................................................. 241 Changes in the value of goodwill and marketing assets ....................................................................................... 242 Appearance and disappearance of financial assets and liabilities ........................................................................ 242 Debt operations ......................................................................................................................................... 243 Creation and exhaustion of financial derivatives ...................................................................................... 244 3. The effect of external events on the value of assets.............................................................................244 Catastrophic losses................................................................................................................................................ 244 Uncompensated seizures....................................................................................................................................... 244 Other changes in volume n.e.c.............................................................................................................................. 245 Fixed assets ............................................................................................................................................... 245 Exceptional losses in inventories .............................................................................................................. 246 Life insurance and annuities entitlements ................................................................................................. 246 Pension entitlements ................................................................................................................................. 246 Provisions for calls under standardized guarantee schemes ..................................................................... 246 4. Changes in classifications ....................................................................................................................247 Changes in sector classification and structure ...................................................................................................... 247 Changes in classification of assets and liabilities ................................................................................................. 247 Sale and reclassification of land and buildings ......................................................................................... 248 Changes of classification involving inventories ....................................................................................... 248 5. Summarizing other volume changes ....................................................................................................248 C. The revaluation account...................................................................................................................................248 1. Different holding gains and losses concepts ....................................................................................... 248 Nominal holding gains.......................................................................................................................................... 249 Neutral holding gains............................................................................................................................................ 250 Real holding gains ................................................................................................................................................ 250 2. Holding gains and losses on specific assets .........................................................................................251 Fixed assets........................................................................................................................................................... 251 Inventories ............................................................................................................................................................ 251 Valuables .............................................................................................................................................................. 252 Financial assets and liabilities .............................................................................................................................. 252 Monetary gold and SDRs .......................................................................................................................... 252 Currency.................................................................................................................................................... 252 Deposits and loans .................................................................................................................................... 252 Debt securities........................................................................................................................................... 252 Equity and investment fund shares ........................................................................................................... 253 Insurance, pension and standardized guarantee schemes.......................................................................... 253 Financial derivatives and employee stock options.................................................................................... 253 Other accounts receivable or payable ....................................................................................................... 253 Assets denominated in foreign currency ................................................................................................... 253 Chapter 13: The balance sheet............................................................................................................................................257 A. Introduction ......................................................................................................................................................257 1. Balance sheets ..................................................................................................................................... 257 2. Asset accounts......................................................................................................................................257 3. Structure of the balance sheet ..............................................................................................................261 4. Structure of asset accounts ...................................................................................................................261 B. General principles of valuation.........................................................................................................................261 1. Value observed in markets .................................................................................................................. 262 2. Values obtained by accumulating and revaluing transactions .............................................................262 3. Present value of future returns .............................................................................................................262 4. Assets denominated in foreign currencies ...........................................................................................262 C. The entries in the balance sheet......................................................................................................................262 1. Produced assets ................................................................................................................................... 263 Fixed assets........................................................................................................................................................... 263 Inventories ............................................................................................................................................................ 264 Valuables .............................................................................................................................................................. 264 2. Non-produced assets ............................................................................................................................264 xxi System of National Accounts Natural resources ................................................................................................................................................. 264 Land.......................................................................................................................................................... 264 Mineral and energy resources .................................................................................................................. 265 Non-cultivated biological resources, water resources and other natural resources.................................. 265 Contracts, leases and licences .............................................................................................................................. 265 Goodwill and marketing assets ............................................................................................................................ 265 3. Financial assets and liabilities ..............................................................................................................265 Monetary gold and SDRs..................................................................................................................................... 265 Currency and deposits.......................................................................................................................................... 265 Debt securities...................................................................................................................................................... 265 Loans.................................................................................................................................................................... 266 Non-performing loans .............................................................................................................................. 266 Equity and investment funds................................................................................................................................ 266 Equity ....................................................................................................................................................... 266 Investment fund shares or units................................................................................................................ 267 Insurance, annuities, pension and standardized guarantee schemes .................................................................... 267 Non-life insurance technical reserves ...................................................................................................... 267 Life insurance and annuities entitlements ................................................................................................ 267 Pension entitlements................................................................................................................................. 268 Provisions for calls under standardized guarantees.................................................................................. 268 Financial derivatives ............................................................................................................................................ 268 Options ..................................................................................................................................................... 268 Forwards................................................................................................................................................... 268 Employee stock options ........................................................................................................................... 268 Other accounts receivable or payable .................................................................................................................. 268 4. Net worth..............................................................................................................................................268 5. Memorandum items..............................................................................................................................269 Consumer durables............................................................................................................................................... 269 Foreign direct investment .................................................................................................................................... 269 Chapter 14: The supply and use tables and goods and services account .....................................................................271 A. Introduction ......................................................................................................................................................271 1. Product balances.................................................................................................................................. 271 2. The goods and services account ...........................................................................................................272 3. Supply and use tables ...........................................................................................................................272 4. The industry dimension........................................................................................................................272 5. A numerical example ...........................................................................................................................273 B. The supply table...............................................................................................................................................273 1. Products and producing units .............................................................................................................. 273 2. Accounting rules ..................................................................................................................................273 3. Production ............................................................................................................................................274 4. Imports .................................................................................................................................................274 Classification........................................................................................................................................................ 274 Goods for processing ........................................................................................................................................... 274 5. Valuation ..............................................................................................................................................275 Trade margins ...................................................................................................................................................... 276 Transport margins ................................................................................................................................................ 276 Domestic transport charges ...................................................................................................................... 276 International transport charges ................................................................................................................. 277 Products not included in customs documentation ....................................................................... 278 Products covered by customs documentation.............................................................................. 278 Transport on merchanted goods................................................................................................... 278 Transport on goods sent abroad for processing ........................................................................... 279 Recording transport margins in the supply and use tables ....................................................................... 279 Taxes and subsidies on products.......................................................................................................................... 280 C. The use table ...................................................................................................................................................280 1. The use of products by producing units .............................................................................................. 281 xxii 2. The use of products for final consumption ..........................................................................................281 3. The use of products for capital formation ............................................................................................282 Gross fixed capital formation ............................................................................................................................... 282 Resale of existing goods ........................................................................................................................... 282 Changes in inventories.......................................................................................................................................... 283 Valuables .............................................................................................................................................................. 283 4. Exports .................................................................................................................................................283 5. Introducing value added.......................................................................................................................283 6. Expanding value added ........................................................................................................................284 7. Adding other variables .........................................................................................................................284 D. Further elaboration of the use table .................................................................................................................284 1. Cross-classification by industry and institutional sectors ....................................................................284 2. A use table at basic prices ....................................................................................................................285 Trade margins ....................................................................................................................................................... 285 Transport margins................................................................................................................................................. 285 Taxes on products ................................................................................................................................................. 285 Subsidies on products ........................................................................................................................................... 286 Separating imports from domestic production ..................................................................................................... 286 3. Expressing the use table in volume terms ............................................................................................286 Deflating which tables? ........................................................................................................................................ 286 Homogeneity......................................................................................................................................................... 287 The applicability of CPIs ...................................................................................................................................... 287 Imports and exports .............................................................................................................................................. 287 Trade and transport margins ................................................................................................................................. 287 Taxes less subsidies on products .......................................................................................................................... 287 Value added .......................................................................................................................................................... 288 E. Numerical example ..........................................................................................................................................288 1. The full supply and use table .............................................................................................................. 288 2. Margins and taxes ................................................................................................................................288 3. A use table at basic prices ....................................................................................................................289 4. The imports matrix...............................................................................................................................289 Chapter 15: Price and volume measures ...........................................................................................................................295 A. Introduction ......................................................................................................................................................295 1. Index number theory ........................................................................................................................... 295 2. Inter-temporal price and volume series................................................................................................295 3. International price comparisons ...........................................................................................................295 4. Further information ..............................................................................................................................296 B. An overview of index number theory................................................................................................................296 1. Quantities, prices and values............................................................................................................... 296 Additivity of quantities, prices and values ........................................................................................................... 296 Volume, quantity, price and unit value indices .................................................................................................... 296 2. Inter-temporal index numbers of prices and volumes..........................................................................297 Laspeyres and Paasche indices ............................................................................................................................. 297 Deflation and volume series using Laspeyres and Paasche formulae....................................................... 297 The relationship between Laspeyres and Paasche indices ........................................................................ 298 Other index number formulae............................................................................................................................... 298 Desirable index number characteristics ................................................................................................................ 299 Index numbers in practice..................................................................................................................................... 299 3. Chain indices........................................................................................................................................299 The rebasing and linking of indices...................................................................................................................... 299 Chaining each period ............................................................................................................................................ 299 Chain Laspeyres and Paasche indices ....................................................................................................... 300 Annually chained quarterly Laspeyres-type indices ................................................................................. 300 Chain Laspeyres or chain superlative indices? ......................................................................................... 301 Annually chained quarterly Fisher-type indices ....................................................................................... 301 xxiii System of National Accounts Chaining and data coverage ..................................................................................................................... 302 Additivity and chaining ............................................................................................................................ 302 Variables that change sign ................................................................................................................................... 302 Contributions to growth ....................................................................................................................................... 302 4. Causes of price variation ......................................................................................................................303 Price variation due to quality differences ............................................................................................................ 303 Price variation without quality differences .......................................................................................................... 303 Price discrimination ............................................................................................................................................. 303 The existence of parallel markets ........................................................................................................................ 304 5. The measurement of changes in quality over time...............................................................................304 Direct methods ..................................................................................................................................................... 304 Hedonics................................................................................................................................................... 305 Indirect methods................................................................................................................................................... 305 Rapidly changing differentiated product markets................................................................................................ 305 Further elaboration............................................................................................................................................... 306 6. Practical advantages of compiling chain indices..................................................................................306 C. Derivation of volume measures in the national accounts.................................................................................306 1. Introduction ......................................................................................................................................... 306 Terminology for volume estimates ...................................................................................................................... 307 1. Price deflation vs. quantity revaluation............................................................................................... 307 2. Available price indices .........................................................................................................................308 3. The supply and use tables as the basis for volume measures of GDP .................................................308 4. Volume measures of the output estimate of GDP ................................................................................308 Market output....................................................................................................................................................... 308 Non-market output of government and NPISHs.................................................................................................. 308 Output for own final use ...................................................................................................................................... 310 Intermediate consumption.................................................................................................................................... 310 Gross domestic product and gross value added ................................................................................................... 310 5. Volume measures of the expenditure estimate of GDP .......................................................................311 Household final consumption expenditure .......................................................................................................... 311 Final consumption expenditure by government and NPISHs.............................................................................. 311 Gross fixed capital formation............................................................................................................................... 311 Changes in inventories......................................................................................................................................... 312 Acquisition less disposal of valuables ................................................................................................................. 312 Exports and imports ............................................................................................................................................. 313 6. Volumes and prices for stocks of fixed assets and consumption of fixed capital................................313 7. Components of value added .................................................................................................................314 Compensation of employees ................................................................................................................................ 314 Taxes and subsidies on products.......................................................................................................................... 314 Net operating surplus and net mixed income....................................................................................................... 314 8. Quarterly and annual estimates ............................................................................................................314 9. Summary recommendations.................................................................................................................315 D. Measures of real income for the total economy ...............................................................................................315 1. The concept of real income ................................................................................................................. 315 2. Trading gains and losses from changes in the terms of trade...............................................................316 3. The interrelationship between volume measures of GDP and real income aggregates .......................317 E. International price and volume comparisons....................................................................................................318 1. Introduction ..........................................................................................................................................318 2. Index number issues .............................................................................................................................318 Representativity versus comparability................................................................................................................. 318 Aggregation.......................................................................................................................................................... 319 Binary comparisons ............................................................................................................................................. 319 Multilateral comparisons ..................................................................................................................................... 319 Transitivity ............................................................................................................................................... 319 The block approach .................................................................................................................................. 320 The binary approach................................................................................................................................. 320 Ring comparisons..................................................................................................................................... 321 3. Practical considerations for national accountants ................................................................................321 xxiv PPPs and the national accounts............................................................................................................................. 321 Why ICP growth rates differ from national growth rates ..................................................................................... 322 Non-market services ............................................................................................................................................ 322 Conclusion ............................................................................................................................................................ 323 Chapter 16: Summarizing and integrating the accounts ..................................................................................................325 A. Introduction ......................................................................................................................................................325 B. Integrating the accounts...................................................................................................................................325 1. Summarizing the current accounts ...................................................................................................... 325 The production account ........................................................................................................................................ 325 The generation of income account........................................................................................................................ 325 The allocation of primary income account ........................................................................................................... 325 The secondary distribution of income account ..................................................................................................... 328 The use of income accounts.................................................................................................................................. 328 2. Summarizing the accumulation accounts.............................................................................................328 The capital account ............................................................................................................................................... 328 The financial account............................................................................................................................................ 329 3. The goods and services account...........................................................................................................329 4. The accounts for the rest of the world..................................................................................................329 5. Integration of stock and flow data........................................................................................................329 Linking the opening and closing balance sheets................................................................................................... 329 Net worth .............................................................................................................................................................. 331 Asset accounts ...................................................................................................................................................... 331 6. Consolidating the accounts ..................................................................................................................331 Consolidating the current accounts ........................................................................................................... 331 Consolidating the accumulation accounts................................................................................................. 332 Consolidating the rest of the world account.............................................................................................. 332 C. The macroeconomic aggregates in the SNA ...................................................................................................332 1. The GDP identities.............................................................................................................................. 332 2. A note on the valuation of output.........................................................................................................333 3. Gross and net domestic product ...........................................................................................................333 4. Gross and net national income .............................................................................................................333 5. National disposable income .................................................................................................................334 D. An example set of integrated economic accounts ...........................................................................................334 1. Institutional sector accounts................................................................................................................ 334 Current accounts ................................................................................................................................................... 334 The use of income account ................................................................................................................................... 335 The accumulation accounts................................................................................................................................... 335 The balance sheets ................................................................................................................................................ 335 2. The rest of the world account...............................................................................................................335 3. The goods and services account...........................................................................................................335 4. The total economy column...................................................................................................................340 Chapter 17: Cross-cutting and other special issues.........................................................................................................341 Part 1: The treatment of insurance ....................................................................................................................................341 A. Introduction ......................................................................................................................................................341 1. Direct insurance .................................................................................................................................. 341 2. Reinsurance ..........................................................................................................................................342 3. The units involved................................................................................................................................342 B. Output of direct insurance ................................................................................................................................342 1. Premiums earned................................................................................................................................. 343 2. Premium supplements ..........................................................................................................................343 3. Claims and benefits ..............................................................................................................................343 xxv System of National Accounts Non-life insurance claims .................................................................................................................................... 343 Life insurance benefits......................................................................................................................................... 344 4. Reserves ...............................................................................................................................................344 5. Defining insurance output ....................................................................................................................344 Non-life insurance................................................................................................................................................ 344 Life insurance....................................................................................................................................................... 344 Reinsurance.......................................................................................................................................................... 344 C. All the transactions associated with non-life insurance....................................................................................345 1. Net premiums and consumption of insurance services ....................................................................... 345 2. Recording non-life insurance claims....................................................................................................345 3. Insurance services provided to and from the rest of the world ............................................................346 4. The accounting entries .........................................................................................................................346 D. All the transactions associated with life insurance ...........................................................................................347 1. Annuities ............................................................................................................................................. 348 E. All transactions associated with reinsurance ...................................................................................................348 F. Annuities ..........................................................................................................................................................350 1. How an annuity works......................................................................................................................... 350 2. The output associated with an annuity .................................................................................................350 3. All the transactions associated with annuities......................................................................................351 Part 2: Social insurance schemes .....................................................................................................................................352 G. Introduction ......................................................................................................................................................352 H. Basic definitions ...............................................................................................................................................352 1. Social benefits ..................................................................................................................................... 352 2. Social benefits provided by general government .................................................................................352 3. Social benefits provided by other institutional units............................................................................353 4. Social insurance schemes .....................................................................................................................353 Multiemployer schemes ....................................................................................................................................... 353 5. Individual insurance policies qualifying as social insurance ...............................................................354 6. Benefits payable under social insurance schemes................................................................................354 I. Accounting for non-pension contributions and benefits ...................................................................................354 1. Non-pension benefits payable under social security ........................................................................... 354 2. Unfunded non-pension benefits other than from social security..........................................................355 3. Funded social insurance other than pensions .......................................................................................355 J. Accounting for pension contributions and pensions.........................................................................................358 1. Social security pensions ...................................................................................................................... 359 2. Employment-related pension schemes other than social security........................................................359 Defined contribution pension schemes ................................................................................................................ 360 Transactions recorded for a defined contribution pension scheme .......................................................... 360 Defined benefit pension schemes......................................................................................................................... 361 Differences between a defined benefit and a defined contribution pension scheme ............................... 361 Transactions recorded for a defined benefit pension scheme .................................................................. 363 Defined benefit pension schemes operated by other than employers ...................................................... 365 The relationship between the employer and the pension fund ................................................................. 366 A numerical example ........................................................................................................................................... 366 Transactions for a defined benefit schemes ............................................................................................. 366 Defined contribution pension schemes .................................................................................................... 367 Other flows for a defined benefit pension scheme ................................................................................... 367 The issue of promotions ........................................................................................................................... 367 3. Transferring pension entitlements........................................................................................................369 4. A note on the tables..............................................................................................................................369 K. The special case of government providing pensions via social security ..........................................................369 Part 3: The treatment of standardized guarantees in the SNA .......................................................................................372 L. Types of guarantees ........................................................................................................................................372 xxvi 1. Standardized guarantee schemes......................................................................................................... 372 2. Guarantees provided by government ...................................................................................................373 3. Balance sheet implications...................................................................................................................373 Part 4: The recording of flows associated with financial assets and liabilities .............................................................375 M. Introduction ......................................................................................................................................................375 1. The characteristics of financial institutions ........................................................................................ 375 2. Charging for financial services ............................................................................................................376 3. Investment income associated with financial instruments ...................................................................377 4. Holding gains and losses on financial instruments ..............................................................................377 N. Recording flows in financial instruments ..........................................................................................................377 1. Monetary gold ..................................................................................................................................... 377 2. SDRs ....................................................................................................................................................378 3. Currency...............................................................................................................................................378 4. Deposits and loans ...............................................................................................................................378 5. Debt securities......................................................................................................................................379 Service charges associated with securities ........................................................................................................... 379 Interest on discounted securities........................................................................................................................... 379 Determining interest flows on bills and bonds ..................................................................................................... 379 Interest on bills and similar instruments ................................................................................................... 379 Interest on bonds and debentures .............................................................................................................. 380 Zero-coupon bonds ................................................................................................................................... 380 Other bonds, including deep-discounted bonds ........................................................................................ 380 Index-linked securities.......................................................................................................................................... 380 6. Equity and investment fund shares ......................................................................................................381 7. Financial derivatives ............................................................................................................................382 8. Employee stock options .......................................................................................................................382 9. Other accounts receivable or payable ..................................................................................................382 Part 5: Contracts, leases and licences ..............................................................................................................................383 O. Introduction ......................................................................................................................................................383 P. Leases .............................................................................................................................................................383 1. Operating leases .................................................................................................................................. 383 2. Financial leases ....................................................................................................................................384 3. Resource leases ....................................................................................................................................385 Q. Licences and permits to use a natural resource ..............................................................................................385 1. The "mobile phone" treatment of licences or permits to use a natural resource................................. 385 2. Radio spectra........................................................................................................................................386 3. Land .....................................................................................................................................................387 4. Timber ..................................................................................................................................................387 5. Fish.......................................................................................................................................................387 6. Water ....................................................................................................................................................388 7. Mineral resources .................................................................................................................................388 R. Sharing assets .................................................................................................................................................388 S. Permits to undertake a specific activity ............................................................................................................389 1. Permits issued by government ............................................................................................................ 389 An example........................................................................................................................................................... 389 Case 1: Government does not offer a refund and A keeps the permit for 3 years .................................... 389 Case 2: Government does not offer a refund and A sells the permit to B after one year.......................... 389 Case 3: Government does offer a refund and A keeps the permit for 3 years .......................................... 389 Case 4: Government does offer a refund and A sells the permit to B after one year................................ 390 Government permits as assets............................................................................................................................... 390 2. Permits issued by other units ...............................................................................................................390 Non-government permits as assets ....................................................................................................................... 390 3. Permits to use natural resources as sinks .............................................................................................390 xxvii System of National Accounts T. Contracts for future production.........................................................................................................................391 U. Leases as assets .............................................................................................................................................391 Marketable operating leases as assets .................................................................................................................. 392 V. Other considerations ........................................................................................................................................392 1. Time-share arrangements .................................................................................................................... 392 2. Lost deposits.........................................................................................................................................392 Part 6: Employee stock options ........................................................................................................................................393 W. Introduction ......................................................................................................................................................393 1. Terminology ........................................................................................................................................ 393 2. Valuation ..............................................................................................................................................393 3. ESOs as a financial asset......................................................................................................................393 4. Recording ESOs in the account of the SNA ........................................................................................393 5. Variations in the use of ESOs ..............................................................................................................393 Chapter 18: Elaborating and presenting the accounts .....................................................................................................395 A. Introduction ......................................................................................................................................................395 B. Time series, revisions and discrepancies ........................................................................................................395 1. Time series .......................................................................................................................................... 395 2. Revisions ..............................................................................................................................................396 3. Discrepancies .......................................................................................................................................396 Discrepancy in net lending or net borrowing....................................................................................................... 397 C. Accounts in volume terms ................................................................................................................................397 1. The expenditure components of GDP ................................................................................................. 397 2. The production components of GDP....................................................................................................398 3. Supply and use tables in volume terms ................................................................................................398 4. Capital stock.........................................................................................................................................398 D. Quarterly and other high frequency accounts ..................................................................................................398 1. Conceptual issues ................................................................................................................................ 398 Time of recording ................................................................................................................................................ 398 Definitions involving a year or more ................................................................................................................... 398 Seasonality ........................................................................................................................................................... 399 2. Data quality ..........................................................................................................................................399 Inventories............................................................................................................................................................ 399 3. Quarterly accounts in volume terms.....................................................................................................399 4. Coverage of quarterly accounts............................................................................................................399 E. Regional accounts............................................................................................................................................399 F. .Presentational issues ......................................................................................................................................402 1. Production measures of GDP .............................................................................................................. 402 Key industries ...................................................................................................................................................... 402 2. Expenditure measures of GDP .............................................................................................................403 3. Income aggregates................................................................................................................................403 4. Accounts in volume terms....................................................................................................................403 5. Quarterly accounts................................................................................................................................403 6. Sector accounts.....................................................................................................................................403 7. Integrated accumulation accounts ........................................................................................................403 Chapter 19: Population and labour inputs .........................................................................................................................405 A. Introduction ......................................................................................................................................................405 1. International standards on labour force statistics ................................................................................ 405 2. The structure of the chapter..................................................................................................................405 B. Population ........................................................................................................................................................406 xxviii 1. Per capita estimates of volume growth ............................................................................................... 406 2. Absolute levels of GDP per capita .......................................................................................................406 C. Measuring the labour force ..............................................................................................................................406 1. Employees ........................................................................................................................................... 407 2. Self-employed persons .........................................................................................................................407 3. Unemployment.....................................................................................................................................408 4. Boundary problems ..............................................................................................................................408 Jobs and employees .............................................................................................................................................. 408 Residence.............................................................................................................................................................. 408 5. The non-observed economy .................................................................................................................409 6. Labour in NPISHs ................................................................................................................................409 7. Volunteer labour ..................................................................................................................................409 D. Standardized measures of labour inputs .........................................................................................................410 1. Employment measured on a full-time equivalent basis ...................................................................... 410 2. Hours worked .......................................................................................................................................410 Defining hours actually worked............................................................................................................................ 410 3. Quality-adjusted labour input...............................................................................................................411 4. Employee labour input at constant compensation................................................................................411 E. Estimating labour productivity ..........................................................................................................................412 1. Labour productivity and MFP............................................................................................................. 412 2. Employment estimates for productivity estimation .............................................................................412 3. Data consistency ..................................................................................................................................412 4. International comparisons ....................................................................................................................413 F. A note on source data......................................................................................................................................413 Chapter 20: Capital services and the national accounts ..................................................................................................415 A. Introduction ......................................................................................................................................................415 1. The basic ideas of capital services ...................................................................................................... 415 B. Valuing capital stock ........................................................................................................................................416 1. Knowing the contribution to production ............................................................................................. 416 2. Knowing the value at any time ............................................................................................................417 3. Age-efficiency and age-price profiles..................................................................................................417 4. The special case of geometrically declining profiles ...........................................................................418 5. Practical considerations.......................................................................................................................418 C. Interpreting the flows........................................................................................................................................418 1. Capital services and gross operating surplus ...................................................................................... 418 2. Prices and volumes...............................................................................................................................419 D. Applying the capital service model...................................................................................................................420 1. Land .................................................................................................................................................... 420 2. Valuing natural resources.....................................................................................................................421 3. Mixed income ......................................................................................................................................421 4. Assets with a residual value .................................................................................................................421 5. Costs of ownership transfer on acquisition ..........................................................................................422 6. Terminal costs ......................................................................................................................................422 7. Major repairs and renovations..............................................................................................................423 8. Work-in-progress for long term projects .............................................................................................423 9. Owner-occupied dwellings ..................................................................................................................423 10. A financial lease...................................................................................................................................424 E. A supplementary table on capital services.......................................................................................................424 Chapter 21: Measuring corporate activity ..........................................................................................................................427 A. Introduction ......................................................................................................................................................427 xxix System of National Accounts 1. A note on terminology......................................................................................................................... 427 B. The demography of corporations .....................................................................................................................427 1. The creation of corporations ............................................................................................................... 427 2. The dissolution of corporations............................................................................................................428 3. Nationalization and privatization .........................................................................................................428 4. Mergers and acquisitions......................................................................................................................428 C. Subsectors .......................................................................................................................................................430 D. Relations between corporations in different economies..................................................................................430 1. Foreign direct investment.................................................................................................................... 430 2. FDI and globalization...........................................................................................................................431 3. The role of "pass through funds" .........................................................................................................431 4. Ultimate investing country ...................................................................................................................431 5. Multinational enterprises......................................................................................................................431 6. Outsourcing ..........................................................................................................................................432 E. The contribution of assets to production ..........................................................................................................432 F. The consequences of financial distress ...........................................................................................................432 1. Bad debts ............................................................................................................................................. 433 2. Concessional lending and debt rescheduling .......................................................................................433 G. Links to commercial accounting .......................................................................................................................433 Chapter 22: The general government and public sectors.................................................................................................435 A. Introduction ......................................................................................................................................................435 1. Data sources ........................................................................................................................................ 436 2. Consolidation .......................................................................................................................................436 B. Defining the general government and public sectors ......................................................................................436 1. Government units .................................................................................................................................436 2. NPIs controlled by government............................................................................................................437 3. Corporations controlled by government...............................................................................................437 4. Economically significant prices ..........................................................................................................438 Suppliers of goods and services to government................................................................................................... 438 Definition of sales and costs ................................................................................................................................ 438 5. A decision tree for public units ............................................................................................................438 6. Subsectors of the general government sector.......................................................................................439 7. Subsectors of the public sector.............................................................................................................439 8. Borderline cases ...................................................................................................................................439 Quasi-corporations............................................................................................................................................... 440 The case of restructuring agencies....................................................................................................................... 440 Special purpose entities........................................................................................................................................ 440 Joint ventures ....................................................................................................................................................... 441 Supranational authorities ..................................................................................................................................... 441 C. The government finance presentation of statistics...........................................................................................441 1. Introduction ......................................................................................................................................... 441 2. Revenue................................................................................................................................................442 3. Expense ................................................................................................................................................442 4. Outlays .................................................................................................................................................443 5. Net operating balance...........................................................................................................................443 6. Net lending or net borrowing ...............................................................................................................443 7. Consolidation .......................................................................................................................................443 8. Classification of the functions of government .....................................................................................444 D. Accounting issues particular to the general government and public sectors ..................................................444 1. Clarification of the recording of taxes..................................................................................................444 Government issued permits.................................................................................................................................. 444 Accrual recording of taxes ................................................................................................................................... 445 xxx Tax credits ............................................................................................................................................................ 445 2. Transactions with other national, international and supranational organizations ................................446 International membership dues............................................................................................................................. 446 International assistance ......................................................................................................................................... 446 3. Debt and related operations..................................................................................................................446 Debt....................................................................................................................................................................... 446 Debt reorganization .............................................................................................................................................. 447 Debt forgiveness (or debt cancellation) .................................................................................................... 447 Debt rescheduling and refinancing........................................................................................................... 447 Debt conversion ........................................................................................................................................ 447 Debt assumption........................................................................................................................................ 448 Other issues related to debt re-organization ......................................................................................................... 448 Government guarantees ........................................................................................................................................ 448 Securitization ........................................................................................................................................................ 449 Government assumption of pension liabilities ..................................................................................................... 449 4. Relations of general government with corporations ............................................................................449 Earnings from equity investment.......................................................................................................................... 449 Dividends versus withdrawal of equity ................................................................................................................ 449 Disposal of assets.................................................................................................................................................. 450 Acquisition of equity, capital transfers and subsidies .......................................................................................... 450 Privatization.......................................................................................................................................................... 450 Nationalization...................................................................................................................................................... 450 Bailouts ................................................................................................................................................................. 450 Restructuring, mergers and reclassifications ........................................................................................................ 451 Transactions with the central bank ....................................................................................................................... 451 Public-private partnerships ................................................................................................................................... 452 E. The public sector presentation of statistics ......................................................................................................453 Chapter 23: Non-profit institutions .....................................................................................................................................455 A. Introduction ......................................................................................................................................................455 1. Non-profit institutions in the SNA...................................................................................................... 455 2. The accounting rules for NPIs in the SNA ..........................................................................................456 3. A satellite account for NPIs .................................................................................................................456 B. The units included in the NPI satellite account ................................................................................................456 1. Determining characteristics of units for the satellite account ............................................................. 456 2. Examples of units included ..................................................................................................................457 3. Borderline cases ...................................................................................................................................457 4. Classification of NPIs ..........................................................................................................................458 C. Accounts for non-profit institutions in the satellite account .............................................................................459 D. Other SNA considerations concerning NPIs ....................................................................................................459 1. NPISHs and government..................................................................................................................... 459 2. Informal and temporary NPISHs .........................................................................................................460 3. The output of NPISHs..........................................................................................................................460 Chapter 24: The households sector....................................................................................................................................461 A. Introduction ......................................................................................................................................................461 1. Unincorporated enterprises ................................................................................................................. 461 2. The problems associated with subsectoring households......................................................................462 3. Structure of the chapter ........................................................................................................................462 B. Household composition and sectoring .............................................................................................................462 1. Definition of a household.................................................................................................................... 462 2. Residence .............................................................................................................................................463 3. Determining subsectors........................................................................................................................463 4. Household surveys ...............................................................................................................................463 xxxi System of National Accounts C. Subsectoring households.................................................................................................................................464 1. The production perspective ................................................................................................................. 464 2. The consumption perspective...............................................................................................................464 3. The income perspective........................................................................................................................465 4. Using a reference person ......................................................................................................................465 5. The consequences of demographic change ..........................................................................................465 6. Other considerations.............................................................................................................................465 D. Households as producers ................................................................................................................................466 1. Households and the informal sector .....................................................................................................466 2. Agriculture ...........................................................................................................................................466 3. Housing ................................................................................................................................................466 4. Domestic staff ......................................................................................................................................467 E. Households as consumers...............................................................................................................................467 1. Consumption goods and services provided in kind............................................................................. 467 2. Expenditure by tourists.........................................................................................................................468 3. Consumption expenditure by type of product ......................................................................................468 F. Household income ...........................................................................................................................................468 G. Household wealth and associated income flows..............................................................................................468 1. Household balance sheets.................................................................................................................... 468 2. Family trusts.........................................................................................................................................469 3. The distribution of wealth ....................................................................................................................469 4. Pension considerations .........................................................................................................................469 5. Consumer durables...............................................................................................................................469 Chapter 25: Informal aspects of the economy ...................................................................................................................471 A. Introduction ......................................................................................................................................................471 1. The policy interest in measuring activity undertaken by informal enterprises ....................................472 2. Structure of the chapter .......................................................................................................................472 B. Characteristics of units acting informally..........................................................................................................472 C. The non-observed economy ............................................................................................................................474 D. The informal sector as defined by the ILO .......................................................................................................474 1. The ILO concept of the informal sector .............................................................................................. 474 2. Defining the sector ...............................................................................................................................475 Exclusion of units producing purely for own final use........................................................................................ 475 Exclusion of units with formal characteristics..................................................................................................... 475 Two categories of informal enterprises................................................................................................................ 475 Exclusions on grounds of activity........................................................................................................................ 476 3. Clarifying the use of familiar terminology...........................................................................................476 Sector ................................................................................................................................................................... 476 Enterprise ............................................................................................................................................................. 476 Subsectoring production ...................................................................................................................................... 476 Formal sector, informal sector and households ................................................................................................... 477 E. Informal employment........................................................................................................................................477 1. Informal employment...........................................................................................................................477 2. Employment in the informal sector......................................................................................................477 F. Work of the Delhi Group...................................................................................................................................478 G. Deriving data on activities of informal enterprises from the SNA accounts......................................................478 1. Candidate households...........................................................................................................................478 2. Adjustments for national practices.......................................................................................................479 3. Disaggregation by type of activity .......................................................................................................479 4. Presenting the data on the informal sector and informal employment.................................................480 Production ............................................................................................................................................................ 480 Employment......................................................................................................................................................... 480 xxxii H. Approaches to measuring activities undertaken in the informal economy .......................................................480 1. Household surveys ...............................................................................................................................481 2. Establishment surveys..........................................................................................................................481 3. Mixed household-enterprise surveys ...................................................................................................481 I. Guidelines, studies and handbooks on the informal economy.........................................................................481 Chapter 26: The rest of the world accounts and links to the balance of payments.......................................................483 A. Introduction ......................................................................................................................................................483 1. The rest of the world account in the SNA........................................................................................... 483 Current accounts ................................................................................................................................................... 483 Accumulation accounts......................................................................................................................................... 483 2. The international accounts in BPM6....................................................................................................483 3. The structure of the chapter .................................................................................................................484 B. Accounting principles .......................................................................................................................................484 1. Comparison with SNA accounting principles..................................................................................... 484 Valuation............................................................................................................................................................... 484 Time of recording and change of ownership ........................................................................................................ 485 Netting .................................................................................................................................................................. 485 2. Units .....................................................................................................................................................485 Economic territory ................................................................................................................................................ 485 Institutional units .................................................................................................................................................. 485 Branches.................................................................................................................................................... 485 Notional resident units .............................................................................................................................. 486 Multiterritory enterprises .......................................................................................................................... 486 3. Residence .............................................................................................................................................487 Residence of households....................................................................................................................................... 487 Residence of enterprises ....................................................................................................................................... 488 Residence of other entities.................................................................................................................................... 488 C. A comparison between the international accounts and the SNA rest of the world accounts ...........................488 1. Goods and services account ................................................................................................................ 489 2. The primary income account................................................................................................................491 Income of direct investment enterprises ............................................................................................................... 491 3. Secondary income account...................................................................................................................491 4. Balancing items in the current accounts of the international accounts ................................................492 5. The capital account ..............................................................................................................................492 6. The financial account and IIP ..............................................................................................................492 7. The other changes in assets accounts ...................................................................................................493 D. International accounts functional categories....................................................................................................493 1. Direct investment ................................................................................................................................ 495 2. Portfolio investment .............................................................................................................................495 3. Financial derivatives (other than reserves) and employee stock options.............................................495 4. Other investment ..................................................................................................................................495 5. Reserve assets ......................................................................................................................................496 E. Special international accounts considerations .................................................................................................496 1. Global imbalances............................................................................................................................... 496 2. Exceptional financing ..........................................................................................................................496 3. Debt instruments ..................................................................................................................................496 4. Debt reorganization..............................................................................................................................497 5. Regional arrangements, including currency unions .............................................................................497 6. Currency conversion, including multiple exchange rates ....................................................................497 Chapter 27: Links to monetary statistics and the flow of funds ......................................................................................499 A. Introduction ......................................................................................................................................................499 xxxiii System of National Accounts 1. Monetary statistics................................................................................................................................499 2. Financial statistics ................................................................................................................................499 3. Flow of Funds.......................................................................................................................................499 A. Monetary statistics ...........................................................................................................................................500 1. Defining depository corporations........................................................................................................ 500 2. Presentation of monetary statistics.......................................................................................................500 B. Financial statistics ............................................................................................................................................501 C. Flow of funds....................................................................................................................................................502 1. Flow accounts...................................................................................................................................... 502 The format of the account .................................................................................................................................... 503 Analytical uses ..................................................................................................................................................... 504 2. Stock accounts......................................................................................................................................504 Chapter 28: Input-output and other matrix-based analyses .............................................................................................507 A. Introduction ......................................................................................................................................................507 1. Input-output tables............................................................................................................................... 507 2. Social accounting matrices...................................................................................................................507 3. The structure of the chapter..................................................................................................................507 B. Flexibility in the supply and use tables.............................................................................................................508 1. The treatment of margins on imports .................................................................................................. 508 2. Goods processed by a unit not assuming economic ownership ...........................................................508 3. Supply and use tables and sector accounts...........................................................................................509 C. Deriving an input-output table ..........................................................................................................................511 1. What is an input-output table? ............................................................................................................ 511 2. Analytical potential of an input-output matrix.....................................................................................512 3. Secondary products ..............................................................................................................................513 4. Reallocating secondary products..........................................................................................................514 Product by product tables..................................................................................................................................... 515 Industry technology assumption............................................................................................................... 515 Product technology assumptions.............................................................................................................. 515 Industry by industry tables................................................................................................................................... 515 Fixed product sales structure.................................................................................................................... 515 Fixed industry sales structures ................................................................................................................. 515 The choice of approach to be used....................................................................................................................... 515 Hybrid approaches.................................................................................................................................... 518 The database required for the transformation ...................................................................................................... 518 D. Social accounting matrices ..............................................................................................................................519 1. Expressing the sequence of accounts in matrix form.......................................................................... 519 2. Expanding the matrix ...........................................................................................................................519 3. Disaggregating households ..................................................................................................................520 4. A SAM for labour accounts .................................................................................................................520 Chapter 29: Satellite accounts and other extensions .......................................................................................................523 A. Introduction ......................................................................................................................................................523 1. Functional classifications .................................................................................................................... 523 2. Key sector accounts..............................................................................................................................523 3. Satellite accounts..................................................................................................................................523 B. Functional classifications .................................................................................................................................524 1. COICOP ...............................................................................................................................................524 2. COFOG ................................................................................................................................................525 3. COPNI..................................................................................................................................................525 4. COPP....................................................................................................................................................525 xxxiv C. Satellite accounts for key sector and other special sector accounts................................................................525 D. Satellite accounts; options for conceptual variations .......................................................................................526 1. Production and products...................................................................................................................... 526 2. Income..................................................................................................................................................527 Primary incomes ................................................................................................................................................... 527 Transfers and disposable income.......................................................................................................................... 527 3. Uses of goods and services ..................................................................................................................527 4. Assets and liabilities.............................................................................................................................528 5. Purposes ...............................................................................................................................................528 6. Aggregates ...........................................................................................................................................528 E. Possible tables for a satellite account ..............................................................................................................528 1. Scoping a functionally orientated account .......................................................................................... 528 2. Determining the products of interest....................................................................................................528 3. Measuring production ..........................................................................................................................529 4. Components of uses/national expenditure ...........................................................................................529 Consumption......................................................................................................................................................... 529 Capital formation .................................................................................................................................................. 529 Transfers ............................................................................................................................................................... 529 Total uses and national expenditure ..................................................................................................................... 530 5. Users or beneficiaries...........................................................................................................................530 6. Financing..............................................................................................................................................530 7. Production and products.......................................................................................................................531 8. Physical data ........................................................................................................................................531 F. Examples of satellite accounts.........................................................................................................................531 1. Tourism satellite accounts................................................................................................................... 531 Defining visitors and tourists................................................................................................................................ 532 Definition and scope of tourism expenditure........................................................................................................ 532 Definition and scope of tourism consumption...................................................................................................... 532 Characteristic products ......................................................................................................................................... 532 Tourism industries ................................................................................................................................................ 532 Main aggregates.................................................................................................................................................... 534 2. Environmental accounting ...................................................................................................................534 The different parts of the SEEA ........................................................................................................................... 534 Physical and hybrid supply and use tables ........................................................................................................... 534 Identifying environmental aspects of the central framework ............................................................................... 535 Environmental taxes, property income and property rights ...................................................................... 535 A set of accounts for environmental protection expenditure .................................................................... 535 Asset accounts ...................................................................................................................................................... 535 Integrating environmental adjustments in the flow accounts ............................................................................... 535 Depletion ................................................................................................................................................... 535 Defensive expenditure............................................................................................................................... 538 Accounting for environmental degradation .............................................................................................. 538 3. Health satellite accounts.......................................................................................................................538 Functional classification of health care ................................................................................................................ 538 Health care provider units..................................................................................................................................... 539 Expenditure on health care ................................................................................................................................... 539 Funding of health care .......................................................................................................................................... 539 Converting the SHA to health satellite accounts .................................................................................................. 539 4. Unpaid household activity ...................................................................................................................542 Unpaid household services ................................................................................................................................... 542 Consumer durables ............................................................................................................................................... 542 Volunteer labour ................................................................................................................................................... 543 Annex 1:The classification hierarchies of the SNA and associated codes ...................................................................545 A. Introduction ......................................................................................................................................................545 B. The classification hierarchies of the SNA ........................................................................................................546 1. Sectors (S codes) ................................................................................................................................. 546 xxxv System of National Accounts 2. Classifications of transactions..............................................................................................................549 Transactions in products (P codes) ...................................................................................................................... 549 Transactions in non-produced assets (NP codes)................................................................................................. 550 Distributive transactions (D codes)...................................................................................................................... 550 Transactions in financial assets and liabilities (F codes)).................................................................................... 552 3. Other flows ..........................................................................................................................................553 Entries in the other changes in assets account (K codes)..................................................................................... 553 Balancing and net worth items (B codes) ............................................................................................................ 554 4. Entries related to stocks of assets and liabilities ..................................................................................555 Balance sheet entries (L codes)............................................................................................................................ 555 Non-financial assets (AN codes) ......................................................................................................................... 555 Financial assets (AF codes) ................................................................................................................................ 556 C. Supplementary items ......................................................................................................................................556 1. Non-performing loans ........................................................................................................................ 556 2. Capital services ...................................................................................................................................557 3. Pensions table ......................................................................................................................................557 Columns .............................................................................................................................................................. 557 Rows ................................................................................................................................................................... 558 4. Consumer durables ..............................................................................................................................558 5. Foreign direct investment ....................................................................................................................559 6. Contingent positions ............................................................................................................................559 7. Currency and deposits .........................................................................................................................559 8. Classification of debt securities according to outstanding maturity ...................................................559 9. Listed and unlisted debt securities ......................................................................................................559 10. Long-term loans with outstanding maturity of less than one year and long-term loans secured by a mortgage .......................................................................................................................................559 11. Listed and unlisted investment shares .................................................................................................560 12. Arrears in interest and repayments ......................................................................................................560 13. Personal and total remittances .............................................................................................................560 Annex 2: The sequence of accounts ..................................................................................................................................561 Annex 3: Changes from the 1993 System of National Accounts ...................................................................................581 A. Introduction ......................................................................................................................................................581 B. Further specifications of statistical units and revisions in institutional sectoring .............................................581 1. Producer unit undertaking ancillary activities to be recognized as a separate establishment in certain cases .................................................................................................................................. 581 2. Artificial subsidiaries not regarded as institutional units unless resident in an economy different from that of their parents ...............................................................................................................581 3. Branch of a non-resident unit recognized as an institutional unit .......................................................581 4. Residence of multiterritory enterprises clarified .................................................................................582 5. Special purpose entities recognized ....................................................................................................582 6. Holding company allocated to the financial corporations sector ........................................................582 7. Head office to be allocated to the institutional sector of the majority of its subsidiaries ...................582 8. Subsector for non-profit institutions introduced .................................................................................582 9. Definition of financial services enlarged ............................................................................................582 10. Subsectoring of the financial corporation sector revised to reflect new developments in financial services, markets and instruments ..................................................................................583 C. Further specifications of the scope of transactions including the production boundary ...................................583 1. Research and development is not an ancillary activity ..................................................................... 583 2. Method for calculating financial intermediation services indirectly measured (FISIM) refined ........583 3. Output of central bank clarified ..........................................................................................................584 4. Recording of the output of non-life insurance services improved ......................................................584 5. Reinsurance similarly treated as direct insurance ...............................................................................585 6. Valuation of output for own final use by households and corporations to include a return to capital 585 xxxvi D. Extension and further specification of the concepts of assets, capital formation and consumption of fixed capital ..........................................................................................................................................585 1. Change of economic ownership introduced ....................................................................................... 585 2. Asset boundary extended to include research and development .........................................................585 3. Revised classification of assets introduced .........................................................................................586 4. Extension of the assets boundary and government gross capital formation to include expenditure on weapons systems .......................................................................................................................587 5. The asset category "computer software" modified to include databases ............................................587 6. Originals and copies recognized as distinct products .........................................................................587 7. The concept of capital services introduced .........................................................................................588 8. Treatment of costs of ownership transfer elaborated ..........................................................................588 9. Mineral exploration and evaluation ....................................................................................................588 10. Land improvements .............................................................................................................................588 11. Goodwill and marketing assets ...........................................................................................................588 12. Water resources treated as an asset in some cases ..............................................................................589 13. Consumption of fixed capital to be measured at the average prices of the period with respect to a constant-quality price index of the asset concerned ...................................................................589 14. Definition of cultivated biological resources made symmetric to uncultivated resources...................589 15. Intellectual property products introduced ...........................................................................................589 16. Concept of resource lease for natural resources introduced ................................................................589 17. Changes in the items appearing in the other changes in the volume of assets account introduced ....590 E. Further refinement of the treatment and definition of financial instruments and assets...................................590 1. Treatment of securities repurchase agreement clarified ..................................................................... 590 2. Treatment of employee stock options described .................................................................................590 3. Treatment of non-performing loans elaborated ..................................................................................590 4. Treatment of guarantees elaborated ....................................................................................................591 5. Treatment of index-linked debt securities elaborated .........................................................................591 6. Treatment of debt instruments indexed to a foreign currency revised ................................................591 7. Flexibility on valuation of unlisted equity ..........................................................................................591 8. Unallocated gold accounts treated as financial assets and liabilities ..................................................592 9. Definition of monetary gold and gold bullion revised ........................................................................592 10. Liability in special drawing rights recognized .....................................................................................592 11. Distinction made between deposits and loans .....................................................................................592 12. Fees payable on securities lending and gold loans .............................................................................592 13. Financial asset classification ...............................................................................................................592 14. Distinction between financial leasing and operating leasing based on economic ownership .............593 15. Changes in recommendations for recording pension entitlements .....................................................593 F. Further specifications of the scope of transactions concerning government and public sector ......................594 1. The boundary between private/public/government sectors clarified ................................................. 594 2. Treatment of restructuring agencies elaborated ..................................................................................594 3. Treatment of government issued permits clarified .............................................................................594 4. Exceptional payments from public corporations should be recorded as withdrawals from equity ....594 5. Exceptional payments from government to public quasi-corporations should be treated as capital transfers ..............................................................................................................................594 6. Accrual recording of taxes ..................................................................................................................594 7. Tax credits ...........................................................................................................................................595 8. Treatment of ownership of fixed assets created through public-private partnerships clarified .........595 9. Taxes on holding gains continue to be shown as current taxes on income and wealth ......................595 G. Harmonization between concepts and classifications of the SNA and BPM6 .................................................595 1. Centre of predominant economic interest as the basic criterion for determining the residence of the unit ..................................................................................................................................... 595 2. Individuals changing residence ...........................................................................................................595 3. Goods sent abroad for processing are recorded on change of ownership basis ..................................595 4. Merchanting ........................................................................................................................................596 xxxvii System of National Accounts H. A check-list of changes in each chapter...........................................................................................................596 1. Introduction ......................................................................................................................................... 596 Chapter 3: Stocks and flows and accounting rules ............................................................................................... 596 Chapter 4: Institutional units and sectors .............................................................................................................. 596 Chapter 5: Enterprises establishments and industries. .......................................................................................... 597 Chapter 6: The production account ....................................................................................................................... 597 Chapter 7: The distribution of income accounts ................................................................................................... 597 Chapter 8: The redistribution of income accounts ................................................................................................ 598 Chapter 9: The use of income accounts ................................................................................................................ 598 Chapter 10: The capital account ........................................................................................................................... 598 Chapter 11: The financial account ........................................................................................................................ 598 Chapter 12: The other changes in assets accounts ................................................................................................ 598 Chapter 13: The balance sheet .............................................................................................................................. 599 Chapter 14: The supply and use tables and goods and services account .............................................................. 599 Chapter 15: Price and volume actions .................................................................................................................. 599 Chapter 16: Summarizing and integrating the accounts ....................................................................................... 599 Chapter 17: Cross-cutting and other special issues ............................................................................................... 599 Chapter 18: Elaborating and presenting the accounts ........................................................................................... 599 Chapter 19: Population and labour inputs ............................................................................................................. 599 Chapter 20: Capital services and the national accounts ........................................................................................ 599 Chapter 21: Measuring corporate activity ............................................................................................................. 599 Chapter 22: The general government and public sectors ...................................................................................... 600 Chapter 23: Non-profit institutions ....................................................................................................................... 600 Chapter 24: The household sector ......................................................................................................................... 600 Chapter 25: Informal aspects of the economy ...................................................................................................... 600 Chapter 26: The rest of the world accounts and links to the balance of payments ............................................... 600 Chapter 27: Links to monetary statistics and the flow of funds ........................................................................... 600 Chapter 28: Input-output and other matrix-based analysis ................................................................................... 600 Chapter 29: Satellite accounts and other extensions ............................................................................................. 600 2. Annexes and other items ......................................................................................................................600 Annex 4: Research Agenda ................................................................................................................................................603 A. Introduction ......................................................................................................................................................603 B. Basic accounting rules .....................................................................................................................................604 1. The relationship of SNA and IASB..................................................................................................... 604 2. Consolidation of enterprise groups ......................................................................................................604 3. Trusts....................................................................................................................................................604 4. Final consumption of corporations.......................................................................................................604 5. Measuring the output of government services .....................................................................................604 6. The treatment of social transfers in kind to the rest of the world.........................................................605 7. Output of central banks: taxes and subsidies on interest rates applied by central banks .....................605 8. The treatment of establishments in the SNA........................................................................................605 9. The inclusion of international organizations in the SNA.....................................................................605 C. The concept of income.....................................................................................................................................605 1. Clarification of income concept in the SNA ....................................................................................... 605 2. GDP at basic prices ..............................................................................................................................605 3. The role of taxes in the SNA................................................................................................................605 4. Life insurance.......................................................................................................................................606 5. Reinvested earnings..............................................................................................................................606 6. Accruing interest in the SNA ...............................................................................................................606 7. Calculation of FISIM ...........................................................................................................................606 8. High inflation .......................................................................................................................................606 9. The measurement of neutral and real holding gains and losses ...........................................................606 10. Income arising from assets...................................................................................................................607 11. Income from activities undertaken on an informal basis .....................................................................607 D. Issues involving financial instruments ..............................................................................................................607 1. Issues arising from a financial crisis ....................................................................................................607 xxxviii 2. Recognition of social security entitlements as liabilities .....................................................................607 3. Wider use of fair value for loans..........................................................................................................607 4. Provisions.............................................................................................................................................607 5. Debt concessionality ............................................................................................................................607 6. Equity valuation and its implications...................................................................................................608 7. Reverse transactions.............................................................................................................................608 E. Issues involving non-financial assets ...............................................................................................................608 1. Tradable emission permits .................................................................................................................. 608 2. Leases to use or exploit natural resources............................................................................................608 3. Broadening the fixed asset boundary to include other intellectual property assets .............................608 Innovation ............................................................................................................................................................. 608 Marketing assets ................................................................................................................................................... 608 Human capital....................................................................................................................................................... 609 4. Costs of ownership transfer of valuables and non-produced assets.....................................................609 5. Distinction between current maintenance and capital repairs..............................................................609 6. Treatment of Private-Public Partnerships ............................................................................................609 7. Transfer of ownership of an asset during its life..................................................................................609 References ...........................................................................................................................................................................611 Glossary ...............................................................................................................................................................................617 Index .....................................................................................................................................................................................635 xxxix System of National Accounts xl List of tables Table 2.1:The production account ...........................................................................................................................................23 Table 2.2:The generation of income account ..........................................................................................................................24 Table 2.3:The allocation of primary income account ...............................................................................................................24 Table 2.4:The secondary distribution of income account ........................................................................................................25 Table 2.5:The redistribution of income in kind account ...........................................................................................................26 Table 2.6:The use of disposable income account ...................................................................................................................26 Table 2.7:The use of adjusted disposable income account .....................................................................................................26 Table 2.8:The capital account ..................................................................................................................................................27 Table 2.9:The financial account ...............................................................................................................................................27 Table 2.10:The other changes in the volume of assets account .............................................................................................28 Table 2.11:The revaluation account ........................................................................................................................................28 Table 2.12:The opening balance sheet, changes in assets and liabilities and closing balance sheet ....................................30 Table 2.13:The integrated presentation of the full sequence of the current accounts .............................................................31 Table 2.14:The integrated presentation of the full sequence of the accumulation accounts and balance sheets ...................32 Table 2.15:The goods and services account ...........................................................................................................................34 Table 4.1:Subsectors of the non-financial corporations sector ................................................................................................74 Table 4.2:Subsectors of the financial corporations sector .......................................................................................................76 Table 6.1:The production account - uses ................................................................................................................................96 Table 6.1 (cont): The production account - resources .............................................................................................................97 Table 7.1:The generation of income account - concise form - uses ......................................................................................132 Table 7.1 (cont): The generation of income account - concise form - resources ...................................................................133 Table 7.2:The allocation of primary income account - concise form - uses ...........................................................................134 Table 7.2 (cont): The allocation of primary income account - concise form - resources ....................................................... 135 Table 7.3:The entrepreneurial income and allocation of other primary income accounts - uses ...........................................136 Table 7.3 (cont): The entrepreneurial income and allocation of other primary income accounts - resources ....................... 137 Table 7.4:The generation of income account - compensation of employees - uses ..............................................................138 Table 7.5:The allocation of primary income account - compensation of employees - resources ..........................................139 Table 7.6:The generation of income account - taxes and subsidies on production - uses ....................................................144 Table 7.7:The allocation of primary income account - taxes and subsidies on production - resources .................................145 Table 7.8:The allocation of primary income account - property income - uses .....................................................................150 Table 7.8 (cont): The allocation of primary income account - property income - resources .................................................. 151 Table 8.1:The secondary distribution of income account - concise form - uses ....................................................................158 Table 8.1 (cont): The secondary distribution of income account - concise form - resources .................................................159 Table 8.2:The redistribution of income account - uses ..........................................................................................................160 Table 8.2 (cont): The redistribution of income account - resources....................................................................................... 161 Table 8.3:The secondary distribution of income account - with details for taxes and social contributions - uses .................168 Table 8.3 (cont): The secondary distribution of income account - with details for taxes and social contributions - resources ........................................................................................................................................................ 169 Table 8.4:The secondary distribution of income account - with details of social benefits - uses ...........................................170 Table 8.4 (cont): The secondary distribution of income account - with details of social benefits - resources ....................... 171 Table 8.5:The secondary distribution of income account - with details of current transfers - uses .......................................174 Table 8.5 (cont): The secondary distribution of income account - with details of current transfers - resources .................... 175 Table 9.1:The use of disposable income account - uses .......................................................................................................180 Table 9.1 (cont): The use of disposable income account - resources ...................................................................................181 Table 9.2:The use of adjusted disposable income account - uses ........................................................................................182 Table 9.2 (cont): The use of adjusted disposable income account - resources..................................................................... 183 Table 10.1: The capital account - concise form - changes in assets .....................................................................................196 xli Table 10.1 (cont): The capital account - concise form - changes in liabilities and net worth .................................................197 Table 10.2:The capital account - the classification of fixed assets ........................................................................................203 Table 10.3:The capital account - changes in inventories and valuables ................................................................................208 Table 10.4:The capital account - non-produced non-financial assets ....................................................................................213 Table 10.5:The capital account - capital transfers - changes in liabilities and net worth .......................................................216 Table 11.1:The financial account - concise form - changes in assets ...................................................................................220 Table 11.1 (cont): The financial account - concise form - changes in liabilities and net worth ..............................................221 Table 11.2:The financial account - full detail - changes in assets ..........................................................................................226 Table 11.2 (cont): The financial account - full detail - changes in liabilities and net worth .................................................... 227 Table 12.1:The other changes in the volume of assets account - concise form - transactions in assets ..............................238 Table 12.1 (cont): The other changes in the volume of assets account - concise form - transactions in liabilities and net worth ............................................................................................................239 Table 12.2:The other changes in the volume of assets accounts - changes in assets due to economic appearance and disappearance .................................................................................................240 Table 12.2 (cont): The other changes in the volume of assets accounts - changes in liabilities and net worth due to economic appearance and disappearance .................................................................................................... 241 Table 12.3:The other changes in the volume of assets account - changes in assets due to external events .......................242 Table 12.3 (cont): The other changes in the volume of assets account - changes in liabilities due to external events......... 243 Table 12.4:The other changes in the volume of assets account - changes in assets due to changes in classifications .......244 Table 12.4 (cont): The other changes in the volume of assets account - changes in liabilities and net worth due to changes in classifications ........................................................................................................................... 245 Table 12.5:The other changes in the volume of assets account - changes in asset by type of asset ...................................246 Table 12.5 (cont): The other changes in the volume of assets account - changes in liabilities and net worth by type of liability ............................................................................................................................................................. 247 Table 12.6:The revaluation account - changes in assets .......................................................................................................254 Table 12.6 (cont): The revaluation account - changes in liabilities and net worth ................................................................. 255 Table 13.1:Opening and closing balance sheets with changes in assets ..............................................................................258 Table 13.1 (cont): Opening and closing balance sheets with changes in liabilities and net worth .........................................259 Table 13.2:Asset accounts for the total economy ..................................................................................................................260 Table 14.1: Abbreviated version of the production part of the supply table ...........................................................................274 Table 14.2: An example of the entries to adjust supply to include trade and transport margins ............................................276 Table 14.3:Example of the impact on prices of transport charges .........................................................................................277 Table 14.4: An example of imports entries in the supply table with the global CIF-to-FOB adjustment ................................279 Table 14.5: An example of the entries to adjust supply to include taxes less subsidies on products ....................................280 Table 14.6:Abbreviated version of the intermediate consumption part of the use table ........................................................281 Table 14.7:The final consumption part of a use table ............................................................................................................282 Table 14.8:The capital formation part of a use table ..............................................................................................................283 Table 14.9:The value added part of a use table ....................................................................................................................284 Table 14.10:The imports content of the use matrix ................................................................................................................286 Table 14.11: Breakdown of use by producing units into the five elements making up purchasers' price valuation ...............289 Table 14.12:Supply and use tables at purchasers' prices .....................................................................................................290 Table 14.12 (cont): Supply and use tables at purchasers' prices .......................................................................................... 291 Table 14.13:Supply and use table: trade and transport margins, taxes and subsidies on intermediate and final use of products ..........................................................................................................................................................292 Table 14.14:Supply and use table: Final and intermediate uses at basic prices, ISIC breakdown ........................................293 Table 14.15:Imports used for intermediate consumption and final demand ..........................................................................294 Table 16.1:Summary of the current accounts in the sequence of accounts ..........................................................................326 Table 16.2:Summary of the accumulation accounts and balance sheets ..............................................................................327 Table 16.3:Entries for the rest of the world using the BPM6 structure of accounts ...............................................................330 Table 16.4:Summary current account with sector details ­ uses ...........................................................................................336 Table 16.4 (cont): Summary current account with sector details ­ resources ....................................................................... 337 Table 16.5: Summary of the accumulation accounts and balance sheets with sector details ­ assets and changes in assets..............................................................................................................................................................338 Table 16.5 (cont): Summary of the accumulation accounts and balance sheets with sector details ­ liabilities, net worth and changes in them ....................................................................................................................... 339 xlii Table 17.1:Accounts for non-life insurance - uses .................................................................................................................346 Table 17.1 (cont): Accounts for non-life insurance - resources .............................................................................................347 Table 17.2:Accounts for life insurance - uses ........................................................................................................................348 Table 17.2 (cont): Accounts for life insurance - resources .................................................................................................... 349 Table 17.3:Accounts for non-pension benefits paid through social security - uses ...............................................................356 Table 17.4:Accounts for non-pension social insurance benefits from unfunded other employment-related schemes - uses ..............................................................................................................................................................356 Table 17.5:Accounts for non-pension social insurance benefits from funded other employment-related schemes - uses ..............................................................................................................................................................356 Table 17.3 (cont): Accounts for non-pension benefits paid through social security - resources............................................ 357 Table 17.4 (cont): Accounts for non-pension social insurance benefits from unfunded other employment-related schemes- resources........................................................................................................................................ 357 Table 17.5 (cont): Accounts for non-pension social insurance benefits from funded other employment-related schemes -resources........................................................................................................................................ 357 Table 17.6:Accounts for pension benefits paid through social security - uses ......................................................................360 Table 17.6 (cont): Accounts for pension benefits paid through social security - resources................................................... 361 Table 17.7:Accounts for pension benefits payable under a defined contribution scheme - uses ..........................................362 Table 17.7 (cont): Accounts for pension benefits payable under a defined contribution scheme - resources....................... 363 Table 17.8:Accounts for pension benefits payable under a defined benefit scheme - uses ..................................................364 Table 17.8 (cont): Accounts for pension benefits payable under a defined benefit scheme - resources .............................. 365 Table 17.9:Detailed transactions concerning social insurance ..............................................................................................368 Table 17.10:A supplementary table showing the extent of pension schemes included and excluded ..................................370 Table 18.1:High-level SNA/ISIC aggregation (A*10) .............................................................................................................400 Table 18.2: Industry level headings for a country with a large subsistence economy ...........................................................401 Table 18.3: GDP by expenditure ...........................................................................................................................................402 Table 23.1:ICNPO groups .....................................................................................................................................................458 Table 26.1:Selected effects of a household's residence status on the statistics of the host economy ..................................486 Table 26.2:Selected effects of the residence status of an enterprise on the statistics of the host economy .........................487 Table 26.3:Overview of the balance of payments ..................................................................................................................489 Table 26.4: Balancing items in the international accounts in relation to the SNA sequence of accounts ..............................492 Table 26.5:Overview of Integrated International Investment Position Statement ..................................................................493 Table 26.6: Link between Financial Assets Classification and Functional Categories ..........................................................494 Table 27.1:Subsectors of the financial corporations sector ...................................................................................................500 Table 27.2:The classification of financial assets and liabilities ..............................................................................................501 Table 27.3:The financial account - concise form - changes in assets ...................................................................................502 Table 27.3 (cont): The financial account - concise form - changes in liabilities and net worth .............................................. 503 Table 27.4:Format for detailed flow of funds table or stocks of financial assets analysed by debtor and creditor ................505 Table 28.1:An example of imports entries in the supply table with the global CIF to FOB adjustment .................................508 Table 28.2:Options for recording goods not changing economic ownership ..........................................................................509 Table 28.3:The use table from table 14.12 ............................................................................................................................510 Table 28.3 (cont): The use table from table 14.12................................................................................................................. 511 Table 28.4:Intermediate consumption and value added cross-classified by industry and institutional sector .......................512 Table 28.4 (cont): Intermediate consumption and value added cross-classified by industry and institutional sector............ 513 Table 28.5:A numerical example of reallocating products from construction to manufacturing .............................................514 Table 28.6:Example of a product by product input-output matrix ..........................................................................................516 Table 28.7:Example of an industry by industry input-output matrix .......................................................................................517 Table 28.8:The goods and services account in matrix form ..................................................................................................518 Table 28.9:The supply and use table in matrix form ..............................................................................................................519 Table 28.10:The flow accounts in the sequence of accounts in matrix form .........................................................................521 Table 28.11:The sequence of accounts including the balance sheets in matrix form ...........................................................522 Table 29.1:Table 6 from the Tourism Satellite Accounts .......................................................................................................533 Table 29.2:Example of a hybrid supply and use table from the SEEA ..................................................................................536 Table 29.3:Example of a combined supply and use table for environmental protection goods and services ........................537 Table 29.4:Example of a supply and use table from the System of Health Accounts ...........................................................540 xliii Table 29.4 (cont): Example of a supply and use table from the System of Health Accounts ................................................ 541 xliv List of figures Figure 2.1:Diagram of the integrated accounts for the total economy .....................................................................................33 Figure 2.2:Summary of the main accounts, balancing items and main aggregates ................................................................ 35 Figure 4.1:Illustrative allocation of units to institutional sectors ...............................................................................................64 Figure 6.1:Basic, producers' and purchasers' prices .............................................................................................................103 Figure 17.1:Example of an annuity ........................................................................................................................................351 Figure 17.2:Indications of the flows associated with different financial instruments.............................................................. 375 Figure 22.1:The public sector and its relation to institutional sectors ....................................................................................439 Figure 25.1:The non-observed economy and the informal sector .........................................................................................471 Figure 25.2:Identifying units in the ILO informal sector .........................................................................................................475 Figure 25.3:Informal employment and employment in the informal sector ............................................................................477 Figure 25.4:Identifying units for the ILO informal sector from within the SNA institutional sectors........................................ 479 xlv xlvi Preface A. Introduction The System of National Accounts, 2008 (2008 SNA) is an updated at its thirty-ninth session held in New York from 26-29 February version of the System of National Accounts, 1993 (1993 SNA). It is 2008 (see notes 1 and 2). The volume was reviewed extensively the fifth version of the SNA, the first of which was published over during its development and, following an extended review period fifty years ago. At its thirty-third session in 2003, the Statistical that ended on 30 April 2008, the United Nations Statistical Commission requested that the 1993 SNA be updated to bring the Commission recommended to the United Nations Economic and national accounting framework into line with the needs of data Social Council that the 2008 SNA be adopted as the new users. The background was that the economic environment in many international standard for compiling national accounts statistics. countries had evolved significantly since the early 1990s when the Volume 2 was adopted by the United Nations Statistical 1993 SNA had been developed and, in addition, methodological Commission at its fortieth session held in New York from 24-27 research over the past decade or so had resulted in improved February 2009 with the recommendation that the terms "volume 1" methods of measuring some of the more difficult components of and "volume 2" be dropped and that the entire 2008 SNA should be the accounts. In accordance with the mandate from the published in one document (see note 3). Commission, the 2008 SNA does not recommend fundamental or comprehensive changes that would impede a smooth transition from implementation of the earlier versions, including the 1968 The 2008 SNA starts with an introduction and an overview and SNA, which is the national accounting framework still used in a then presents the accounting rules, the accounts and tables, and number of countries. Further, consistency with related manuals, their integration. These subjects are the topics of chapters 1-17, such as those on the balance of payments, on government finance previously known as volume 1. Chapters 18 to 29 elaborate various statistics and on monetary and financial statistics was an important aspects of the accounts, provide details about their presentation and consideration in the update. describe some possible extensions to improve the usefulness of the accounts for a wide range of purposes. The 2008 SNA was prepared under the auspices of the Inter-Secretariat Working Group on National Accounts The complete publication is to be made available in electronic (ISWGNA), which consists of five organizations: the Statistical format at the website of the United Nations Statistics Division with Office of the European Communities (Eurostat), the International links to that site from the websites of the other international Monetary Fund (IMF), the Organisation for Economic Co- organizations that are members of the ISWGNA. The complete operation and Development (OECD), the United Nations Statistics volume will also be published in the traditional printed copy. Division and regional commissions of the United Nations, Secretariat and the World Bank. The 2008 SNA is published jointly by the five organizations. Efforts have been made to improve the readability of the text and to make the numeric example running through the text easier to For practical purposes, the 2008 SNA was presented to the United follow. A spreadsheet of the numerical example will be available Nations Statistical Commission in the form of two separate for downloading. The electronic version will include hyper-links to volumes, volume 1, consisting of 17 chapters, and volume 2, other areas of the publication and to external links. Over time, live consisting of a further 12 chapters and four annexes. Volume 1 was links will be added to related documents, numerical examples and adopted in principle by the United Nations Statistical Commission updates about important ongoing research related to key topics. B. New features of the System of National Accounts In response to the Commission's guidance, the new features of the accounting. The changes between the 1993 SNA and the 2008 SNA 2008 SNA introduce treatments for those aspects of economies that are, however, less extensive than the changes introduced in 1993. have become more prominent in recent years, elaborate on points that have increasingly become the focus of analytical attention and The new features fall into five main groups: assets; the financial clarify the national accounting treatment of a wide range of topics. sector; globalization and related issues; the general government and The new features draw on research, practical experience and, where public sectors; and the informal sector. The key changes within appropriate, international standards for business and public each group are shown below. xlvii System of National Accounts Assets of whether funding to meet them exists or not. For pensions provided by government, countries have some flexibility to deviate The accounting treatment of assets previously called "intangible from this rule in the set of core tables. However, the full range of produced assets" and now called, more descriptively, "intellectual information required for a comprehensive analysis of pensions is property products" has been clarified and expanded. Many of these provided in a new standard table that shows the liabilities and assets, often seen as a hallmark of the "new economy," are associated flows of all private and public pension schemes, whether associated with the establishment of property rights over funded or unfunded and including social security. knowledge in one form or another. Globalization and related issues The treatments of databases and of originals and copies have been modified and the principle of treating expenditure on research and The treatments of stocks and flows that are characteristic of development as capital formation has been introduced. economic globalization have been clarified and elaborated. The definition of assets in general was reviewed to set the The treatment of remittances from the movement of persons abroad framework for the discussion of such assets. The review led to has been expanded, with coverage of the flows being closer to the several refinements in the treatment of non-produced non-financial economic reality. assets, covering both tangible assets (for example natural resources) and intangible assets (now identified as contracts, leases The application of the principle of change in ownership of goods and licenses, which can be treated as assets in certain has been made universal, resulting in changes to the recording of circumstances). merchanting and of goods sent for processing, both abroad and within the domestic economy, and then returned to the owner. Expenditures on weapons systems that meet the general definition These changes have shifted the focus away from the physical of assets have been reclassified as fixed capital formation. movements of goods to the impact on the economies of the owner of the products and the processor. As a result, they are consistent The analytical concept of capital services has been introduced. with international financial transactions that are increasingly Details can be presented in a supplementary table for market important in a globalized economy. producers, bringing into the SNA the advances in research in recent decades in the fields of growth and productivity and helping to In recognition of the changing structures of production and finance satisfy the analytical needs of many users. in many economies, guidance is now provided about when "special purpose entities", which are sometimes called shell companies or The financial sector brass plate companies and which can be created by corporations or the government, should be recognized as institutional units, how Recommendations regarding the financial sector have been updated they should be classified, and how their operations should be to reflect developments in one of the fastest-changing segments of treated. many economies. In particular, the 2008 SNA provides a more comprehensive overview of financial services. The general government and public sectors The 1993 SNA was modified several years ago to cater for some Several principles have been clarified and refined in response to developments in financial derivatives during the 1990s. At its developments in accounting standards for government. meeting in March 1999, the United Nations Statistical Commission approved changes to the treatment of financial derivatives. The two The delineation of the government and the public sectors from the most significant changes were that the financial assets boundary other sectors of the economy has been clarified. was expanded to include financial derivative contracts regardless of whether "trading" occurred on or off exchange, and flows associated with interest rate swaps and forward rate agreements The treatments of super dividends paid by public corporations and were recorded as financial transactions rather than interest flows. In capital injections into public enterprises have been clarified. addition, some new functional classifications were introduced. The principles for the treatment of public-private partnerships have The measurement of non-life insurance services has been modified been outlined and the treatment of restructuring agencies in order to provide more plausible estimates following extreme elaborated. events (for example earthquakes) that result in large insurance payouts. Handling transactions between general government and related public corporations and with securitization vehicles has been Guidance on the treatment of impaired (non-performing) loans has clarified to improve the recording of items that could significantly been elaborated. affect government debt. The method for calculating financial intermediation services The treatment of several classes of loan guarantees has been indirectly measured, widely known as FISIM, has been refined in clarified, and a new treatment has been introduced for standardized the light of experience in implementing the 1993 SNA guarantees, such as export credit guarantees and student loan recommendations. guarantees. The most far-ranging change in the financial area relates to new Some other new features are not easily grouped but are no less guidelines for recording pension entitlements. The SNA now important. Notable among these are the clarification of ancillary recognizes the liabilities of employers' pension schemes, regardless units and holding companies and the introduction of accounting for xlviii Preface employee stock options, which came into wide usage in some its applicability not only still hold; they have been reinforced in the countries during the 1990s. 2008 SNA. These new features help maintain the relevance of the SNA in a The informal sector time of rapid economic and institutional change, building on its solid existing framework. Accordingly, the provision of the guidance on the accounting rules, the accounts and tables, and their The 2008 SNA contains a chapter dedicated to the question of integration in the 2008 SNA can be seen as consistent with measuring activity carried out within households on an informal continuing efforts to implement the 1993 SNA in all countries. In basis (the so-called informal sector) and activity that escapes this regard, the four points made in the Preface to the 1993 SNA formal statistical measurement (the so-called not-observed concerning the comprehensiveness of the SNA and the breadth of economy). C. The SNA in the context of other statistical systems The SNA provides guidance for national accounts work since the 1993 SNA was released on the International almost universally Comparison Program and on the international manuals for consumer and producer price indices. There is closer consistency with advice given in the resolutions of the International Conference The final stages of work on the 1993 SNA came at a time when the of Labour Statisticians. There is a chapter dedicated to the formerly centrally planned economies making the transition to consideration of the role of non-profit institutions in the economy market economies in the early to mid 1990s. The years since have drawing on work in this area since the time of the 1993 SNA. For proven the applicability and robustness of the SNA in those environmental accounts, the ground has been laid for consistency economies. The European System of Accounts, 1995 was made with the revised Handbook of National Accounting: Integrated broadly consistent with the 1993 SNA with respect to the Environmental-Economic Accounting, which is expected to definitions, accounting rules and classifications. Its update, which become an international standard. Similarly, the 2008 SNA is is currently under way, will cover the recommendations and consistent with the major classification systems, notably the clarifications agreed at the international level for the 2008 SNA. International Standard Industrial Classification of All Economic The new treatments of goods for processing and remittances from Activities, Rev. 4 and the Central Product Classification, Version 2. persons working abroad are especially relevant for developing economies that are moving into the global economy. In addition, the new guidelines on handling public-private partnerships and the Future developments: the research agenda use of natural resources by non-residents are likely to be especially significant for many countries. The first comprehensive set of national accounting standards was released in 1953, with major updates in 1968, 1993 and, now, 2008. The SNA recognizes the need for flexibility Clearly, though, developments in national accounting do not emerge in steps every 15 to 20 years, so identifying updates needed The 1993 SNA incorporated the concept of satellite accounts, a in the SNA is a continuing process even if a full-scale rewrite major step in the direction of flexibility. Moving forward, satellite occurs infrequently. Developments depend on a combination of the accounts are expected to continue to provide a useful way of evolution of economic processes (such as new financial working towards solutions that give the appropriate level of instruments), advances in statistical estimation and measurement confidence in challenging measures, such as those for techniques, and improvements in data collection. environmental accounting issues. Using satellite accounts as a means of expanding the relevance of the national accounts, but Some contentious issues were considered during the SNA update without affecting the comparability of the central framework used process. The decisions made were based on the best information for economic policymaking, has become an accepted means of and techniques available at the time. In some cases, though, developing and testing new data sources and methods. Further, the research was still under way while the SNA was being updated and 2008 SNA has introduced the item of "supplementary" items and the results of ongoing research may lead to the need to revisit some tables. The term "supplementary" is used when the SNA recognizes of these decisions prior to the next update of the SNA. that items may be of limited relevance in some countries or that while of analytical interest, a table cannot be prepared to the same The ISWGNA has identified a number of areas of ongoing standard of accuracy as the main set of accounts. research. The ISWGNA has recommended these topics should be included in a national accounts research agenda. A list of items for The SNA reinforces the central role of national consideration, as identified at the conclusion of the update process, accounts in statistics appears in Annex 4. The concepts and classifications of the 2008 SNA are harmonized The ISWGNA will be responsible for advancing the research on with other international statistical standards and manuals even these issues (and any other important ones that transpire), but will more than was the case with the 1993 SNA. Of special note is the be relying on assistance from the agencies responsible for national close coordination of the processes during the update of the SNA accounts around the world. Depending on the outcomes, it may and the simultaneous revision of the Balance of Payments Manual. prove useful to incorporate the outcomes from this research into the The chapter on price and volume measures has benefited from 2008 SNA before the next major update. xlix System of National Accounts D. Acknowledgements The 2008 SNA is the result of a process that was notable for its IMF: Adriaan Bloem and Kim Zieschang transparency and the wide involvement of the international statistical community, both of which were made possible by the OECD: François Lequiller and Charles Aspden innovative use of a project website as a communication tool. The process comprised six steps. United Nations Statistics Division: Ivo Havinga, Viet Vu, Magdolna Csizmadia, Gulab Singh, Herman Smith and Annette in the first stage of the process, identifying and obtaining Becker agreement on the issues to be considered during the update (2002-2004); United Nations Economic Commission for Europe: Lidia Bratanova and Tihomira Dimova the research into these issues and presenting the proposals for change to the 1993 SNA; World Bank: Barbro Hexeberg. the consideration of the issues by experts and agreement on Other staff members of the ISWGNA organizations who provisional recommendations (2004­2006); contributed substantively were: consultations with countries on the recommendations (2006); Eurostat: Paolo Passerini, Francis Malherbe, Ligia Frankford and John Verrinder presenting a set of recommendations to the Statistical Commission in 2007; and IMF: Edgar Ayales, Sagé de Clerck, Robert Dippelsman, Keith Dublin, René Fiévet, Cornelis Gorter, Robert Heath, John incorporating the agreed recommendations into the text of the Joisce, Lucie Laliberté, Alfredo Leone, Ralph Kozlow, Russell 2008 SNA for approval by the Statistical Commission in two Krueger, Jaroslav Kucera, Randall Merris, Jose-Carlos stages in 2008 and 2009 (2007-9). Moreno, Neil Patterson, Lisbeth Rivas, Armida San Jose, Manik Shrestha and Mick Silver The ISWGNA and project staff OECD: Nadim Ahmad, William Cave, Jean-Pierre Dupuis, The process involved the five international organizations that Anders Nordin, and Paul Schreyer comprise the ISWGNA; other international, regional and non- governmental organizations; project staff; agencies responsible for United Nations Statistics Division: Alessandra Alfieri, Youlia compiling official statistics in many countries; working groups, Antonova, Ralf Becker and Vetle Hvidsten. other expert groups and electronic discussion groups; and individual experts in national accounting and related fields from all The staff of the Economic Statistics Branch of the United Nations regions of the world. As could be expected of a product of such a Statistics Division, under Ivo Havinga, served as the secretariat to complex and sustained process, the 2008 SNA reflects many the ISWGNA. The United Nations Statistics Division developed diverse contributions. and maintained the Project website, which provides more information on the contributions summarized in this preface (see The ISWGNA managed and coordinated the process at the http://unstats.un.org/unsd/nationalaccount/snarev1.asp). A team request of the Statistical Commission, similarly to what from the Development Data Group of the World Bank, under happened for the 1993 SNA. The ISWGNA member Misha Belkindas, provided administrative support, including for organizations' contributions were in cash and in kind. At the the multidonor trust fund established for the SNA Update Project. senior level, the representatives were: The Project staff comprised Carol S. Carson, Project Manager from Pieter Everaers and Laurs Norlund (Eurostat) 2004 to February 2008, Paul McCarthy, Project Manager from February 2008, and Anne Harrison, Editor. Anne was an expert Carol S. Carson and Robert Edwards (IMF) voice in all phases of the Project and undertook the enormous task of revising the text of the 2008 SNA. Enrico Giovannini (OECD) The Advisory Expert Group Willem de Vries and Paul Cheung (United Nations Statistics Division) The Advisory Expert Group (AEG) on National Accounts was established in 2003. It was positioned to have a key role in the update process by considering proposals for change and expressing Shaida Badiee (World Bank). its views. The following served as members of the AEG: Heidi Arboleda, Philippines; Ole Berner, Denmark; Mariam Cover National accountants and other professionals of the ISWGNA Jimenez, Costa Rica; Meshesha Getahun, Ethiopia; Omar organizations who regularly participated in tasks of coordination Mohammad Ali Hakouz, Jordan; Peter Harper, Australia; Jan and substantive leadership were as follows: Heller, Czech Republic; Andrey Kosarev, Russian Federation; Akhilesh C. Kulshreshtha, India; Robin Lynch, United Kingdom of Eurostat: Gallo Gueye, Christian Ravets, Dieter Glatzel and Great Britain and Northern Ireland; Jacques Magniez, France; Brian Newson Reimund Mink, European Central Bank; Brent R. Moulton, United l Preface States of America; Chellam Palanyandy, Malaysia; Peter Pariag, A number of other groups considered SNA-related topics as part of Trinidad and Tobago; Johan Prinsloo, South Africa; Roberto Luís their larger agenda. These include the European Central Bank/ Olinto Ramos, Brazil; Irena Tvarijonaviciute, Lithuania; Peter van Eurostat Task Force on the Statistical Measurement of the Assets de Ven, Netherlands; Karen Wilson, Canada. and Liabilities of Pension Schemes in General Government (Eduardo Barredo and Reimund Mink, co-chairs, and John Verrinder, secretary), the OECD Group of National Experts on The AEG met six times: in February 2004, in Washington, hosted Science and Technology (Fred Gault, chair, and Alessandra by the IMF; in December 2004, in New York City, hosted by the Colecchia, secretary), the Paris Group on Labour and United Nations Statistics Division; in July 2005, in Bangkok, Compensation (Denis Ward, moderator), the Delhi Group on hosted by the United Nations Economic and Social Commission for Informal Sector Statistics (Pronab Sen, chair), the United Nations Asia and the Pacific; in January-February 2006, in Frankfurt, Expert Group on Industrial Statistics (Ivo Havinga, chair, and Viet hosted by the European Central Bank; in March 2007, in New York Vu and Gulab Singh, secretaries), the United Nations Expert Group City, hosted by the United Nations Statistics Division, and in on International Classifications (Ivo Havinga, chair, and Ralf November 2008 in Washington, hosted by the World Bank. In all Becker, secretary) and the United Nations Technical Subgroup on of these meetings and in electronic consultations, the national the Movement of Persons--Mode 4 (Ivo Havinga, chair, and accountants of the ISWGNA also participated and expressed their Alessandra Alfieri, secretary). views. Paul McCarthy served as rapporteur for the meetings in July 2005, February 2006 and March 2007. Other consultations also informed the process. These included meetings of OECD and Eurostat national accounts working groups, The papers prepared for consideration of the AEG represent a national accounts meetings and workshops of several United substantial body of research. They will continue to be available on Nations regional commissions, and the International Association the Project website noted above. The authors included the for Research in Income and Wealth. following individuals: Nadim Ahmad, Alessandra Alfieri, Charles Aspden, Adriaan Bloem, Stuart Brown, Carol S. Carson, William Cave, W. Erwin Diewert, Robert Dippelsman, Brian Donaghue, Country contributions René Fiévet, Russel Freeman, Jean Galand, Antonio Galicia- Escotto, Jeff Golland, Cornelis Gorter, Anne Harrison, Ivo Havinga, Tony Johnson, John Joisce, Brett Kaufmann, Andrew Agencies responsible for compiling official statistics contributed in Kitili, Ralph Kozlow, François Lequiller, Robin Lynch, Christoph several distinct ways. In the first of these, heads of statistical Maier, Reimund Mink, Brent R. Moulton, Anders Nordin, Patrick offices were involved through participation in the Statistical O'Hagan, Neil Patterson, John Pitzer, Jens Reinke, Lisbeth Rivas, Commission in agreeing the governance of the process and then Philippe de Rougemont, John Ruser, Carlos Sánchez Muńoz, Paul shaping the list of issues to be considered in the update. Schreyer, Richard Shepherd, Manik Shrestha, Gulab Singh, Herman Smith, Pierre Sola, Philippe Stauffer, Hidetoshi Takeda, Viet Vu, John Walton and Chris Wright. Secondly, to an unprecedented extent, countries provided comments on the provisional recommendations for change. After each meeting, the AEG's recommendations were sent to national Other expert groups statistical offices and interested central banks with an invitation to comment. From 40 to 60 countries commented after each round of recommendations. In all, comments were received from almost 100 Topical expert groups, some standing groups and some created countries. All these comments, which are posted on the Project especially for the purpose of advancing the update, carried out most website, provide a rich source of information on why countries of the research on issues and preparation of proposals for change supported the recommendations or, in some cases, why they did put forward to the AEG. These groups included the Canberra II not; their views on implementation of the recommendations, and Group on the Measurement of Non-financial Assets (Peter Harper, ideas about the kind of guidance they would hope to find in the chair, and Charles Aspden, secretary), the IMF-BEA Task Force on updated SNA. Employers' Retirement Schemes (Adriaan Bloem and John Ruser, co-chairs, and Brian Donaghue, secretary), the IMF-OECD Task Force on the Harmonization of Public Sector Accounts (Lucie Thirdly, countries provided comments on draft chapters. Around 70 Laliberté, chair, and Jean-Pierre Dupuis, secretary), the OECD countries commented on the final draft of volume 1 during April Task Force on Financial Services (Ruth Meier, chair, and Philippe and May 2008 and on volume 2 in January and February of 2009. Stauffer and Anders Nordin, secretaries), the OECD Task Force on Fourthly, a number of statistical offices provided in-kind the Measurement of Non-life Insurance (Fenella Maitland-Smith contributions, such as the time of AEG members for meetings (and and then François Lequiller, moderator) and the OECD Task Force for developing country AEG members, travel expenses as well). on the Valuation and Measurement of Equity (Patrick O'Hagan, moderator). The annex to this preface lists the authors of issues papers prepared for and considered by most of these groups. The Finally, a group of national statistical offices and central banks IMF Committee on Balance of Payments Statistics (Robert supported the project by financial contributions. These Edwards, chair, and John Joisce, Manik Shrestha and Andrew contributions were from Statistics Sweden, the Australian Bureau Kitili, secretaries) and its subgroups considered a number of issues of Statistics, Statistics Canada, the Central Bank of Cyprus, the that were of common concern to national accountants and balance Central Bank of Kazakhstan, Statistics Netherlands, the Office of of payments compilers. The authors of the issues papers most National Statistics of the United Kingdom and the Bureau of related to the SNA are also listed in the annex. Economic Analysis of the United States of America. li System of National Accounts Notes 1. See the report of the 39th session of the Statistical Commission (document E/2008/24 and E/CN.3/2008/34) at http://unstats.un.org/ unsd/statcom/doc08/Report-English.pdf 2. Referred to, at the time of the United Nations Statistical Commission session, as 1993 SNA, Rev. 1. 3. See the report of the 40th session of the Statistical Commission (document E/2009/24 and E/CN.3/2009/29) at http://unstats.un.org/ unsd/statcom/doc09/Report-English.pdf References Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank, System of National Accounts 1993. Brussels/Luxembourg, Washington, D.C., Paris, New York, 1993. United Nations Publication, Sales No. E.94.XVII.4. Commission of the European Communities, European System of Accounts 1995. Luxembourg, 1999. International Monetary Fund, The Balance of Payments and International Investment Position Manual, sixth edition. Washington, D.C., 2009. Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank. Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003. Luxembourg, Washington, D.C., Paris, New York, 2003. United Nations. International Standard Industrial Classification of All Economic Activities, Revision 4. New York, 2008. UNited Nations Publication, Sales No. E.08.XVII.25, United Nations. Central Product Classification, Version 2. New York, 2008. United Nations Publication, Sales No. E.08.XVII.7. lii Annex: Authors of Issues Papers Prepared for Task Forces, Groups and Committees Considering SNA Update Issues Canberra II Group on the Measurement of Non- Jacques Magniez, Tonya Manning, Reimund Mink, Tulsi Ram, financial Assets Marshall Reinsdorf, Ingber Roymans, Peter Van de Ven and J. S. Venkateswarlu. Nadim Ahmad, Charles Aspden, John R. Baldwin, Desmond Beckstead, Dirk van den Bergen, Lauren Binns, Ariel Coremberg, IMF-OECD Task Force on the Harmonization of Carol Corrado, Mariam Cover Jimenez, Martin Daniels, W. Erwin Public Sector Accounts Diewert, Emma Edworthy, Barbara Fraumeni, Guy Gellatly, Dominique Guellec, Mark de Haan, Michael Harper, Peter Harper, Anne Harrison, Ivo Havinga, Richard Hemming, Peter Hill, Bruce Baker, Matthew Bohun, Sřren Brodersen, Paula Burges, Ian Charles Hulten, Ning Huang, Vetle Hvidsten, Tony Johnson, Carruthers, Giseal Csonka, Sagé De Clerck, Tim Dobbs, Jean- Andreas Kuipers, François Lequiller, Robin Lynch, Christophe Pierre Dupuis, Keith Dublin, Jeff Golland, Betty Gruber, Ivo Maier, Pablo Mandler, Ian McPhee, Franciso Moris, Brent Havinga, Christopher Heady, Richard Hemming, Graham Moulton, Carol Moylan, Carl Obst, Sumiye Okubo, Dean Parham, Jenkinson, Brett Kaufmann, Robert Keys, François Lequiller, Soli Peleg, John Pitzer, Marshall Reinsdorf, Carol Robbins, Jacques Magniez, Reimund Mink, Robert Kilpatrick, Lucie Antoine Rose, Paul Romanis, Salem, Oda Schmalwasser, Paul Laliberté, François Lequiller, Ian Mackintosh, Iana Paviola, John Schreyer, Daniel Sichel, Yusuf Siddiqi, Zuzana Stara, Leo Pitzer, Tulsi Ram, Brooks Robinson, Philippe de Rougemont, Sveikauskas, Luke Thompson, Jeff Tyndall, André Vanoli, Peter Veronique Row, André Schwaller, Richard Shepherd and Paul van de Ven, John Verrinder and Viet Vu. Sutcliffe, Ken Warren, Kurt Wass and Graham Watkins. IMF Committee on Balance of Payments Statistics OECD Task Force on Financial Services Stuart Brown, Robert Dippelsman, Robert Edwards, Antonio Galicia-Escotto, René Fiévet, Jean Galand, Robert Heath, John Dennis Fixler, Anne Harrison, Anders Nordin, Paul Schreyer, Joisce, Andrew Kitili, Carlos Sanchez Munoz, Neil Patterson, Jens Philippe Stauffer, John Turnbull and John Walton. Reinke, Richard Shepherd, Manik Shrestha, Pierre Sola, Hidetoshi Takeda and Chris Wright. OECD Task Force on the Measurement of Non-life IMF-BEA Task Force on Employers' Retirement Insurance Schemes Robert Dippelsman, Fenella Maitland-Smith, François Lequiller, Bo Bergman, Ole Berner, Dieter Glatzel, Peter Harper, Anne Anne Harrison, Ingber Roymans, Gabe H. de Vries and John Harrison, Tony Johnson, Ramesh Kolli, François Lequiller, Walton. liii System of National Accounts liv List of abbreviations and acronyms ABO Accrued benefit obligation GNI Gross national income ADB Asian Development Bank GVATI Gross value added of the tourism industry AEG Advisory Expert Group on National Accounts AMNE Activities of Multinational Enterprises HS Harmonized commodity description and coding System BD OECD Benchmark Definition on Foreign Direct Investment IASB International accounting standards board BIS Bank for International Settlements IC Insurance corporation BOOT Build, own, operate, transfer ICLS International Conference of Labour Statisticians BOP Balance of payments ICNPO International Classification of Non-Profit BPM Balance of Payments and International Investment Organizations Position Manual ICP International Comparison Program ICPF Insurance corporations and pension funds CIF Cost, insurance and freight ICSE Resolution concerning the International CISSTAT Interstate Statistical Committee of the Classification of Status in Employment Commonwealth of Independent States ICT Information, communication and COFOG Classification of the Functions of Government telecommunications COICOP Classification of Individual Consumption by IFRS International Financial Reporting Standards Purpose IIP International investment position COLI Cost of living index ILO International Labour Organization COPNI Classification of the Purposes of Non-profit IMF International Monetary Fund Institutions Serving Households IMTS International Merchandise Trade Statistics: COPP Classification of Outlays of Producers by Purpose Concepts and Definitions CPC Central Product Classification IPSASB International Public Sector Accounting Standards CPD Country-product-dummy (method) Board CPI Consumer price index ISIC International Standard Industrial Classification of CPL Comparative price level All Economic Activities ISWGNA Inter-Secretariat Working Group on National Accounts DBMS Database management system ITC Invitation to comment ED Exposure draft KAU Kind-of-activity unit EDG Electronic Discussion Group KLEMS Capital-labour-energy-materials-service inputs EEZ Exclusive economic zone EKS Eltetö-Köves-Szulc (method) LP Laspeyres price index ESO Employee stock option LQ Laspeyres volume index FATS Foreign AffiliaTe Statistics MFP Multifactor productivity FDI Foreign direct investment MFSM Monetary and Financial Statistics Manual FDIR Framework for Direct Investment Relationships MMF Money market fund FISIM Financial intermediation services indirectly measured MNE Multinational enterprise FOB Free on board MPI Import price index FP Fisher price index MSITS Manual on Statistics of International Trade in Services FPI For-profit institution FQ Fisher volume index n.e.c. Not elsewhere classified FRA Forward rate agreement NDP Net domestic product n.i.e. not included elsewhere GDI Gross domestic income NIF Note issuance facility GDP Gross domestic product NNDI Net national disposable income GFS Government finance statistics NNI Net national income GFSM Government Finance Statistics Manual NOE Non-Observed Economy GK Geary Khamis (method) NPI Non-profit institution lv System of National Accounts NPISH Non-profit institution serving households SHA System of Health Accounts NPV Net present value SITC Standard Industrial Trade Classification SNA System of National Accounts OECD Organisation for Economic Cooperation and SPD Structured product description Development SPE Special purpose entity OEEC Organisation for European Economic Cooperation TDGDP Tourism direct gross domestic product PAYE Pay-as-you-earn TDGVA Tourism direct gross value added PBO Projected benefit obligation TFP Total factor productivity PF Pension fund TP Törnqvist price index PFI Private finance initiative TQ Törnqvist volume index PIM Perpetual inventory method TSA Tourism satellite account PIM Perpetual inventory model PP Paasche price index UJV Unincorporated joint venture PPI Producer price index UNECE United Nations Economic Commission for Europe PPP Public/private partnership UNESCAP United Nations Economic and Social Commission PPP Purchasing power parity for Asia and the Pacific PQ Paasche volume index R&D Research and development WHO World Health Organization XMPI Export and import price indices SAM Social accounting matrix SDR Special drawing right XPI Export price index SEEA System of Environmental and Economic Accounts lvi Chapter 1: Introduction A. What is the System of National Accounts? 1.1 The System of National Accounts (SNA) is the calculation of such aggregates has long ceased to be the internationally agreed standard set of recommendations on primary purpose for compiling the accounts. In order to how to compile measures of economic activity in understand the workings of the economy, it is essential to accordance with strict accounting conventions based on be able to observe and analyse the economic interactions economic principles. The recommendations are expressed taking place between different sectors of the economy. The in terms of a set of concepts, definitions, classifications and SNA is designed to be implemented at different levels of accounting rules that comprise the internationally agreed aggregation: at the level of individual economic agents, or standard for measuring such items as gross domestic institutional units as they are called in the SNA; for groups product (GDP), the most frequently quoted indicator of of such units, or institutional sectors; or at the level of the economic performance. The accounting framework of the total economy. SNA allows economic data to be compiled and presented in a format that is designed for purposes of economic analysis, decision-taking and policymaking. The accounts 1.4 The SNA is designed for economic analysis, decision- themselves present in a condensed way a great mass of taking and peacemaking, whatever the industrial structure detailed information, organized according to economic or stage of economic development reached by a country. principles and perceptions, about the working of an The basic concepts and definitions of the SNA depend economy. They provide a comprehensive and detailed upon economic reasoning and principles which should be record of the complex economic activities taking place universally valid and invariant to the particular economic within an economy and of the interaction between the circumstances in which they are applied. Similarly, the different economic agents, and groups of agents, that takes classifications and accounting rules are meant to be place on markets or elsewhere. The framework of the SNA universally applicable. There is no justification, for provides accounts that are: example, for seeking to define parts of the SNA differently in less developed than in more developed economies, or in a. comprehensive, in that all designated activities and the large relatively closed economies than in small open consequences for all agents in an economy are covered; economies, or in high-inflation economies than in low- inflation economies. Certain definitions, or accounting b. consistent, because identical values are used to rules, specified in the SNA might become superfluous in establish the consequences of a single action on all certain circumstances (for example, if there were no parties concerned using the same accounting rules; inflation), but it is nevertheless necessary for a general system to include definitions and rules covering as wide a c. integrated, in that all the consequences of a single range of circumstances as possible. action by one agent are necessarily reflected in the resulting accounts, including the impact on measurement of wealth captured in balance sheets. 1.5 Some countries may be able, at least initially, to calculate only a small number of accounts and tables for the total 1.2 The accounts of the SNA provide more than a snapshot of economy with little or no disaggregation into sectors, but a the economy at a point in time, since in practice the reduced set of accounts or tables does not constitute an accounts are compiled for a succession of time periods, alternative system. It is not appropriate to try to lay down thus providing a continuing flow of information that is general priorities for data collection when economic indispensable for the monitoring, analysis and evaluation of circumstances may vary considerably from one country to the performance of an economy over time. The SNA another. In practice, priorities can only be established provides information not only about economic activities country by country by economic analysts or policymakers taking place within a period but also about the levels of an familiar with the particular economic situation, needs and economy's assets and liabilities, and thus the wealth of its problems of the individual countries in question. It is not inhabitants, at particular points of time. In addition, the useful, for example, to try to specify general priorities for SNA includes an external account that displays the links developing countries when they constitute a very between an economy and the rest of the world. heterogeneous group of countries at a world level. Data priorities may vary as much between one developing 1.3 Certain key aggregate statistics, such as GDP, that are country and another as between a developing and a widely used as indicators of economic activity at the level developed country or indeed between two developed of the total economy, are defined within the SNA, but the countries. 1 System of National Accounts B. The conceptual elements of the SNA 1.6 The SNA measures what takes place in the economy, 2. The institutional sectors of the economy between which agents, and for what purpose. At the heart of the SNA is the production of goods and services. These 1.9 Two main kinds of institutional units, or transactors, are may be used for consumption in the period to which the distinguished in the SNA; households and legal entities. accounts relate or may be accumulated for use in a later Legal entities are either entities created for purposes of period. In simple terms, the amount of value added production, mainly corporations and non-profit institutions generated by production represents GDP. The income (NPIs), or entities created by political processes, corresponding to GDP is distributed to the various agents specifically government units. The defining characteristic or groups of agents as income and it is the process of of an institutional unit is that it is capable of owning goods distributing and redistributing income that allows one agent and assets, incurring liabilities and engaging in economic to consume the goods and services produced by another activities and transactions with other units in its own right. agent or to acquire goods and services for later consumption. The way in which the SNA captures this 1.10 For the purposes of the SNA, institutional units that are pattern of economic flows is to identify the activities resident in the economy are grouped together into five concerned by recognizing the institutional units in the mutually exclusive sectors composed of the following types economy and by specifying the structure of accounts of units: capturing the transactions relevant to one stage or another of the process by which goods and services are produced a. Non-financial corporations; and ultimately consumed. These concepts are sketched below and developed further in chapter 2 and later chapters. b. Financial corporations; 1. Activities and transactions c. Government units, including social security funds; d. NPIs serving households (NPISHs); 1.7 The SNA is designed to provide information about the behaviour of institutional units and the activities in which e. Households. they engage, namely production, consumption and the accumulation of assets, in an analytically useful form. This The five sectors together make up the total economy. Each is achieved by recording the exchange of goods, services sector may be further divided into subsectors; for example, and assets between institutional units in the form of the non-financial and financial corporations sectors are transactions. At the same time, other transactions are divided to distinguish corporations subject to control by recorded that represent the form of payment for the governments or foreign units from other corporations. The exchange which may be a good, service or asset of similar SNA makes provision for a complete set of flow accounts value but is often some form of financial claim including and balance sheets to be compiled for each sector, and notes and coins. subsector if desired, as well as for the total economy. The total number of accounts that may be compiled is therefore 1.8 Data on transactions provide the basic source material from potentially quite large, depending upon the level of disaggregation that is required and feasible. Only by which the values of the various elements in the accounts are disaggregation into sectors and subsectors is it possible to built up or derived. The use of transactions data has observe the interactions between the different parts of the important advantages. The first of these is that the prices at economy that need to be measured and analysed for which goods and services are exchanged in transactions purposes of policymaking. between buyers and sellers on markets provide the information needed for valuing, directly or indirectly, all the items in the accounts. Secondly, a transaction that takes 1.11 Institutional units that are resident abroad form the rest of place between two different institutional units has to be the world. The SNA does not require accounts to be recorded for both parties to the transaction and therefore compiled in respect of economic activities taking place in the rest of the world, but all transactions between resident generally appears twice in a system of macroeconomic and non-resident units have to be recorded in order to accounts. This enables important linkages to be established obtain a complete accounting for the economic behaviour in the SNA. For example, output is obtained by summing of resident units. Transactions between residents and non- the amounts sold, bartered or transferred to other units plus residents are grouped together in a single account, the rest the amounts entered into, less the amounts withdrawn from, of the world account inventories. In effect, the value of output is obtained by recording the various uses of that output by means of data on transactions. In this way, flows of goods and services 3. Accounts and their corresponding economic can be traced through the economic system from their activities producers to their eventual users. Some transactions are only internal bookkeeping transactions that are needed 1.12 This section gives a very brief summary of the accounts of when a single unit engages in two activities, such as the the SNA. It is impossible to do justice to the wealth of production and consumption of the same good or service, information contained in the SNA in a short section of this but the great majority of transactions takes place between kind, and reference should be made to chapter 2 for a different units on markets. comprehensive overview. 2 Introduction The goods and services account 1.17 The production account records the activity of producing goods and services as defined within the SNA. Its balancing item, gross value added, is defined as the value 1.13 Fundamental to the SNA is the identity that goods and of output less the value of intermediate consumption and is services produced in the economy must be consumed, used a measure of the contribution to GDP made by an for capital formation or exported while all goods and individual producer, industry or sector. Gross value added services used within the economy must be produced in the is the source from which the primary incomes of the SNA economy or imported. From this, once suitable allowance is are generated and is therefore carried forward into the made for the effect on prices of taxes and subsidies on primary distribution of income account. Value added and products, the goods and services account is derived and GDP may also be measured net by deducting consumption thence GDP. of fixed capital, a figure representing the decline in value during the period of the fixed capital used in a production process. The sequence of accounts 1.18 A set of articulated accounts shows how incomes are: 1.14 This basic identity is elaborated within the SNA into a sequence of interconnected flow accounts linked to a. Generated by production; different types of economic activity taking place within a given period of time, together with balance sheets that b. Distributed to institutional units with claims on the record the values of the stocks of assets and liabilities held value added created by production; by institutional units or sectors at the beginning and end of the period. Each flow relates to a particular kind of activity such as production, or the generation, distribution, c. Redistributed among institutional units, mainly by redistribution or use of income. Each account shows the government units through social security contributions resources available to the institutional units and the uses and benefits and taxes; made of these resources. An account is balanced by introducing a balancing item defined residually as the d. Used by households, government units or non-profit difference between the total resources recorded on one side institutions serving households (NPISHs) for purposes of the account and the total uses recorded on the other side. of final consumption or saving; The balancing item from one account is carried forward as the first item in the following account, on the opposite side, e. Available as saving for accumulating wealth. thereby making the set of accounts an articulated whole. The balancing items typically encapsulate the net result of the activities covered by the account in question and are The income accounts have considerable intrinsic economic therefore economic constructs of considerable interest and interest in themselves. In particular, they are needed to analytical significance. Examples of balancing items explain the behaviour of institutional units as final include value added, disposable income and saving. There consumers, that is, as users of the goods and services for is also a strong link between the flow accounts and the the satisfaction of the individual and collective needs and balance sheets, as all the changes occurring over time that wants of households and the community. The balancing affect the assets or liabilities held by institutional units or item emerging from the complete set of income accounts is sectors are systematically recorded in one or another of the saving. flow accounts. 1.19 As the balancing item, saving is carried forward into the capital account, the first in the sequence of accumulation 1.15 The set of accounts just described is referred to as the accounts. "sequence of accounts" but it should be noted that, although it is necessary to present the accounts in a particular order, the activities they describe should not be Accumulation accounts interpreted as taking place sequentially in time. For example, incomes are generated continuously by processes 1.20 The accumulation accounts are those that record flows that of production, while expenditures on the outputs produced affect the entries in the balance sheets at the start and end of may also be taking place more or less simultaneously. An the accounting period. There are four accumulation economy is a general equilibrium system in which accounts; the capital account, the financial account, the interdependent economic activities involving countless other change in the volume of assets account and the transactions between different institutional units are carried revaluation account. out simultaneously. Feedbacks are continually taking place from one type of economic activity to another. a. The capital account records acquisitions and disposals of non-financial assets as a result of transactions with other units, internal bookkeeping transactions linked to Current accounts production (such as changes in inventories and consumption of fixed capital) and the redistribution of 1.16 The current accounts record the production of goods and wealth by means of capital transfers. services, the generation of incomes by production, the subsequent distribution and redistribution of incomes b. The financial account records acquisitions and among institutional units, and the use of incomes for disposals of financial assets and liabilities, also through purposes of consumption or saving. transactions. 3 System of National Accounts c. The other changes in the volume of assets account point, as they are described in chapter 2, but it is useful to records changes in the amounts of the assets and draw attention to two specific elements which play a major liabilities held by institutional units or sectors as a role in the SNA. result of factors other than transactions; for example, destruction of fixed assets by natural disasters. Supply and use tables d. The revaluation account records those changes in the 1.24 In addition to the flow accounts and balance sheets values of assets and liabilities that result from changes described earlier, the central framework of the SNA also in their prices. contains detailed supply and use tables in the form of matrices that record how supplies of different kinds of 1.21 The link between the accumulation accounts and the goods and services originate from domestic industries and current accounts is provided by the fact that saving must be imports and how those supplies are allocated between used to acquire financial or non-financial assets of one kind various intermediate or final uses, including exports. These or another, including cash. When saving is negative, the tables involve the compilation of a set of integrated excess of consumption over disposable income must be production and generation of income accounts for financed by disposing of assets or incurring liabilities. The industries by drawing upon detailed data from industrial financial account shows the way in which funds are censuses or surveys. The supply and use tables provide an channelled from one group of units to another, especially accounting framework within which the product flow through financial intermediaries. Access to finance is a method of compiling national accounts, whereby the total prerequisite for engaging in many types of economic supplies and uses of individual types of goods and services activities. have to be balanced with each other, can be systematically exploited. The supply and use tables also provide the basic Balance sheets information for the derivation of detailed input-output tables that may be used for purposes of economic analysis 1.22 The balance sheets show the values of the stocks of assets and projections. and liabilities held by institutional units or sectors at the beginning and end of an accounting period. As already Accounts in volume terms noted, the values of the assets and liabilities held at any moment in time vary whenever any transactions, price 1.25 The SNA also provides specific guidance about the changes or other changes affecting the volume of assets or methodology to be used to compile an integrated set of liabilities held take place. These are all recorded in one or price and volume indices for flows of goods and services, another of the accumulation accounts so that the difference gross and net value added and GDP that are consistent with between the values in the opening and closing balance the concepts and accounting principles of the SNA. It is sheets is entirely accounted for within the SNA, provided recommended that annual chain indices should be used that the assets and liabilities recorded in the balance sheets where possible. are valued consistently with the transactions and other changes. 1.26 Rates of inflation and economic growth appropriately measured by price and volume indices for the main Other accounts of the SNA aggregates of the SNA are key variables both for the evaluation of past economic performance and as targets for 1.23 The SNA is a rich and detailed economic accounting the formulation of economic policymaking. They are an system that extends well beyond the sequence of accounts essential part of the SNA when any amount of inflation to encompass other accounts or tables that either contain appears and become increasingly important as inflation information that cannot be included in the main accounts or increases. The SNA also recognizes that the growth in the present information in alternative ways, such as matrices, volume of GDP and the growth of an economy's real that may be more appropriate for certain types of analysis. income are not the same because of trading gains or losses It is not proposed to list all these various elements at this resulting from changes in international terms of trade. C. Uses of the SNA 1.27 The main objective of the SNA is to provide a 1. Monitoring the behaviour of the economy comprehensive conceptual and accounting framework that can be used to create a macroeconomic database suitable 1.28 Certain key aggregates of the SNA, such as GDP and GDP for analysing and evaluating the performance of an per head of population, have acquired an identity of their economy. The existence of such a database is a prerequisite own and are widely used by analysts, politicians, the press, for informed, rational policymaking and decision-taking. the business community and the public at large as Some of the more specific uses of the SNA are described in summary, global indicators of economic activity and the following sections. 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 4 Introduction the relative success or failure of economic policies pursued return for fees. Such agencies typically require very by governments. detailed national accounts data. 1.29 National accounts data provide information covering both 3. International comparisons different types of economic activities and the different sectors of the economy. It is possible to monitor the movements of major economic flows such as production, 1.33 The SNA is used for international reporting of national household consumption, government consumption, capital accounts data that conform to standard, internationally formation, exports, imports, etc., in both value and volume accepted concepts, definitions and classifications. The terms. Moreover, information is provided about certain key resulting data are widely used for international comparisons balancing items and ratios which can only be defined and of the volumes of major aggregates, such as GDP or GDP measured within an accounting framework, for example, per head, and also for comparisons of structural statistics, the budget surplus or deficit, the share of income that is such as ratios of investment, taxes or government saved or invested by individual sectors of the economy or expenditures to GDP. Such comparisons are used by the economy as a whole, the trade balance, etc. The SNA economists, journalists or other analysts to evaluate the also provides the background against which movements of performance of one economy against that of other similar short-term indicators, such as monthly indices of industrial economies. They can influence popular and political production, consumer or producer prices can be interpreted judgements about the relative success of economic and evaluated. The monitoring of the behaviour of the programmes in the same way as developments over time economy may be significantly improved if at least some of within a single country. Databases consisting of sets of the main aggregates of the SNA are compiled quarterly as national accounts for groups of countries can also be used well as annually, although many of the accounts, tables or for econometric analyses in which time-series and cross- balance sheets of the SNA are not usually compiled more section data are pooled to provide a broader range of frequently than once a year. observations for the estimation of functional relationships. 2. Macroeconomic analysis 1.34 Levels of GDP or, alternatively, gross national income (GNI) per head in different countries are also used by international organizations to determine eligibility for 1.30 National accounts are also used to investigate the causal loans, aid or other funds or to determine the terms or mechanisms at work within an economy. Such analysis conditions on which such loans, aid or funds are made usually takes the form of the estimation of the parameters available. When the objective is to compare the volumes of of functional relationships between different economic goods or services produced or consumed per head, data in variables by applying econometric methods to time series national currencies must be converted into a common of data in both value and volume terms compiled within a currency by means of purchasing power parities and not national accounting framework. The types of exchange rates. It is well known that, in general, neither macroeconomic models used for such investigations may vary according to the school of economic thought of the market nor fixed exchange rates reflect the relative internal investigator as well as the objectives of the analysis, but the purchasing powers of different currencies. When exchange SNA is sufficiently flexible to accommodate the rates are used to convert GDP, or other statistics, into a requirements of different economic theories or models, common currency the prices at which goods and services in provided only that they accept the basic concepts of high-income countries are valued tend to be higher than in production, consumption, income, etc. on which the SNA is low-income countries, thus exaggerating the differences in based. real incomes between them. Exchange rate converted data must not, therefore, be interpreted as measures of the relative volumes of goods and services concerned. Levels 1.31 Economic policy in the short term is formulated on the of GDP, or GDP per head, in different countries are also basis of an assessment of the recent behaviour and current used to determine, in whole or in part, the size of the state of the economy and a view, or precise forecast, about contributions which the member countries of an likely future developments. Short-term forecasts are international organization make to finance the operations of typically made using econometric models of the type just the organization. described. Over the medium- or long-term, economic policy has to be formulated in the context of a broad economic strategy. 1.35 Although international organizations use the SNA in order to be able to collect internationally comparable national accounts data, the SNA has not been created for this 1.32 Economic policymaking and decision-taking take place at purpose. It has become the standard, or universal, system all levels of government and also within public and private used with little or no modification by most countries in the corporations. Large corporations such as multinationals world for their own national purposes. National statistical have the ability to build their own macroeconomic models offices and government agencies have a strong vested tailored to their own requirements, for which they need interest in ensuring that the SNA meets their own analytic national accounts data. The investment programmes of and policy requirements and have taken an active part in major corporations must be based on long-term the development of the SNA for this reason. expectations about future economic developments that require national accounts data. There are also specialist agencies that provide forecasts for individual clients in 5 System of National Accounts D. The boundaries of the SNA 1. Non-monetary transactions institutional unit, in which labour and assets are used to transform inputs of goods and services into outputs of other goods and services. All goods and services produced as 1.36 When goods and services produced within the economy are outputs must be such that they can be sold on markets or at sold in monetary transactions, their values are least be capable of being provided by one unit to another, automatically included in the accounts of the SNA. Many with or without charge. The SNA includes within the goods or services are not actually sold but are nevertheless production boundary all production actually destined for supplied to other units: for example, they may be bartered the market, whether for sale or barter. It also includes all for other goods or services or provided free as transfers in goods or services provided free to individual households or kind. Such goods and services must be included in the collectively to the community by government units or accounts even though their values have to be estimated. NPISHs. The goods or services involved are produced by activities that are no different from those used to produce goods or services for sale. Moreover, the transactions in which the Household production goods and services are supplied to other units are also proper transactions even though the producers do not 1.41 The main problem for defining the range of activities receive money in exchange. It is misleading to describe recorded in the production accounts of the SNA is to decide such output as "imputed". For example, the services of upon the treatment of activities that produce goods or financial intermediaries which are measured indirectly in services that could have been supplied to others on the the SNA do actually take place; but their values have to be market but are actually retained by their producers for their measured indirectly. It is the value, not the transaction that own use. These cover a very wide range of productive is "imputed". activities, in particular: 1.37 When goods or services are retained for own use, no a. The production of agricultural goods by household transactions with other units take place. In such cases, in enterprises for own final consumption; order to be able to record the goods or services in the accounts, internal transactions have to be recorded whereby b. The production of other goods for own final use by producers allocate the goods or services for their own households: the construction of dwellings, the consumption or capital formation and values also have to production of foodstuffs and clothing, etc.; be estimated for them. c. The production of housing services for own final 1.38 Thus, estimates and imputations are needed in order to be consumption by owner occupiers; able to record in the accounts productive activities whose outputs are not disposed of in monetary transactions with other units. Such estimates and imputations should not be d. The production of domestic and personal services for interpreted as introducing hypothetical activities or flows of consumption within the same household: the goods and services into the SNA. Their purpose is the preparation of meals, care and training of children, opposite, namely, to capture in the accounts major flows of cleaning, repairs, etc. goods and services actually taking place in the economy that would otherwise be omitted. In order to obtain All of these activities are productive in an economic sense. comprehensive measures, values have to be estimated for However, inclusion in the SNA is not simply a matter of all outputs of goods and services that are not sold but estimating monetary values for the outputs of these disposed of in other ways. activities. If values are assigned to the outputs, values have also to be assigned to the incomes generated by their 1.39 In practice the SNA does not record all outputs, however, production and to the consumption of the output. It is clear because domestic and personal services produced and that the economic significance of these flows is very consumed by members of the same household are omitted. different from that of monetary flows. For example, the Subject to this one major exception, GDP is intended to be incomes generated are automatically tied to the a comprehensive measure of the total gross value added consumption of the goods and services produced; they have produced by all resident institutional units. GDP is little relevance for the analysis of inflation or deflation or confined to outputs produced by economic activities that other disequilibria within the economy. The inclusion of are capable of being provided by one unit to another. Not large non-monetary flows of this kind in the accounts all activities that require the expenditure of time and effort together with monetary flows can obscure what is by persons are productive in an economic sense, for happening on markets and reduce the analytic usefulness of example, activities such as eating, drinking or sleeping the data. cannot be produced by one person for the benefit of another. 1.42 The SNA is designed to meet a wide range of analytical and policy needs. A balance has to be struck between the desire for the accounts to be as comprehensive as possible and the 2. The production boundary need to prevent flows used for the analysis of market behaviour and disequilibria from being swamped by non- 1.40 The activity of production is fundamental. In the SNA, monetary values. The SNA therefore includes all production is understood to be a physical process, carried production of goods for own use within its production out under the responsibility, control and management of an boundary, as the decision whether goods are to be sold or 6 Introduction retained for own use can be made even after they have been expenditures, and actual consumption, is similarly produced, but it excludes all production of services for own governed by the production boundary. For example, these final consumption within households (except for the expenditures include the estimated values of the services produced by employing paid domestic staff and the agricultural products consumed by households that they own-account production of housing services by owner- have produced themselves and also the values of the occupiers). The services are excluded because the decision housing services consumed by owner occupiers, but not the to consume them within the household is made even before values of "do-it-yourself" repairs and maintenance to the service is provided. The location of the production vehicles or household durables, the cleaning of dwellings, boundary in the SNA is a compromise, but a deliberate one the care and training of children, or similar domestic or that takes account of the needs of most users. In this context personal services produced for own final consumption. it may be noted that in labour force statistics economically Only the expenditures on goods utilized for these purposes, active persons are defined as those engaged in productive such as cleaning materials, are included in household final activities as defined in the SNA. If the production boundary consumption expenditures. were extended to include the production of personal and domestic services by members of households for their own 4. The asset boundary final consumption, all persons engaged in such activities would become self-employed, making unemployment virtually impossible by definition. This illustrates the need 1.46 Balance sheets are compiled for institutional units, or to confine the production boundary in the SNA and other sectors, and record the values of the assets they own or the related statistical systems to market activities or fairly close liabilities they have incurred. Assets as defined in the SNA substitutes for market activities. are entities that must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time. Other production boundary problems Financial assets and fixed assets, such as machinery, equipment and structures which have themselves been 1.43 Certain natural processes may or may not be counted as produced as outputs in the past, are clearly covered by this production depending upon the circumstances in which definition. However, the ownership criterion is important they occur. A necessary condition for an activity to be for determining which natural resources are treated as treated as productive is that it must be carried out under the assets in the SNA. Natural resources such as land, mineral instigation, control and responsibility of some institutional deposits, fuel reserves, uncultivated forests or other unit that exercises ownership rights over whatever is vegetation and wild animals are included in the balance produced. For example, the natural growth of stocks of fish sheets provided that institutional units are exercising in the high seas not subject to international quotas is not effective ownership rights over them, that is, are actually in counted as production: the process is not managed by any a position to be able to benefit from them. Assets need not institutional unit and the fish do not belong to any be privately owned and could be owned by government institutional unit. On the other hand, the growth of fish in units exercising ownership rights on behalf of entire fish farms is treated as a process of production in much the communities. Thus, many environmental assets are same way that rearing livestock is a process of production. included within the SNA. Resources such as the Similarly, the natural growth of wild, uncultivated forests atmosphere or high seas, over which no ownership rights or wild fruits or berries is not counted as production, can be exercised, or mineral or fuel deposits that have not whereas the cultivation of crop-bearing trees, or trees been discovered or that are unworkable, are not included as grown for timber or other uses, is counted in the same way they are not capable of bringing any benefits to their as the growing of annual crops. However, the deliberate owners, given the technology and relative prices existing at felling of trees in wild forests, and the gathering of wild the time. fruit or berries, and also firewood, counts as production. Similarly, rainfall and the flow of water down natural 1.47 Changes in the values of natural resources owned by watercourses are not processes of production, whereas institutional units between one balance sheet and the next storing water in reservoirs or dams and the piping, or are recorded in the accumulation accounts of the SNA. For carrying, of water from one location to another all example, the depletion of a natural resource as a result of its constitute production. use in production is recorded in the other changes in volume of assets account, together with losses of fixed 1.44 These examples show that many activities or processes that assets due to their destruction by natural disasters (floods, may be of benefit to institutional units, both as producers earthquakes, etc.). Conversely, when deposits or reserves of and consumers, are not processes of production in an minerals or fuels are discovered or previously unworkable economic sense. Rainfall may be vital to the agricultural deposits become workable, their appearance is recorded in production of a country but it is not a process of production this account and they enter the balance sheets in this way. whose output can be included in GDP. 5. National boundaries 3. The consumption boundary 1.48 The accounts of the SNA are compiled for resident 1.45 The coverage of production in the SNA has ramifications institutional units grouped into institutional sectors and that extend considerably beyond the production account subsectors. The concept of residence is the same as that itself. The boundary of production determines the amount used in the Balance of Payments and International of value added recorded and hence the total amount of Investment Position Manual, Sixth Edition (International income generated by production. The range of goods and Monetary Fund (IMF), 2008), known as BPM6. An services that are included in household final consumption institutional unit is said to be resident within the economic 7 System of National Accounts territory of a country when it maintains a centre of produced assets (such as machinery, equipment, buildings predominant economic interest in that territory, that is, or other structures) that are used repeatedly or continuously when it engages, or intends to engage, in economic in production over several accounting periods (more than activities or transactions on a significant scale either one year). The distinction between intermediate indefinitely or over a long period of time, usually consumption and gross capital formation depends on interpreted as one year. whether the goods and services involved are completely used up in the accounting period or not. If they are, the use 1.49 The GDP of a country, viewed as an aggregate measure of of them is a current transaction recorded as intermediate production, is equal to the sum of the gross value added of consumption; if not it is an accumulation transaction all resident institutional units engaged in production (plus recorded in the capital account. any taxes, and minus any subsidies, on products not included in the value of their outputs). This is not exactly 1.53 The general nature and purpose of the distinction between the same as the sum of the gross value added of all gross fixed capital formation and consumption, whether productive activities taking place within the geographical intermediate or final, is clear. The distinction is boundaries of the national economy. Some of the fundamental for economic analysis and policymaking. production of a resident institutional unit may take place Nevertheless, the borderline between consumption and abroad, for example, the installation of some exported gross fixed capital formation is not always easy to machinery or equipment or a consultancy project determine in practice. Certain activities contain some undertaken by a team of expert advisers working elements that appear to be consumption and at the same temporarily abroad. Conversely, some of the production time others that appear to be capital formation. In order to taking place within a country may be attributable to non- try to ensure that the SNA is implemented in a uniform resident institutional units. way, decisions have to be taken about the ways in which certain difficult, even controversial, items are to be 1.50 When GDP is derived from the expenditure side, allowance classified. Two examples are given below. has also to be made for goods and services produced by non-residents but consumed by residents as well as for Human capital goods and services produced by residents but consumed abroad. For the SNA to be comprehensive in coverage, all 1.54 It is often proposed that expenditures on staff training and transactions with the rest of the world have to be identified education should be classified as gross fixed capital so their impact on measures relating to the resident formation as a form of investment in human capital. The economy is properly accounted for. The complete set of acquisition of knowledge, skills and qualifications transactions with the rest of the world in the SNA matches increases the productive potential of the individuals exactly the set of transactions captured in the balance of concerned and is a source of future economic benefit to payments. them. However, while knowledge, skills and qualifications are clearly assets in a broad sense of the term, they cannot 6. Final consumption, intermediate be equated with fixed assets as understood in the SNA. consumption and gross fixed capital They are acquired through learning, studying and formation practising, activities that cannot be undertaken by anyone else on behalf of the student and thus the acquisition of knowledge is not a process of production even though the 1.51 The contents of the accounts are determined not only by the instruction conveyed by education services is. The conceptual framework, definitions and classifications of the education services produced by schools, colleges, SNA but also by the ways in which they are interpreted and universities, etc. are thus treated as being consumed by implemented in practice. No matter how simple and precise students in the process of their acquiring knowledge and concepts and classifications may appear in principle, there skills. This type of education is treated as final are inevitably difficult borderline cases which cannot easily consumption. When training is given by an employer to be fitted into predetermined categories. These points may enhance the effectiveness of staff, the costs are treated as be illustrated by considering a fundamental distinction in intermediate consumption. economics and in the SNA, namely, the distinction between consumption and gross fixed capital formation (or gross 1.55 This treatment of education costs is consistent with the fixed investment, as it is often described in other contexts). production and asset boundaries of the SNA but not all users of the SNA find it satisfactory in all instances. 1.52 Before considering the difference between consumption However, as explained below, the SNA is such that users and investment, though, it is necessary to look more closely are encouraged to explore alternative conventions in the at the nature of consumption. Consumption is an activity in form of satellite accounts, described in chapter 29. An which institutional units use up goods or services, but there alternative treatment for the recording of human capital is are two quite different kinds of consumption. Intermediate one such application. consumption consists of goods and services used up in the course of production within the accounting period. Final Repairs, maintenance and gross fixed capital consumption consists of goods and services used by individual households or the community to satisfy their formation individual or collective needs or wants. The activity of gross fixed capital formation, like intermediate 1.56 Another, less familiar, example of the intrinsic difficulty of consumption, is restricted to institutional units in their trying to draw a dichotomy between consumption and gross capacity as producers, being defined as the value of their fixed capital formation is provided by repairs and acquisitions less disposals of fixed assets. Fixed assets are maintenance. Ordinary maintenance and repairs undertaken 8 Introduction by enterprises to keep fixed assets in good working order SNA provides certain recommendations for this purpose. are treated as intermediate consumption. However, major Some analysts, however, consider that the distinction improvements, additions or extensions to fixed assets, both between ordinary repairs and maintenance and major machinery and structures, which improve their improvements and additions is neither operational nor performance, increase their capacity or prolong their expected working lives count as gross fixed capital defensible and would favour a more "gross" method of formation. In practice it is not easy to draw the line between recording in which all such activities are treated as gross ordinary repairs and major improvements, although the fixed capital formation. E. The SNA as a coordinating framework for statistics 1. Harmonization between different statistical relate. For example, economic theory indicates that changes systems in the pattern of the distribution of income may be expected to have an impact on aggregate consumption over and above that due to changes in the aggregate level of income. 1.57 The SNA has a very important statistical function by Information relating to individual units may be needed not serving as a coordinating framework for economic statistics only to obtain a better understanding of the working of the in two different senses. In the first place, the SNA is seen as economy but also to monitor the impact of government the conceptual framework for ensuring the consistency of policies, or other events, on selected types of units about the definitions and classifications used in different, but which there may be special concern, such as households related, fields of statistics. Secondly, the SNA acts as an with very low incomes. Microdata sets also make it accounting framework to ensure the numerical consistency possible to follow the behaviour of individual units over of data drawn from different sources, such as industrial time. Given the continuing improvements in computers and inquiries, household surveys, merchandise trade statistics, communications, the management and analysis of very VAT returns and other administrative sources. large microdatabases is becoming progressively easier. Data can be derived from a variety of different sources, 1.58 Consistency between different statistical systems enhances such as administrative and business records, as well as the analytical usefulness of all the statistics involved. The specially conducted censuses and surveys. SNA has always occupied a central position in economic statistics because the data from more specialized systems, such as balance of payments or labour force statistics, 1.60 In practice, however, macroeconomic accounts can seldom typically have to be used in conjunction with national be built up by simply aggregating the relevant microdata. accounts data. The need for harmonization of the SNA and Even when individual institutional units keep accounts or related statistical systems, such as financial statistics or records, the concepts that are needed or appropriate at a balance of payments statistics, leads to the practice of micro level may not be suitable at a macro level. Individual revising other statistical systems in parallel with, and in units may be obliged to use concepts designed for other close collaboration with, that of the SNA. This purposes, such as taxation. The accounting conventions and coordination eliminates conceptual differences between valuation methods used at a micro level typically differ them other than a few exceptions that can be specifically from those required by the SNA. For example, the justified in terms of the special characteristics of different widespread use of historic cost accounting means that the kinds of data, or the special requirements of different kinds accounts of individual enterprises may differ significantly of users. Harmonization between the SNA and other major from those used in the SNA. Depreciation as calculated for systems has proved to be largely successful and has been tax purposes may be quite arbitrary and unacceptable from achieved by making changes to the SNA as well as to the an economic viewpoint as a measure of consumption of other systems. fixed capital. In such situations, it is impractical to try to adjust the individual accounts of thousands of enterprises before aggregating them. Instead the data are adjusted after 2. The use of microdata for macroeconomic they have been aggregated to some extent. Of course, the accounting data do not have to be aggregated to the level of the total economy, or even complete sectors or industries, before 1.59 The sequence of accounts and balance sheets of the SNA being adjusted and it is likely to be more efficient to make could, in principle, be compiled at any level of aggregation, the adjustments for smaller and more homogenous groups even that of an individual institutional unit. It might of units. This may involve compiling so-called intermediate therefore appear desirable if the macroeconomic accounts systems of accounts. At whatever level of aggregation the for sectors or the total economy could be obtained directly adjustments are made, the inevitable consequence is to by aggregating corresponding data for individual units. make the resulting macrodata no longer equivalent to There would be considerable analytical advantages in simple aggregations of the microdata from which they are having microdatabases that are fully compatible with the derived. When the microdata are not derived from business corresponding macroeconomic accounts for sectors or the accounts or administrative records but from censuses or total economy. Data in the form of aggregates, or averages, surveys designed for statistical purposes, the concepts used often conceal a great deal of useful information about should be closer to those required, but the results may still changes occurring within the populations to which they require adjustment at a macro level because of incomplete 9 System of National Accounts coverage (the surveys being confined to enterprises above a them consistent with macrodata from other sources, such as certain size, for example) and bias from response errors. imports. The systematic exploitation of microdata may also be restricted by the increasing concerns about 1.61 Most households are unlikely to keep accounts of the kind confidentiality and possible misuse of such databases. needed by the SNA. Microdata for households are typically derived from sample surveys that may be subject to 1.62 It may be concluded therefore that, for various reasons, it significant response and reporting errors. It may be may be difficult, if not impossible, to achieve particularly difficult to obtain reliable and meaningful data microdatabases and macroeconomic accounts that are fully about the activities of small unincorporated enterprises compatible with each other in practice. Nevertheless, as a owned by households. Aggregates based on household general objective, the concepts, definitions and surveys have to be adjusted for certain typical biases, such classifications used in economic accounting should, so far as the underreporting of certain types of expenditure (on as possible, be the same at both a micro and macro level to tobacco, alcoholic drink, gambling, etc.) and also to make facilitate the interface between the two kinds of data. F. Links with business accounting 1.63 The accounting rules and procedures used in the SNA are place. In the SNA, however, the concept of opportunity based on those long used in business accounting. The cost as defined in economics is employed. In other words, traditional double-entry bookkeeping principle, whereby a the cost of using, or using up, some existing asset or good transaction gives rise to a pair of matching debit and credit in one particular process of production is measured by the entries within the accounts of each of the two parties to the amount of the benefits that could have been secured by transaction, is a basic axiom of economic or national using the asset or good in alternative ways. Opportunity accounting. For example, recording the sale of output cost is calculated with reference to the opportunities requires not only an entry in the production account of the foregone at the time the asset or resource is used, as distinct seller but also an entry of equal value, often described as from the costs incurred at some time in the past to acquire the counterpart, in the seller's financial account to record the asset. The best practical approximation to opportunity the cash, or short-term financial credit, received in cost accounting is current cost accounting, whereby assets exchange for the output sold. As two matching entries are and goods used in production are valued at their actual or also needed for the buyer, the transaction must give rise to estimated current market prices at the time the production four simultaneous entries of equal value in a system of takes place. Current cost accounting is sometimes macroeconomic accounts covering both the seller and the described as replacement cost accounting, although there buyer. In general, a transaction between two different may be no intention of actually replacing the asset in institutional units always requires four equal, simultaneous question after it has been used. entries in the accounts of the SNA (that is, quadruple entry accounting) even if the transaction is a transfer and not an 1.66 When there is persistent inflation, even at moderate levels, exchange and even if no money changes hands. These the use of historic costs tends to underestimate the multiple entries enable the economic interactions between opportunity costs of production in an economic sense so different institutional units and sectors to be recorded and that historic cost profit may be much greater than the analysed. However, transactions within a single unit (such operating surplus as defined in the SNA. Profits at historic as the consumption of output by the same unit that costs are liable to give very misleading signals as to the produced it) require only two entries whose values have to profitability of the production processes to which they be estimated. relate by systematically undervaluing inputs compared with outputs. They can lead to mistaken decisions at both a 1.64 The design and structure of the SNA draws heavily on microeconomic and macroeconomic level. economic theory and principles as well as business accounting practices. Basic concepts such as production, 1.67 Current cost accounting has ramifications that permeate the consumption and capital formation are meant to be rooted entire SNA. It affects all the accounts and balance sheets in economic theory. When business accounting practices and their balancing items. A fundamental principle conflict with economic principles, priority is given to the underlying the measurement of gross value added, and latter, as the SNA is designed primarily for purposes of hence GDP, is that output and intermediate consumption economic analysis and policymaking. The difference must be valued at the prices current at the time the between business accounting and economic theory can be production takes place. This implies that goods withdrawn illustrated by the concept of cost of production used in the from inventories must be valued at the prices prevailing at SNA. the times the goods are withdrawn and not at the prices at which they entered inventories. This method of recording 1.65 Business accounts commonly (but not invariably) record changes in inventories is not commonly used in business costs on an historic basis, partly to ensure that they are accounting, however, and may sometimes give very completely objective. Historic cost accounting requires different results, especially when inventory levels fluctuate goods or assets used in production to be valued by the while prices are rising. Similarly, consumption of fixed expenditures actually incurred to acquire those goods or capital in the SNA is calculated on the basis of the assets, however far back in the past those expenditures took estimated opportunity costs of using the assets at the time 10 Introduction they are used, as distinct from the prices at which the assets corporations, since they do not have final consumption, this were acquired. Even when the fixed assets used up are not is the amount available for investment. actually replaced, the amount of consumption of fixed capital charged as a cost of production should be sufficient 1.69 Unlike commercial accounting, the SNA excludes from the to enable the assets to be replaced, if desired. When there is calculation of income any assets received or disposed of as persistent inflation, the value of consumption of fixed a result of capital transfers that merely redistribute wealth capital is liable to be much greater than depreciation at between different units, and also any assets received or historic costs, even if the same assumptions are made in the disposed of as a result of events not connected with SNA and in business accounts about the service lives of the production, such as earthquakes or other natural disasters, assets and their rates of wear and tear and obsolescence. To or acts of war. Real holding gains or losses on assets or liabilities due to changes in their relative prices are also avoid confusion, the term "consumption of fixed capital" is excluded from income generated by production. used in the SNA to distinguish it from "depreciation" as typically measured in business accounts. 1. International accounting standards 1.68 A difference between the SNA and commercial accounting is that the term "profits" is not used to describe a balancing 1.70 A feature of the 2008 update of the SNA is recognition of item in the SNA. The item entrepreneurial income is a close the increasing use of international accounting standards by approximation to before tax profits and disposable income corporations and in the public sector. Subsequent chapters to after tax profits. The use of the term disposable income make reference to International Accounting Standards Board (IASB) and the International Public Sector comes from the fact that the corresponding item for the Accounting Standards Board (IPSASB) norms. In several household sector represents the maximum amount available cases, notably on pension liabilities and intangible assets, to a household for purposes of consumption after the feasibility of including certain items in the SNA is maintaining its net worth intact, that is the current value of dependent on the application of the international its assets minus the current value of its liabilities. For accounting standards. G. Expanding the scope of the SNA 1.71 The SNA is designed to be sufficiently comprehensive that using two or more criteria together in a hierarchical individual countries, whatever their economic structures, manner. institutional arrangements or level of development, can select from within it those parts of the SNA that are 1.73 Ways in which the SNA may be adapted to meet differing considered to be most relevant and useful to implement in circumstances and needs are addressed in chapters 18 to 29. the light of their own needs and capabilities. The SNA is Chapter 29 shows how flexibility may be taken a stage meant to be implemented in a flexible manner and the further by developing satellite accounts that are closely accounts and tables, classifications and sectoring presented linked to the main SNA but are not bound to employ in this volume should not be regarded as fixed. For exactly the same concepts or restricted to data expressed in example, classifications of institutional units, transactions monetary terms. Satellite accounts are intended for special and assets may be implemented flexibly by introducing purposes such as monitoring the community's health or the further aggregation or disaggregation in order to adapt them state of environment. They may also be used to explore to the data availability and special circumstances of new methodologies and to work out new accounting different countries. The flexible use of classifications does procedures that, when fully developed and accepted, may not change the basic concepts and definitions of the SNA. become absorbed into the main SNA in the course of time, in the way that input-output analysis, for example, has been integrated into the SNA. 1.72 In some cases, the SNA explicitly insists on flexibility. For example, two alternative methods of subsectoring the 1.74 Another way in which the SNA may be implemented general government sector are proposed in chapter 4 flexibly is by rearranging the data in the accounts in the without either being assigned priority. Similarly, although form of a social accounting matrix in order better to serve the SNA suggests subsectoring the households sector on particular analytical and policy needs. Such matrices the basis of the household's principal source of income, it should not be construed as constituting different systems stresses that this is only one possible criterion for but as alternative ways of presenting the mass of subsectoring. In some cases, it may be more appropriate to information contained in the SNA which some users and subsector on the basis of socio-economic criteria or the analysts find more informative and powerful for both type of area in which the household is located or, indeed, to monitoring and modelling social and economic carry the disaggregation of the households sector further by development. 11 System of National Accounts H. The SNA and measures of welfare 1.75 GDP is often taken as a measure of welfare, but the SNA 3. The impact of external events on welfare makes no claim that this is so and indeed there are several conventions in the SNA that argue against the welfare interpretation of the accounts. The implications of some of 1.79 The level of an individual's and a nation's welfare may be these conventions are outlined briefly in this section. affected by a wide range of factors that are not economic in origin. Consider the effects of an exceptionally severe winter combined with an influenza epidemic. Other things 1. Qualifications to treating expenditure as a being equal, the production and consumption of a number welfare measure of goods and services may be expected to rise in response to extra demands created by the cold and the epidemic; the production and consumption of fuels, clothing and medical 1.76 In a market economy, the prices used to value different services will tend to increase. As compared with the goods and services should reflect not only their relative previous year, people may consider themselves to be worse costs of production but also the relative benefits or utilities off overall because of the exceptionally bad weather and to be derived from using them for production or the epidemic, notwithstanding the fact that production and consumption. This establishes the link between changes in consumption may have increased in response to the aggregate production and consumption and changes in additional demand for heating and health services. Total welfare. However, changes in the volume of consumption, welfare could fall even though GDP could increase in for example, are not the same as changes in welfare. It is volume terms. widely accepted that, other things being equal, increased expenditure on goods and services leads to increased welfare. The increase in welfare may not, however, be 1.80 This kind of situation does not mean that welfare cannot be proportionate to the increase in expenditure. Nor is the unit expected to increase as GDP increases, other things being incurring the expenditure necessarily the one that benefits equal. Given the occurrence of the cold and the epidemic, from an increase in welfare. The SNA makes a distinction the community presumably finds itself much better off with between actual consumption, showing the amount of goods the extra production and consumption of heating and health and services actually consumed, and consumption services than without them. There may even be a general expenditure. Household actual consumption is greater than tendency for production to rise to remedy the harmful consumption expenditure because it includes expenditures effects of events that reduce people's welfare in a broad incurred by general government and NPISHs on behalf of sense. For example, production may be expected to individual households. increase in order to repair the damage caused by such natural disasters as earthquakes, hurricanes and floods. 1.77 An increase in consumption of food by someone living in Given that the disaster has occurred, the extra production extreme poverty is likely to lead to a greater increase in presumably increases welfare. However the question welfare than a similar increase in consumption by someone remains how changes in welfare should be measured over already well-fed. The SNA however, cannot distinguish time; a community that has suffered a natural disaster will this because although the rules allow distinguishing which have a higher level of welfare if damage is repaired than if unit incurs the expenditure as opposed to which unit it is not, but how does this new level of welfare compare to consumes the food, the valuation basis in the SNA is the the situation in the absence of the disaster? price paid for the food with no adjustment for the qualitative benefits derived from its consumption. The most that can be claimed for treating expenditure as a measure of 4. The impact of externalities on welfare welfare is that it may be a reasonable lower bound on the level of welfare engendered by the expenditure. 1.81 Some production activities cause a loss in welfare that is not captured in the SNA. A factory, for example, may 2. Unpaid services and welfare generate noise and emit pollutants into the air or nearby water systems to the extent of causing a loss of amenity and thus a loss of welfare to individuals living nearby. As long 1.78 The production boundary of the SNA is such that the as there is no financial penalty to the factory, the services produced and consumed by households are not consequences go unmeasured in the SNA. If, in response to included except for the imputed rental of owner-occupied government legislation or otherwise, the factory incurs dwellings and the payments made to domestic staff. expenditures that reduce the noise or quantity of pollutants Similarly, no estimate is included in the SNA for the labour emitted, costs will rise and so will welfare but again the services of individuals provided without cost to non-profit match is not necessarily one to one and the level of welfare institutions. In both these cases, the contribution of time after the ameliorations may still be lower than it might be if increases the welfare of other individuals in the the factory simply closed down. community. The exclusion of these services from the production boundary is not a denial of the welfare properties of the services but a recognition that their 1.82 Environmental externalities are a major cause of concern inclusion would detract from rather than add to the both as regards measuring welfare and indeed economic usefulness of the SNA for the primary purposes for which it growth itself. In response to these concerns, a satellite is designed, that is economic analysis, decision-taking and account of the SNA has been developed and is being policymaking. refined to try to answer such questions. 12 Introduction 5. Non-economic impacts on welfare 6. Welfare indicators and macroeconomic aggregates 1.83 An individual's state of well-being, or welfare, is not determined by economic factors alone. Personal and family 1.84 Welfare is a wide-ranging concept with many different circumstances, quality of health, the satisfaction of lack of facets. Some of these may be captured reasonably well by it derived from employment are just some other factors that one or more of the key aggregates of the SNA. Others may affect welfare. It is difficult to imagine an objective way in be captured by using the basic structure of the SNA and which factors such as these could be quantified and more expanding it in certain directions, perhaps by including difficult to imagine the usefulness of including them in a unpaid services and the effects of environmental damage, system designed primarily to facilitate economic analysis for example. Yet other aspects are likely to remain forever outside the reach of a system not designed with the measurement of welfare as a prime consideration. It would be foolish to deny this just as it is unrealistic to expect a system of economic accounts to necessarily and automatically yield a wholly satisfactory measure of welfare. 13 System of National Accounts 14 Chapter 2: Overview A. Introduction 2.1 This chapter provides an overview of the accounting accounts or statistics provided by elementary units will not framework of the SNA and in doing so gives an overview be fully consistent for various reasons and so achieving the of most of the following chapters also. consistency required by the SNA requires a large amount of additional work. a. It introduces the conceptual elements that form the building blocks of the accounting system and the rules 1. Analysing flows and stocks of accounting to be followed. They are further elaborated in section B and C and in their full detail in 2.5 Basically, the purpose of a system of national accounts is to chapters 3, 4 and 5. record economic flows and stocks. Economic flows can be thought of in various ways. Consider the question "Who b. It describes the standard view of the central framework does what?" "Who" refers to the economic agent engaged of main accounting structure. Each account is in doing something, the operator. "What" is connected with introduced with a description of the nature of the the kind of action this agent is undertaking. In a few cases, account and an insight into the sort of analysis the the answer to this simple question provides a good account can yield. The accounts are described in preliminary characterization of an economic flow. section D and then in chapters 6 to 17. However, in general the question is too simple to provide even a rough economic description of a specific flow. Take c. Thereafter, the chapter shows some of the ways in the example of somebody buying a loaf of bread. In order which the central framework may be applied flexibly, to characterize the flow, it is necessary to consider from depending on specific country requirements. In whom this loaf of bread is bought (a baker or a particular satellite accounts are introduced. These supermarket) and what is given in exchange (a coin or a extensions and applications of the SNA are described note). So the starting question is transformed into "Who briefly in section E and in chapters 18 to 29. does what with whom in exchange for what?" This rather simple flow involves two operators (a buyer, a seller), two 2.2 As explained in chapter 1, the central framework describes main actions (a purchase, a sale), two secondary actions (a the essential phenomena which constitute economic payment, a receipt) and two objects (bread, a coin or a behaviour: production, consumption, accumulation and the note). Again, a complete description would require more associated concepts of income and wealth. The SNA aims information, at least the weight, kind and price of the bread. to provide a representation of this set of phenomena and their interrelations that is simplified to aid comprehension 2.6 The picture in the real world is still more complicated. but still covers all important considerations. To achieve Before this flow occurred, the seller had a certain quantity this, the central framework must satisfy two conditions; it of bread in his shop; afterwards he has less bread but more must be integrated and consistent. money. The buyer had a certain amount of money, now he has less money but some bread (before eating it). So the 2.3 To be integrated, the same concepts, definitions and flow between them has changed their initial situations. This classifications must be applied to all accounts and sub- means that flows cannot be looked at in isolation; the accounts. For example, once it is decided dwellings are situations before and after a flow occurs need to be treated as assets, all dwellings must give rise to housing considered. At those two points in time, one must ask the services that are included within the production boundary, question "Who has what?" The baker not only has bread regardless of whether the dwellings are occupied by the and currency, he also has a house with the shop, baking owners or are rented on the market. Equally, all give rise to equipment, some flour, a deposit in a bank, a car, etc. In income that must be treated in the same way in the SNA, other words, he has (he owns) a certain stock of objects. regardless of the relationship between the owner and the The same is true for the buyer. In addition to what they are occupier. in themselves, flows modify stocks. Flows and changes in stocks are intrinsically connected. The previous question is 2.4 To be consistent, each economic flow or stock level again transformed into "Who does what with whom in appearing in the SNA must be measured identically for the exchange for what with what changes in stocks?" parties involved. This consistency is achieved by applying throughout the SNA the same concepts and definitions and 2.7 However, the various ways of looking at this example have also by using a single set of accounting rules for all entries not yet been exhausted. Before the baker can sell bread, he in the SNA. In practice, the actual data coming from the has to bake it. He uses flour, water, electricity, baking 15 System of National Accounts equipment, etc. So, an additional question is "Who does Total pur- what by what means?" What he does can also be A B C chases characterized in two ways: his activity (to bake) and the result of it (a product: bread). With respect to the buyer one A 2 3 5 can ask "Why does he buy bread?" The obvious purpose is B 6 1 7 to eat, as food; however, it could be to give to a beggar, as C 4 4 8 charity. This raises the question "Who does what for what purpose?" Total 10 6 4 20 sales 2.8 Adding all the questions together results in a rather complex combination of simple links: "Who does what, with whom, in exchange for what, by what means, for what 2.11 Although only the purchases were specified, it follows that purpose, with what changes in stocks?" Answering these the receipts of each unit are also available in the table. The questions for all economic flows and stocks and operators totals in the right-most column show the total purchases of in a given economy would provide an enormous amount of each of the three units and the bottommost row shows the information describing the complete network of economic total receipts by each of the three units. The sum of each interrelations. However, it would require an enormous must, obviously, be the same since each is the sum of all amount of basic information, which is not always available entries within the table. Within the central framework, the nor complete in that it may cover only certain aspects of the full detail of the flows from each of A, B and C to each of complex chain of questions. Further, it is necessary to the others is not generally shown; it is sufficient to show organize the recording of economic flows and stocks in a only the totals in the right-most column and the comprehensible way, as discussed in the next section. bottommost row and know that these must balance. 2. Recording flows and stocks 2.12 In some presentations, particularly those using a matrix format of presentation, some of these extra details may be 2.9 Users' needs set certain requirements for the accounting shown. Discussion of this appears in chapters 14, 28 and framework. The first requirement is that it should provide a 29. Even in the central framework, the full detail may be picture of the economy, but the picture must be simplified available. For example if in some case A, B and C do not in order to be both comprehensible and manageable. The interact with one another but only with another unit G, as is second requirement is that it should faithfully represent the case in the payment of taxes, then there are only four economic behaviour by covering all important aspects in a entries to be shown; the payments by each of A, B and C balanced way without neglecting or giving too little and the receipts by G. emphasis to some aspects or giving others too much prominence. Finally, it should portray all significant economic interrelations and the results of economic 2.13 Another case where the SNA introduces a simplification is activity. Although meeting these requirements is necessary, in terms of the "what in exchange for what?" question; that they are somewhat contradictory. Achieving the right is, it does not indicate, for example, the specific nature of balance between them is not easy. Too great a the financial counterpart (currency or deposit or short-term simplification can lose sight of or neglect important aspects loan, etc.) for the purchases of goods and services or the of economic behaviour; too detailed a portrayal of reality payment of taxes. can overburden the picture and reduce insight; too much sophistication can lower comprehension and mislead some 2.14 The fact that the SNA is integrated, although articulated in users; and so on. only two and not three dimensions, does not reduce its consistency requirements. In effect, the purpose of the SNA 2.10 To meet these requirements, the SNA uses a limited is to derive national accounts that are as consistent as they number of basic categories to analyse and aggregate certain would be if they were fully articulated; each economic flow aspects (Who? What? What purpose? What stocks?) of the or stock should be measured identically for both parties very numerous elementary flows. However, the SNA involved. The consistency in the SNA is achieved by simplifies the picture it gives of the economic interrelations applying the same concepts and definitions throughout and by not recording the "from-whom-to-whom?" question in a also by using a single strict set of accounting rules. fully systematic way; that is, it does not always depict the network of flows between the various types of operators. Consider three units, A, B and C, each of which makes payments of the same type to the other two; they might be three shopkeepers, for example, who sell different types of goods. Suppose A buys 2 from B and 3 from C; B buys 6 from A and 1 from C; C buys 4 from each of A and B. A full articulation of the flows could be captured in a three- by-three table as follows: 16 Overview B. The conceptual elements of the SNA 2.15 The SNA contains a number of conceptual elements that one household. The principal functions of households determine the accounting framework of the SNA and are to supply labour, to undertake final consumption permit various aspects of the questions raised above to be and, as entrepreneurs, to produce market goods and answered. These concepts are: non-financial (and possibly financial) services. The entrepreneurial activities of a household consist of a. Institutional units and sectors (who?); unincorporated enterprises that remain within the household except under certain specific conditions. b. Transactions and other flows (what?); e. Non-profit institutions serving households (NPISHs) c. Assets and liabilities (what stocks?); are legal entities that are principally engaged in the production of non-market services for households or the community at large and whose main resources are d. Products and producing units (other aspects of who and voluntary contributions. what?); 2.18 Each sector contains a number of subsectors distinguished e. Purposes (why?). according to a hierarchical classification (described in chapter 4). A subsector comprises entire institutional units, They are presented in turn. and each institutional unit belongs to only one subsector though alternative groupings are possible. The distinction 1. Institutional units and sectors between public, national private and foreign controlled corporations and between various socio-economic groups 2.16 The fundamental units identified in the SNA are the of households is included in the SNA in order to respond to economic units that can engage in the full range of policy concerns. transactions and are capable of owning assets and incurring liabilities on their own behalf. These units are called Delimitation of the total economy and the rest of institutional units. Further, because they have legal the world responsibility for their actions, institutional units are centres of decision-making for all aspects of economic 2.19 The total economy is defined in terms of institutional units. behaviour. In practice, some institutional units are It consists of all the institutional units which are resident in controlled by others and thus in such cases autonomy of the economic territory of a country. The economic territory decision is not total and may vary over time. Legally of a country, although consisting essentially of the independent holding of assets and liabilities and geographical territory, does not coincide exactly; some autonomous behaviour do not always coincide. In the SNA, additions and subtractions are made (see chapter 26). The preference is generally given to the first aspect because it concept of residence in the SNA is not based on nationality provides a better way to organize the collection and or legal criteria. An institutional unit is said to be a resident presentation of statistics even if its usefulness is limited in unit of a country when it has a centre of predominant some cases. economic interest in the economic territory of that country; that is, when it engages for an extended period (one year or Institutional sectors more being taken as a practical guideline) in economic activities on this territory. The institutional sectors referred 2.17 The institutional units are grouped together to form to above include only resident units. institutional sectors, on the basis of their principal functions, behaviour and objectives: 2.20 Resident units engage in transactions with non-resident units (that is, units that are residents of other economies). a. Non-financial corporations are institutional units that These transactions are the external transactions of the are principally engaged in the production of market economy and are grouped in the account of the rest of the goods and non-financial services. world. Strictly speaking, the rest of the world is the account of transactions occurring between resident and non-resident b. Financial corporations are institutional units that are units, but it may also be seen as the whole group of non- principally engaged in financial services including resident units that enter into transactions with resident financial intermediation. units. In the accounting structure of the SNA, the rest of the world plays a role similar to that of an institutional sector, although non-resident units are included only in so far as c. General government consists of institutional units that, they are engaged in transactions with resident institutional in addition to fulfilling their political responsibilities units. and their role of economic regulation, produce services (and possibly goods) for individual or collective consumption mainly on a non-market basis and 2. Transactions and other flows redistribute income and wealth. 2.21 Institutional units fulfil various economic functions; that is, d. Households are institutional units consisting of one they produce, consume, save, invest, etc. They may engage individual or a group of individuals. All physical in various types of production (agriculture, manufacturing, persons in the economy must belong to one and only etc.) as entrepreneurs, providers of labour or suppliers of 17 System of National Accounts capital. In all aspects of their economic functions and is, a flow in one direction is linked to a counterpart flow in activities, they undertake a great number of elementary the opposite direction; a social assistance benefit in cash is economic actions. These actions result in economic flows, a two-unit flow that does not involve a quid pro quo. which, however they are characterized (wages, taxes, fixed Another kind of flow involves only one institutional unit. capital formation, etc.), create, transform, exchange, Such flows may be physically observable, as in the case of transfer or extinguish economic value; they involve output for own-account consumption or capital formation, changes in the volume, composition or value of an or destruction by natural catastrophes. A value has to be institutional unit's assets or liabilities. The economic value attributed to them (this may be fairly easy in certain cases, may take the form of ownership rights on physical objects such as when output is mostly sold). Other intra-unit, or (a loaf of bread, a dwelling) or intangible assets (a film internal, flows may not be observable as such; accounting original) or of financial claims (liabilities being understood entries are then constructed in order to measure economic as negative economic value). In all cases, economic value is performance correctly. This is the case for the consumption potentially usable to acquire goods or services, pay wages of fixed capital or the revaluation of assets and liabilities. or taxes, etc. Certain inter-units flows, such as reinvested earnings on foreign direct investment, are also accounting entries 2.22 Most economic actions are undertaken by mutual created for analytical purposes. Finally, some observable agreement between institutional units. They are either an monetary transactions are not recorded as they are observed exchange of economic value or a voluntary transfer by one in practice because they are of a composite nature (nominal unit to another of a certain amount of economic value interest, total insurance premiums) or their legal nature without a counterpart. These actions undertaken by mutual does not correspond to their economic one (financial agreement between two institutional units are called leasing). Consequently, for the SNA, they are split up into transactions in the SNA. The SNA also treats certain various components and their classification and routing are economic actions involving only a single institutional unit modified. as transactions. They are described as internal, or intra-unit, transactions. For example, own-account fixed capital 2.25 Although monetary transactions have a basic role in the formation is treated as a transaction between a unit in its valuation of flows in the SNA, non-monetary transactions capacity as a producer with itself in its capacity as an are also significant. They include flows of goods and acquirer of fixed capital. Such transactions are similar in services that take place between institutional units for nature to actions undertaken by mutual agreement by two which values have to be estimated and also some flows that different institutional units. are assumed to take place within units. The relative importance of non-monetary transactions varies according 2.23 However, not all economic flows are transactions. For to the type of economy and the objectives pursued by the example, certain actions undertaken unilaterally by one accounting system. Although the volume of non-monetary institutional unit have consequences on other institutional flows is generally greater for less developed economies units without the latter's consent. The SNA records such than for developed ones, even for the latter it is not actions only to a limited extent, essentially when negligible. governments or other institutional units take possession of the assets of other institutional units, including non-resident Main types of transactions and other flows units, without full compensation. In fact, unilateral economic actions bearing consequences, either positive or negative, on other economic units (externalities) are much 2.26 Elementary transactions and other flows are very broader but such externalities are not recorded in the SNA. numerous. They are grouped into a relatively small number Human action may result in the transfer of natural assets to of types according to their nature. The main classification economic activities and the subsequent transformation of of transactions and other flows in the SNA includes four these assets. These phenomena are recorded in the SNA as first-level types, with each subdivided according to a economic flows, bringing in economic value. Non- hierarchical classification. It is designed to be used economic phenomena, such as wars and natural disasters, systematically in the accounts and tables of the central may destroy economic assets, and this extinction of framework and cross-classified with institutional sectors, economic value must be accounted for. The value of industry and product, and purpose classifications. A full set economic assets and liabilities may change during the time of transactions and their codes appear in annex 1. they are held as stocks, as a consequence of changes in prices. These and similar flows that are not transactions, 2.27 Transactions in goods and services (products) describe the which are called other economic flows in the SNA, are origin (domestic output or imports) and use (intermediate described in chapter 12. consumption, final consumption, capital formation or exports) of goods and services. By definition, goods and 2.24 Economic flows can be actual, observable flows or they can services in the SNA are always a result of production, be built up or estimated for analytical purposes. Certain either domestically or abroad, in the current period or in a flows may be directly observed in value terms. This is the previous one. The term products is thus a synonym for case for monetary transactions between two institutional goods and services. units, such as a purchase or sale of a good or the payment of a tax. Other two-unit flows are observable but cannot be 2.28 Distributive transactions consist of transactions by which immediately valued. These flows include barter of goods the value added generated by production is distributed to and services or education services consumed by students labour, capital and government and transactions involving and provided free of charge by government; a value in the redistribution of income and wealth (taxes on income money terms has to be attributed to them. Barter is an and wealth and other transfers). The SNA draws a example of a two-unit flow involving a "quid pro quo" that distinction between current and capital transfers, with the 18 Overview latter deemed to redistribute saving or wealth rather than start and end of an accounting period but they can in income. (This distinction is discussed in detail in chapter principle be constructed at any point in time. However, 8.) stocks result from the accumulation of prior transactions and other flows, and they are modified by future 2.29 Transactions in financial instruments (or financial transactions and other flows. Thus stocks and flows are transactions) refer to the net acquisition of financial assets closely related. or the net incurrence of liabilities for each type of financial instrument. Such changes often occur as counterparts of 2.34 The coverage of assets is limited to those assets which are non-financial transactions. They also occur as transactions subject to ownership rights and from which economic involving only financial instruments. Transactions in benefits may be derived by their owners by holding them or contingent assets and liabilities are not considered using them in an economic activity as defined in the SNA. transactions in the SNA (see chapter 11). Consumer durables, human capital and those natural resources that are not capable of bringing economic 2.30 Other accumulation entries cover transactions and other benefits to their owners are outside the scope of assets in economic flows not previously taken into account that the SNA. change the quantity or value of assets and liabilities. They include acquisitions less disposals of non-produced non- 2.35 The classification of assets distinguishes, at the first level, financial assets, other economic flows of non-produced financial and non-financial (produced and non-produced) assets, such as discovery or depletion of subsoil resources assets (see chapter 10). Most non-financial assets generally or transfers of other natural resources to economic serve two purposes. They are primarily objects usable in activities, the effects of non-economic phenomena such as economic activity and, at the same time, serve as stores of natural disasters and political events (wars for example) value. Financial assets are necessarily and primarily stores and finally, they include holding gains or losses, due to of value, although they may also fulfil other functions. changes in prices, and some minor items (see chapter 12). Characteristics of transactions in the SNA 4. Products and producing units 2.31 In order to provide more useful answers to the questions Products raised in the analysis of flows, some transactions are not recorded in the SNA as they might be directly observed. 2.36 Goods and services, also called products, are the result of The SNA often uses categories which are more closely production. They are exchanged and used for various identified with an economic concept. For example, gross purposes; as inputs in the production of other goods and fixed capital formation, a subcategory of transactions in services, as final consumption or for investment. The SNA goods and services, is broader than the limited coverage makes a conceptual distinction between market, own final thought of as "purchases of fixed assets". In order to be use and non-market goods and services, allowing in closer to an economic concept, it covers the acquisition of principle any kind of good or service to be any of these new and existing fixed assets, through purchases, barter three types. transactions or own-account capital formation, less the disposal of existing assets, through sales or barter transactions. Producing units 2.32 As the previous example shows, the SNA also often uses 2.37 Institutional units such as corporations may produce categories which are compacted, that is, are the result of various types of goods and services. These goods and combining a number of elementary transactions. The term services result from processes of production which may changes in inventories, for example, refers to the difference differ as regards materials and supplies consumed, kind of between entries into and withdrawals from inventories and equipment and labour employed and techniques used. In recurrent losses. The same netting happens for transactions other words, they may come from different production in financial instruments. All transactions in an instrument activities. In order to study transactions in goods and held as an asset (or as a liability) are grouped under the services in detail, the SNA uses the Central Product heading of this instrument. The item "loans," for example, Classification Version 2 (CPC) 2 (United Nations 2008b). covers issuance of new loans, conversions, and redemptions or cancellations of existing loans. Finally, some categories of transactions in the SNA, such as 2.38 To study production and production functions in detail, it is distributive transactions concerning interest and net non- necessary to refer to more homogeneous units. The ideal life insurance premiums, require an actual transaction to be solution would be to be able to identify and observe units split into parts. that engaged in only one production activity. As it is also necessary to give a picture of the distribution of production in space, this unit should also be in a single location or 3. Assets and liabilities nearby sites. In practice, it is not always feasible to distinguish units of production engaged in a single activity, 2.33 Assets and liabilities are the components of the balance and for which the necessary data are available, inside sheets of the total economy and institutional sectors. In multiactivity units. Inevitably, therefore, some secondary contrast to the accounts that show economic flows, a activities that cannot be separated are covered. For that balance sheet shows the stocks of assets and liabilities held reason, for the detailed study of production, the SNA uses a at one point in time by each unit or sector or the economy unit which, in addition to its principal activity, may cover as a whole. Balance sheets are normally constructed at the secondary activities. This unit is the establishment. 19 System of National Accounts 2.39 Establishments that have the same principal activity are 2.41 There is a hierarchical relationship between institutional grouped into industries according to the International units and establishments. An institutional unit contains one Standard Industrial Classification of All Economic or more entire establishment(s); an establishment belongs Activities Revision 4 (ISIC, Rev.4) (United Nations, 2008a). to one and only one institutional unit. 2.40 Given the fundamental role played by the market in modern 5. Purposes economies, the SNA distinguishes, as an essential feature of its structure, between establishments that are market producers, producers for own final use and non-market 2.42 The concept of purpose, or function, relates to the type of producers. Market establishments produce goods and need a transaction or group of transactions aims to satisfy services mostly for sale at prices that are economically or the kind of objective it pursues. Transactions are first significant. Producers for own final use produce goods and analysed in the SNA according to their nature. Then, for services mostly for final consumption or fixed capital certain sectors or kind of transactions, they are analysed formation by the owners of the enterprises in which they from the expenditure side, by purpose, answering the are produced. Non-market establishments supply most of earlier question "for what purpose?" Classification by the goods and services they produce without charge or at purpose is described in the context of the supply and use prices that are not economically significant. tables in chapter 14. C. Rules of accounting 1. Introduction processes goods on behalf of another unit. For example, one unit may receive a set of components from another unit and return the assembled product. Terminology for the two sides of the accounts 2.47 Within the SNA, a distinction is made between legal 2.43 The SNA utilizes the term resources for transactions which ownership and economic ownership. The criterion for add to the amount of economic value of a unit or a sector. recording the transfer of products from one unit to another For example, wages and salaries are a resource for the unit in the SNA is that the economic ownership of the product or sector receiving them. Resources are by convention changes from the first unit to the second. The legal owner is shown on the right-hand side of the current accounts. The the unit entitled in law to the benefits embodied in the value left-hand side of the accounts, which includes transactions of the product. A legal owner may, though, contract with that reduce the amount of economic value of a unit or another unit for the latter to accept the risks and rewards of sector, is termed uses. To continue the example, wages and using the product in production in return for an agreed salaries are a use for the unit or sector that must pay them. amount that has a smaller element of risk in it. Such an example is when a bank legally owns a plane but allows an 2.44 Balance sheets are presented with liabilities and net worth airline to use it in return for an agreed sum. It is the airline (the difference between assets and liabilities) on the right- that then must take all the decisions about how often to fly hand side and assets on the left-hand side. Comparing two the plane, to where and at what cost to the passengers. The successive balance sheets gives changes in liabilities and airline is then said to be the economic owner of the plane net worth and changes in assets. even though the bank remains the legal owner. In the accounts, it is the airline and not the bank that is shown as 2.45 The accumulation accounts and balance sheets being fully purchasing the plane. At the same time, a loan, equal in integrated, the right-hand side of the accumulation accounts value to payments due to the bank for the duration of the is called changes in liabilities and net worth and their left- agreement between them is imputed as being made by the hand side is called changes in assets. In the case of bank to the airline. transactions in financial instruments, the changes in liabilities are often referred to as (net) incurrence of 2.48 The same principle applies to goods sent abroad for liabilities and the changes in assets as (net) acquisition of processing. If the processor is not concerned about how and financial assets. where and for how much the item he is assembling is sold, the economic ownership remains with the legal owner. Change of ownership and the recording of Even though the goods may physically pass from one transactions in goods and services country to another, they are not treated as imports and exports because the economic ownership has not changed. 2.46 A good may be held and be processed by a unit that does not have title to the ownership of the good. One example is 2.49 Within a large enterprise with several specialized a good given to a unit for repair. The activity of the repairer establishments, it is not immediately obvious whether a is only the cost incurred to effect the repair and the cost of delivery of goods from one establishment to another is to the good being repaired does not feature in the accounts of be recorded or not. Since all the establishments have the the repairer. This is obvious and uncontroversial for every same ownership, the distinction between economic and day types of repairs such as repairing shoes or a vehicle. legal ownership needs refining. The criterion used is to However, the same principle also applies when one unit record a delivery when the receiving unit assumes the 20 Overview responsibility, in terms of economic risks and rewards, of all flows occurring in a given period. They rely on accounts the items delivered. If the receiving unit does not accept of various units that are not always consistent, complete or this responsibility, for example by returning the processed even available. For household accounts in particular, other items to the original sending unit, then it is only performing statistics such as those from household surveys have to be a service on the items and they are not recorded as being used. Reconciling disparate data sources within the delivered from the first unit to the second. consistency constraints imposed by the quadruple entry accounting principle is fundamental to compiling a Double entry or quadruple entry accounting complete set of accounts. 2.50 For a unit or sector, national accounting is based on the 2. Time of recording principle of double entry, as in business accounting. Each transaction must be recorded twice, once as a resource (or a 2.54 One implication of the quadruple entry accounting change in liabilities) and once as a use (or a change in principle is that transactions, or other flows, have to be assets). The total of transactions recorded as resources or recorded at the same point of time in the various accounts changes in liabilities and the total of transactions recorded in question for both units involved. The same applies to as uses or changes in assets must be equal, thus permitting a stocks of financial assets and liabilities. check of the consistency of the accounts. Economic flows that are not transactions have their counterpart directly as 2.55 The general principle in national accounting is that changes in net worth. This is shown in section D below transactions between institutional units have to be recorded (and also in chapter 12, which describes the other changes when claims and obligations arise, are transformed or are in the volume of assets account and the revaluation cancelled. This time of recording is called an accrual basis. account). Transactions internal to one institutional unit are equivalently recorded when economic value is created, 2.51 The implications of the double entry principle are easy to transformed or extinguished. Generally speaking, all grasp in a number of cases. A household's purchase on transactions, however they are described, can always be credit of a consumer good will appear as a use under final viewed as dealing with economic value. consumption expenditure and as an incurrence of a liability under loans. If this good is paid for in cash, however, the 2.56 One has thus to distinguish carefully between the point in picture is less simple. The counterpart of a use under final time at which a transaction and the corresponding cash consumption is now a negative acquisition of assets, under movement take place. Even when a transaction (a purchase currency and deposits. Other transactions are more or sale of a good, for example) and the payment or receipt complicated. Output of goods is recorded as a resource in are simultaneous, the two aspects exist. The purchaser the account of a producer, its counterpart among uses is incurs a liability, the seller acquires a claim as a counterpart recorded as a positive change in inventories. When the of the delivery of the good. Then the liability and the claim output is sold, there is a negative change in inventories, that are cancelled by the payment. In most cases there is a delay is, a negative acquisition of non-financial assets, balanced between the actual transaction and the corresponding by a positive acquisition of financial assets, for instance payment or receipt. In principle, national accounts record under currency and deposits. In many instances, as actual transactions on an accrual basis, not on a cash basis. explained earlier, the difficulty of seeing how the double Conceptually national accounts follow the same principle entry principle applies is due to the fact that the categories as business accounting. of transactions in the SNA are compacted. 2.57 Although the principle is clear, its implementation is far 2.52 In principle, the recording of the consequences of an action from simple. Institutional units do not always apply the as it affects all units and all sectors is based on a principle same rules. Even when they do, differences in actual of quadruple entry accounting, because most transactions recording may occur for practical reasons such as delays in involve two institutional units. Each transaction of this type communication. Consequently, transactions may be must be recorded twice by each of the two transactors recorded at different times by the transactors involved, involved. For example, a social benefit in cash paid by a sometimes even in a different accounting period. government unit to a household is recorded in the accounts Discrepancies exist which national accounts must eliminate of government as a use under the relevant type of transfers by after-the-fact adjustments. In addition, because the time and a negative acquisition of assets under currency and at which a claim or liability arises is not always deposits; in the accounts of the household sector, it is unambiguous, further implementation problems arise. The recorded as a resource under transfers and an acquisition of rules and conventions adopted in the SNA for particular assets under currency and deposits. The principle of transactions are specified in subsequent chapters, in quadruple entry accounting applies even when the detailed particular in chapter 3. from-whom-to-whom relations between sectors are not shown in the accounts. Correctly recording the four transactions involved ensures full consistency in the 3. Valuation accounts. General principles 2.53 As noted in the introduction, the data available to the national accounts compiler may not in practice initially 2.58 It also follows from the quadruple entry accounting satisfy the consistency requirements of the SNA. The principle that a transaction must be recorded at the same accounts of the nation are not kept in the same way as a value through all the accounts of both sectors involved. The business unit or government, that is, by actually recording same principle applies to assets and liabilities. It means that 21 System of National Accounts a financial asset and its liability counterpart have to be difference between output and intermediate consumption) recorded for the same amount in the creditor and the debtor by a producer, a sector or an industry. When output is accounts. valued at basic prices, value added includes besides primary incomes due to labour and capital, only taxes less 2.59 Transactions are valued at the actual price agreed upon by subsidies on production other than taxes less subsidies on the transactors. Market prices are thus the basic reference products; when output is valued at producers' prices, value for valuation in the SNA. In the absence of market added includes taxes, less subsidies, on products other than transactions, valuation is made according to costs incurred value added type taxes (which means all taxes, less (for example, non-market services produced by subsidies, on products when value added type taxes do not government) or by reference to market prices for analogous exist). A complementary definition of value added is at goods or services (for example, services of owner-occupied factor cost, which excludes taxes on production of any dwellings). kind, though this concept is not used explicitly in the SNA. 2.60 Assets and liabilities are recorded at current values at the Volume measures and measures in real terms time to which the balance sheet relates, not at their original valuation. Theoretically, national accounts are based on the 2.66 Up until this point, only current values have been assumption that the values of assets and liabilities are described. In addition, the SNA includes calculation of continuously uprated to current values, even if in fact up- some transactions in volume terms, that is, the use of the rating occurs only periodically. The appropriate valuation systems of prices which prevailed in a past period. The basis for assets and liabilities is the value at which they changes over time in the current values of flows of goods might be bought in markets at the time the valuation is and services and of many kinds of assets can be required. Ideally, values observed in markets or estimated decomposed into changes in the prices of these goods and from observed market values should be used. When this is services or assets and changes in their volumes. Flows or not possible, current values may be approximated for stocks in volume terms take into account the changes in the balance sheet valuation in two other ways, by accumulating price of each item covered. However, many flows or stocks and revaluing transactions over time or by estimating the do not have price and quantity dimensions of their own. discounted present value of future returns expected from a Their current values may be deflated by taking into account given asset (see also chapter 13). the change in the prices of some relevant basket of goods and services or assets, or the change in the general price 2.61 Internal transactions are valued at current values at the time level. In the latter case, flows or stocks are said to be in real these transactions occur, not at the original valuation. These terms (that is, they represent values at constant purchasing internal transactions include entries into inventories, power). For example, the SNA provides for the calculation withdrawals from inventories, intermediate consumption of income in real terms. Interspatial comparisons raise and consumption of fixed capital. similar but even more complex problems than inter- temporal comparisons because countries at different stages Methods of valuation of development are involved. 2.62 Various methods exist of treating the effect of taxes on 2.67 Both inter-temporal and interspatial measures are discussed products, subsidies and trade and transport margins on the in chapter 15. valuation of transactions on products (goods and services). 4. Consolidation and netting 2.63 The preferred method of valuation of output is at basic prices, although producers' prices may be used when Consolidation valuation at basic prices is not feasible. The distinction is related to the treatment of taxes and subsidies on products. Basic prices are prices before taxes on products are added 2.68 Consolidation may cover various accounting procedures. In and subsidies on products are subtracted. Producers' prices general, it refers to the elimination from both uses and include, in addition to basic prices, taxes less subsidies on resources of transactions which occur between units that products other than value added type taxes. Thus three are grouped together and to the elimination of financial valuations of output may be encountered; at basic prices, at assets and the counterpart liabilities. producers' prices in the absence of value added type taxes, and at producers' prices in the presence of value added type 2.69 As a matter of principle, flows between constituent units taxes. within subsectors or sectors are not consolidated. However, consolidated accounts may be compiled for complementary 2.64 In the same set of accounts and tables, all transactions on presentations and analyses. Even then, transactions the uses of goods and services (such as final consumption, appearing in different accounts are never consolidated so intermediate consumption, capital formation) are valued at that the balancing items are not affected by consolidation. purchasers' prices. Purchasers' prices are the amounts paid Consolidation may be useful, for example, for the by the purchasers, excluding the deductible part of value government sector as a whole, thus showing the net added type taxes. Purchasers' prices are the actual costs to relations between government and the rest of the economy. the users. This possibility is elaborated in chapter 22. 2.65 The various methods of valuing output, with intermediate 2.70 Accounts for the total economy, when fully consolidated, consumption always at purchasers' prices, imply give rise to the rest of the world account (external consequences for the content and uses of value added (the transactions account). 22 Overview Netting principle, the SNA discourages netting beyond the degree shown in the classifications of the SNA. Netting financial 2.71 Consolidation must be distinguished from netting. For assets (changes in financial assets) against liabilities current transactions, netting refers to offsetting uses against (changes in liabilities) is especially to be avoided. Netting resources. The SNA does this only in a few specific is discussed in chapters 3 and 11. instances; for example, taxes on products may be shown net of subsidies on products. For changes in assets or changes in liabilities, netting may be envisaged in two ways. The The use of "net" first case is where various types of changes in assets (for example, entries in inventories and withdrawals from 2.72 With very few exceptions, in the SNA the term "net" is inventories) or various types of liabilities (for example, used only in connection with the balancing items of the incurrence of a new debt and redemption of an existing accounts in juxtaposition to the term "gross". The debt) are netted. The second case is where changes in financial assets and changes in liabilities (or, in the balance exceptions are the use of the expressions net worth, net sheet, financial assets and liabilities themselves) related to borrowing and net lending in relation to the accumulation a given financial instrument are netted. As a matter of accounts and net premiums in the context of insurance. D. The accounts 1. Introduction 2.76 The other parts of the accounting system bring in the three other conceptual elements from section B, that is, establishments, products and purposes as well as 2.73 With the tools introduced in sections B and C above, all population and employment. The accounts covered here flows and stocks can be recorded. This is done in the include the supply and use framework, which is the subject accounts of the SNA. Each account relates to a particular of chapter 14, population and employment tables which are aspect of economic behaviour. It contains flows or stocks described in chapter 19, the three dimensional analysis of and shows the entries for an institutional unit, a group of financial transactions and stocks of financial assets and units such as a sector or the rest of the world. Typically the liabilities, showing the relations between sectors (from- entries in the account do not conceptually balance so a whom-to-whom) described in chapter 27 and functional balancing item must be introduced. Balancing items are analyses, whereby certain transactions of institutional meaningful measures of economic performance in sectors are presented according to the purpose they serve. themselves. When calculated for the whole economy, they These appear in a number of chapters including chapter 14. constitute significant aggregates. 2.77 The sections following are devoted to: 2.74 The accounts can be divided into two main classes: a. The full sequence of accounts; a. The integrated economic accounts; and b. An integrated presentation of the accounts including b. The other parts of the accounting structure. the goods and services account, the accounts for the rest of the world and an examination of the aggregates of the SNA; and 2.75 The integrated economic accounts use the first three of the conceptual elements of the SNA described in section B, c. The other parts of the accounting structure. (institutional units and sectors, transactions and assets and liabilities) together with the concept of the rest of the world to form a wide range of accounts. These include the full 2. The full sequence of accounts sequence of accounts for institutional sectors, separately or collectively, the rest of the world and the total economy. 2.78 Before presenting the full sequence of accounts for The full sequence of accounts is described briefly below. A institutional units and sectors, some preliminary remarks full description of each of the accounts concerned is the are useful. The purpose of this subsection is to explain the subject matter of chapters 6 to 13. The rest of the world accounting structure of the SNA in general, not to show the account is described in chapter 26. precise content of the accounts for each specific unit or Table 2.1:The production account Uses Resources Output Intermediate consumption Value added 23 System of National Accounts sector. The accounting structure is uniform throughout the starts with the balancing item of the previous one recorded SNA. It applies to all institutional units, subsectors, sectors as resources. The last balancing item is saving which, in the and the total economy. However, some accounts may not context of the SNA, is that part of income originating in be relevant for certain sectors. Similarly, not all production, domestically or abroad that is not used for final transactions are relevant for each sector and, when they are, consumption. they may constitute resources for some sectors and uses for others. 2.84 Accumulation accounts cover changes in assets and liabilities and changes in net worth (the difference for any 2.79 Another remark relates to the way the classification of institutional unit or group of units between its assets and transactions is used when presenting the general structure liabilities). The accounts concerned are the capital account, of the accounts. Section B above shows only the main financial account, the other changes in the volume of assets categories of transactions, not the detailed ones which are account and the revaluation account. The accumulation displayed in the relevant chapters of the publication. accounts show all changes that occur between two balance However, in order to make the accounts clear, it is sheets. necessary to include a number of specific transactions. This is done by using the actual classification of transactions in the SNA at a level of detail sufficient for a good 2.85 Balance sheets present stocks of assets and liabilities and understanding of the accounts. Definitions of these net worth. Opening and closing balance sheets are included transactions are not given at this stage unless absolutely with the full sequence of accounts. Even when balance necessary but appear in subsequent chapters. sheets are not compiled, a clear understanding of the conceptual relationship between accumulation accounts 2.80 It is also worth noting that balancing items can be and balance sheets is necessary if the accumulation expressed gross or net, the difference being the accounts themselves are to be correctly elaborated. consumption of fixed capital. Conceptually, net balancing items are much more meaningful. However, gross The production account concepts, specifically gross aggregates, are widely used and gross accounts are often estimated more easily, accurately and promptly than the net ones. In order to accommodate 2.86 The production account (shown in table 2.1) is designed to both solutions and to ease the integrated presentation of the show value added as one of the main balancing items in the accounts and aggregates, a double presentation of SNA. Consequently, it does not cover all transactions balancing items is allowed. linked with the production process, but only the result of production (output) and the using up of goods and services when producing this output (intermediate consumption). 2.81 Finally, it has to be said that the sequence of accounts Intermediate consumption does not cover the progressive shows the accounting structure of the SNA; it is not wear and tear of fixed capital. The latter is recorded as a necessarily a format for publishing the results. separate transaction (consumption of fixed capital) which is the difference between the gross and net balancing items. The three sections of the sequence of accounts 2.87 As already explained in section C, different types of 2.82 The accounts are grouped into three categories: current valuation of output may be used according to the choice accounts, accumulation accounts and balance sheets. made between basic prices and producers' prices and, in the latter case, the existence or absence of value added type 2.83 Current accounts deal with production, the generation, taxes. Consequently, the extent to which taxes (less distribution and use of income. Each account after the first subsidies) on products are included in value added differs. Table 2.2:The generation of income account Uses Resources Value added Compensation of employees Taxes on production and imports Subsidies (-) Operating surplus, net Mixed income, net Table 2.3:The allocation of primary income account Uses Resources Operating surplus, net Mixed income, net Compensation of employees Taxes on production and imports Subsidies (-) Property income Property income Balance of primary incomes 24 Overview 2.88 All institutional sectors have a production account. 2.94 For non-financial and financial corporations, the allocation However, in the production account of institutional sectors, of primary income account is further subdivided in order to output and intermediate consumption are shown in total show an additional balancing item, entrepreneurial income, only, not broken down by products. which is closer to the concept of current profit before tax familiar in business accounting. This balancing item and the related sub-accounts are shown in chapter 7. 2.89 The balancing item of the production account is value added. Like all balancing items in the current accounts, value added may be measured gross or net. The secondary distribution of income account 2.95 The secondary distribution of income account (table 2.4) The distribution of income accounts covers redistribution of income through current transfers other than social transfers in kind made by government and 2.90 The process of distribution and redistribution of income is NPISHs to households. Social transfers in kind are so important that it is worth distinguishing various steps recorded in the redistribution of income in kind account. and depicting them separately in different accounts. The The secondary distribution of income account records as distribution of income is decomposed into three main steps: resources, in addition to balance of primary incomes, primary distribution, secondary distribution and current taxes on income, wealth, etc. and other current redistribution in kind. As long as all kinds of distributive transfers except social transfers in kind. On the uses side, current transactions included in the SNA are actually the same types of transfers are also recorded. Since these measured, increasing the number of accounts adds very transfers are resources for some sectors and uses for others little to the work already done, but it allows the also, their precise content varies from one sector to another. introduction of balancing items that are meaningful concepts of income. 2.96 It is worth explaining in some detail here the way social contributions are recorded in the SNA. Although employers normally pay social contributions on behalf of their The primary distribution of income account employees directly to the social insurance schemes, in the SNA these payments are treated as if they were made to 2.91 The primary distribution of income account shows how employees who then make payments to social insurance gross value added is distributed to labour, capital, schemes. In terms of the accounts, this means that they first government and, where necessary, flows to and from the appear as a component of compensation of employees in rest of the world. In fact the primary distribution of income the use side of the generation of income account of account is never presented as a single account but always as employers and the resource side of the allocation of two sub-accounts. The first of these is the generation of primary income account of households (adjusted for income account (shown in table 2.2) in which value added external flows in compensation of employees). They are is distributed to labour (compensation of employees), then recorded as uses in the secondary distribution of capital and government (taxes on production and imports income account of households (and possibly of the rest of the world), and as resources of the sectors managing social less subsidies as far as they are included in the valuation of insurance schemes. All employers' social contributions output). The distribution to capital appears in the balancing follow this route. This way of recording transactions as if item in this account, operating surplus or mixed income. they followed another course is often called "rerouting". 2.92 The allocation of primary income account (table 2.3) shows 2.97 The balancing item of the secondary distribution of income the remaining part of the primary distribution of income. It account is disposable income. For households, this is the contains operating surplus or mixed income as a resource. income that can be used for final consumption expenditure It records, for each sector, property income receivable and and saving. For non-financial and financial corporations, payable, and compensation of employees and taxes, less disposable income is income not distributed to owners of subsidies, on production and imports receivable by equity remaining after taxes on income are paid. households and government, respectively. Since transactions of this kind may appear in the rest of the world The redistribution of income in kind account account, these must be included also. 2.98 Because of the nature of the transactions concerned, this 2.93 The balancing item of the allocation of primary income account is significant only for government, households and account (and of the complete primary distribution of NPISHs. Social transfers in kind cover two more elements income account) is the balance of primary income. in the portrayal of the redistribution process. The first of Table 2.4:The secondary distribution of income account Uses Resources Balance of primary incomes Current transfers Current transfers Current taxes on income, wealth, etc. Current taxes on income, wealth, etc. Net social contributions Net social contributions Social benefits other than social transfers in kind Social benefits other than social transfers in kind Other current transfers Other current transfers Disposable income 25 System of National Accounts these is non-market production by government and NPISHs consumption and saving. In addition, both variants of the of individual services and the second is the purchase by use of income account include, for households and for government and NPISHs of goods and services for transfer pension funds, an adjustment item for the change in to households free or at prices that are not economically pension entitlements which relates to the way transactions significant. The redistribution of income in kind account between households and pension funds are recorded in the (table 2.5) records social transfers in kind as resources for SNA. This adjustment item, which is explained in chapter households and uses of government and NPISHs. 9, is not discussed here. 2.99 The purpose of this account is fourfold. In the first place it 2.102 The difference between the resources of the two variants of aims at giving a clearer picture of the role of government as the use of income account depends on which balancing the provider of goods and services to individual item is carried down from an earlier account. In terms of households. Secondly, it delivers a more complete measure uses, the difference is between whether final consumption of household income. Thirdly, it facilitates international expenditure or actual final consumption is recorded. The comparisons and comparisons over time when economic former is recorded in the use of disposable income account; and social arrangements differ or change. Fourthly, it gives the latter in the use of adjusted disposable income account. a more complete view of the redistribution process between subsectors or other groupings of households. Redistribution of income in kind is a tertiary distribution of income. 2.103 Final consumption expenditure covers transactions in final consumption of goods and services for which a sector is the ultimate bearer of the expense. Government and NPISHs 2.100 The balancing item of the redistribution of income in kind produce non-market goods and services in their production account is adjusted disposable income. account, where intermediate consumption and compensation of employees are recorded as uses. Final The use of income accounts consumption expenditure of these producers relates to the value of their output of non-market goods and services, less their receipts from the sale of non-market goods and 2.101 The use of income account exists in two variants, the use of services at prices which are not economically significant. disposable income account (table 2.6) and the use of However, it also covers goods and services that are adjusted disposable income account (table 2.7). The use of purchased by government or NPISHs for ultimate transfer, disposable income account has the balancing item from the without transformation, to households. secondary distribution of income account, disposable income, as a resource. The use of adjusted disposable income account has the balancing item from the 2.104 Actual final consumption of households covers goods and redistribution of income in kind account, adjusted services which are effectively available for individual disposable income, as a resource. Both accounts show how, consumption by households, regardless of whether the for those sectors that undertake final consumption (that is, ultimate bearer of the expense is government, NPISHs or government, NPISHs and households), disposable income households themselves. Actual final consumption of or adjusted disposable income is allocated between final government and NPISHs is equal to consumption Table 2.5:The redistribution of income in kind account Uses Resources Disposable income Social transfers in kind Social transfers in kind Adjusted disposable income Table 2.6:The use of disposable income account Uses Resources Disposable income Final consumption expenditure Adjustment for the change in pension entitlements Adjustment for the change in pension entitlements Saving Table 2.7:The use of adjusted disposable income account Uses Resources Adjusted disposable income Actual final consumption Adjustment for the change in pension entitlements Adjustment for the change in pension entitlements Saving 26 Overview expenditure less social transfers in kind, or, in other words, 2.109 A second group of accounts relates to changes in assets, collective consumption. liabilities and net worth due to other factors. Examples are discoveries or depletion of subsoil resources, destruction by 2.105 At the level of total economy, disposable income and political events, such as war, or by natural disasters, such as adjusted disposable income are equal, as are final earthquakes. Such factors actually change the volume of consumption expenditure and actual final consumption. assets, either physically or quantitatively. Other changes in They differ only when considering the relevant sectors. For assets may also be linked with changes in the level and each sector, the difference between final consumption structure of prices. In the latter case, only the value of expenditure and actual final consumption is equal to social assets and liabilities is modified, not their volume. Thus the transfers in kind, provided or received. It is also equal to second group of accumulation accounts is subdivided the difference between disposable income and adjusted between an account for other changes in volume of assets disposable income. Thus the figures for saving are the same and an account for revaluation. in both variants of the use of income account as income on the resources side and consumption on the uses side differ The capital account by the same amount. 2.110 The capital account (table 2.8) records transactions linked 2.106 The balancing item of the use of income account, in its two to acquisitions of non-financial assets and capital transfers variants, is saving. Saving ends the subsequence of current involving the redistribution of wealth. The right-hand side accounts. includes saving, net, and capital transfers receivable and capital transfers payable (with a minus sign) in order to The accumulation accounts arrive at that part of changes in net worth due to saving and capital transfers. The capital account includes among uses 2.107 Saving, being the balancing item of the last current account the various types of investment in non-financial assets. is the starting element of accumulation accounts. Because consumption of fixed capital is a negative change in fixed assets, it is recorded, with a negative sign, on the left-hand side of the account. Recording gross fixed capital 2.108 A first group of accounts covers transactions which would formation less consumption of fixed capital on the same correspond to all changes in assets or liabilities and net side is equivalent to recording net fixed capital formation. worth if saving and capital transfers were the only sources of changes in net worth. The accounts concerned are the capital account and the financial account. These two 2.111 The balancing item of the capital account is called net accounts are distinguished in order to show a balancing lending when positive and measuring the net amount a unit item which is useful for economic analysis, that is, net or a sector finally has available to finance, directly or lending or net borrowing. indirectly, other units or sectors, or net borrowing when Table 2.8:The capital account Changes in assets Changes in liabilities and net worth Saving Gross fixed capital formation Consumption of fixed capital (-) Changes in inventories Acquisitions less disposals of valuables Acquisitions less disposals of non-produced assets Capital transfers, receivable (+) Capital transfers payable (-) Changes in net worth due to saving and capital transfers Net lending (+) / net borrowing (­) Table 2.9:The financial account Changes in assets Changes in liabilities and net worth Net lending (+) / net borrowing (­) Net acquisition of financial assets Net acquisition of financial liabilities Monetary gold and SDRs Monetary gold and SDRs Currency and deposits Currency and deposits Debt securities Debt securities Loans Loans Equity and investment fund shares Equity and investment fund shares Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes Financial derivatives and employee stock options Financial derivatives and employee stock options Other accounts receivable/payable Other accounts receivable/payable 27 System of National Accounts negative, corresponding to the amount a unit or a sector is account also includes some adjustment elements such as obliged to borrow from others. changes in classification and structure which may or may not have an influence on net worth (see chapter 12). The The financial account balancing item, changes in net worth due to other changes in the volume of assets, is recorded on the right-hand side. 2.112 The financial account (table 2.9) records transactions in financial instruments for each financial instrument. These The revaluation account transactions in the SNA show net acquisition of financial assets on the left-hand side or net incurrence of liabilities on the right-hand side. 2.115 The revaluation account (table 2.11) records holding gains or losses. It starts with nominal holding gains and losses. This item records the full change in value of the various 2.113 The balancing item of the financial account is again net lending or net borrowing, which appears this time on the assets or liabilities due to the change in the prices of those right-hand side of the account. In principle, net lending or assets and liabilities since the beginning of the accounting net borrowing is measured identically in both the capital period or the time of entry into stock and the time of exit and financial accounts. In practice, achieving this identity is from stock or the end of the accounting period. one of the most difficult tasks in compiling national accounts. 2.116 Just as transactions and other flows in assets appear on the left of the account and transactions in liabilities on the The other changes in the volume of assets account right, so nominal gains or losses on assets appear on the left-hand side of the revaluation account, while nominal 2.114 The other changes in the volume of assets account (table gains and losses on financial liabilities are recorded on the 2.10) records the effect of exceptional events that cause not right-hand side. A positive revaluation of financial only the value but also the volume of assets and liabilities liabilities is equivalent to a nominal holding loss; a to vary. In addition to the kind of events referred to above, negative revaluation of liabilities is equivalent to a nominal such as the consequences of war or earthquakes, this holding gain. Table 2.10:The other changes in the volume of assets account Changes in assets Changes in liabilities and net worth Economic appearance of assets Economic appearance of assets Economic disappearance of non-produced assets Economic disappearance of non-produced assets Catastrophic losses Catastrophic losses Uncompensated seizures Uncompensated seizures Other changes in volume n.e.c. Other changes in volume n.e.c. Changes in classification Changes in classification Total other changes in volume Total other changes in volume Produced assets Produced assets Non-produced assets Non-produced assets Financial assets Financial assets Changes in net worth due to other changes in volume of assets Table 2.11:The revaluation account Changes in assets Changes in liabilities and net worth Nominal holding gains and losses Nominal holding gains and losses Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Changes in net worth due to nominal holding gain and losses Neutral holding gains and losses Neutral holding gains and losses Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Changes in net worth due to neutral holding gains and losses Real holding gains and losses Real holding gains and losses Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Changes in net worth due to real holding gains and losses 28 Overview 2.117 The balancing item of the revaluation account is changes in 3. An integrated presentation of the accounts net worth due to nominal holding gains and losses. 2.125 It is now possible to put together the various elements 2.118 Nominal holding gains and losses are subdivided between which have been introduced in the previous subsections and two components. The first shows the revaluation in to present in detail the integrated economic accounts. Table proportion to the general price level which is obtained by 2.13 gives a simplified version of the integrated current applying, during the same periods of time, an index of the accounts. It is formed by taking each of tables 2.1, 2.2, 2.3, change in general price level to the initial value of all assets 2.4 and 2.6 and placing them immediately one under the or liabilities, even to those that are fixed in monetary terms. other. In this presentation the transactions and other flows The results of this operation are called neutral holding are shown in the middle of the table with columns to the gains and losses because all assets and liabilities are left for the uses and columns to the right for resources. In a revalued so as to preserve exactly their purchasing power. full presentation of this type there would be one column for each sector or subsector of interest. In the interest of introducing the table in a simple manner, only four columns 2.119 The second component of holding gains and losses shows are shown in table 2.13. The first of these represents the the difference between nominal holding gains and losses sum of all the five sectors of the total economy (non- and neutral holding gains and losses. This difference is financial corporations, financial corporations, general called real holding gains and losses. If the nominal holding government, NPISHs and households). There follows a gains and losses are higher than the neutral holding gains column for the rest of the world, then one headed goods and and losses, there is a real holding gain, due to the fact that services and the last is a column representing the sum of the on average the actual prices of the assets in question have previous three. This column has little economic meaning increased more (or decreased less) than the general price but is a critical way of ensuring that the tables are complete level. In other words, the relative prices of its assets have and consistent since the totals on the left-hand side and increased. Similarly, a decrease in relative prices of assets right-hand side of the accounts must be equal line by line. leads to a real holding loss. (When balancing items are shown as the last item in one account and the first in the next account, this equality is 2.120 Each of the three types of holding gains or losses are misaligned but still obvious.) subdivided according to the main groups of assets and liabilities, a decomposition which is necessary even in a 2.126 Table 2.14 shows the continuation of the integrated simplified accounting presentation. Changes in net worth accounts, including the accumulation accounts and balance due to nominal holding gains and losses can be subdivided sheets as previously presented in tables 2.8, 2.9, 2.10, 2.11 into changes due to neutral holding gains and losses and and 2.12. Here the columns to the left represent assets or changes due to real holding gains and losses. changes in assets and columns to the right liabilities or changes in liabilities and net worth. Together tables 2.13 and 2.14 make up the integrated economic accounts. The Balance sheets data in the two tables are drawn from the numerical example that runs through the entire publication. The tables 2.121 The opening and closing balance sheets (table 2.12), for each account in chapters 6 to 13 are expanded versions display assets on the left-hand side, liabilities and net worth of the tables shown here with columns for all institutional on the right-hand side. Assets and liabilities, as previously sectors and a full set of transactions and other flows for explained, are valued at the prices of the date a balance each of these accounts. A composite version of the tables, sheet is established. with all the details just mentioned, appears in Annex 2. 2.122 The balancing item of a balance sheet is net worth, the 2.127 The integrated economic accounts give a complete picture difference between assets and liabilities. Net worth is of the accounts of the total economy including balance equivalent to the present value of the stock of economic sheets, in a way that permits the principal economic value a unit or a sector holds. relations and the main aggregates to be shown. This table shows, simultaneously, the general accounting structure of the SNA and presents a set of data for the institutional 2.123 The changes in the balance sheet recapitulate the content of sectors, the economy as a whole and the rest of the world. the accumulation accounts, that is, the entry for each asset or liability is the sum of the entries in the four accumulation 2.128 The presentation of the integrated accounts in this form is accounts corresponding to that asset or liability. The one of several ways in which a bird's eye view of the changes in net worth can be calculated from these entries accounts can be obtained. Another way is by means of a but must by definition be equal to the changes in net worth diagram such as figure 2.1, which gives the same due to saving and capital transfers from the capital account information in schematic form. plus changes in net worth due to other changes in the volume of assets from the other changes in the volume of 2.129 The integrated economic accounts provide an overview of assets account plus nominal holding gains and losses from the economy as a whole. As already indicated, the the revaluation account. integrated presentation contains much more detail than has actually been included in the tables and may be used to give 2.124 Conceptually, the entries for the closing balance sheet are a more detailed view if so desired. Columns might be equal, asset by asset and liability by liability to the entries introduced for subsectors. The rest of the world column can in the opening balance sheet plus the changes recorded in be subdivided according to various geographical zones. the four accumulation accounts. The column for goods and services may show market 29 System of National Accounts goods and services separately. The classification of The goods and services account transactions in the rows might be used at more detailed levels, and so on. However, including more detail directly in this scheme at the same time would result in a very 2.133 As noted above, the integrated presentation of the account complicated and unmanageable table. For this reason, more includes a column on each side labelled goods and services. detailed analysis of production and transactions in goods Entries in these columns reflect the various transactions in and services, transactions in financial instruments, detailed goods and services that appear in the accounts of the balance sheets, as well as analysis by purpose are done in institutional sectors. Uses of goods and services in the other frameworks. These are presented in the next section institutional sectors accounts are reflected on the right-hand and their links with the integrated economic accounts are column for goods and services; resources of goods and also explained. services in the institutional sectors accounts are reflected on the left-hand column for goods and services. On the The rest of the world accounts resources side of the table, the figures appearing in the column for goods and services are the counterparts of the 2.130 The rest of the world account covers transactions between uses made by the various sectors and the rest of the world: resident and non-resident institutional units and the related exports (540), intermediate consumption (1 883), final stocks of assets and liabilities where relevant. consumption (1 399), gross fixed capital formation (376), changes in inventories (28) and acquisitions less disposals 2.131 As the rest of the world plays a role in the accounting of valuables (10). On the use side of the table, the figures in structure similar to that of an institutional sector, the rest of the column for goods and services are the counterparts of the world account is established from the point of view of the resources of the various sectors and the rest of the the rest of the world. A resource for the rest of the world is world: imports (499) and output (3 604). Taxes on products a use for the total economy and vice versa. If a balancing (less subsidies) are also included on the resource side of the item is positive, it means a surplus of the rest of the world accounts. The coverage of this item varies according to the and a deficit of the total economy, and vice versa if the way output is valued (see the discussion on valuation in balancing item is negative. section C). The part (possibly the total) of taxes on products (less subsidies on products), that is not included in the 2.132 The external account of goods and services is shown at the value of output does not originate in any specific sector or same level as the production account for institutional industry; it is a resource of the total economy. In the sectors. Imports of goods and services (499) are a resource numerical example taxes, less subsidies, on products (133) for the rest of the world, exports (540) are a use. The are shown directly in the column for goods and services. external balance of goods and services is (-41). With a They are a component of the value of the supply of goods positive sign, it is a surplus of the rest of the world (a deficit and services which has no counterpart in the value of the of the nation) and vice versa. To this are added or deducted output of any institutional sector. the various kinds of taxes, compensation of employees and other current transfers payable to, and receivable from, the rest of the world. The current external balance is -32, 2.134 The goods and services account is a particularly important indicating a deficit for the rest of the world but a surplus for account as it forms the basis of the most familiar definition the total economy. Again, if it had a positive sign, it would of GDP. Table 2.15 shows the account in the same format be a surplus of the rest of the world (a deficit of the total as earlier tables in the chapter (though with numeric values economy). included). Table 2.12:The opening balance sheet, changes in assets and liabilities and closing balance sheet Stocks and changes in assets Stocks and changes in liabilities Opening balance sheet Opening balance sheet Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Net worth Total transactions and other flows Total transactions and other flows Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Changes in net worth, total Saving and capital transfers Other changes in volume of assets Nominal holding gains and losses Closing balance sheet Closing balance sheet Non-financial assets Non-financial assets Produced assets Produced assets Non-produced assets Non-produced assets Financial assets/liabilities Financial assets/liabilities Net worth 30 Overview Table 2.13:The integrated presentation of the full sequence of the current accounts Uses Resources Total economy Total economy Goods and Goods and Rest of the Rest of the services services world world Total Total Transactions and balancing items 499 499 Imports of goods and services 499 499 392 392 Imports of goods 392 392 107 107 Imports of services 107 107 540 540 Exports of goods and services 540 540 462 462 Exports of goods 462 462 78 78 Exports of services 78 78 Production account 3 604 3 604 Output 3 604 3 604 3 077 3 077 Market output 3 077 3 077 147 147 Output for own final use 147 147 380 380 Non-market output 380 380 1 883 1 883 Intermediate consumption 1 883 1 883 141 141 Taxes on products 141 141 -8 -8 Subsidies on products (-) -8 -8 1 854 1 854 Value added, gross / Gross domestic product 222 222 Consumption of fixed capital 1 632 1 632 Value added, net / Net domestic product - 41 - 41 External balance of goods and services Generation of income account Value added, gross / Gross domestic product 1 854 1 854 Value added, net / Net domestic product 1 632 1 632 1 150 1 150 Compensation of employees 235 235 Taxes on production and imports 141 141 Taxes on products 94 94 Other taxes on production - 44 - 44 Subsidies -8 -8 Subsidies on products - 36 - 36 Other subsidies on production 452 452 Operating surplus, gross 61 61 Mixed income, gross 214 Consumption of fixed capital on gross operating surplus 8 Consumption of fixed capital on gross mixed income 238 238 Operating surplus, net 53 53 Mixed income, net Allocation of primary income account Operating surplus, gross 452 452 Mixed income, gross 61 61 Operating surplus, net 238 238 Mixed income, net 53 53 6 6 Compensation of employees 1 154 2 1 156 0 Taxes on production and imports 235 235 0 Subsidies - 44 - 44 391 44 435 Property income 397 38 435 1 864 1 864 Balance of primary incomes, gross / National income, gross 1 642 1 642 Balance of primary income, net / National income, net Secondary distribution of income account Balance of primary incomes, gross / National income, gross 1 864 1 864 Balance of primary income, net / National income, net 1 642 1 642 1 212 17 1 229 Current transfers 1 174 55 1 229 212 1 213 Current taxes on income, wealth, etc. 213 0 213 333 0 333 Net social contributions 333 0 333 384 0 384 Social benefits other than social transfers in kind 384 0 384 283 16 299 Other current transfers 244 55 299 1 826 1 826 Disposable income, gross 1 604 1 604 Disposable income, net Use of disposable income account Disposable income, gross 1 826 1 826 Disposable income, net 1 604 1 604 1 399 1 399 Final consumption expenditure 1 399 1 399 11 0 11 Adjustment for the change in pension entitlements 11 0 11 427 427 Saving, gross 205 205 Saving, net - 13 - 13 Current external balance 31 System of National Accounts Table 2.14:The integrated presentation of the full sequence of the accumulation accounts and balance sheets Changes in assets Changes in liabilities and net worth Total economy Total economy Goods and Goods and Rest of the Rest of the services services world world Total Total Transactions and balancing items Capital account Saving, net 205 205 Current external balance - 13 - 13 414 414 Gross capital formation 414 414 192 192 Net capital formation 192 192 376 376 Gross fixed capital formation 376 376 - 222 - 222 Consumption of fixed capital - 222 - 222 Gross fixed capital formation by type of asset 28 28 Changes in inventories 28 28 10 10 Acquisitions less disposals of valuables 10 10 0 0 Acquisitions less disposals of non-produced assets 0 0 Capital transfers, receivable 62 4 66 Capital transfers, payable - 65 -1 - 66 Changes in net worth due to saving and capital transfers 202 - 10 192 10 - 10 0 Net lending (+) / net borrowing (­) Financial account Net lending (+) / net borrowing (­) 10 - 10 0 436 47 483 Net acquisition of liabilities 426 57 483 -1 1 0 Monetary gold and SDRs 89 11 100 Currency and deposits 102 -2 100 86 9 95 Debt securities 74 21 95 78 4 82 Loans 47 35 82 107 12 119 Equity and investment fund shares 105 14 119 48 0 48 Insurance, pension and standardized guarantee schemes 48 0 48 14 0 14 Financial derivatives and employee stock options 11 3 14 15 10 25 Other accounts receivable/payable 39 - 14 25 Other changes in the volume of assets account 13 13 Total other changes in volume 3 3 -7 -7 Produced non-financial assets 17 17 Non-produced non-financial assets 3 3 Financial assets 3 3 Changes in net worth due to other changes in volume of assets 10 Revaluation account Nominal holding gains and losses 280 280 Non-financial assets 84 7 91 Financial assets/liabilities 76 15 91 Changes in net worth due to nominal holding gains/losses 288 -8 280 Neutral holding gains and losses 198 198 Non-financial assets 136 12 148 Financial assets/liabilities 126 22 148 Changes in net worth due to neutral holding gains/losses 208 - 10 214 Real holding gains and losses 82 82 Non-financial assets - 52 -5 - 57 Financial assets/liabilities - 50 -7 - 57 Changes in net worth due to real holding gains/losses 80 2 66 Stocks and changes in assets Opening balance sheet 4 621 4 621 Non-financial assets 8 231 805 9 036 Financial assets/liabilities 7 762 1 274 9 036 Net worth 5 090 - 469 4 621 Total changes in assets and liabilities 482 482 Non-financial assets 523 54 577 Financial assets/liabilities 505 72 577 Changes in net worth, total 500 - 18 482 Saving and capital transfers 202 - 10 192 Other changes in volume of assets 10 10 Nominal holding gains/losses 288 -8 280 Neutral holding gains/losses 208 - 10 198 Real holding gains/losses 80 2 82 Closing balance sheet 5 103 5 103 Non-financial assets 8 754 859 9 613 Financial assets/liabilities 8 267 1 346 9 613 Net worth 5 590 - 487 5 103 32 Output 3 604 > Production Intermediate consumption 1 883 Opening external < financial position Value added 1 721 Exports 540 Assets, 805 < liabilities, 1 274 > Imports 499 net - 469 V 10 Primary incomes < External transactions > Taxes less subsidies on products 133 > - 38 Current transfers < Distribution and use of income Closing external Goods and 0 Adjustment for the change financial position services < Final consumption 1 399 in pension liabilities < Assets, 859 liabilities, 1 346 Consumption of fixed capital 222 Saving, net 205 -3 Capital transfers net - 487 V V V ^ ^ ^ Changes in inventories 28 < Accumulation Gross fixed capital formation 376 Acquisitions less disposals of non-produced 0 < non-financial assets Acquisitions less disposals of valuables 10 Transactions in financial instruments 10 Net lending - 10 < Other changes in the volume of assets 10 Other changes in the volume of assets 0 Revaluation of assets 288 Revaluation of assets -8 Figure 2.1:Diagram of the integrated accounts for the total economy Opening stocks Closing stocks Non-financial assets 4 621 Non-financial assets 5 103 Financial assets 8 231 Financial assets 8 754 Liabilities 7 762 V Liabilities 8 267 Net worth 5 090 Net worth 5 590 33 Overview System of National Accounts The aggregates up in the production process. Thus, theoretically, value added is a net concept. This conclusion applies to domestic 2.135 The aggregates of the SNA, such as value added, income, product as well; theoretically, domestic product should be a consumption and saving, are composite values which net concept. Net domestic product (NDP) is obtained by measure one aspect of the activity of the entire economy. deducting the consumption of fixed capital from GDP. They are summary indicators and key magnitudes for purposes of macroeconomic analysis and comparisons over 2.142 However, gross measures of product and income are time and space. The SNA aims to provide a simplified but commonly used for various reasons. The depreciation of complete and detailed picture of complex economies, so the fixed assets as calculated in business accounting does not calculation of the aggregates is neither the sole nor the generally meet the requirements of the SNA. The main purpose of national accounting; nevertheless calculation of consumption of fixed capital requires that summary figures are very important. statisticians estimate the present value of the stock of fixed assets, the lifetime of various types of assets, patterns of 2.136 Some aggregates may be obtained directly as totals of depreciation, etc. Not all countries make such calculations, particular transactions in the SNA; examples are final and when they do there may be differences in methodology consumption, gross fixed capital formation and social (with some of them using business data even when contributions. Others may result from aggregating inadequate). Consequently, gross figures are more often balancing items for the institutional sectors; examples are available, or available earlier, and they are generally value added, balance of primary incomes, disposable considered more comparable between countries. So GDP is income and saving. They may need some further broadly used even if it is, on a conceptual basis, elaboration. However, some of them are so commonly used economically inferior to NDP. However, NDP should also that they deserve additional explanation at this early stage. be calculated, with improved estimates of consumption of fixed capital when necessary, in order to provide a 2.137 An overview of the aggregates in the SNA and the accounts significant tool for various types of analysis. in which they appear is given in figure 2.2. Gross national income (GNI) Gross domestic product (GDP) 2.143 Primary incomes generated in the production activity of 2.138 Basically, GDP derives from the concept of value added. resident producer units are distributed mostly to other Gross value added is the difference between output and resident institutional units; however, part of them may go to intermediate consumption. GDP is the sum of gross value non-resident units. Symmetrically, some primary incomes added of all resident producer units plus that part (possibly generated in the rest of the world may come from resident the total) of taxes on products, less subsidies on products, units. This leads to the definition and measurement of gross that is not included in the valuation of output. national income (GNI). GNI is equal to GDP less primary incomes payable to non-resident units plus primary 2.139 Next, GDP is also equal to the sum of the final uses of incomes receivable from non-resident units. In other words, goods and services (all uses except intermediate GNI is equal to GDP less taxes (less subsidies) on consumption) measured at purchasers' prices, less the value production and imports, compensation of employees and of imports of goods and services. property income payable to the rest of the world plus the corresponding items receivable from the rest of the world. 2.140 Finally, GDP is also equal to the sum of primary incomes Thus GNI is the sum of gross primary incomes receivable distributed by resident producer units. by resident institutional units or sectors. In contrast to GDP, GNI is not a concept of value added, but a concept of Net and gross measures income. 2.141 In principle, the concept of value added should exclude the 2.144 By deducting the consumption of fixed capital from GNI, allowance for consumption of fixed capital. The latter, in net national income (NNI) is obtained. The remarks above effect, is not newly created value, but a reduction in the about the conceptual relevance of the net concept in case of value of previously created fixed assets when they are used product apply even more strongly to national income. Table 2.15:The goods and services account Uses Resources Intermediate consumption 1 883 Output 3 604 Final consumption expenditure 1 399 Imports of goods and services 499 Gross capital formation 414 Taxes on products 141 Gross fixed capital formation 376 Subsidies on products (-) -8 Changes in inventories 28 Acquisitions less disposals of valuables 10 Exports of goods and services 540 Total uses 4 236 Total resources 4 236 34 Overview National disposable income intermediate consumption and taxes on products, less subsidies on products can all be calculated in volume terms. 2.145 Primary incomes receivable by resident institutional units On the other hand, aggregates of income may not be may be used in part to make transfers to non-resident units expressed in volume terms because income flows may not, and resident units may receive transfers originating out of strictly speaking, be broken down into a quantity and a primary incomes in the rest of the world. Gross national price component. They may, however, be calculated at disposable income is equal to GNI less current transfers constant purchasing power, which is described as being in (other than taxes, less subsidies, on production and real terms. When moving from domestic product in volume imports) payable to non-resident units, plus the terms to national income in real terms, the effect of changes corresponding transfers receivable by resident units from in the terms of trade between the total economy and the rest the rest of the world. Gross national disposable income of the world must be taken into account. The necessary measures the income available to the total economy for adjustment is described in chapter 15. final consumption and gross saving. By deducting the consumption of fixed capital from gross national disposal 4. The other parts of the accounting structure income, net national disposable income is obtained. National disposable income is the sum of disposable income of all resident institutional units or sectors. The central supply and use table and other input-output tables Accounts in volume terms 2.147 The detailed analysis of production by industries and flows 2.146 All the aggregates referred to above are calculated in of goods and services by kind of products is an integral part current values. The influence of changes in prices may also of the integrated central framework. It would be feasible to be eliminated. Domestic product is calculated in volume include further details in the integrated economic accounts terms in order to measure the real change that occurs from table; for example, the rows for output, intermediate one period to another. This is possible because output, consumption and value added might be subdivided by kind Figure 2.2: Summary of the main accounts, balancing items and main aggregates Account Balancing item Main aggregates Current accounts Production account Production account Value added Domestic product Distribution and use of income accounts Primary distribution of income accounts Generation of income account Operating surplus/ mixed income Allocation of primary income account Balance of primary income National income (GNI,NNI) Entrepreneurial income account Entrepreneurial income Allocation of other primary income account Balance of primary income Secondary distribution of income account Disposable income National disposable income Redistribution of income in kind account Adjusted disposable income Use of income accounts Use of disposable income account Saving Use of adjusted disposable income account Saving National saving Accumulation accounts Capital account Net borrowing(+)/ net lending (-) Financial account Net borrowing(+)/ net lending (-) Other changes in assets accounts Other changes in the volume of assets account Revaluation account Balance sheets Opening balance sheet Net worth National wealth Changes in assets and liabilities Changes in net worth Closing balance sheet Net worth National wealth Contributions to change in net worth Capital account Change in net worth due to saving and capital transfers Other changes in the volume of assets account Change in net worth due to other changes in the volume of assets Revaluation account Changes in the value of net worth due to nominal holding gains and 35 System of National Accounts of economic activity; the columns for goods and services Complete balance sheets and assets and might be subdivided by type of products. However, the liabilities accounts SNA does not adopt this solution, because the table would become cumbersome. Instead, tables that provide a systematic cross-classification by institutional sectors and 2.152 In the integrated economic accounts, balance sheets are industries of output, intermediate consumption, and value presented in a very aggregated way. For each sector or added and its components are proposed. They are described subsector more complete balance sheets may be built up in detail in chapters 14 and 28 but the main features are using the detailed classification of assets and liabilities outlined here. when appropriate. Changes in assets and liabilities for each sector may also be analysed for each type of asset and liability and each source of change. 2.148 The production and generation of income accounts in the integrated economic accounts are given only by institutional sectors and with a global balance of 2.153 In addition, three-dimensional tables may be elaborated transactions on goods and services. The detailed analysis of showing the "from-whom-to-whom" links for each type of production activities and product balances is made in the financial instrument, to permit better analysis. The supply and use tables presenting: presentation of such tables is exactly the same as for tables of financial transactions except that the stock of assets or a. The resources and uses of goods and services for each liabilities is shown instead of changes in assets or liabilities type of product; and the net financial position of each sector appears instead of its net lending or borrowing. These tables closely follow the principles for the similar flow tables and are also b. The production and generation of income accounts for described in chapter 27. each industry according to kind of economic activity; c. Data on factors of production (labour and fixed capital) Functional analysis used by industries. 2.154 As explained in section B, the description of a transaction The tables of financial transactions and financial explains what type of flow is being recorded but it does not assets and liabilities explain why the transaction is being entered into. In order to analyse the purpose of transactions, it is necessary to 2.149 The integrated economic accounts show which sectors apply a functional classification to the basic transaction. acquire which financial assets and incur which liabilities. In For example, instead of disaggregating household order to examine the working of the financial sector, the consumption by type of product, it may be disaggregated to first expansion of the financial account is to distinguish show how much is spent on food, housing, health, nine subsectors within financial corporations and eight recreation and so on. For government consumption a categories of financial assets and liabilities. The subsectors distinction may be made between consumption related to of financial institutions are discussed in chapter 4 and the law and order, defence, health or education, for instance. details of the financial instruments are described in chapter As compatible but different classifications are used 11. according to the sector concerned, these partial analyses by purpose cannot be integrated in a single table and, in most cases, no exhaustive total for the total economy can be 2.150 However, as explained in the introduction to this chapter, calculated in the central framework. the presentation of the financial account as described in this chapter even with the elaboration of subsectors and financial instruments described in chapters 4 and 11, is still 2.155 Another way of looking at function may be to identify all not fully articulated. It shows which sectors and subsectors expenditure related to a particular functional activity, such incur loans and make deposits but it does not allow an in- as, for example, environmental protection. This is not (yet) depth examination of the intermediation process whereby a an area where all relevant expenditures are easily identified financial institution draws in funds, repackages them and and so it may be desirable to develop this further outside issues them as other instruments to other units. In order to the central framework in a satellite account. explore this, a three-dimensional "from-whom-to-whom" style of presentation is needed. This is sometimes referred Population and labour inputs tables to as a flow of funds matrix. The three-dimensional table of financial transactions is usually presented as a series of matrices, one matrix for each kind of financial instrument 2.156 A dimension is added to the usefulness of a number of showing the flows from one sector to another. national accounts aggregates by calculating these figures per head. For broad aggregates such as GDP, GNI or 2.151 As such a presentation is not necessarily useful for actually household final consumption, the denominator commonly presenting the data, other presentations may be preferred in used is the total (resident) population. When subsectoring practice for publication. For example, a table showing each the accounts or part of the accounts of the household sector, type of financial asset cross-classified by debtor sector and data on the number of households and the number of each type of liability cross-classified by creditor sectors persons in each subsector are also necessary. may be considered. As compared to the presentation of the financial accounts made in the integrated economic 2.157 In productivity studies, data on the labour inputs used by accounts, this means, in short, introducing a sector each industry in the process of production are distinction below headings of financial instruments when indispensable. Total hours worked is the preferred measure relevant. (For a more complete explanation see chapter 27.) of labour inputs for the SNA. Inferior alternatives are full- 36 Overview time equivalent jobs, the number of jobs or the number of 2.158 Data on population and labour inputs must generally be persons employed. adjusted in order to be consistent with the concepts, definitions and classifications of the SNA. The resulting tables are an integral part of the SNA and are explained in chapter 19. E. The integrated central framework and flexibility 1. Applying the central framework in a flexible institutional sectors. The components of the public sector way may be rearranged to group the accounts of the overall public sector. These accounts may be shown before consolidation and after consolidation to describe the 2.159 The central framework of the SNA is consistent in terms of relations between the public sector and the private sector its concepts and its accounting structure. Links between the and between the public sector and the rest of the world (by various elements of the integrated SNA have been separating out the external transactions of the public illustrated in order to depict its structure in a simple but sector). complete way. That presentation does not imply any order of priority or frequency (quarterly, annually, etc.) for implementing national accounts. Priorities in compiling 2.163 Chapters 21-29 provide more detailed analyses of the above national accounts are a matter of statistical policy; no examples. They also present illustrations of the flexible universal recommendation can be made. (Some indications uses of the central framework in the field of key sector relevant to specific circumstances are provided in relevant accounting, external accounts problems and the informal handbooks.) Similarly, the accounting structure does not economy. imply that results always have to be presented exactly as they stand in this or other chapters. A country may choose 2. Introducing social accounting matrices to publish mainly time series, to prepare only some accounts or aggregates, etc. 2.164 A social accounting matrix (SAM) is a presentation of the SNA in matrix terms that permits the incorporation of extra 2.160 In general, the SNA has to be looked at in a consistent but details of special interest. To date, builders of SAMs have flexible way. According to analytical requirements and data exploited the flexibility to highlight special interests and availability, the attention paid to various aspects of the concerns such as disaggregating the household sector to central framework may vary. In general, greater emphasis show the link between income generation and may be given to one part rather than another by choosing consumption. The power of a SAM, as well as of the SNA, the level of disaggregation to adopt for classifications of comes from choosing the appropriate type of institutional sectors, industries, products, transactions, disaggregation to study the topic of interest. In addition to a sequence of accounts, etc., by using different methods of flexible application, SAMs may incorporate more extensive valuation; by using different priorities for various parts of adjustments, which are of a satellite accounting nature, in the accounts and different frequencies; by rearranging the order to serve specific analytical purposes. For further results; by introducing some additional elements, etc. explanation of the matrix presentation and SAMs, see chapters 28 and 29. 2.161 The household sector provides a good illustration of what may be done in order to provide an in-depth analysis of the 3. Introducing satellite accounts household conditions and the functioning of the economy as a whole. A detailed approach to the household sector may be undertaken, first of all, by deconsolidating the 2.165 In some cases, working with the central framework, even in household sector beyond the subsectors included in the a flexible way, is not sufficient. Even when conceptually main classification of the SNA, distinguishing, for instance, consistent, the central framework may become the type of economic activity carried out (formal or overburdened with details. Moreover, some requirements informal), the location of the household (urban or rural) or may conflict with the concepts and architecture of the the level of skill. Secondly, it is possible to adapt the way central framework. household activities are portrayed in the sequence of accounts. For instance, a concept of discretionary income 2.166 In some types of analysis, the basic intention is not to use may be used by excluding from disposable income those alternative economic concepts, but simply to focus on a elements which are provided in kind and for which the certain field or aspect of economic and social behaviour in household has no choice on how to spend this part of the context of national accounts. The intent is to make income, or the classification of household transactions may apparent and to describe in more depth aspects that are be complemented, to show the industry of origin of various hidden in the accounts of the central framework or surface types of income, and so on. only to a limited extent. Tourism is a good example. Various aspects of producing and consuming activities 2.162 The flexibility of the SNA is further illustrated with the connected with tourism may appear in detailed public sector, whose components are systematically shown classifications of activities, products and purposes. at various levels of detail in the classification of However, transactions and purposes specific to tourism 37 System of National Accounts appear separately in only a few cases. In order to describe record the relationships between natural resources and and measure tourism in a national accounts framework, it is economic activities differently by recording the depletion necessary to make a choice between two approaches: either and the degradation of subsoil or other natural resources. In subdivide many elements in the accounts of the central these approaches, the economic process itself is depicted framework to get the required figures for tourism and pay differently and complementary or alternative aggregates are the price of overburdening and unbalancing the various calculated. The analysis of a number of important fields components of the accounts, or elaborate a specific such as social protection, health or the environment may framework for tourism. The latter approach also allows benefit from building a framework to accommodate adaptation of the various classifications and measurement elements which are included in the central accounts, of additional aggregates, such as national expenditure on explicitly or implicitly, plus complementary elements tourism, which may cover intermediate as well as final (either monetary or in physical quantities) possibly as well consumption. as alternative concepts and presentations. In all cases, however, the links with the central framework are made 2.167 In other types of analysis, more emphasis is given to explicit; there are a number of common elements and any alternative concepts. For instance, the production boundary contradictory features are introduced, not by chance, but may be changed, generally by enlarging it, for example, the after explicitly considering various ways of looking at production of domestic services by members of the reality. household for their own final consumption may be brought within the production boundary. The concept of fixed assets and the related fixed capital formation may be 2.168 Those special constructs, which are consistent with but not broadened, by covering consumer durables or human fully integrated the central framework, are called satellite capital. It is also possible in environmental accounting to accounts and are described in more detail in chapter 29. 38 Chapter 3: Stocks, flows and accounting rules A. Introduction 3.1 The SNA is a system of accounts designed to measure 3.5 An asset is a store of value representing a benefit or series stocks of, and changes in, economic value and to identify of benefits accruing to the economic owner by holding or the person, group of persons, legal or social entity with using the entity over a period of time. It is a means of claims on the economic value. This chapter discusses the carrying forward value from one accounting period to concept of stocks of economic value, the flows that reflect another. Assets may be financial in nature or not. For changes in economic value and the accounting rules applied almost all financial assets, there is a corresponding to the recording of stocks and flows. In order to portray [financial] liability. A liability is established when one unit stocks and flows in an accounting system, it is necessary to (the debtor) is obliged, under specific circumstances, to identify the parties with a claim to economic value provide a payment or series of payments to another unit measured in stocks or affected by flows. These parties are (the creditor). An elaboration of these definitions and the the persons, groups of persons, legal and social entities concepts embodied in them as well as a typology of the already referred to. They are described as institutional units different assets and liabilities in the SNA is given in section in the SNA and are grouped into institutional sectors B of this chapter. according to their economic objectives, functions and behaviour. Units and sectors are the subject of chapter 4. 3.6 Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value; they 3.2 Stocks measure economic value at a point in time. Flows involve changes in the volume, composition, or value of measure changes in economic value over a period of time. an institutional unit's assets and liabilities. Mirroring the Stocks appear in the balance sheets and related tables (and, diversity of the economy, economic flows have specific for certain stocks, with the use table in an input-output natures as wages, taxes, interest, capital flows, etc., that context). Flows appear in all the other accounts and tables record the ways in which a unit's assets and liabilities are of the SNA. The flow accounts in the full sequence of changed. accounts for institutional sectors consist of the current accounts, which deal with production, income and use of 3.7 Economic flows consist of transactions and other flows. A income, and the accumulation accounts, which show all transaction is an economic flow that is an interaction changes between two balance sheets. between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is 3.3 In order to have a system that is complete and consistent, operating in two different capacities. The value of an asset all changes in economic value between stock measures at or a liability may be affected by economic flows that do not two points in time must be captured in flows. The first satisfy the requirements of a transaction. Such flows are requirement in specifying the accounting conventions is described as "other flows". Other flows are changes in the thus to define precisely what is meant by stocks and flows. value of assets and liabilities that do not result from Once that is done, the rules to set the changes in economic transactions. Examples are losses due to natural disasters value within an accounting system need to be specified. and the effect of price changes on the value of assets and These rules are defined so as to ensure that the SNA is liabilities. consistent in terms of value, time of recording and classification. 3.8 There is a discussion of the different types of economic flows in section C of this chapter. 1. Stocks and flows 2. Balancing items 3.4 Stocks are a position in, or holdings of, assets and liabilities at a point in time. The SNA records stocks in 3.9 Economic flows are grouped together into accounts with accounts, usually referred to as balance sheets, compiled in outflows (which may be called debit entries, uses or respect of the beginning and end of the accounting period. changes in assets) on the left-hand side and inflows (credit However, stocks are connected with flows: they result from entries, resources, or changes in liabilities or net worth) on the accumulation of prior transactions and other flows, and the right-hand side. A balancing item is an accounting they are changed by transactions and other flows in the construct obtained by subtracting the total value of the period. They result in fact from a continuum of entries and entries on one side of an account (resources or changes in withdrawals, with some changes in volume or in value liabilities) from the total value of the entries on the other occurring during the time a given asset or liability is held. side (uses or changes in assets). It cannot be measured 39 System of National Accounts independently of the entries in the accounts; as a derived 3.15 In principle, any lapse of time may be chosen as the entry, it reflects the application of the general accounting accounting period. Periods that are too short have the rules to the specific entries on the two sides of the disadvantage that statistical data are influenced by account. There is also a balancing item for the balance incidental factors, while long periods do not adequately sheet where the difference between assets and liabilities is portray changes going on in the economy. Merely seasonal known as net worth. effects can be avoided by having the accounting period cover a whole cycle of regularly recurrent economic phenomena. Most business and government accounting 3.10 Balancing items are constructed because they convey refers to complete years. In general, calendar or financial interesting economic information. Many of the key years or quarters are best suited for drawing up a full set of aggregates of the SNA including GDP actually emerge as national accounts. balancing items. Balancing items are discussed in section D. 3.16 The SNA covers all economic activity in such a way that it is possible to derive accounts for individual groups of units 3. Grouping stocks and flows into accounts or for all units in the economy. To permit this, the accounting rules ensure consistency with respect to valuation, timing, classification and grouping of flows and 3.11 The accounts and tables of the SNA contain information stocks. These rules are summarized below to provide a relating to the economic actions or events that take place context for the discussion of the nature of stocks, flows, within a given period of time and the effect of these events and balancing items in sections B, C and D. on the stocks of assets and liabilities at the beginning and end of that period. a. Flows and stocks must be recorded consistently with respect to their valuation. Entries are at current value on 3.12 The flows and stocks are grouped according to the the market (that is, the amount agreed upon by two classification hierarchy of the SNA, shown in annex 1. The parties) or at its closest equivalent. The value on the classification of transactions and other flows has five market may need to be adjusted to the coverage of the headings at the highest level, dealing with transactions in flow or stock as defined in the SNA and expressed products, transactions showing how income is distributed appropriately given the nature of the flow or stock with and redistributed within the SNA, transactions in non- respect to taxes and subsidies on products, transport produced assets, financial assets and liabilities, and other costs and trade margins. accumulation entries. In the accumulation accounts, the hierarchy may show both the transaction and the type of b. Flows and stocks must be recorded consistently with asset it applies to. respect to timing. Flows are recorded at the moment of accrual within the accounting period (that is, the moment economic value is created, transformed, 3.13 The flows and stocks are entered in the accounts of the exchanged, transferred or extinguished). Stocks are institutional units involved and thus in the accounts of the recorded at the moment to which the account relates, sectors into which the institutional units are grouped. typically the beginning or end of the accounting period. Institutional units and sectors are the subject of chapter 4. In general, flows and stocks are entered in the accounts of the institutional units that own or owned the goods and c. Individual flow and stock entries must be recorded assets involved, in the accounts of units that deliver or take consistently with respect to their classification, both in delivery of services, or in the accounts of units that provide respect of the categories in the classifications of labour and capital or use them in production. For some transactions, other flows and assets and the categories purposes, an institutional unit participating in production is in the classification of transactors as (sub)sectors or viewed as one or more establishments and establishments industries. may be grouped into industries. Establishments and industries are defined and discussed in chapter 5. d. Depending on the character of the entry, a distinction should be made between resources and uses or between assets and liabilities. In the process of grouping, netting 4. Accounting rules is implicit for several items, but consolidation is not advised. 3.14 All entries in the accounts have to be measured in terms of money, and therefore the elements from which the entries 3.17 The basic accounting framework of the SNA is one of are built up must be measured in terms of money. In some quadruple accounting. This implies that a transaction gives cases, the amounts entered are the actual payments that rise to two entries for each party to the transaction. There is form part of flows that involve money; in other cases the vertical consistency within each unit and horizontal amounts entered are estimated by reference to actual consistency between the two units for each type of entry. monetary values. Money is thus the unit of account in The principles of quadruple accounting are explained in which all stocks and flows are recorded. more detail in section E in this chapter. 40 Stocks, flows and accounting rules B. Stocks 3.18 Stocks relate to the total level of assets or liabilities in an in general and technical innovation that affects the benefits economy at a point of time. (In balance of payments to be earned from capital and natural resources. The methodology, the levels of stocks are referred to as consequence is that benefits from capital, natural resources positions.) In order to discuss stocks, it is necessary to and labour in the form of operating surplus and income define assets and liabilities and these definitions depend from employment are not wholly predictable in advance, crucially on the concepts of benefits and ownership. Once but embody a degree of risk. the definitions are clear, the way in which assets and liabilities are classified within a balance sheet are touched 3.24 The second type of risk refers to the process of transferring on as well as the way in which items enter and leave the benefits between time periods. It arises because of balance sheet. uncertainty over interest rates in future periods, which in turn affects the comparative performance of different types 1. Benefits of benefits. 3.19 The heart of the SNA describes how labour, capital and 3.25 When economic agents make decisions about consumption natural resources including land are used to produce goods or accumulation, they have to make a judgement about the and services. These goods and services are used for the relative advantages of benefits being converted to goods three economic activities recognized in the SNA, and services in the current period as against conversion in a production, consumption and accumulation. An economic later period. Thus all economic activity involves both benefit is defined as denoting a gain or positive utility benefits and risks. Transferring benefits between time arising from an action. It implies a comparison between periods inevitably involves transferring risks also. An agent two states. This can be elaborated within the SNA so that may opt for a lower but more certain benefit in future rather benefits are seen as rewards for providing services, such as than a benefit that might be higher but is less certain. Of those of labour and capital to production and also the particular interest is the case when an agent swaps benefits means of acquiring goods and services for production, and risks associated with production with those associated consumption or accumulation in the current period or in with financial assets and liabilities. future periods. 3.20 Sometimes the immediate benefit is in terms of goods and 3.26 The economic owner of entities such as goods and services directly, for example own account production or services, natural resources, financial assets and liabilities wages and salaries in kind. More often a benefit is in the is the institutional unit entitled to claim the benefits form of the medium of exchange (money), for example as associated with the use of the entity in question in the wages and salaries. Consumption is an activity that takes course of an economic activity by virtue of accepting the place in the current period only but may be financed from associated risks. past benefits. Production and accumulation also involve benefits postponed to future periods. Thus, means of 3.27 Every entity has both a legal owner and an economic allowing benefits to be moved from one accounting period owner, though in many cases the economic owner and the to another have to be recognized. These take the form of legal owner of an entity are the same. Where they are not, assets and liabilities where a benefit in one period is the legal owner has handed responsibility for the risk converted to a benefit in one or more future periods. involved in using the entity in an economic activity to the Similarly goods and services, or current benefits, may be economic owner along with associated benefits. In return acquired by committing future benefits in the form of the legal owner accepts another package of risks and financial liabilities. benefits from the economic owner. In general within the SNA, when the expression "ownership" or "owner" is used 2. Ownership and the legal and economic owners are different, the reference should be understood to be to the economic owner. Part 5 of chapter 17, on contracts, leases and 3.21 Two types of ownership can be distinguished, legal licences, discusses a number of cases where legal and ownership and economic ownership. The legal owner of economic ownership are different. entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled in law and sustainable under the law to claim the 3.28 When government claims legal ownership of an entity on benefits associated with the entities. behalf of the community at large, the benefits also accrue to the government on behalf of the community at large. Thus 3.22 Sometimes government may claim legal ownership of an government is both the legal and economic owner of these entity on behalf of the community at large. No entity that entities. does not have a legal owner, either on an individual or collective basis, is recognized in the SNA. 3.29 The benefits inherent in financial assets and liabilities are seldom transferred from a legal owner to an economic 3.23 The acts of production, consumption and accumulation owner in exactly the same state. They are usually involve varying degrees of risk. Two main forms of risk transformed to new forms of financial assets and liabilities can be identified. The first sort refers to production. These by the intermediation of a financial institution that assumes arise because of such uncertainties as the demand for goods some of the risk and benefits while passing the balance on and services once produced, developments in the economy to other units. 41 System of National Accounts 3. The definition of an asset 5. The asset boundary and the first-level classification of assets 3.30 Leading on from the above it is possible to define an asset as follows. An asset is a store of value representing a 3.37 All entities that meet the definition of an asset given above benefit or series of benefits accruing to the economic are included in the asset boundary of the SNA. Assets that owner by holding or using the entity over a period of time. are not financial assets are non-financial assets. Non- It is a means of carrying forward value from one financial assets are further subdivided into those that are accounting period to another. produced and those that are non-produced. 3.38 Because assets represent a store of future benefits, all assets 3.31 All assets in the SNA are economic assets. Attributes such can be represented by a monetary value. This value as reputation or skill, which are sometimes described in represents the market's view of the total of the benefits common parlance as an asset, are not recognized as such in embodied by the asset. Where a direct market view of this the SNA because they are not economic in nature in the value is not available, it must be approximated by other sense described under ownership. means. There is a discussion of this topic in chapter 11. 4. Financial assets and liabilities 3.39 The only non-financial assets included in the asset boundary of an economy are those whose economic owners are resident in the economy. However, in the case of most 3.32 A particularly important mechanism in the economy is the natural resources and immobile fixed capital, which device whereby one economic unit exchanges a particular physically cannot leave the economy, a notional resident set of benefits with another economic unit. Benefits are unit is established if the economic owner is technically a exchanged by means of payments. From this a financial non-resident unit. In this way the assets in question do claim, and hence a liability, can be defined. There are no become those with resident economic owners and so are non-financial liabilities recognized in the SNA, thus the included within the asset boundary and are included on the term liability necessarily refers to a liability that is financial balance sheet. Portable non-financial assets that are in nature. physically located in an economy but are owned by non- residents are excluded from the balance sheet; those that are physically located in the rest of the world but owned by 3.33 A liability is established when one unit (the debtor) is residents are included in the asset boundary. For example, obliged, under specific circumstances, to provide a planes belonging to a domestic airline are always assets of payment or series of payments to another unit (the the domestic economy regardless of where in the world creditor). The most common circumstance in which a they happen to be. liability is established is a legally binding contract that specifies the terms and conditions of the payment(s) to be Contingent liabilities and provisions made and payment according to the contract is unconditional. 3.40 A liability, as defined in paragraph 3.33 above, is unconditional once the contract establishing the liability is 3.34 In addition, a liability may be established not by contract agreed by both parties. If the liability is established not by a but by long and well-recognized custom that is not easily legal contract but by long and well-established custom, it is refuted. In these cases, the creditor has a valid expectation referred to as a constructive liability. Some liabilities may of payment, despite the lack of a legally binding contract. involve a legal contract but specify that one party is obliged Such liabilities are called constructive liabilities. to provide a payment or series of payments to another unit only if certain specified conditions prevail. Such liabilities are called contingent liabilities. In general, the SNA 3.35 Whenever either of these types of liability exists, there is a includes (legal) liabilities and constructive liabilities but corresponding financial claim that the creditor has against not contingent liabilities. An exception is made for the debtor. A financial claim is the payment or series of standardized guarantees where, although each individual payments due to the creditor by the debtor under the terms arrangement involves a contingent liability, the number of of a liability. Like the liabilities, the claims are similar guarantees is such that an actual liability is unconditional. In addition, a financial claim may exist that established for the proportion of guarantees likely to be entitles the creditor to demand payment from the debtor but called. whereas the payment by the debtor is unconditional if demanded, the demand itself is discretionary on the part of the creditor. 3.41 A corporation may set aside funds to cover unexpected events or to cover default by their customers. Such monies may be described as provisions. These are not treated as 3.36 Financial assets consist of all financial claims, shares or liabilities in the SNA because they are not the subject of the other equity in corporations plus gold bullion held by sort of contract, legal or constructive, associated with a monetary authorities as a reserve asset. Gold bullion held liability. Though financial institutions may regularly write by monetary authorities as a reserve asset is treated as a off bad debts, for example, it would not be appropriate to financial asset even though the holders have no claim over regard the provisions set aside for this as assets of the other designated units. Shares are treated as financial assets borrowers. Even though they may be earmarked for even though the financial claim their holders have on the specific purposes, the amounts designated as provisions corporation is not a fixed or predetermined monetary remain part of the net worth of the corporation. Provisions amount. are thus a designation of the purpose for which funds may 42 Stocks, flows and accounting rules be used rather than a category of financial assets and when the conditions restricting access are lifted or when liabilities in and of themselves. there is no longer a benefit to be earned from having restricted access to the asset. Goodwill and marketing 6. Entry and exit of assets from the balance assets are only recognized as assets in the SNA when they are evidenced by a sale. sheet 3.42 All assets appear on the balance sheet of the economy. The 3.45 Financial assets and liabilities come into being when a first level of classification of assets is important since the commitment is made by one unit to make a payment to process by which assets enter and leave the balance sheet another unit. They cease to exist when there is no longer a differs for the three types of assets. commitment for one unit to make payments to the other. This may be because the term of the agreement specified in the commitment has expired or for other reasons. 3.43 Produced non-financial assets come into being via the production process or as imports. Two exceptions exist. Historical monuments are included as produced assets even 7. Exclusions from the asset boundary though they may have been constructed long before economic accounts existed. Occasionally a monument may be newly recognized as having value and thus enter the 3.46 The coverage of assets is limited to those assets used in asset boundary as a produced asset other than through a economic activity and that are subject to ownership rights; current production process. Similar arguments apply to thus for example, consumer durables and human capital, as artefacts treated as valuables. Produced non-financial assets well as natural resources that are not owned, are excluded. leave the asset boundary by being exhausted or by being sold to resident units that will not continue to use the asset 3.47 Consumer durables are not regarded as assets in the SNA in production as a source of future benefits or by being sold because the services they provide are not within the to non-resident units. production boundary. Because the information on the stock of durables is of analytical interest, though, it is suggested 3.44 Non-produced non-financial assets are of three types; that this information appear as a memorandum item in the natural resources; contracts, leases and licences; and balance sheet but not be integrated into the totals of the purchased goodwill and marketing assets. The borderline table. determining which natural resources are considered assets and which are not depends on a number of factors 3.48 Human capital is not treated by the SNA as an asset. It is described in chapter 10. Contracts, leases and licences may difficult to envisage "ownership rights" in connection with represent an asset to the holder when the agreement people, and even if this were sidestepped, the question of restricts the general use or supply of products covered by valuation is not very tractable. the agreement and thus enhances the benefits accruing to the party to the agreement beyond what would accrue in the case of unrestricted supply. These assets come into 3.49 There are some environmental resources excluded from the existence when the agreement is made and the enhanced SNA asset boundary. These are usually of the same type as benefits become apparent. They leave the balance sheet those within the boundary but are of no economic value. C. Flows 3.50 Economic flows are of two kinds. Most flows are 3.52 Institutional units, referred to in the definition, are the transactions. Flows included in the SNA that do not meet fundamental economic units of the SNA. They are the characteristics of transactions as described below are described and defined in chapter 4. The following are the called "other flows". Transactions appear in all of the main attributes of institutional units that are relevant to accounts and tables in which flows appear except the other their engaging in transactions: changes in the volume of assets account and the revaluation account. Other flows appear in only these two accounts. a. They are entitled to own goods or assets in their own More meaning can be given to the definition of flows by right, and therefore are able to exchange them; describing the two kinds. b. They are able to take economic decisions and engage in economic activities for which they are held to be 1. Transactions directly responsible and accountable at law; c. They are able to incur liabilities on their own behalf, to 3.51 A transaction is an economic flow that is an interaction take on other obligations or future commitments and to between institutional units by mutual agreement or an enter into contracts. action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is 3.53 The definition of a transaction stipulates that an interaction operating in two different capacities. between institutional units be by mutual agreement. When 43 System of National Accounts a transaction is undertaken by mutual agreement, the prior a quid pro quo. Such transactions are sometimes called knowledge and consent of the institutional units is implied. exchanges. This does not mean, however, that both units necessarily enter a transaction voluntarily, because some transactions 3.58 Taxes and social assistance benefits are examples of two- are imposed by force of law, such as payments of taxes or party transactions in which one party provides a good, other compulsory transfers. Although individual service or asset to the other but does not receive a institutional units are not free to fix the amounts of taxes recompense in return. This kind of transaction, sometimes they pay, there is nevertheless collective recognition and called a "something for nothing" transaction, or a acceptance by the community of the obligation to pay transaction without a quid pro quo, is called a transfer in the taxes. Thus, payments of taxes are considered transactions SNA. despite being compulsory. 3.59 The scope of the recompenses mentioned in describing 3.54 Transactions take so many different forms that, even with exchanges and transfers does not cover entitlement to these explanations, any general definition is inevitably contingent benefits or collective services. Such benefits are rather imprecise. To give more precision, the various kinds generally uncertain or not quantifiable, or both. Moreover, of transactions have to be systematically described and the amount of benefit that may eventually be received by an classified. A first distinction is between monetary and non- individual unit is not proportional to the amount of the monetary transactions. Other distinctions, such as between previous payment and may be very much greater or smaller transactions with and without a quid pro quo, are drawn than the latter. Thus, payments such as a social insurance within each of these kinds of transactions. Frequently the contribution or a non-life insurance premium may entitle individual, identifiable transactions of everyday economic the unit making the payment to some contingent future life are simply grouped together in the accounts; sometimes benefits, and a household paying taxes may be able to they are subdivided and rearranged in order to form the consume certain collective services provided by transaction categories of the SNA. government units, but these payments are regarded as transfers rather than exchanges. Monetary transactions 3.60 A distinction is made between current and capital transfers. 3.55 A monetary transaction is one in which one institutional A capital transfer is one in which the ownership of an asset unit makes a payment (receives a payment) or incurs a (other than cash or inventories) is transferred or which liability (receives an asset) stated in units of currency. In obliges one or both parties to acquire, or dispose of, an the SNA, all flows are recorded in monetary terms, but the asset (other than cash or inventories). Capital transfers distinguishing characteristic of a monetary transaction is redistribute wealth but leave saving unaffected. They that the parties to the transaction express their agreement in include, for example, capital taxes and investment grants. monetary terms. For example, a good is purchased or sold Other transfers are described as current. Current transfers at a given number of units of currency per unit of the good, redistribute income. They include, for example, taxes on or labour is hired or provided at a given number of units of income and social benefits. A fuller description of transfers currency per hour or day. appears in chapter 8. 3.56 All monetary transactions are interactions between Rearrangements of transactions institutional units; that is, all monetary transactions are two-party transactions. The following is a list of common monetary transactions: 3.61 Monetary transactions may not always be recorded in the accounts in the same way as they appear to the institutional a. Expenditure on consumption of goods and services, units involved. The values of these actual, or observed, transactions are already available in the accounts of the units concerned, but the SNA rearranges certain b. Acquisition of a security, transactions to bring out the underlying economic relationships more clearly. The three kinds of c. Wages and salaries, rearrangements affect the channels through which the transactions are seen as taking place, the number of d. Interest, dividends and rent, transactions that are seen as taking place, or the units that are seen as being involved. The three sections below e. Taxes, illustrate the main characteristics of these rearrangements and the kind of analytical purpose they serve. f. Social assistance benefits in cash. Rerouting transactions Transactions with and without a recompense 3.62 Rerouting records a transaction as taking place through 3.57 The expenditure on consumption goods and services, the channels that differ from the actual ones or as taking place acquisition of a security, wages and salaries, and interest, in an economic sense when it does not take place in fact. In dividends, and rent are two-party transactions in which one the first kind of rerouting, a direct transaction between unit party provides a good, service, labour or asset to the other A and unit C is recorded as taking place indirectly through and receives a recompense of commensurate value in a third unit B, usually, however, with some change in the return. This kind of transaction is sometimes called a transaction category. In the second kind of rerouting, a "something for something" transaction or a transaction with transaction of one kind from unit A to unit B is recorded 44 Stocks, flows and accounting rules with a matching transaction of a different kind from unit B components. One component represents interest as defined to unit A. in the SNA while the remainder represents the purchase of financial intermediation services for which the 3.63 The recording of the payment of social security intermediaries do not charge explicitly. The purpose of the contributions is an example of the first kind of rerouting. In partitioning is to make the service item explicit. In practice, employers typically deduct the contributions that consequence, intermediate and final consumption of the employees are obliged to make to social security funds particular industries and institutional sectors as well as from the employee's wages and salaries. In addition the gross domestic product are affected. However, the saving employers make contributions to social security funds from of all the units concerned, including the financial their own resources on behalf of the employees. Both intermediaries themselves, is not affected. contributions go directly from the employer to social security funds. However, in the SNA, the employers' 3.68 The recording in the SNA of transactions for wholesalers contributions are treated as part of compensation of and retailers does not mirror the way in which those employees and are recorded as being paid to the employee. involved view them. The purchases of goods for resale by The employee is then recorded as making a payment to wholesalers and retailers are not recorded by these units social security funds consisting of both the employer's and explicitly, and they are viewed as selling, not the goods, but employee's own contributions. Social security the services of storing and displaying a selection of goods contributions are thus recorded strictly according to the in convenient locations and making them easily available general principles governing the recording of transactions for customers. This partitioning measures output for traders in the SNA to bring out the economic substance behind by the value of the margins realized on goods they purchase arrangements adopted for administrative convenience. As a for resale. result of the rerouting, employers' social contributions are included as a part of labour cost. Units facilitating a transaction on behalf of other parties 3.64 An example of the second kind of rerouting is provided by the treatment of the retained earnings of foreign direct investment enterprises. The retention of some or all of the 3.69 Many service activities consist of one unit arranging for a earnings of a foreign direct investment enterprise within transaction to be carried out between two other units in that enterprise can be regarded as a deliberate investment return for a fee from one or both parties to the transaction. decision by the foreign owners. Accordingly, the retained In such a case, the transaction is recorded exclusively in the earnings are rerouted in the SNA by showing them as first accounts of the two parties engaging in the transaction and remitted to the foreign owners as property income and then not in the accounts of the third party facilitating the reinvested in the equity of the direct investment enterprise. transaction. Some service output may be recognized with the facilitator. For example, purchases a commercial agent 3.65 Similarly, the property income earned on the reserves of makes under the orders of, and at the expense of, another certain life insurance corporations is deemed to be paid out party are directly attributed to the latter. The accounts of to policyholders and then paid back again as premium the agent only show the fee charged to the principal for the supplements even though in actuality the property income facilitation services rendered. is retained by the insurance enterprises. As a result, the saving of persons or households includes the amount of the 3.70 A second example is the collection of taxes by one rerouted property income while the saving of insurance government unit on behalf of another. The SNA follows the enterprises does not. This alternative picture of saving, guidance of the Government Finance Statistics Manual which better reflects economic reality, is the purpose of the (International Monetary Fund (IMF), 2001), known as rerouting. GFSM2001 as follows. In general, a tax is attributed to the government unit that Partitioning transactions a. exercises the authority to impose the tax (either as a principal or through the delegated authority of the 3.66 Partitioning records a transaction that is a single transaction principal), and from the perspective of the parties involved as two or more differently classified transactions. For example, the rental actually paid by the lessee under a financial lease is not b. has final discretion to set and vary the rate of the tax. recorded as a payment for a service; instead, it is partitioned into two transactions, a repayment of principal 3.71 Where an amount is collected by one government for and and a payment of interest. This partitioning of the rental on behalf of another government, and the latter government payment is part of a treatment that implements an economic has the authority to impose the tax, set and vary its rate, view of financial leasing in the SNA. Financial leasing is then the former is acting as an agent for the latter and the viewed as a method of financing the purchase of a fixed tax is reassigned. Any amount retained by the collecting asset and a financial lease is shown in the SNA as a loan government as a collection charge should be treated as a from the lessor to the lessee. payment for a service. Any other amount retained by the collecting government, such as under a tax-sharing 3.67 Another example is the treatment of certain financial arrangement, should be treated as a current grant. If the services. For example, the SNA prescribes partitioning collecting government was delegated the authority to set interest payable by financial intermediaries on deposits and and vary the rate, then the amount collected should be payable to financial intermediaries on loans into two treated as tax revenue of this government. 45 System of National Accounts 3.72 Where different governments jointly and equally set the other in return for a good, service or asset other than cash. rate of a tax and jointly and equally decide on the As mentioned above, barter is an example of an actual distribution of the proceeds, with no individual government transaction for which a value must be estimated. Barter having ultimate overriding authority, then the tax revenues transactions in which goods are traded for goods have are attributed to each government according to its always been important. The barter of goods may be respective share of the proceeds. If an arrangement allows systematically organized on proper markets or, in some one government unit to exercise ultimate overriding countries, may occur only sporadically on a small scale. authority, then all of the tax revenue is attributed to that Barter between nations involving exports and imports also unit. occurs. 3.73 There may also be the circumstance where a tax is imposed Remuneration in kind under the constitutional or other authority of one government, but other governments individually set the tax 3.80 Remuneration in kind occurs when an employee accepts rate in their jurisdictions. The proceeds of the tax generated payment in the form of goods and services instead of in each respective government's jurisdiction are attributed money. This practice is extensive in most economies for as tax revenues of that government. reasons ranging from the desire of employers to find captive markets for part of their output, to tax avoidance or 3.74 Similar principles are applied for the payment of subsidies evasion. Remuneration in kind takes various forms and the or social benefits. following list includes some of the most common types of goods and services provided without charge, or at reduced Non-monetary transactions prices, by employers to their employees: a. Meals and drinks, 3.75 Non-monetary transactions are transactions that are not initially stated in units of currency. The entries in the SNA therefore represent values that are indirectly measured or b. Housing services or accommodation of a type that can otherwise estimated. In some cases, the transaction may be be used by all members of the household to which the an actual one and a value has to be estimated to record it in employee belongs, the accounts. Barter is an obvious example. In other cases, the entire transaction must be constructed and then a value c. The services of vehicles provided for the personal use estimated for it. Consumption of fixed capital is an of employees, example. (In the past, the estimation of a value has sometimes been called imputation, but it is preferable to d. Goods and services produced as outputs from the reserve that term for the kind of situation that involves not employer's own processes of production, such as free only estimating a value but also constructing a transaction.) coal for miners. 3.76 The amounts of money associated with non-monetary Further, in addition to goods and services, some employees transactions are entries whose economic significance is may be willing, or obliged, to accept part of their different from cash payments as they do not represent compensation in the form of financial or other assets. freely disposable sums of money. The various methods of valuation to be employed for non-monetary transactions are Payments in kind other than remuneration in kind dealt with in the section on valuation in section E. 3.81 Payments in kind other than remuneration in kind occur 3.77 Non-monetary transactions can be either two-party when any of a wide variety of payments is made in the form transactions or actions within an institutional unit. The two- of goods and services rather than money. For example, a party transactions consist of barter, remuneration in kind, doctor may accept payment in wine instead of money. Or, payments in kind other than compensation in kind and instead of paying rent or rentals in money, the user of land transfers in kind. These two-party transactions are or fixed capital, respectively, may pay the owner in goods discussed first, followed by a discussion of internal or services. In agriculture, for example, the "rent" may be transactions. paid by handing over part of the crops produced to the landlord. (This is known as share cropping.) Tax payments, 3.78 Although two-party transactions in kind do exist in also, may be paid in kind; for example, inheritance taxes practice, in the SNA they are frequently recorded in the may be paid by making donations of paintings or other same way as a monetary transaction with an associated valuables. expenditure of the item provided in kind. This ensures that there is a change in wealth of the donor without the donor Transfers in kind acquiring the product transferred while the recipient acquires the product without any change in wealth. There is further discussion on this in respect of current transfers in 3.82 As noted above, transactions in kind are normally recorded chapter 8 and of capital transfers in chapter 10. in the accounts as if they are monetary transfers followed by the expenditure by the recipient on the products concerned. This treatment applies to government Barter transactions international cooperation, gifts and charitable contributions. Government international cooperation, gifts, 3.79 Barter transactions involve two parties, with one party and charitable contributions are often made in kind for providing a good, service or asset other than cash to the convenience, efficiency, or tax purposes. For example, 46 Stocks, flows and accounting rules international aid after a natural disaster may be more or NPISHs on outputs produced by establishments they effective and delivered faster if made directly in the form of own themselves. (As already explained, the acquisition of medicine, food, and shelter instead of money. Charitable these services by households is recorded separately under contributions in kind sometimes avoid taxes that would be social transfers in kind, another form of non-monetary due if the item in question were sold and the money given transactions that take place between the government units to the charity. or NPISHs and the households in question.) 3.83 A special case of transfers in kind is that of social transfers 3.89 The SNA recognizes several other transactions within in kind. These consist of goods and services provided by enterprises to give a fuller view of production. For general government and non-profit institutions serving example, when enterprises produce fixed assets for their households (NPISHs) that are delivered to individual own use, the SNA records deliveries by the enterprises to households. Health and education services are the prime themselves as the subsequent users. Also, when enterprises examples. Rather than provide a specified amount of use fixed assets (whether own-account or purchased) money to be used to purchase medical and educational during production, the SNA charges the decline in the value services, the services are often provided in kind to make of the asset during the period of production as a cost. sure that the need for the services is met. (Sometimes the recipient purchases the service and is reimbursed by the 3.90 The recording of deliveries between one establishment and insurance or assistance scheme. Such a transaction is still another belonging to the same enterprise is discussed in treated as being in kind because the recipient is merely paragraph 6.104. acting as the agent of the insurance scheme.) 3.84 Social transfers in kind are recorded as an implicit transfer Externalities and illegal actions of income from government and NPISHs to households and a transfer of consumption goods and services. The measure 3.91 The sections above describe the kinds of actions that are of income after the transfer is called adjusted disposable considered transactions in the SNA. This section focuses on income (rather than disposable income) and the measure of externalities and illegal actions, explaining why consumption is called actual final consumption (rather than externalities are not considered transactions and final consumption expenditure). distinguishing among kinds of illegal actions that are and are not considered transactions. Internal transactions Externalities 3.85 The SNA treats certain kinds of actions within a unit as transactions to give a more analytically useful picture of 3.92 Certain economic actions carried out by institutional units final uses of output and of production. These transactions cause changes in the condition or circumstances of other that involve only one unit are called internal, or intra-unit, units without their consent. These are externalities; they transactions. can be regarded as unsolicited services, or disservices, delivered without the agreement of the units affected. It is 3.86 Some households, all NPISHs and general government an uncooperative action, usually with undesirable units operate as both producers and as final consumers. consequences, which is the antithesis of a market When an institutional unit engages in both activities, it may transaction. make the choice to consume some or all of the output itself after the production is completed. In such a case, no 3.93 It is necessary to consider, however, whether values should transaction takes place between institutional units, but it is be assigned to such externalities. Economic accounts have useful to construct a transaction and estimate its value to to measure economic functions such as production or record both output and consumption in the accounts. consumption in the context of a particular legal and socio- economic system within which relative prices and costs are 3.87 For households, the principle in the SNA is that all goods determined. Further, there would be considerable technical produced by persons that are subsequently used by the difficulties involved in trying to associate economically same persons, or members of the same households, for meaningful values with externalities when they are purposes of final consumption are to be included in output intrinsically non-market phenomena. As externalities are in a manner analogous to that for goods sold on the market. not market transactions into which institutional units enter This means that transactions are assumed in which the of their own accord, there is no mechanism to ensure that persons responsible for the production of the goods are the positive or negative values attached to externalities by deemed to deliver the goods to themselves as consumers, or the various parties involved would be mutually consistent. members of their own households, and then values have to Moreover, accounts including values for externalities could be associated with them in order to enter them in the not be interpreted as representing equilibrium, or accounts. economically sustainable, situations. If such values were to be replaced by actual payments the economic behaviour of 3.88 Establishments owned by governments or NPISHs the units involved would change, perhaps considerably. commonly provide education, health, or other kinds of services to individual households without charge or at 3.94 A typical example is the pollution by one producer of the prices that are not economically significant. The costs of air or water used by other units for purposes of production providing these services are incurred by the governments or or consumption. If the producer is allowed to pollute NPISHs, and the values are recorded as internal without charge or risk of being penalized, the private costs transactions: that is, as final expenditures by governments of production of the polluter will be less than the social 47 System of National Accounts costs to the community. Some countries, at least at certain 2. Other flows points in their history, may choose to frame their laws so that some producers are permitted to reduce their private 3.99 Other flows are changes in the value of assets and costs by polluting with impunity. This may be done liabilities that do not result from transactions. The reason deliberately to promote rapid industrialization, for example. that these flows are not transactions is linked to their not The wisdom of such a policy may be highly questionable, meeting one or more of the characteristics of transactions. especially in the long run, but it does not follow that it is For example, the institutional units involved may not be appropriate or analytically useful for economic accounts to acting by mutual agreement, as with an uncompensated try to correct for presumed institutional failures of this kind seizure of assets. Or the change may be due to a natural by attributing costs to producers that society does not event such as an earthquake rather than a purely economic choose to recognize. For example, the whole purpose of phenomenon. Alternatively the value of an asset expressed trying to internalize some externalities by imposing taxes in foreign currency may change as a result of an exchange or other charges on the discharge of pollutants is to bring rate change. about a change in production methods to reduce pollution. A complete accounting for externalities would be extremely complex as it is not sufficient merely to 3.100 The entries for other flows appear in one of the two introduce costs into the accounts of the producers but accounts that comprise the other changes in assets would also necessitate introducing various other accounts. The other changes in the volume of assets adjustments of questionable economic significance to account includes changes that lead to a change in value of balance the accounts. an asset because of a change in the quantity or physical characteristics of the asset in question. The revaluation account includes changes in the value of assets, liabilities, 3.95 This sort of example illustrates why some analyses are best and net worth due to only changes in the level and structure carried out in the context of a satellite account where some of prices, which are reflected in holding gains and losses. of the normal constraints and conventions of the SNA are relaxed. In the case of pollution, the SEEA2003 has been Other changes in the volume of assets developed precisely to explore this issue among other environmental topics. 3.101 Other changes in the volume of assets fall into three main categories. Illegal actions 3.102 The first category relates to the appearance and disappearance of assets and liabilities other than by 3.96 Illegal actions that fit the characteristics of transactions transactions. Some of these may relate to naturally (notably the characteristic that there is mutual agreement occurring assets, such as subsoil resources, so that the between the parties) are treated the same way as legal entrances and exits come about as interactions between actions. The production or consumption of certain goods or institutional units and nature. Others relate to assets created services, such as narcotics, may be illegal but market by human activity, such as valuables. For valuables, for transactions in such goods and services have to be recorded example, the capital account records their acquisition as in the accounts. If expenditures on illegal goods or services newly produced goods or imports in transactions, and it by households were to be ignored on grounds of principle, records transactions in existing goods already classified as household saving would be overestimated and households valuables. It is the recognition of a significant or special presumed to obtain assets that they do not in fact acquire. value for goods not already recorded in the balance sheets Clearly, the accounts as a whole are liable to be seriously that is considered an economic appearance to be recorded distorted if monetary transactions that in fact take place are as an other flow. These valuables may not be in the balance excluded. It may be difficult, or even impossible, to obtain sheets for any of several reasons. For example, they may data about illegal transactions, but in principle they should antedate the accounts or were originally recorded as be included in the accounts if only to reduce error in other consumption goods. items, including balancing items. 3.103 The second category relates to the effects of externalities and disasters. One such event is one institutional unit's 3.97 However, many illegal actions are crimes against persons effectively removing an asset from its owner without the or property that in no sense can be construed as owner's agreement, an action that is not considered a transactions. For example, theft can scarcely be described transaction because the element of mutual agreement is as an action into which two units enter by mutual absent. These events also include those that destroy assets, agreement. Conceptually, theft or violence is an extreme such as natural disaster or war. In contrast, transactions, form of externality in which damage is inflicted on another such as consumption of fixed capital or change in institutional unit deliberately and not merely accidentally or inventories, refer to normal rates of loss or damage. casually. Thus, thefts of goods from households, for example, are not treated as transactions and estimated values are not recorded for them under household 3.104 The third category relates to changes in assets and expenditures. liabilities that reflect changes in the classification of institutional units among sectors and in the structure of institutional units, or in the classification of assets and 3.98 If thefts, or acts of violence (including war), involve liabilities. For example, if an unincorporated enterprise significant redistributions, or destructions, of assets, it is becomes more financially distinct from its owner and takes necessary to take them into account. As explained below, on the characteristics of a quasi-corporation, it and the they are treated as other flows, not as transactions. assets and liabilities it holds move from the household 48 Stocks, flows and accounting rules sector to the non-financial corporations sector and changes kinds of goods held by producers, including work-in- in the sector allocation of the assets and liabilities owned progress, often described as "stock appreciation". Holding by the quasi-corporation are recorded under this heading. gains may accrue on assets held for any length of time during the accounting period, not only on assets held Holding gains and losses throughout the period and may thus appear for assets appearing on neither the opening or closing balance sheet. 3.105 Positive or negative nominal holding gains accrue during the accounting period to the owners of assets and liabilities as a result of a change in their prices. Holding gains are 3.106 Nominal holding gains depend upon changes in the prices sometimes described as "capital gains", but "holding gain" of assets and liabilities over time. The prices in question are is preferred here because it emphasizes that holding gains the prices at which the assets may be sold on the market. accrue purely as a result of holding assets or liabilities over Nominal holding gains may be further decomposed into time without transforming them in any way. Holding gains neutral holding gains, which reflect changes in the general include not only gains on "capital" such as fixed assets, price level, and real holding gains which reflect changes in land and financial assets but also gains on inventories of all the relative prices of assets. D. Balancing items 3.107 A balancing item is an accounting construct obtained by d. Saving, subtracting the total value of the entries on one side of an account from the total value for the other side. It cannot e. Net lending or net borrowing, be measured independently of the other entries; as a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account. f. Current external balance. It does not relate to any specific set of transactions, or any set of assets, and so it cannot be expressed in terms of its Balancing items in the balance sheets own price or quantity units. 3.109 Net worth, which is defined as the value of all the non- Balancing items in the flow accounts financial and financial assets owned by an institutional unit or sector less the value of all its outstanding liabilities, is 3.108 Balancing items are not simply devices introduced to the balancing item in the balance sheets. As is true for other ensure that accounts balance. They are often used as key balancing items in the SNA, net worth cannot be measured macroeconomic indicators to assess economic independently of the other entries, nor does it relate to any performance. They encapsulate a great deal of information specific set of transactions. and include some of the most important entries in the accounts, as can be seen by the examples of balancing items for the accounts containing flows reproduced below: 3.110 As well as net worth appearing as a stock level, changes in net worth due to different sorts of transactions and other flows may also be derived. Just as the changes in the levels a. Value added or domestic product, of any asset can be traced through changes in transactions and other flows throughout the period, so changes in total b. Operating surplus, net worth can be exhaustively described according to the transactions and other flows that led to changes in the total c. Disposable income, level of assets and liabilities. E. Accounting rules 3.111 As noted in the introduction, this section covers the 1. Quadruple-entry accounting quadruple entry accounting principle, valuation, time of recording, classification of accounting entries and grouping 3.112 The accounting system underlying the SNA derives from of transactions. The application of each of these to the broad bookkeeping principles. To understand the individual flows and stocks is explained in detail in the accounting system for the SNA, three bookkeeping chapters that describe the entries in the various tables and principles can be distinguished: accounts of the central framework. The details on classifications of accounting entries are discussed, account by account, in chapters 6 to 13. 49 System of National Accounts 1. Vertical double-entry bookkeeping, also known as flows within the economy and with the rest of the world are simply double-entry bookkeeping used in business completely balanced. The balance of payments accounts accounting, show the consolidated position of all domestic sectors relative to the rest of the world. It is thus an exact mirror 2. Horizontal double-entry bookkeeping, and image of the accounts for the rest of the world within the SNA. However, despite the reversal of the sides of the accounts on which items are shown, there is equality in 3. Quadruple-entry bookkeeping. coverage, measurement and classification between the two systems. This is discussed further in chapter 24. 3.113 The main characteristic of vertical double-entry bookkeeping is that each transaction leads to at least two entries, traditionally referred to as a credit entry and a debit 2. Valuation entry, in the books of the transactor. This principle ensures that the total of all credit entries and that of all debit entries General rules for all transactions are equal, thus permitting a check on consistency of accounts for a single unit. Each transaction requires two entries. 3.118 The power of the SNA as an analytical tool stems largely from its ability to link numerous, very varied economic 3.114 Other flows have their counterpart entries directly in phenomena by expressing them in a single accounting unit. changes in net worth. As a result, vertical double-entry The SNA does not attempt to determine the utility of the bookkeeping ensures the fundamental identity of a unit's flows and stocks that come within its scope. Rather, it balance sheet, that is, the total value of assets equals the measures the current exchange value of the entries in the total value of liabilities plus net worth. The total value of accounts in money terms, that is, the values at which goods, the assets owned by an entity minus the total value of services, labour or assets are in fact exchanged or else liabilities provides net worth. could be exchanged for cash (currency or transferable deposits). 3.115 The concept of horizontal double-entry bookkeeping is useful for compiling accounts that reflect the mutual Valuation of transactions economic relationships between different institutional units in a consistent way. It implies that if unit A provides something to unit B, the accounts of both A and B show the 3.119 Market prices for transactions are defined as amounts of transaction for the same amount: as a payment in A's money that willing buyers pay to acquire something from account and as a receipt in B's account. Horizontal double- willing sellers; the exchanges are made between entry bookkeeping ensures the consistency of recording for independent parties and on the basis of commercial each transaction category by counterparties. For example, considerations only, sometimes called "at arm's length." dividends payable throughout the economy should be equal Thus, according to this strict definition, a market price to dividends receivable throughout the economy once refers only to the price for one specific exchange under the transactions with the rest of the world are taken into stated conditions. A second exchange of an identical unit, account. even under circumstances that are almost exactly the same, could result in a different market price. A market price defined in this way is to be clearly distinguished from a 3.116 The simultaneous application of both the vertical and price quoted in the market, a world market price, a going horizontal double-entry bookkeeping results in a price, a fair market price, or any price that is intended to quadruple-entry bookkeeping, which is the accounting express the generality of prices for a class of supposedly system underlying the recording in the SNA. It deals in a identical exchanges rather than a price actually applying to coherent way with multiple transactors or groups of a specific exchange. Furthermore, a market price should not transactors, each of which satisfies vertical double-entry necessarily be construed as equivalent to a free market bookkeeping requirements. A single transaction between price; that is, a market transaction should not be interpreted two counterparties thus gives rise to four entries. In contrast as occurring exclusively in a purely competitive market to business bookkeeping, national accounts deal with situation. In fact, a market transaction could take place in a interactions among a multitude of units in parallel, and thus monopolistic, monopsonistic, or any other market structure. require special care from a consistency point of view. As a Indeed, the market may be so narrow that it consists of the liability of one unit is mirrored in a financial asset of sole transaction of its kind between independent parties. another unit, for instance, they should be identically valued, allocated in time and classified to avoid inconsistencies in aggregating balance sheets of units by sectors or for the 3.120 When a price is agreed by both parties in advance of a total economy. The same is also true for all transactions and transaction taking place, this agreed, or contractual, price is other flows that affect balance sheets of two counterparties. the market price for that transaction regardless of the prices that prevail when the transaction takes place. 3.117 The SNA uses the following conventions and terminologies for recording flows with the rest of the world. Imports, for 3.121 Actual exchange values in most cases will represent market instance, are a resource of the rest of the world used in the prices as described in the preceding paragraph. Paragraphs domestic economy and payments for imports represent a 3.131 to 3.134 describe cases where actual exchange values drawdown of wealth for the domestic economy but a do not represent market prices. Transactions that involve financial resource for the rest of the world. By treating the dumping and discounting represent market prices. rest of the world account as a pseudo-sector, the quadruple Transaction prices for goods and services are inclusive of entry accounting principle can be applied and all stocks and appropriate taxes and subsidies. A market price is the price 50 Stocks, flows and accounting rules payable by the buyer after taking into account any rebates, transportation costs. If the unit providing the goods for refunds, adjustments, etc. from the seller. barter also provides the transport, this will, in general, mean that the barter "package" includes some 3.122 Transactions in financial assets and liabilities are recorded transportation services and the value to the recipient will be at the prices at which they are acquired or disposed of. a purchaser's price including this transportation cost. If the Transactions in financial assets and liabilities should be unit receiving the goods must provide the transport, this recorded exclusive of any commissions, fees, and taxes may reduce the valuation of the goods to the recipient. whether charged explicitly, included in the purchaser's price, or deducted from the seller's proceeds. This is 3.126 Barter transactions may concern new or existing goods because both debtors and creditors should record the same acquired by one party to the barter in which case the value amount for the same financial instrument. The to that party will be the cost of acquisition (in the case of commissions, fees, and taxes should be recorded separately new goods) or the realizable value in the case of existing from the transaction in the financial asset and liability, goods. under appropriate categories. The valuation of financial instruments, which excludes commission charges, differs 3.127 Barter transactions necessarily involve two units and (at from the valuation of non-financial assets, which includes least) two products. Each unit may place a different value any costs of ownership transfer. on either item being bartered. In such a case, since the accounting rules of the SNA require a single value to be 3.123 When market prices for transactions are not observable, recorded for both parties, on pragmatic grounds a simple valuation according to market-price-equivalents provides average of the different valuations (after allowing for any an approximation to market prices. In such cases, market taxes and transportation costs) may be taken as the value of prices of the same or similar items when such prices exist the transaction. will provide a good basis for applying the principle of market prices. Generally, market prices should be taken 3.128 Barter transactions do not always take place from the markets where the same or similar items are simultaneously. When this is not the case, an account traded currently in sufficient numbers and in similar receivable/payable should be recorded even though neither circumstances. If there is no appropriate market in which a part of the barter transaction takes place in monetary terms. particular good or service is currently traded, the valuation of a transaction involving that good or service may be derived from the market prices of similar goods and Quotation prices services by making adjustments for quality and other differences. 3.129 Market valuation also poses problems for transactions in goods in which the contracts establish a quotation period Agricultural products sold from the farm often months after the goods have changed hands. In such cases, market value at the time of change of ownership should be estimated. The estimate should be revised with 3.124 A significant qualification to the foregoing remark is the actual market value, when known. Market value is necessary in the case of agricultural products sold directly given by the contract price even if it is unknown at the time from the farm. The so-called farm-gate price may be of change of ownership. significantly lower than a price in the nearest market where prices can be observed since the latter include the costs of bringing the goods to market. Further, if only a small Valuation of transfers in kind fraction of a crop gets to the market, it may command a higher price than would be the case if all the available crop 3.130 When non-financial resources are provided without a quid were traded. Such considerations are to be understood by pro quo, such resources should be valued at the market the qualification that observed market prices are prices that would have been received if the resources had appropriate only when similar products are traded in been sold in the market. In the absence of a market price, sufficient number and in similar circumstances. When these the donor's view of the imputed value of the transaction conditions do not hold, adjustments must be made to the will often be quite different from that of the recipient. The observed prices. suggested rule of thumb is to use the value assigned by the donor as a basis for recording. Barter Transfer pricing 3.125 The case of barter requires specific consideration. The products bartered must be valued when produced as well as 3.131 In some cases actual exchange values may not represent when acquired for consumption or for capital formation. market prices. Examples are transactions involving transfer While it may often be the case that for small scale barter prices between affiliated enterprises, manipulative transactions entered into by the producer, there are no taxes agreements with third parties, and certain non-commercial on products payable (or if they are nominally payable the transactions, including concessional interest (that is, conditions of the barter means they are avoided and not interest payable at a reduced rate as a matter of policy). paid) there is no automatic exclusion of bartered products Prices may be under- or over-invoiced, in which case an from liability to taxes on products. Subsidies on bartered assessment of a market-equivalent price needs to be made. products are possible conceptually but unlikely to be Although adjustment should be made when actual significant. By the nature of barter, there are no wholesale exchange values do not represent market prices, this may or retail margins applicable to bartered products. Goods not be practical in many cases. Adjusting the actual subject to barter may, however, have associated exchange values to reflect market prices will have 51 System of National Accounts consequences in other accounts. Therefore, when such some goods and services can only be valued by the amount adjustments are made, corresponding adjustments in other that it would cost to produce them currently. Market and accounts should also be made, for example, if prices of own-account goods and services valued in this way should goods are adjusted, associated income account or financial include a mark-up that reflects the net operating surplus or account transactions or both should also be adjusted. mixed income attributable to the producer. For non-market goods and services produced by government units or 3.132 Values put on an invoice may deviate systematically or to NPISHs, however, no allowance should be made for any such a large extent from the prices paid in the market for net operating surplus. similar items that it must be presumed that the sums paid cover more than the specified transactions. An example is Valuation of assets so-called transfer pricing: affiliated enterprises may set the prices of the transactions among themselves artificially high or low in order to effect an unspecified income 3.136 Sometimes it is necessary to value stocks at their estimated payment or capital transfer. Such transactions should be written down current acquisition values or production made explicit if their value is considerable and would costs. The write-down should then include all changes that hinder a proper interpretation of the accounts. In some have occurred to the item since it was purchased or cases, transfer pricing may be motivated by income produced (such as consumption of fixed capital, partial distribution or equity build-ups or withdrawals. Replacing depletion, exhaustion, degradation, unforeseen book values (transfer prices) with market-value equivalents obsolescence, exceptional losses and other unanticipated is desirable in principle, when the distortions are large and events). The same method could be applied to non- when availability of data (such as adjustments by customs monetary flows of existing assets. or tax officials or from partner economies) makes it feasible to do so. Selection of the best market-value equivalents to 3.137 If none of the methods mentioned above can be applied, replace book values is an exercise calling for cautious and stocks, or flows arising from the use of assets, may be informed judgment. recorded at the discounted present value of expected future returns. For some financial assets, particularly those with a 3.133 The exchange of goods between affiliated enterprises may face value applicable at some point in the future, the often be one that does not occur between independent present market value is established as the face value parties (for example, specialized components that are discounted to the present by the market interest rate. In usable only when incorporated in a finished product). principle, therefore, if a reasonably robust estimate of the Similarly, the exchange of services, such as management stream of future earnings to come from an asset can be services and technical know-how, may have no near made, along with a suitable discount rate, this allows an equivalents in the types of transactions in services that estimate of the present value to be established. However, usually take place between independent parties. Thus, for because it may be difficult to determine the future earnings transactions between affiliated parties, the determination of with the appropriate degree of certainty, and given that values comparable to market values may be difficult, and assumptions are also needed about the asset's life length compilers may have no choice other than to accept and the discount factor to be applied, the other possible valuations based on explicit costs incurred in production or sources of valuation described in the preceding paragraphs any other values assigned by the enterprise. should be exhausted before resorting to this method. Further, if this method is used, some sensitivity testing of the assumptions made may be appropriate. In fact, the Concessional pricing method most commonly used to derive estimates of consumption of fixed capital and the capital stock of fixed 3.134 While some non-commercial transactions, such as a grant assets associates a stream of future earnings with the in kind, have no market price, other non-commercial decline in value of a fixed asset in use in production. (This transactions may take place at implied prices that include method, the perpetual inventory method, is described some element of grant or concession so that those prices further in chapters 13 and 20.) also are not market prices. Examples of such transactions could include negotiated exchanges of goods between 3.138 Although the net present value method depends on making governments and government loans bearing lower interest projections of future earnings and discount rates, it is rates than those with similar grace and repayment periods theoretically sound as can often be verified for a number of or other terms for purely commercial loans. Concessional financial assets. If it is used for non-financial assets, some lending is described in chapter 24. Transactions by general sensitivity testing of the assumptions made may be government bodies and private non-profit entities not appropriate. engaged in purely commercial undertakings are often subject to non-commercial considerations. However transfers involving provision of goods and services may 3.139 In conformity with the general rule, provision of assets, also be provided or received by other sectors of the services, labour or capital in exchange for foreign cash is economy. recorded at the actual exchange value agreed upon by the two parties to the transaction. Flows and stocks concerning foreign currency are converted to their value in national Valuation at cost currency at the rate prevailing at the moment they are entered in the accounts, that is, the moment the transaction 3.135 If there is no appropriate market from which the value of a or other flow takes place or the moment to which the particular non-monetary flow or stock item can be taken by balance sheet applies. The midpoint between the buying analogy, its valuation may be derived from prices that are and selling rate should be used so that any service charge is established in less closely related markets. Ultimately, excluded. 52 Stocks, flows and accounting rules Business accounting valuation 3.146 Output of products is recorded at basic prices. The basic price is defined as the amount receivable by the producer from the purchaser for a unit of good or service produced as 3.140 Business accounts, tax returns and other administrative output minus any tax payable and plus any subsidy records are main sources of data for drawing up the receivable on the product as a consequence of its national accounts. One should be aware, however, that production or sale. It excludes any transport charges none of these necessarily satisfies the valuation invoiced separately by the producer. If it proves impossible requirements of the SNA and that accordingly adjustments to obtain the required information at basic prices, output may have to be made. In particular, in the interest of may be valued at producers' prices. The producer's price is prudence, business accounting often adopts valuations that defined as the amount receivable by the producer from the are not appropriate for the national accounts. Similarly, purchaser for a unit of a good or service produced as output valuations for tax purposes often serve objectives that differ minus any value added tax (VAT), or similar deductible from those of macroeconomic analysis. For example, the tax, invoiced to the purchaser. It also excludes any depreciation methods favoured in business accounting and transport charges invoiced separately by the producer. those prescribed by tax authorities almost invariably deviate from the concept of consumption of fixed capital employed in the SNA. 3.147 Use of products is recorded at purchasers' prices. The purchaser's price is defined as the amount payable by the purchaser, excluding any deductible VAT or similar Valuation of partitioned flows deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. 3.141 Where a single payment refers to more than one transaction The purchaser's price of a good includes any transport category (as they are defined in the SNA), the individual charges paid separately by the purchaser to take delivery at flows need to be recorded separately. In such a case, the the required time and place. total value of the individual transactions after partitioning must equal the market value of the exchange that actually 3.148 The difference in value recorded for a product between occurred. For example, actual exchange values involving when it is produced and the moment it is used for, say, final foreign currency include commission for currency consumption expenditure can be considerable. Components conversion. The portion related to currency conversion of this difference may be: should be recorded separately as transactions in services. As another example, the SNA recommends dividing a. Taxes less subsidies on products payable by the interest transactions with financial corporations between producer; two transaction categories, one showing interest as understood in the SNA and the other representing the implicit payment for financial intermediation services. b. Trade and transport margins, including taxes less subsidies on products payable by wholesale and retail traders; 3.142 Partitioning is not limited to transactions; an example is real holding gains, which are separated for analytical c. Transport, including taxes less subsidies on products, reasons from neutral holding gains that are simply paid separately by the consumer; proportionate to changes in the general price level. d. Predictable quality increases producing additional 3.143 In some cases partitioning is connected with deceptive output volume less current losses during storage; behaviour. An example is the sort of transfer pricing discussed in paragraph 3.132. e. Holding gains while the product is with the producer and with wholesale and retail traders. 3.144 A less obvious mingling of transactions occurs when the provision of an asset and the related money payment or As one can see from the above, the difference between the payments do not take place simultaneously. When the time gap becomes unusually long and the amount of trade credit original basic price and ultimate purchasers' price of a extended is very large, the conclusion may be that particular good encompasses both pure price and volume elements. In practice, of course, the estimates do not keep implicitly an interest fee has been charged. In such extreme cases, the actual payment or payments should be adjusted track of individual products but are made at a more global for accrued interest in order to arrive at the correct value of level for groups of products. the asset transferred. Such adjustments are not recommended for normal trade credit. 3.149 Imports and exports of goods are recorded in the SNA at border values. Total imports and exports of goods are valued free-on-board (FOB, that is, at the exporter's Special valuations concerning products customs frontier). As it may not be possible to obtain FOB values for detailed product breakdowns, the tables 3.145 Usually, the producer and the user of a given product containing details on foreign trade show imports of goods perceive its value differently owing to the existence of valued at the importer's customs frontier (CIF, that is, cost, taxes and subsidies on products, transport costs to be paid insurance and freight), supplemented with global and the occurrence of trade margins. In order to keep as adjustments to FOB values. CIF values include the close as possible to the views of the economic transactors insurance and freight charges incurred between the themselves, the SNA records all uses at purchasers' prices exporter's frontier and that of the importer. The value on including these elements, but excludes them from the value the commercial invoice may of course differ from both of of output of the product. these. 53 System of National Accounts 3.150 As the overall balance of imports and exports must markets were open. Debt securities have a current market conform to actual circumstances, border valuation of goods value as well as a nominal value, and for some purposes has consequences for the recording of freight and insurance supplementary data on the nominal values of positions of in the SNA. Usually, the values of both imports and exports debt securities may be useful. for these service items have to be adapted to compensate for the special conventions on goods traded with the rest of 3.156 Valuation according to market-value equivalent is needed the world. Further details on this treatment are in chapters for valuing financial assets and liabilities that are not traded 14 and 26. in financial markets or are traded only infrequently. For these assets and liabilities, it will be necessary to estimate Valuation of other flows fair values that, in effect, approximate market prices. The present value of future cash flows can also be used as an approximation to market prices, provided an appropriate Other changes in the volumes of assets discount rate can be used. 3.151 In order to determine the valuation of the other changes in 3.157 Market values, fair values, and nominal values should be the volume of assets, it is usually necessary to value the distinguished from such notions as amortized values, face asset before and after the change in volume and take the values, book values, and historic cost. difference that is not explained by any transaction as the value of the other change. a. Fair value is a market-equivalent value. It is defined as the amount for which an asset could be exchanged, or a 3.152 Other changes in the volume of financial assets and liability settled, between knowledgeable, willing liabilities are recorded at the market-equivalent prices of parties in an arm's length transaction. It thus represents similar instruments. For writing-off of financial an estimate of what could be obtained if the creditor instruments that are valued at nominal values, the value had sold the financial claim. recorded in the other changes in the volume of assets account should correspond to their nominal value prior to being written off. For all reclassifications of assets and b. Nominal value refers to the amount the debtor owes to liabilities, values of both the new and old instruments the creditor, which comprises the outstanding principal should be the same. amount including any accrued interest. c. Amortized value reflects the amount at which the Holding gains and losses financial asset or liability was measured at initial recognition minus the principal repayments. Excess 3.153 Holding gains and losses accrue continuously and apply to payments over the scheduled principal repayments both non-financial and financial assets and liabilities. In reduce the amortized value whereas payments that are general, they are estimated by deducting from the total less than the scheduled principal repayments or change in the value of assets those that can be attributed to scheduled interest increase the amortized value. On transactions and to other changes in volumes. each scheduled date, amortized value is the same as nominal value, but it may differ from the nominal value 3.154 Since most financial assets are matched by liabilities, either on other dates due to the accrued interest being within the domestic economy or with the rest of the world, included in the nominal value. it is important that holding gains in one are matched by holding losses in the other and vice versa. A holding gain d. Face value is the undiscounted amount of principal to occurs when an asset increases in value or a liability be repaid. decreases in value; a holding loss occurs when an asset decreases in value or a liability increases in value. The e. Book value in business accounts generally refers to the value of holding gains and losses during an accounting value recorded in the enterprise's records. Book values period shows net changes in holding gains and holding may have different meanings because their values are losses for an asset and a liability separately. In practice, the influenced by timing of acquisition, company value of holding gains and losses is calculated for each takeovers, frequency of revaluations, and tax and other asset and liability between two points in time: the regulations. beginning of the period or when the asset or liability is acquired or incurred and the end of the period or when the asset or liability is sold or extinguished. f. Historic cost, in its strict sense, reflects the cost at the time of acquisition, but sometimes it may also reflect occasional revaluations. Valuation of positions of financial assets and liabilities 3.158 The valuation of financial assets and liabilities in data reported by enterprises or other respondents may be based 3.155 Stocks of financial assets and liabilities should be valued as on commercial, supervisory, tax, or other accounting if they were acquired in market transactions on the balance standards that do not fully reflect the market prices of the sheet reporting date. Many financial assets are traded in assets and liabilities. In such cases, the data should be markets on a regular basis and therefore can be valued by adjusted to reflect, as closely as possible, the market value directly using the price quotations from these markets. If of the financial assets and liabilities. (More information on the financial markets are closed on the balance sheet date, valuation rules can be found in External Debt Statistics: the market prices that should be used in the valuation are Guide for Compilers and Users (Bank for International those that prevailed on the closest preceding date when the Settlements, the Commonwealth Secretariat, Eurostat, 54 Stocks, flows and accounting rules International Monetary Fund, Organisation for Economic data sources. The SNA recommends recording on an Co-operation and Development, the Paris Club Secretariat, accrual basis throughout. the United Nations Conference on Trade and Development and World Bank (2003)), known as the External Debt Choice for recording on an accrual basis Guide.) 3.164 Cash accounting records only cash payments and records 3. Time of recording them at the times these payments occur. This method is widely used for certain business purposes. A practical Choice of time of recording advantage is the avoidance of problems connected with valuing non-monetary flows. Yet, cash accounting cannot be used generally for economic and national accounting as 3.159 When discussing timing in the SNA, an essential the times at which payments take place may diverge distinction should be made between stock data as recorded significantly from the economic activities and transactions in balance sheets, on the one hand, and flow data as to which they relate and it is these underlying activities and recorded in the accounts, on the other. Balance sheets, by transactions that the SNA seeks to portray. Moreover, cash definition, refer to specific points in time. In contrast, flows recording cannot be applied to the many non-monetary are aggregations, over some chosen accounting period, of flows included in the SNA. individual transactions or other flows, which are themselves scattered over the accounting period. 3.165 Due-for-payment recording shows flows that give rise to cash payments at the latest times they can be paid without 3.160 Thus, the SNA does not show individual transactions or incurring additional charges or penalties and, in addition to other flows, but there are two reasons why precise rules on these, actual cash payments at the moments they occur. The their individual timing must be given. In the first place, period of time (if any) between the moment a payment rules have to be formulated to say in which accounting becomes due and the moment it is actually made is bridged period the discrete flows are to be recorded. Secondly, an by recording a receivable or a payable in the financial exact timing of individual flows within the accounting accounts. Due-for-payment recording furnishes a more period is crucial to distinguish between changes in net comprehensive description of monetary flows than does worth due to transactions and changes due to holding gains cash accounting. A disadvantage is, of course, that the or losses. This distinction is particularly important in registration is still limited to monetary flows. situations of high inflation. 3.166 Accrual accounting records flows at the time economic 3.161 One of the problems in pinning down the timing of value is created, transformed, exchanged, transferred or transactions is that activities of institutional units often extinguished. This means that flows that imply a change of extend over periods in which several important moments ownership are entered when the change occurs, services are can be distinguished. For instance, many commercial sales recorded when provided, output at the time products are commence with the signing of a contract between a seller created and intermediate consumption when materials and and a buyer, encompass a date of delivery and a date or supplies are being used. The SNA favours accrual dates on which payments become due and are only accounting because: completed as of the date the last payment is received by the seller. Each of these distinct moments in time is to some a. The timing of accrual accounting is in full agreement extent economically relevant. with the way economic activities and other flows are defined in the SNA. This agreement allows the 3.162 Similarly, in analysing government expenditure one can profitability of productive activities to be evaluated distinguish the day that a budget is voted upon by the correctly (that is, without the disturbing influence of legislature, the day on which the ministry of finance leads and lags in cash flows) and a sector's net worth to authorizes a department to pay out specified funds, the day be calculated correctly at any point in time; a particular commitment is entered into by the departments, the day deliveries take place and finally the day payment b. Accrual accounting can be applied to non-monetary orders are issued and cheques are paid. With regard to flows. taxes, for example, important moments are the day or the period in which the liability arises, the moment the tax 3.167 Many transactions, such as everyday purchases of liability is definitively assessed, the day that it becomes due households in shops, are monetary transactions in which for payment without penalty and the day the tax is actually some asset is delivered against immediate, or nearly paid or refunds are made. immediate, payment in cash. In those instances there are no differences between the three methods discussed here. 3.163 Clearly, making entries for all successive stages discernible Accrual accounting is particularly relevant to the timing of within the activities of institutional units, although various internal transactions (such as output that is added to theoretically possible, would severely overburden the SNA. the inventories of the producer), exchanges in which the A choice has to be made, recognizing (a) the needs of parties deliver at differing times (such as sales with macroeconomic analysis, (b) microeconomic views, and (c) deferred payments) and obligatory transfers (taxes and commonly available sources. Often, in this respect, a flows connected with social security). distinction is drawn between recording flows on a cash basis, due-for-payment basis, the commitment basis and 3.168 Usually, accrual accounting is the norm for the institutional accrual basis. There may be other timing bases, such as units involved. Numerous transactions consist of an physical movement or administrative process, used in some exchange between two enterprises of, say, goods for 55 System of National Accounts financial assets. In such an exchange, accounting entries particular earning period, and dividends are to be recorded will be made in the books of each enterprise, showing the as of the moment the associated share starts to be quoted same dates for the acquisition of the goods and the "ex dividend". Other examples are withdrawals from surrender of the financial assets, on the one hand, and for income of quasi-corporations and various voluntary the acquisition of the financial assets and the surrender of transfers, which are recorded when effected. the goods, on the other. Sometimes, however, the two parties involved in a transaction will not perceive it as Time of recording of transactions in financial occurring at the same moment. Furthermore, some transactors, in particular government units, do not keep assets and liabilities records of purchases on an accrual basis. In these cases, the rules of consistency in the SNA require that efforts should 3.172 Transactions in financial assets (including payments of be undertaken to correct basic statistics for major cash) are recorded in the SNA on a change-of-ownership deviations and flaws. The application of the general rule of basis. Some financial claims or liabilities defined in the recording on an accrual basis to the most common SNA, in particular trade credits and advances, are the circumstances is discussed below. implicit result of a non-financial transaction and are not otherwise evidenced. In these cases the financial claim is Time of recording of acquisitions of goods and deemed to arise when its non-financial counterpart occurs. The same holds for financial transactions that the SNA services records between a quasi-corporation and its owner. 3.169 The time of recording of the acquisition of goods is the 3.173 Both parties involved in a financial transaction may record moment when the economic ownership of those goods it at varying dates in their own books because they acquire changes hands. When change of ownership is not obvious, the documents evidencing the transaction at different times. the moment of entering in the books of the transaction This variation is caused by the process of clearing, the time partners may be a good indication and, failing that, the cheques are in the mail, etc. The amounts involved in such moment when physical possession and control is acquired. "floats" are generally substantial in the case of transferable These subsidiary rules apply in particular to internal deposits and other accounts receivable and payable. Again, transactions or when a change of ownership is taken to reasons of consistency require that the transactions are occur under a financial lease or hire-purchase arrangement. entered on the same date for both parties. If no precise date Imports and exports of goods are recorded when change of can be fixed on which the change of ownership occurs, the ownership occurs. In the absence of sources specifying the date on which the transaction is fully completed (thus the date on which ownership changes, there is a strong date on which the creditor receives his payment) is presumption that the goods will cross the frontiers of the decisive. countries concerned either shortly before or soon after the change of ownership takes place. Trade statistics based on customs documents reflecting the physical movement of 3.174 For securities, the transaction date (that is, the time of the goods across the national or customs frontier may therefore change in ownership of the securities) may precede the often be used as an approximation. settlement date (that is, the time of the delivery of the securities). Both parties should record the transactions at the time ownership changes, not when the underlying 3.170 Services are recorded in the SNA when they are provided. financial asset is delivered. Any significant difference Some services are special in the sense that they are between transaction and settlement dates gives rise to characteristically supplied on a continuous basis. Examples accounts payable or receivable. are operating leasing, insurance and housing services (including those of owner-occupied dwellings). These services are recorded as provided continuously over the 3.175 According to the accrual basis, repayments of debts are whole period the contract lasts or the dwelling is available. recorded when they are extinguished (such as when they are paid, or rescheduled, or forgiven by the creditor). When arrears occur, no transactions should be imputed, but the Time of recording of redistributive transactions arrears should continue to be shown in the same instrument until the liability is extinguished. If the contract provided 3.171 Following the general rule, distributive transactions are for a change in the characteristics of a financial instrument recorded at the moment the related claims arise. As a result, when it goes into arrears, this change should be recorded as for example, compensation of employees, interest, rent on a reclassification in the other changes in the financial assets land, social contributions and benefits are all registered in and liabilities account. The reclassification applies to the period during which the amounts payable are built up. situations where the original contract remains, but the terms Equally, entries for taxes are made at the moment on which within it changes (for example, interest rates or repayment the underlying transactions or other flows occur that give periods). If the contract is renegotiated or the nature of the rise to the liability to pay. This implies that taxes on instrument changes from one instrument category to products and imports are recorded at the times the products another (for example, from bonds to equity), the in question are produced, imported or sold, depending on consequences are to be recorded as new transactions. the basis for taxation. Current taxes on income are recorded when the income to which they pertain is earned although Time of recording of output and intermediate taxes deducted at source may have to be recorded when they are deducted. With respect to some distributive consumption transactions, the time of accrual depends on the unit's decision when to distribute income or make a transfer. The 3.176 The principle of recording on an accrual basis implies that level of dividends is not unambiguously attributable to a output is recorded over the period in which the process of 56 Stocks, flows and accounting rules production takes place. Thus, additions to work-in-progress · The accounting period begins; or are recorded continuously as work proceeds. When the production process is terminated, the whole of the work-in- · Ownership is acquired from other units (through progress accumulated up to that point is effectively purchase or a transaction in kind); or transformed into a stock of finished product ready for delivery or sale. · An asset is produced; and 3.177 Similarly, the intermediate consumption of a good or b. The moment at which: service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer. · The accounting period ends; or Time of recording of changes in inventories and · The ownership of an asset is relinquished (through sale consumption of fixed capital or a transaction in kind); or · An asset is consumed in the production process. 3.178 Inventories may be materials and supplies held as inputs by producers, output as yet unsold, or products held by wholesale and retail traders. In all cases, additions to 3.184 One may wonder why nominal holding gains and losses are inventories are recorded when products are purchased, not calculated over a period beginning at the moment on produced or otherwise acquired. Deductions from which two units agree to a mutual exchange of assets inventories are recorded when products are sold, used up as instead of the period that starts with the moment on which intermediate consumption or otherwise relinquished. the assets are acquired. After all, does not the signing of the contract fix prices, implying that the risk for any later price changes is being transferred? The SNA, however, regards 3.179 The timing of consumption of fixed capital is inextricably commitments resulting from a contract as contingent until linked with the question of its valuation. Consumption of one of the parties has performed its obligation (by passing fixed capital is a cost category that accrues over the whole the ownership of some asset to the other party, providing a period the fixed asset in question is available for productive service or providing labour or capital). Also, a unit can purposes. The exact proportioning to accounting periods incur holding gains and losses only on the assets or depends on the rate of depreciation. liabilities over which it has economic ownership. The combination of these two rules implies that during the Time of recording of composite transactions and period between the signing of the contract and the date on balancing items which the first party delivers, the second party cannot incur any price risks on this contract: the second party neither 3.180 Transactions that are measured as the balance of two or owns the assets to be delivered nor owns a claim on the first more other transactions follow the timing of the constituent party to be recorded in the financial accounts. basic flows. For example, financial intermediation services indirectly measured (FISIM) are recorded as interest on 3.185 Changes in structure and classification should be entered at loans and deposits accrues. the moment when, according to the rules adopted in the SNA, a unit or an asset is moved to a different category 3.181 The same rule for time of recording applies to balancing than that to which it was classified previously. An items. However, due to the variety of transactions and other integrated stock-flow system like the SNA requires that all flows covered, each with its own characteristics, some reclassifications are recorded and all entries for the thought is needed in interpreting balancing items. For reclassification are recorded at the same time. instance, in analysing the balancing item "saving" of non- financial corporations, one should be aware that the time 3.186 In order to obtain statistical series that are more comparable when the operating surplus arises does not necessarily tally over time, one might be tempted to stockpile major with the timing of the other factors, such as when dividends reclassifications for a number of years and enter them as are payable. one block at the end of this period. However understandable this procedure might be, it does not Time of recording of other flows conform to the recommendations of the SNA, which aim at correct estimates on levels. Keeping records of reclassifications makes it possible in principle to 3.182 Other changes in the volume of assets are usually discrete reconstruct time series based on the situation in any events that accrue at precise moments or within fairly short accounting period. periods of time. Timing adjustments for international transactions Time of recording of holding gains and losses 3.187 Differences in the time of recording by partner economies 3.183 Changes in prices often have a more continuous character, may occur due to various factors. One of the intrinsic particularly in respect of assets for which active markets problems with recording international transactions is the exist. In practice, nominal holding gains or losses will be difference in time zones. Differences in time of recording computed between two points in time: may also arise from delays in mail deliveries or settlement clearing processes. In most cases, data at some aggregate a. The moment at which: level rather than individual records are used in the 57 System of National Accounts compilation of international accounts. Several data sources Combinations in which all elementary items are shown for may often only approximate the required basis. It is their full values are called gross recordings. Combinations important to make timing adjustments where there are whereby the values of some elementary items are offset major divergences from the required basis. against items on the other side of the account or which have an opposite sign are called net recordings. 3.188 In choosing among available statistical sources, compilers may wish to consider the advantage of using data for which 3.194 The SNA recommends gross recording apart from the the correct timing is already recorded. For example, records degree of netting that is inherent in the classifications of actual drawings on loans are preferred to sources that themselves. In fact, netting is already a feature of many of quote authorization dates or program dates that may not be the recommendations of the SNA. It mostly serves to realized in fact. Some sources chosen by compilers as highlight an economically important property that is not generally the most suitable may not have been specifically apparent from gross data. designed to yield information for balance of payments purposes. 3.195 Netting is implicit in various transaction categories, the most outstanding example being "changes in inventories", Balance sheet items which underlines the analytically significant aspect of overall capital formation rather than tracking daily 3.189 Balance sheets can be drawn up for any point in time. The additions and withdrawals. Similarly, with few exceptions, SNA defines balance sheets for all sectors at the moment the financial account and other changes in assets accounts when one accounting period ends and a new accounting record increases in assets and in liabilities on a net basis, period begins. The closing balance sheet of one period is bringing out the final consequences of these types of flows identical to the opening balance sheet of the next one, so at the end of the accounting period. All balancing items there remain no price changes, reclassifications or other also involve netting. To avoid confusion, the SNA uses the economic flows that are not duly recognized by the SNA. words "gross" and "net" in a very restrictive sense. Apart from a few headings ("net premiums", "net worth" and "net 4. Aggregation, netting, consolidation lending or net borrowing"), the SNA classifications employ the word "net" exclusively to indicate the value of variables after deduction of consumption of fixed capital. Aggregation 3.196 In the case of flows of financial assets and liabilities, the 3.190 The immense number of individual transactions, other terms "net changes in assets" and "net changes in flows and assets within the scope of the SNA have to be liabilities" are used to reflect the nature of the financial arranged in a manageable number of analytically useful flows. Financial flows reflect changes due to all credit and groups. In the SNA, such groups are constructed by debit entries during an accounting period. That is, financial crossing two or more classifications. As a minimum, a flows are recorded on a net basis separately for each classification of institutional sectors or industries is crossed financial asset and liability. The use of the terms "net with the classification of transactions, other accumulation changes in assets" and "net changes in liabilities" brings entries or assets. Additionally, resources must be the financial account into line with the convention used in distinguished from uses and assets from liabilities. In order the accumulation accounts. These are general terms that to accommodate more detailed analysis, the classes thus apply to both the financial account and other changes in generated may be further subdivided: examples are financial assets and liabilities account. The use of these specifications of kind of product or asset, of function and of terms also simplifies the interpretation of data. For both transaction partners. assets and liabilities, a positive change indicates an increase in stocks and a negative change indicates a decrease in 3.191 Since the classifications in the SNA contain a number of stocks. The interpretation of increase or decrease under the levels made explicit in the codes, corresponding levels of credit or debit notion, however, depends on whether the aggregation may be distinguished. increase or decrease refers to assets or liabilities (a debit for an asset is an increase while a debit for a liability is a 3.192 Although conceptually the value for each aggregate is the decrease). While the debit and credit presentation is not sum of the values for all elementary items in the relevant emphasized for financial account transactions, it is category, in practice other estimation methods are important to recognize and maintain the accounting frequently used. In the first place, information on identities; for example, a credit is always conceptually elementary transactions, other flows and assets may be matched with a corresponding debit, the latter relating to incomplete or even non-existent. Secondly, the data either an increase in an asset, or reduction in a liability. obtained from different primary sources are usually not fully consistent due to variations in definitions and Consolidation coverage, so adjustments at aggregate level are necessary to reconcile them. 3.197 Consolidation is a special kind of cancelling out of flows and stocks that should be distinguished from other kinds of Netting netting. It involves the elimination of those transactions or debtor or creditor relationships that occur between two 3.193 Individual units or sectors may have the same kind of transactors belonging to the same institutional sector or transaction both as a use and as a resource (for example, subsector. Consolidation should not be seen as a sheer loss they both pay and receive interest) and the same kind of of information; it entails an elementary specification by the financial instrument both as an asset and as a liability. transaction partner. Consolidation may be most relevant for 58 Stocks, flows and accounting rules financial institutions and general government. There is 3.198 The rule of non-consolidation takes a special form more detail on this in chapters 22 and 27. For certain kinds regarding the transaction categories "output" and of analysis, information on the transactions of these "intermediate consumption". These transactions are to be recorded throughout at the level of establishments. This (sub)sectors with other sectors and the corresponding implies specifically that the accounts for institutional "external" financial position is more significant than sectors and for industries should not be consolidated in overall gross figures. As a rule, however, the entries in the respect of output delivered between establishments SNA are not consolidated. belonging to the same institutional unit. 59 System of National Accounts 60 Chapter 4: Institutional units and sectors A. Introduction 4.1 This chapter is concerned with the definition and 4.5 The individual members of multiperson households are not description of institutional units and the way in which they treated as separate institutional units. Many assets are are grouped to make up the sectors and subsectors of the owned, or liabilities incurred, jointly by two or more SNA. Another key concept to be discussed is residence members of the same household while some or all of the since the total economy consists of the entire set of resident income received by individual members of the same institutional units. household may be pooled for the benefit of all members. Moreover, many expenditure decisions, especially those relating to the consumption of food, or housing, may be 1. Institutional units made collectively for the household as a whole. It may be impossible, therefore, to draw up meaningful balance 4.2 An institutional unit is an economic entity that is capable, sheets or other accounts for members of the household on in its own right, of owning assets, incurring liabilities and an individual basis. For these reasons, the household as a engaging in economic activities and in transactions with whole rather than the individual persons in it must be other entities. The main attributes of institutional units may treated as the institutional unit. be described as follows: 4.6 The second type of institutional unit is a legal or social a. An institutional unit is entitled to own goods or assets entity that engages in economic activities and transactions in its own right; it is therefore able to exchange the in its own right, such as a corporation, non-profit institution ownership of goods or assets in transactions with other (NPI) or government unit. A legal or social entity is one institutional units; whose existence is recognized by law or society independently of the persons, or other entities, that may own or control it. Such units are responsible and b. It is able to take economic decisions and engage in accountable for the economic decisions or actions they economic activities for which it is itself held to be take, although their autonomy may be constrained to some directly responsible and accountable at law; extent by other institutional units; for example, corporations are ultimately controlled by their c. It is able to incur liabilities on its own behalf, to take on shareholders. Some unincorporated enterprises belonging other obligations or future commitments and to enter to households or government units may behave in much the into contracts; same way as corporations, and such enterprises are treated as quasi-corporations when they have complete sets of accounts. d. Either a complete set of accounts, including a balance sheet of assets and liabilities, exists for the unit, or it would be possible and meaningful, from an economic 4.7 In the legal sense, corporations may be described by viewpoint, to compile a complete set of accounts if they different names: corporations, incorporated enterprises, were to be required. public limited companies, public corporations, private companies, joint-stock companies, limited liability companies, limited liability partnerships, and so on. 4.3 There are two main types of units in the real world that may Conversely, some legal entities that are non-profit qualify as institutional units, namely persons or groups of institutions may sometimes be described as "corporations". persons in the form of households, and legal or social The status of an institutional unit cannot always be inferred entities. from its name, and it is necessary to examine its objectives and functions. In the SNA, the term corporation covers 4.4 For purposes of the SNA, a household is a group of legally constituted corporations and also cooperatives, persons who share the same living accommodation, who limited liability partnerships, notional resident units and pool some, or all, of their income and wealth and who quasi-corporations. The description of these various consume certain types of goods and services collectively, institutional units is given in section B. mainly housing and food. As well as individual households, there are units described as institutional 4.8 Non-profit institutions (NPIs) are legal or social entities households that comprise groups of persons staying in created for the purpose of producing goods and services hospitals, retirement homes, convents, prisons, etc. for long but whose status does not permit them to be a source of periods of time. income, profit or other financial gain for the units that 61 System of National Accounts establish, control or finance them. In practice, their rather than being attributed to the economy of location of productive activities are bound to generate either surpluses the head office. or deficits but any surpluses they happen to make cannot be appropriated by other institutional units. The articles of 4.13 In general, an institutional unit is resident in one and only association by which they are established are drawn up in one economic territory determined by the unit's centre of such a way that the institutional units that control or predominant economic interest. Exceptions may be made manage them are not entitled to a share in any profits or for multiterritory enterprises that operate a seamless other income they generate. For this reason, they are operation over more than one economic territory. Although frequently exempted from various kinds of taxes. A the enterprise has substantial activity in more than one description of the treatment of NPIs within the SNA is economic territory, it cannot be broken up into separate given in section C. branches or a parent and branch(es) because it is run as an indivisible operation with no separate accounts or 4.9 Government units are unique kinds of legal entities decisions. Such enterprises are typically involved in cross- established by political processes that have legislative, border activities and include shipping lines, airlines, judicial or executive authority over other institutional hydroelectric schemes on border rivers, pipelines, bridges, units within a given area. Viewed as institutional units, the tunnels and undersea cables. If it is not possible to identify principal functions of government are to assume a parent or separate branches, it is necessary to prorate the responsibility for the provision of goods and services to the total operations of the enterprise into the individual community or to individual households and to finance their economic territories. For more information on these special provision out of taxation or other incomes; to redistribute cases, reference should be made to BPM6. income and wealth by means of transfers; and to engage in non-market production. 4.14 An institutional unit has a centre of predominant economic interest in an economic territory when there exists, within 2. Residence the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either 4.10 The residence of each institutional unit is the economic indefinitely or over a finite but long period of time, in territory with which it has the strongest connection, in economic activities and transactions on a significant scale. other words, its centre of predominant economic interest. The location need not be fixed so long as it remains within The concept of economic territory in the SNA coincides the economic territory. Actual or intended location for one with that of the BPM6. Some key features are as follows. In year or more is used as an operational definition; while the its broadest sense, an economic territory can be any choice of one year as a specific period is somewhat geographic area or jurisdiction for which statistics are arbitrary, it is adopted to avoid uncertainty and facilitate required. The connection of entities to a particular international consistency. economic territory is determined from aspects such as physical presence and being subject to the jurisdiction of the government of the territory. The most commonly used 4.15 The concept of residence in the SNA is exactly the same as concept of economic territory is the area under the effective in BPM6. Some key consequences follow: economic control of a single government. However economic territory may be larger or smaller than this, as in a. The residence of individual persons is determined by a currency or economic union or a part of a country or the that of the household of which they form part and not world. by their place of work. All members of the same household have the same residence as the household 4.11 The economic territory includes the land area, airspace, itself, even though they may cross borders to work or territorial waters, including jurisdiction over fishing rights otherwise spend periods of time abroad. If they work and rights to fuels or minerals. In a maritime territory, the and reside abroad so long that they acquire a centre of economic territory includes islands that belong to the economic interest abroad, they cease to be members of territory. The economic territory also includes territorial their original households; enclaves in the rest of the world. These are clearly demarcated land areas (such as embassies, consulates, b. Unincorporated enterprises that are not quasi- military bases, scientific stations, information or corporations are not separate institutional units from immigration offices, aid agencies, central bank their owners and, therefore, have the same residence as representative offices with diplomatic immunity, etc.) their owners; located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or c. Corporations and NPIs may normally be expected to other purposes with the formal agreement of governments have a centre of economic interest in the country in of the territories where the land areas are physically which they are legally constituted and registered. located. Corporations may be resident in countries different from their shareholders and subsidiary corporations 4.12 Economic territory has the dimensions of physical location may be resident in countries different from their parent as well as legal jurisdiction. The concepts of economic corporations. When a corporation, or unincorporated territory and residence are designed to ensure that each enterprise, maintains a branch, office or production site institutional unit is a resident of a single economic territory. in another country in order to engage in production The use of an economic territory as the scope of economic over a long period of time (usually taken to be one year statistics means that each member of a group of affiliated or more) but without creating a subsidiary corporation enterprises is resident in the economy in which it is located, for the purpose, the branch, office or site is considered 62 Institutional units and sectors to be a quasi-corporation (that is, a separate 4.19 Corporations are divided between those mainly providing institutional unit) resident in the country in which it is financial services and those mainly providing goods and located; other services. The two groups are known as financial corporations and non-financial corporations respectively. d. Owners of land, buildings and immovable structures in The distinction is made because of the special role that the economic territory of a country, or units holding financial corporations play in the economy. long leases on either, are deemed always to have a centre of economic interest in that country, even if they 4.20 The economic objectives, functions and behaviour of do not engage in other economic activities or government units are quite distinct. They organize and transactions in the country. All land and buildings are finance the provision of goods and services, to individual therefore owned by residents; households and the community at large and therefore incur expenditures on final consumption. They may produce e. Extraction of subsoil resources can only be undertaken most of these goods and services themselves but the by resident institutional units. An enterprise that will products are usually either provided free or at prices undertake extraction is deemed to become resident determined by considerations other than purely market when the requisite licences or leases are issued, if not forces. Government units are also concerned with before; distribution and redistribution of income and wealth through taxation and other transfers. Government units f. For entities such as many special purpose entities, that include social security funds. have few if any attributes of location, the location is determined by their place of incorporation. 4.21 The economic objectives, functions and behaviour of households are different again. Although primarily Further elaboration of borderline cases is given in chapter consumer units, they can also engage in production. Often 26 and in BPM6. this production activity is relatively small scale and includes informal and subsistence activities. When the 3. Sectoring and economic behaviour production units of households are not legal entities (and cannot be treated as such) they are described as 4.16 The institutional sectors of the SNA group together similar unincorporated enterprises. They remain part of the same kinds of institutional units. Corporations, NPIs, institutional unit as the household to which they belong. government units and households are intrinsically different from each other in that their economic objectives, functions 4.22 NPIs are institutional units created for the purpose of and behaviour are different. producing or distributing goods or services but not for the purpose of generating any income or profit for the units that 4.17 Institutional units are allocated to sector according to the control or finance them. Nevertheless, some NPIs deliver nature of the economic activity they undertake. The three goods and services to customers at economically significant basic economic activities recorded in the SNA are prices and, when they do, these NPIs are treated in the same production of goods and services, consumption to satisfy way as corporations in the SNA. Other NPIs that are human wants or needs and accumulation of various forms controlled by government are treated as government units. of capital. Corporations undertake either production or The remaining NPIs, those that produce goods and services accumulation (or both) but do not undertake (final) but do not sell them at economically significant prices and consumption. Government undertakes production (but are not controlled by government, are treated as a special mainly of a different type from corporations), accumulation group of units called non-profit institutions serving and final consumption on behalf of the population. All households (NPISHs). They are in effect non-governmental households undertake consumption on their own behalf and social institutions. may also engage in production and accumulation. NPIs are diverse in nature. Some behave like corporations, some are effectively part of government and some undertake 4. The total economy activities similar to government but independently of it. 4.23 The total economy is defined as the entire set of resident 4.18 Fundamental to the distinction between corporations and institutional units. The resident institutional units that government is the basis on which production is undertaken. make up the total economy are grouped into five mutually Corporations produce for the market and aim to sell their exclusive institutional sectors. Sectors are groups of products at economically significant prices. Prices are said institutional units and the whole of each institutional unit to be economically significant if they have a significant must be classified to one or other sector of the SNA. The effect on the amount that producers are willing to supply full sequence of accounts of the SNA may be constructed and the amounts purchasers wish to buy. These prices for a single institutional unit or a group of units. The normally result when the producer has an incentive to attributes of an institutional unit described in paragraph 4.2 adjust supply either with the goal of making a profit in the explain why it is not possible to compile a full set of long run (or at a minimum, covering capital and other accounts for only part of a unit. However, it is possible, costs) and consumers have the freedom to purchase or not useful and common practice to compile some accounts for purchase and make the choice on the basis of the prices sub-divisions of corporations, discriminating on the basis charged. There is more extensive discussion of the of the type of production the parts undertake. This is the definition of economically significant prices and the subject of chapter 5. For the present chapter attention meaning of market and non-market production in chapters focuses on the allocation of complete units to one sector or 6 and 22. another. 63 System of National Accounts Figure 4.1: Illustrative allocation of units to institutional sectors Is the unit resident? No ROW Yes Is it a household or institutional Yes Households household? No Is it a non-market producer? Yes No Is it controlled by Does it produce financial government? services? No Yes NPISH No Yes General government Non-financial Financial corporations corporations Is it controlled by Is it controlled by government? government? Yes Yes No No Public non-financial Public financial corporations corporations Is it foreign Is it foreign controlled? controlled? Yes Yes No No Foreign controlled Foreign controlled non-financial financial corporations corporations National private non- National private financial financial corporations corporations 64 Institutional units and sectors 5. An overview of institutional sectors interests of those enterprises. The financial corporations sector is described further in section E. 4.24 All resident institutional units are allocated to one and only one of the following five institutional sectors: 4.30 The general government sector consists mainly of central, state and local government units together with social security funds imposed and controlled by those units. In The non-financial corporations sector; addition, it includes NPIs engaged in non-market production that are controlled by government units or social The financial corporations sector; security funds. The general government sector; 4.31 The non-profit institutions serving households sector consists of all resident NPIs, except those controlled by The non-profit institutions serving households sector; government, that provide non-market goods or services to households or to the community at large. The households sector. 4.32 The households sector consists of all resident households. These include institutional households made up of persons 4.25 The conceptual basis for the allocation of a unit to the staying in hospitals, retirement homes, convents, prisons, appropriate sector can be seen in figure 4.1. The boxes for etc. for long periods of time. As already noted, an the sectors of the total economy, plus the box for the rest of unincorporated enterprise owned by a household is treated the world, appear with double borders. Once non-resident as an integral part of the latter and not as a separate units and households are set aside, only resident legal and institutional unit unless the accounts are sufficiently social entities remain. Three questions determine the detailed to treat the activity as that of a quasi-corporation. sectoral allocation of all such units. The first is whether the unit is a market or non-market producer. This depends on whether the majority of the unit's production is offered at 6. Subsectors economically significant prices or not. 4.33 Each of the five institutional sectors listed above may be 4.26 The second question determining sectoral allocation applies divided into subsectors. No single method of subsectoring to non-market units, all of which, including non-market may be optimal for all purposes or all countries, so that NPIs, are allocated either to general government or to the alternative methods of subsectoring are recommended for NPISH sector. The determining factor is whether the unit is certain sectors. Dividing the total economy into sectors part of, or controlled by, government. The criteria to enhances the usefulness of the accounts for purposes of establish control are discussed in section C below. economic analysis by grouping together institutional units with similar objectives and types of behaviour. Sectors and 4.27 The third question determining sectoral allocation applies subsectors are also needed in order to be able to target or to market units, all of which, including market NPIs, are monitor particular groups of institutional units for policy allocated to either the non-financial corporations sector or purposes. For example, the household sector has to be the financial corporations sector. In the context of sectors divided into subsectors in order to be able to observe how as elsewhere in the SNA, the term "corporation" is used to different sections of the community are affected by, or encompass cooperatives, limited liability partnerships, benefit from, the process of economic development or notional resident units and quasi-corporations as well as government economic and social policy measures. legally constituted corporations. Similarly, it may be important to treat corporations subject to control by non-residents as subsectors of the financial and non-financial corporate sectors not only because they 4.28 All resident non-financial corporations are included in the are liable to behave differently from domestically non-financial corporations sector and make up most of the controlled corporations but because policymakers may sector in practice. In addition, the sector includes non-profit wish to be able to identify and observe those parts of the institutions (NPIs) engaged in the market production of economy that are subject to influence from abroad. The goods and non-financial services: for example, hospitals, division of sectors into subsectors depends upon the type of schools or colleges that charge fees that enable them to analysis to be undertaken, the needs of policymakers, the recover their current production costs, or trade associations availability of data and the economic circumstances and financed by subscriptions from non-financial corporate or institutional arrangements within a country. unincorporated enterprises whose role is to promote and serve the interests of those enterprises. The non-financial corporations sector is described further in section D. Public and foreign control 4.29 The financial corporations sector includes all resident 4.34 One common subsectoring is to identify those non-financial corporations whose principal activity is providing financial and financial corporations that are controlled by the services including financial intermediation, insurance and government, called public corporations, and those that are pension fund services, and units that provide activities that controlled from abroad. The remaining corporations form facilitate financial intermediation. In addition, the sector the national private corporations in an economy. The includes NPIs engaged in market production of a financial criteria for determining control by government and from nature such as those financed by subscriptions from abroad are discussed in section B. Figure 4.1 includes this financial enterprises whose role is to promote and serve the type of subsectoring for both groups of corporations. 65 System of National Accounts Non-profit institutions following sections. Particular subsectors are suggested for general government, financial corporations and households. 4.35 As described above, the SNA assigns NPIs to different sectors according to whether they produce for the market or 7. The rest of the world not, regardless of motivation, status of employees or the activity they are engaged in. However, there is increasing 4.37 On occasion it is convenient to refer to non-resident interest in considering the full set of NPIs as evidence of households or corporations as units that are resident in the "civil society" so it is recommended that NPIs within the rest of the world. Whenever accounts are drawn up for corporate and government sectors be identified in distinct institutional sectors, as well as an account for the total subsectors so that supplementary tables summarizing all economy, a further account is shown showing the NPI activities can be derived in a straightforward manner as relationship with the rest of the world. In effect, therefore and when required. transactions with the rest of the world are recorded as if the rest of the world is a de facto sixth sector. Other subsectoring 4.36 The question of subsectoring is included in the more extensive consideration of each institutional sector in B. Corporations in the SNA 1. Types of corporations 4.40 The laws governing the creation, management and operations of legally constituted corporations may vary from country to country so that it is not feasible to provide 4.38 In the SNA, the term corporation is used more broadly than a precise, legal definition of a corporation that would be in just the legal sense. In general, all entities that are: universally valid. It is possible, however, to indicate in more detail the typical features of corporations that are a. capable of generating a profit or other financial gain for most relevant from the point of view of the SNA. They may their owners, be summarized as follows: a. A corporation is an entity created by process of law b. recognized at law as separate legal entities from their whose existence is recognized independently of the owners who enjoy limited liability, other institutional units that may own shares in its equity. The existence, name and address of a c. set up for purposes of engaging in market production, corporation are usually recorded in a special register kept for this purpose. A corporation may normally be expected to have a centre of predominant economic are treated as corporations in the SNA, however they may interest (that is, to be resident) in the country in which describe themselves or whatever they may be called. As it is created and registered. well as legally constituted corporations the term corporations is used to include cooperatives, limited liability partnerships, notional resident units and quasi- b. A corporation that is created for the purpose of corporations. Whenever the term corporation is used, the producing goods or services for sale on the market does broader coverage rather than the narrow legal definition is so at prices that are economically significant. This intended unless otherwise stated. Each of the main implies that it is a market producer. (A description of components of the broader coverage is discussed in turn economically significant prices and the difference below. between market and non-market production is given in chapters 6 and 22.) Legally constituted corporations c. A corporation is fully responsible and accountable at law for its own actions, obligations and contracts, this 4.39 Legally constituted corporations may be described by being an essential attribute of an institutional unit in the different names: corporations, incorporated enterprises, SNA. A corporation is subject to the tax regime of the public limited companies, public corporations, private country where it is resident in respect of its productive companies, joint-stock companies, limited liability activities, income or assets. companies, limited liability partnerships, and so on. A legally constituted corporation is a legal entity, created for d. Ownership of a corporation is vested in the the purpose of producing goods or services for the market, shareholders collectively. The amount of income that may be a source of profit or other financial gain to its actually distributed to shareholders as dividends in any owner(s); it is collectively owned by shareholders who single accounting period is decided by the directors of have the authority to appoint directors responsible for its the corporation. Income is usually distributed to general management. shareholders in proportion to the value, or amounts, of 66 Institutional units and sectors the shares or other capital participations they own. b. an unincorporated enterprise owned by a non- There may be different kinds of shares in the same resident institutional unit that is deemed to be a corporation carrying different entitlements. resident institutional unit because it engages in a significant amount of production in the economic e. In the event of a corporation being wound up, or territory over a long or indefinite period of time. liquidated, the shareholders are similarly entitled to a share in the net worth of the corporation remaining 4.43 Three main kinds of quasi-corporations are recognized in after all assets have been sold and all liabilities paid. If the SNA: a corporation is declared bankrupt because its liabilities exceed the value of its assets, the shareholders are not a. Unincorporated enterprises owned by government units liable to repay the excess liabilities. that are engaged in market production and that are operated in a similar way to publicly owned f. Control of a corporation is ultimately exercised by the corporations; shareholders collectively. A corporation has a board of directors that is responsible for the corporation's policy b. Unincorporated enterprises, including unincorporated and appoints the senior management of the corporation. partnerships or trusts, owned by households that are The board of directors is usually appointed by the operated as if they were privately owned corporations; collective vote of the shareholders. c. Unincorporated enterprises that belong to institutional g. In practice, however, some shareholders may exert units resident abroad, referred to as "branches". much more influence or control over the policies and operations of a corporation than others. 4.44 The intent behind the concept of a quasi-corporation is clear: namely, to separate from their owners those h. The voting rights of shareholders may not be equal. unincorporated enterprises that are sufficiently self- Some types of shares may carry no voting rights, while contained and independent that they behave in the same others may carry exceptional rights, such as the right to way as corporations. If they function like corporations, they make specific appointments to the board of directors or must keep complete sets of accounts. Indeed, the existence the right to veto other appointments made on a majority of a complete set of accounts, including balance sheets, for vote. Such exceptional rights may be held by the the enterprise is a necessary condition for it to be treated as government when it is a shareholder in a corporation. a quasi-corporation. Otherwise, it would not be feasible from an accounting point of view to distinguish the quasi- corporation from its owner. i. Many shareholders with voting rights do not choose to exercise them, so that a small, organized minority of 4.45 As a quasi-corporation is treated as a separate institutional active shareholders may be in a position to control the unit from its owner, it must have its own value added, policy and operations of a corporation. saving, assets, liabilities, etc. It must be possible to identify and record any flows of income and capital that are deemed Cooperatives, limited liability partnerships, etc. to take place between the quasi-corporation and its owner. The amount of income withdrawn from a quasi-corporation during a given accounting period is decided by the owner, 4.41 Cooperatives are set up by producers for purposes of such a withdrawal being equivalent to the payment of a marketing their collective output. The profits of such dividend by a corporation to its shareholder(s). Given the cooperatives are distributed in accordance with their agreed amount of the income withdrawn, the saving of the quasi- rules and not necessarily in proportion to shares held, but corporation (that is, the amount of earnings retained within effectively they operate like corporations. Similarly, the quasi-corporation) is determined. A balance sheet is partnerships whose members enjoy limited liability are also needed for the quasi-corporation showing the values of separate legal entities that behave like corporations. In its non-financial assets used in production and also the effect, the partners are at the same time both shareholders financial assets and liabilities owned or incurred in the and managers. name of the enterprise. Quasi-corporations 4.46 Experience has shown that countries have difficulty treating unincorporated enterprises owned by households as 4.42 Some unincorporated enterprises function in all (or almost quasi-corporations. However, it is not useful to introduce all) respects as if they were incorporated. These are termed additional criteria, such as size, into the definition of quasi- quasi-corporations in the SNA and are included with corporations owned by households. If an enterprise is not in corporations in the non-financial and financial corporations fact operated like a corporation and does not have a sectors. A quasi-corporation is: complete set of accounts of its own, it cannot and should not be treated as a quasi-corporation however large it may be. a. either an unincorporated enterprise owned by a resident institutional unit that has sufficient information to compile a complete set of accounts and Branches is operated as if it were a separate corporation and whose de facto relationship to its owner is that of a 4.47 When a non-resident unit has substantial operations over a corporation to its shareholders, or significant period in an economic territory, but no separate 67 System of National Accounts legal entity, a branch may be identified as an institutional necessary, a notional resident unit is identified in this case unit. This unit is identified for statistical purposes because also. the operations have a strong connection to the location of operations in all ways other than incorporation. An 2. Special cases unincorporated enterprise abroad should be treated as a quasi-corporation when indications of substantial operations can be identified separately from the rest of the Groups of corporations entity. As with other quasi-corporations, either a complete set of accounts for the unit exists or it would be meaningful 4.51 Large groups of corporations, or conglomerates, may be from an economic point of view to compile them. The created whereby a parent corporation controls several availability of separate records indicates that an actual unit subsidiaries, some of which may control subsidiaries of exists and makes it practical to prepare statistics. In their own, and so on. For certain purposes, it may be addition, all or most of the following factors tend to be desirable to have information relating to a group of present for a branch to be recognized: corporations as a whole. However, each individual corporation should be treated as a separate institutional a. Production based in the territory is undertaken or unit, whether or not it forms part of a group. Even intended for one year or more in a territory other than subsidiaries that are wholly owned by other corporations that of its head office: are separate legal entities that are required by law and the tax authorities to produce complete sets of accounts, · If the production process involves physical presence, including balance sheets. Although the management of a subsidiary corporation may be subject to the control of then the operations should be physically located in that another corporation, it remains responsible and accountable territory. Some indicators of an intention to locate in for the conduct of its own production activities. the territory include purchasing or renting business premises, acquiring capital equipment, and recruiting 4.52 Another reason for not treating groups of corporations as local staff. single institutional units is that groups are not always well defined, stable or easily identified in practice. It may be · If the production does not involve physical presence, difficult to obtain data for groups whose activities are not such as some cases of banking, insurance, or other closely integrated. Moreover, many conglomerates are financial services, the operations should be recognized much too large and heterogeneous for them to be treated as as being in the territory by virtue of the registration or single units, and their size and composition may be legal domicile of those operations in that territory. continually shifting over time as a result of mergers and takeovers. b. The operations are recognized as being subject to the income tax system, if any, of the economy in which it is Head offices and holding companies located even if it may have a tax-exempt status. 4.53 Two quite different types of units exist that are both often 4.48 Some construction projects undertaken by a nonresident referred to as holding companies. The first is the head contractor may give rise to a branch. Construction may be office that exercises some aspects of managerial control carried out or managed by a nonresident enterprise, without over its subsidiaries. These may sometimes have noticeably the creation of a local legal entity, for example, major fewer employees, and more at a senior level, than its projects (such as bridges, dams, power stations) that take a subsidiaries but it is actively engaged in production. These year or more to complete and that are managed through a types of activities are described in ISIC Rev. 4 in section M local site office. class 7010 as follows: Notional resident units This class includes the overseeing and managing of other units of the company or enterprise; undertaking the strategic or organizational planning and decision making 4.49 Immovable assets such as land and other natural resources, role of the company or enterprise; exercising operational and buildings and structures are treated as being owned by control and manage the day-to-day operations of their resident units except in one particular circumstance. If the related units. legal owner is actually non-resident, an artificial unit, called a notional resident unit, is created in the SNA. The notional resident unit is recorded as owning the asset and Such units are allocated to the non-financial corporations receiving the rent or rentals that accrue to the asset. The sector unless all or most of their subsidiaries are financial legal owner owns the equity in the notional resident unit corporations, in which case they are treated by convention and then receives income from the notional resident unit in as financial auxiliaries in the financial corporations sector. the form of property income paid abroad. The only exception is made for land and buildings in extraterritorial 4.54 The type of unit properly called a holding company is a unit enclaves of foreign governments (such as embassies, that holds the assets of subsidiary corporations but does not consulates and military bases) that are subject to the laws of undertake any management activities. They are described the home territory and not those of the territory where they in ISIC Rev. 4 in section K class 6420 as follows: are physically situated. This class includes the activities of holding companies, i.e. 4.50 A long-term lease to use immovable assets such as land and units that hold the assets (owning controlling-levels of other natural resources must also be held by a resident. If equity) of a group of subsidiary corporations and whose 68 Institutional units and sectors principal activity is owning the group. The holding a company may be called a conduit), securitization vehicles companies in this class do not provide any other service to and to carry out other financial functions. the enterprises in which the equity is held, i.e. they do not administer or manage other units. 4.60 The degree of independence from its parent may be demonstrated by exercising some substantive control over Such units are always allocated to the financial its assets and liabilities to the extent of carrying the risks corporations sector and treated as captive financial and reaping the rewards associated with the assets and institutions even if all the subsidiary corporations are non- liabilities. Such units are classified in the financial financial corporations. corporations sector. Special purpose entities 4.61 An entity of this type that cannot act independently of its parent and is simply a passive holder of assets and 4.55 A number of institutional units may be described as special liabilities (sometimes described as being on auto-pilot) is purpose entities (SPEs) or special purpose vehicles. There not treated as a separate institutional unit unless it is is no common definition of an SPE but some of the resident in an economy different from that of its parent. If it following characteristics may apply. is resident in the same economy as its parent, it is treated as an "artificial subsidiary" as described immediately below. 4.56 Such units often have no employees and no non-financial assets. They may have little physical presence beyond a "brass plate" confirming their place of registration. They Artificial subsidiaries of corporations are always related to another corporation, often as a subsidiary, and SPEs in particular are often resident in a 4.62 Within the SNA, the term corporation is used to denote territory other than the territory of residence of the related both those institutions legally recognized as corporations corporations. In the absence of any physical dimension to and other units treated in the SNA as corporations, an enterprise, its residence is determined according to the specifically quasi-corporations, branches and notional economic territory under whose laws the enterprise is units. For the following six paragraphs, however, the term incorporated or registered. For more detail on corporation is used in the sense of a corporation as a legal problematical cases see BPM6. entity. 4.57 Entities of this type are commonly managed by employees of another corporation which may or may not be a related 4.63 A subsidiary corporation, wholly owned by a parent one. The unit pays fees for services rendered to it and in corporation, may be created to provide services to the turn charges its parent or other related corporation a fee to parent corporation, or other corporations in the same group, cover these costs. This is the only production the unit is in order to avoid taxes, to minimize liabilities in the event involved in though it will often incur liabilities on behalf of of bankruptcy, or to secure other technical advantages its owner and will usually receive investment income and under the tax or corporation legislation in force in a holding gains on the assets it holds. particular country. For example, the parent may create a subsidiary to which ownership of its land, buildings or equipment is transferred and whose sole function is to lease 4.58 Whether a unit has all or none of these characteristics, and them back again to the parent corporation; the subsidiary whether it is described as an SPE or some similar may be the nominal employer of all the staff who are then designation or not, it is treated in the SNA in the same way contracted to other corporations in the group, the subsidiary as any other institutional unit by being allocated to sector may keep the accounts and records of the parent on a and industry according to its principal activity unless it falls separate computer installation; the role of the subsidiary into one of the three following categories: may be established to take advantage of favourable funding or regulatory treatments and so on. In some cases, a. Captive financial institutions, corporations may create "dormant" subsidiaries that are not actually engaged in any production but which may be b. Artificial subsidiaries of corporations, activated at the convenience of the parent corporation. c. Special purpose units of general government. 4.64 In general, these sorts of corporations do not satisfy the definition of an institutional unit in the SNA because they Each of these is described below. lack the ability to act independently from their parent corporation and may be subject to restrictions on their ability to hold or transact assets held on their balance Captive financial institutions sheets. Their level of output and the price they receive for it are determined by the parent that (possibly with other 4.59 A holding company that simply owns the assets of corporations in the same group) is their sole client. They subsidiaries is one example of a captive financial are thus not treated as separate institutional units in the institution. Other units that are also treated as captive SNA but are treated as an integral part of the parent and financial institutions are units with the characteristics of their accounts are consolidated with those of the parent. As SPEs as described above including investment and pension noted above, the accounts for passive SPEs (those on auto- funds and units used for holding and managing wealth for pilot) are also consolidated with their parent corporation individuals or families, holding assets for securitization, unless they are resident in an economy different from that issuing debt securities on behalf of related companies (such where the parent is resident. 69 System of National Accounts 4.65 Quasi-corporations such as a partnership or trust may also other corporations, households or government units. In be set up by a parent corporation for similar reasons to the general, institutional units do not have to be autonomous subsidiary corporations just described. Within the SNA, but they do have to be responsible, and accountable, for the these are also treated as an integral part of the parent and decisions and actions they take. their accounts are consolidated with the parent. 4.70 Because many shareholders do not exercise their voting 4.66 A distinction must be made between artificial subsidiaries rights, a single shareholder, or small number of as just described and a unit undertaking only ancillary shareholders acting together, may be able to secure control activities. As described in more detail in section D of over a corporation, even though they may hold chapter 5, ancillary activities are limited in scope to the considerably less than half of the total shares. When type of service functions that virtually all enterprises need ownership of shares is widely diffused among a large to some extent or another such as cleaning premises, number of shareholders, control may be secured by owning running the staff payroll or providing the information considerably less than half of the total shares. technology infrastructure for the enterprise. Units undertaking only ancillary activities will in general not 4.71 However, it is not possible to stipulate a minimum satisfy the conditions of being an institutional unit (for the shareholding below 50 per cent that will guarantee control same sort of reason as artificial subsidiaries do not) but in all cases. The minimum must vary depending upon the they may sometimes be treated as a separate establishment total number of shareholders, the distribution of shares of the enterprise if this is analytically useful. among them, and the extent to which small shareholders take an active interest, etc. Special purpose units of general government Subsidiary and associate corporations 4.67 General government may also set up special units, with characteristics and functions similar to the captive financial 4.72 It is common for corporations to own shares in other institutions and artificial subsidiaries of corporations just corporations, and certain interrelationships between described. Such units do not have the power to act corporations need to be specified for purposes of the SNA. independently and are restricted in the range of transactions they can engage in. They do not carry the risks and rewards associated with the assets and liabilities they hold. Such Subsidiary corporations units, if they are resident, are treated as an integral part of general government and not as separate units. If they are 4.73 Corporation B is said to be a subsidiary of corporation A non-resident they are treated as separate units. Any when: transactions carried out by them abroad are reflected in corresponding transactions with government. Thus a unit that borrows abroad is then regarded as lending the same a. Either corporation A controls more than half of the amount to general government, and on the same terms, as shareholders' voting power in corporation B; or the original borrowing. b. Corporation A is a shareholder in corporation B with 3. Ownership and control of corporations the right to appoint or remove a majority of the directors of corporation B. 4.68 The ownership of a listed corporation is diffused among the 4.74 Corporation A may be described as the parent corporation institutional units that own its shares in proportion to the in this situation. As the relationship of a parent corporation shareholdings. It is possible for one single institutional unit, to a subsidiary is defined in terms of control rather than whether another corporation, a household or a government ownership, the relationship must be transitive: that is, if C unit, to own all the equity or shares in a corporation but, in is a subsidiary of B and B is a subsidiary of A, then C must general, ownership of a listed corporation is diffused also be a subsidiary of A. If A has a majority shareholding among several, possibly very many, institutional units. in B while B has a majority shareholding in C, A cannot also have a majority shareholding in C. Nevertheless, A 4.69 A single institutional unit owning more than a half of the must be able to control C if it controls B. By analogy with shares, or equity, of a corporation is able to control its families of persons, corporation B can be described as a policy and operations by outvoting all other shareholders, if first generation subsidiary of corporation A, and necessary. Similarly, a small, organized group of corporation C as a second generation subsidiary of A. shareholders whose combined ownership of shares exceeds Evidently, large families of corporations may be built up 50 per cent of the total is able to control the corporation by with any number of subsidiaries at each level or generation acting in concert. There may be exceptional cases in which and also any number of generations. Very large families of certain shareholders enjoy privileged voting rights, such as corporations, described as conglomerates, are encountered a "golden share" giving a right of veto, but in general an in some countries. Conglomerates that include corporations individual institutional unit or group of units owning more resident in different countries are usually described as than half the voting shares of a corporation can exercise multinational corporations. complete control by appointing directors of its own choice. The degree of autonomy exercised by the directors and managers of a corporation is, therefore, likely to vary Associate corporations considerably, depending upon the extent to which the ownership of its shares is concentrated in the hands of a 4.75 Corporation B is said to be an associate of corporation A small number of other institutional units, whether these are when corporation A and its subsidiaries control between 10 70 Institutional units and sectors per cent and 50 per cent of the shareholders' voting power be based on whether the shares owned by other public in B so that A has some influence over the corporate policy entities provide a majority voice. and management of B. b. Control of the board or other governing body. The 4.76 By definition, a corporation is able to exert less influence ability to appoint or remove a majority of the board or over an associate corporation than over a subsidiary. other governing body as a result of existing legislation, Although some corporations may be able to exert regulation, contractual, or other arrangements will considerable influence over their associates, this cannot be likely constitute control. Even the right to veto guaranteed. The relationship between associates is weaker proposed appointments can be seen as a form of control than that between parent and subsidiary corporations, and if it influences the choices that can be made. If another groups of associates may not be well defined. body is responsible for appointing the directors, it is necessary to examine its composition for public Government control of corporations influence. If a government appoints the first set of directors but does not control the appointment of 4.77 A corporation is a public corporation if a government unit, replacement directors, the body would then be part of another public corporation, or some combination of the public sector until the initial appointments had government units and public corporations controls the expired. entity, where control is defined as the ability to determine the general corporate policy of the corporation. The c. Control of the appointment and removal of key expression "general corporate policy" as used here is personnel. If control of the board or other governing understood in a broad sense to mean the key financial and body is weak, the appointment of key executives, such operating policies relating to the corporation's strategic as the chief executive, chairperson and finance director, objectives as a market producer. may be decisive. Non-executive directors may also be relevant if they sit on key committees such as the 4.78 Because governments exercise sovereign powers through remuneration committee determining the pay of senior legislation, regulations, orders and the like, care needs to be staff. applied in determining whether the exercise of such powers amounts to a determination of the general corporate policy of a particular corporation and therefore control of the d. Control of key committees of the entity. Subcommittees corporation. Laws and regulations applicable to all units as of the board or other governing body could determine a class or to a particular industry should not be viewed as the key operating and financial policies of the entity. amounting to control of these units. Majority public sector membership on these subcommittees could constitute control. Such 4.79 The ability to determine general corporate policy does not membership can be established under the constitution necessarily include the direct control of the day-to-day or other enabling instrument of the corporation. activities or operations of a particular corporation. The officers of such corporations would normally be expected e. Golden shares and options. A government may own a to manage these in a manner consistent with and in support "golden share," particularly in a corporation that has of the overall objectives of the particular corporation. Nor been privatized. In some cases, this share gives the does the ability to determine the general corporate policy of government some residual rights to protect the interests a corporation include the direct control over any of the public by, for example, preventing the company professional, technical or scientific judgments, as these selling off some categories of assets or appointing a would normally be viewed as part of the core competence special director who has strong powers in certain of the corporation itself. For example, the professional or circumstances. A golden share is not of itself indicative technical judgments exercised by a corporation set up to of control. If, however, the powers covered by the certify aircraft airworthiness would not be considered golden share do confer on the government the ability to controlled in respect of individual approvals and determine the general corporate policy of the entity in disapprovals, though its broader operating and financial particular circumstances and those circumstances policies, including the airworthiness criteria, may well be currently existed, then the entity should be in the public determined by a government unit as part of the sector from the date in question. The existence of a corporation's corporate policy. share purchase option available to a government unit or a public corporation in certain circumstances may also 4.80 Because the arrangements for the control of corporations be similar in concept to the golden share arrangement can vary considerably, it is neither desirable nor feasible to discussed above. It is necessary to consider whether, if prescribe a definitive list of factors to be taken into account. the circumstance in which the option may be exercised The following eight indicators, however, will normally be exists, the volume of shares that may be purchased the most important and likely factors to consider: under the option and the consequences of such exercise means that the government has "the ability to determine a. Ownership of the majority of the voting interest. the general corporate policy of the entity" by exercising Owning a majority of shares will normally constitute that option. An entity's status in general should be control when decisions are made on a one-share one- based on the government's existing ability to determine vote basis. The shares may be held directly or corporate policy exercised under normal conditions indirectly, and the shares owned by all other public rather than in exceptional economic or other entities should be aggregated. If decisions are not made circumstances such as wars, civil disorders or natural on a one-share one-vote basis, the classification should disasters. 71 System of National Accounts f. Regulation and control. The borderline between control may be implied if only the government was regulation that applies to all entities within a class or prepared to lend. industry group and the control of an individual corporation can be difficult to judge. There are many Although a single indicator could be sufficient to establish examples of government involvement through control, in other cases, a number of separate indicators may regulation, particularly in areas such as monopolies and collectively indicate control. A decision based on the privatized utilities. It is possible for regulatory totality of all indicators must necessarily be judgmental in involvement to exist in important areas, such as in price nature but clearly similar judgements must be made in setting, without the entity ceding control of its general similar cases. corporate policy. Choosing to enter into or continue to operate in a highly regulated environment suggests that Control by a non-resident unit the entity is not subject to control. When regulation is so tight as to effectively dictate how the entity performs its business, then it could be a form of control. If an 4.81 In general, a non-resident unit controls a resident entity retains unilateral discretion as to whether it will corporation if the non-resident unit owns more than 50 per take funding from, interact commercially with, or cent of the equity of the corporation. Branches of non- otherwise deal with a public sector entity, the entity has resident corporations are by their nature always under the ultimate ability to determine its own corporate foreign control. However, control may also be possible policy and is not controlled by the public sector entity. with a holding of less than half the equity if the non- resident unit can exercise some of the powers just described as indicating possible control by government, for example g. Control by a dominant customer. If all of the sales of a the control of the board or other governing body, control of corporation are to a single public sector customer or a the appointment and removal of key personnel, control of group of public sector customers, there is clear scope key committees of the corporations and so on. for dominant influence. The presence of a minority private sector customer usually implies an element of 4.82 Within the balance of payments, a distinction is made independent decision-making by the corporation so that between corporations where over 50 per cent of the equity the entity would not be considered controlled. In is held by non-residents and those corporations where general, if there is clear evidence that the corporation between 10 and 50 per cent of the equity is held abroad. All could not choose to deal with non-public sector clients corporations with foreign holdings of 10 per cent or more because of the public sector influence, then public are described as foreign direct investment enterprises and control is implied. special treatment of their earnings is applied. Further details on this are given in chapters 7 and 26. It is important h. Control attached to borrowing from the government. to note, however, that while all foreign controlled Lenders often impose controls as conditions of making corporations are foreign direct investment enterprises, the loans. If the government imposed controls through reverse is not true, for example even a publicly controlled lending or issuing guarantees that are more than would corporation may be a foreign direct investment enterprise be typical when a healthy private sector entity borrows if, in addition to government controlling half of the equity, from a bank, control may be indicated. Similarly, a further 10 per cent is owned by a non-resident. C. Non-profit institutions 4.83 Non-profit institutions are legal or social entities, created goods or services to other persons in need; or they may be for the purpose of producing goods and services, whose intended to provide health or education services for a fee, status does not permit them to be a source of income, but not for profit; or they may be intended to promote the profit or other financial gain for the units that establish, interests of pressure groups in business or politics; etc. control or finance them. In practice, their productive activities are bound to generate either surpluses or deficits 1. The characteristics of NPIs but any surpluses they happen to make cannot be appropriated by other institutional units. The articles of association by which they are established are drawn up in 4.85 The main features of NPIs may be summarized as follows: such a way that the institutional units that control or manage them are not entitled to a share in any profits or a. Most NPIs are legal entities created by process of law other income they receive. For this reason, they are whose existence is recognized independently of the frequently exempted from various kinds of taxes. persons, corporations or government units that establish, finance, control or manage them. The 4.84 NPIs may be created by households, corporations, or purpose of the NPI is usually stated in the articles of government but the motives leading to their creation are association or similar document drawn up at the time of varied. For example, NPIs may be created to provide its establishment. In some countries, especially services for the benefit of the households or corporations developing countries, an NPI may be an informal entity who control or finance them; or they may be created for whose existence is recognized by society but does not charitable, philanthropic or welfare reasons to provide have any formal legal status; such NPIs may be created 72 Institutional units and sectors for the purpose of producing non-market goods or impact on demand. Such NPIs are not charities, their real services for the benefit of individual households or objective often being to provide educational, health or other groups of households. services of a very high quality using their incomes from endowments merely to keep down somewhat the high fees b. Many NPIs are controlled by associations whose they have to charge. members have equal rights, including equal votes on all major decisions affecting the affairs of the NPI. Market NPIs serving enterprises Members enjoy limited liability with respect to the NPI's operations. 4.89 Some market NPIs restrict their activities to serving a particular subset of other market producers. Most market c. There are no shareholders with a claim on the profits or NPIs serving enterprises are created by associations of the equity of the NPI. The members are not entitled to a enterprises whose interests they are designed to promote. share in any profits, or surplus, generated by the They consist of chambers of commerce, agricultural, productive activities of the NPI, such profits being manufacturing or trade associations, employers' retained within the NPI. organizations, research or testing laboratories or other organizations or institutes that engage in activities that are d. The direction of an NPI is usually vested in a group of of common interest or benefit to the group of enterprises officers, executive committee or similar body elected that control and finance them. The NPIs often engage in by a simple majority vote of all the members. These publicity on behalf of the group, lobby politicians or officers are the counterpart of the board of directors of provide advice or assistance to individual members in a corporation and are responsible for appointing any difficulty for one reason or another. The NPIs are usually paid managers. financed by contributions or subscriptions from the group of enterprises concerned. The subscriptions are treated not e. The term "non-profit institution" derives from the fact as transfers but as payments for services rendered and these that the members of the association controlling the NPI NPIs are, therefore, classed as market producers. However, are not permitted to gain financially from its operations as explained below, when chambers of commerce or and cannot appropriate any surplus that it may make. It similar organizations intended for the benefit of enterprises does not imply that an NPI cannot make an operating are controlled by government units, they are classified as surplus on its production. non-market NPIs and allocated to the general government sector. 4.86 In some countries NPIs are subject to preferential tax treatment, possibly to exemption from income tax, but this 3. NPIs engaged in non-market production is not necessarily so and is not a determining factor in the identification of an NPI. 4.90 The majority of NPIs in most countries are non-market rather than market producers. Non-market producers are 4.87 As in the case of producer units owned by government producers that provide most of their output to others free or units, it is important to distinguish between NPIs engaged at prices that are not economically significant. Thus, NPIs in market and non-market production as this affects the engaged mainly in non-market production may be sector of the economy to which an NPI is allocated. NPIs distinguished not only by the fact that they are incapable of do not necessarily engage in non-market production. providing financial gain to the units that control or manage them, but also by the fact that they must rely principally on 2. NPIs engaged in market production funds other than receipts from sales to cover their costs of production or other activities. Their principal source of 4.88 Market producers are producers that sell most or all of their finance may be regular subscriptions paid by the members output at prices that are economically significant, that is, at of the association that controls them or transfers or prices that have a significant influence on the amounts the donations from third parties, including government or from producers are willing to supply and on the amounts property income. purchasers wish to buy. Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market 4.91 NPIs engaged mainly in non-market production are divided producers when they charge fees that are based on their into two groups: those NPIs controlled by government and production costs and that are sufficiently high to have a those that are not. The former are included in the general significant influence on the demand for their services. Their government sector. The latter are described as "non-profit production activities must generate an operating surplus or institutions serving households" (NPISHs) and constitute a loss. Any surpluses they make must be retained within the separate sector in the SNA. institutions as their status prevents them from distributing them to others. On the other hand, because of their status as "non-profit institutions" they are also able to raise Government control of non-profit institutions additional funds by appealing for donations from persons, corporations or government. In this way, they may be able 4.92 Control of an NPI is defined as the ability to determine the to acquire assets that generate significant property income general policy or programme of the NPI. All NPIs allocated in addition to their revenues from fees, thereby enabling to the general government sector should retain their identity them to charge fees below average costs. However, they as NPIs in statistical records, to facilitate analysis of the must continue to be treated as market producers so long as complete set of NPIs. To determine if an NPI is controlled their fees are determined mainly by their costs of by the government, the following five indicators of control production and are high enough to have a significant should be considered: 73 System of National Accounts a. The appointment of officers. The government may have regulations, then it would not be considered controlled the right to appoint the officers managing the NPI by government. either under the NPI's constitution, its articles of association or other enabling instrument. d. Degree of financing. An NPI that is mainly financed by government may be controlled by that government. b. Other provisions of enabling instrument. The enabling Generally, if the NPI remains able to determine its instrument may contain provisions other than the policy or programme to a significant extent along the appointment of officers that effectively allow the lines mentioned in the previous indicator, then it would government to determine significant aspects of the not be considered controlled by government. general policy or programme of the NPI. For example, the enabling instrument may specify or limit the e. Risk exposure. If a government openly allows itself to functions, objectives and other operating aspects of the be exposed to all, or a large proportion of, the financial NPI, thus making the issue of managerial appointments risks associated with an NPI's activities, then the less critical or even irrelevant. The enabling instrument arrangement constitutes control. The criteria are the may also give the government the right to remove key same as in the previous two indicators. personnel or veto proposed appointments, require prior approval of budgets or financial arrangements by the A single indicator could be sufficient to establish control in government, or prevent the NPI from changing its some cases, but in other cases, a number of separate constitution, dissolving itself, or terminating its indicators may collectively indicate control. A decision relationship with government without government based on the totality of all indicators will necessarily be approval. judgmental in nature. c. Contractual agreements. The existence of a contractual agreement between a government and an NPI may NPIs serving households (NPISHs) allow the government to determine key aspects of the NPI's general policy or programme. As long as the NPI 4.93 Non-profit institutions serving households (NPISHs) is ultimately able to determine its policy or programme consist of non-market NPIs that are not controlled by to a significant extent, such as by being able to renege government. They provide goods and services to on the contractual agreement and accept the households free or at prices that are not economically consequences, by being able to change its constitution significant. Most of these goods and services represent or dissolve itself without requiring government individual consumption but it is possible for NPISHs to approval other than that required under the general provide collective services. D. The non-financial corporations sector and its subsectors 4.94 Non-financial corporations are corporations whose c. All resident NPIs that are market producers of goods or principal activity is the production of market goods or non-financial services. non-financial services. The non-financial corporations sector is composed of the following set of resident institutional units: 4.95 Some non-financial corporations or quasi-corporations may have secondary financial activities: for example, producers or retailers of goods may provide consumer credit directly a. All resident non-financial corporations (as understood to their own customers. As explained more fully below, in the SNA and not just restricted to legally constituted such corporations or quasi-corporations are nevertheless corporations), regardless of the residence of their classified as belonging in their entirety to the non-financial shareholders; corporate sector provided their principal activity is non- financial. Sectors are groups of institutional units, and the b. The branches of non-resident enterprises that are whole of each institutional unit must be classified to one or engaged in non-financial production on the economic other sector of the SNA even though that unit may be territory on a long-term basis; engaged in more than one type of economic activity. Table 4.1:Subsectors of the non-financial corporations sector Non-financial corporations NPIs FPIs Public non-financial corporations Public non-financial NPIs Public non-financial FPIs National private non-financial corporations National private non-financial NPIs National private non-financial FPIs Foreign controlled non-financial corporations Foreign controlled non-financial NPIs Foreign controlled non-financial FPIs Total non-financial corporations Total non-financial NPIs Total non-financial FPIs 74 Institutional units and sectors 4.96 Two classification criteria are used to subsector the non- section B. Corporations controlled by non-resident units are financial corporations sector. One criterion is to show NPIs described as being foreign controlled. separately from other units in the sector. These units other than NPIs may be described as for profit institutions (FPIs). The second criterion is that of control to show: 4.97 The full subsectoring of the non-financial corporations sector can be seen as a two-way table as shown in table 4.1. a. Public non-financial corporations, The exact form of presentation of the subsectors will depend on both analytical and statistical considerations. It b. National private non-financial corporations, and may be that the number of NPIs is such that some control categories are empty or sufficiently sparse that the detail c. Foreign controlled non-financial corporations. cannot be shown for reasons of confidentiality. At the least, though, it is useful, and should be feasible, to distinguish The criteria for control of corporations and NPIs by the entries for the left-most column and bottom row of table government and non-resident units are described in detail in 4.1. E. The financial corporations sector and its subsectors 4.98 Financial corporations consist of all resident a. A non-financial enterprise does not create a new corporations that are principally engaged in providing institutional unit, such as a subsidiary corporation, to financial services, including insurance and pension carry out the financial activity; and funding services, to other institutional units. The financial corporations sector is composed of the following set of b. The financial activity remains secondary to the resident institutional units: principal activity of the enterprise. a. All resident financial corporations (as understood in the 4.100 The same principle applies to the subsectoring of financial SNA and not just restricted to legally constituted corporations. For example, many central banks also engage corporations), regardless of the residence of their in some commercial banking. However, as a single shareholders; institutional unit, the central bank as a whole, including its commercial banking activities, is classified in the subsector "central banks". For the same reason, central bank or b. The branches of non-resident enterprises that are monetary authority-type functions carried out by agencies engaged in financial activity on the economic territory within the central government that are not separate on a long-term basis; institutional units from government are not allocated to the central bank subsector. (This is discussed further in the c. All resident NPIs that are market producers of financial following section and in chapter 22.) services. 4.101 Financial corporations can be divided into three broad classes namely, financial intermediaries, financial The production of financial services is the result of auxiliaries and other financial corporations. Financial financial intermediation, financial risk management, intermediaries are institutional units that incur liabilities liquidity transformation or auxiliary financial activities. on their own account for the purpose of acquiring Because the provision of financial services is typically financial assets by engaging in financial transactions on subject to strict regulation, it is usually the case that units the market. They include insurance corporations and providing financial services do not produce other goods and pension funds. Financial auxiliaries are institutional units services and financial services are not provided as principally engaged in serving financial markets, but do secondary production. not take ownership of the financial assets and liabilities they handle. Other financial corporations are 4.99 One form of financial innovation has seen a substantial institutional units providing financial services, where growth in activity of a kind traditionally carried out by, or most of their assets or liabilities are not available on open through, financial corporations but that may also be done financial markets. directly by non-financial enterprises themselves. For example, there is a tendency in some countries for 4.102 The financial corporations sector can be divided into nine producers or retailers of goods to provide consumer credit subsectors according to its activity in the market and the directly to their customers. Another example is the liquidity of its liabilities. These nine subsectors are shown tendency for non-financial enterprises in some countries to in table 4.2 and each is described later in this section. raise funds themselves by selling their own obligations Subsector 6 corresponds to financial auxiliaries; subsector directly on the money or capital markets. However, the 7 corresponds to other financial corporations. All the other enterprise as a whole must continue to be classified as non- subsectors are financial intermediaries of one sort or financial provided that: another. 75 System of National Accounts 4.103 As well as being subsectored according to the nature of the liabilities of deposit-taking corporations are typically financial activity being undertaken, the financial included in measures of money broadly defined. corporations sector can also be subsectored in the same manner as the non-financial corporations sector to show the 4.106 In general, the following financial intermediaries are difference between NPIs and FPIs and to show which units classified in this subsector: are subject to public control, which are national private corporations and which are foreign controlled. Thus in principle each of the rows in table 4.2 may be further a. Commercial banks, "universal" banks, "all-purpose" disaggregated in the manner of table 4.1 though it is banks; unlikely that all possible cross-classifications exist and a compressed subsectoring based on local circumstance and b. Savings banks (including trustee savings banks and particular analytical interest may be sufficient. savings and loan associations); 1. Central bank c. Post office giro institutions, post banks, giro banks; 4.104 The central bank is the national financial institution that d. Rural credit banks, agricultural credit banks; exercises control over key aspects of the financial system. In general, the following financial intermediaries are e. cooperative credit banks, credit unions; and classified in this subsector: f. Specialized banks or other financial corporations if a. The national central bank, including where it is part of they take deposits or issue close substitutes for a system of central banks. deposits. b. Currency boards or independent currency authorities 3. Money market funds (MMFs) that issue national currency that is fully backed by foreign exchange reserves. 4.107 Money market funds (MMFs) are collective investment schemes that raise funds by issuing shares or units to the c. Central monetary agencies of essentially public origin public. The proceeds are invested primarily in money (for example, agencies managing foreign exchange or market instruments, MMF shares or units, transferable issuing bank notes and coin) that keep a complete set of debt instruments with a residual maturity of not more accounts but are not classified as part of central than one year, bank deposits and instruments that pursue government. Supervisory authorities that are separate a rate of return that approaches the interest rates of institutional units are not included with the central bank money market instruments. MMF shares can be but are included with financial auxiliaries. transferred by cheque or other means of direct third-party payment. Because of the nature of the instruments the schemes invest in, their shares or units may be regarded as As long as the central bank is a separate institutional unit, it close substitutes for deposits. is always allocated to the financial corporations sector even if it is primarily a non-market producer. 4. Non-MMF investment funds 2. Deposit-taking corporations except the 4.108 Non-MMF investment funds are collective investment central bank schemes that raise funds by issuing shares or units to the public. The proceeds are invested predominantly in 4.105 Deposit-taking corporations except the central bank have financial assets, other than short-term assets, and in non- financial intermediation as their principal activity. To this financial assets (usually real estate). Investment fund end, they have liabilities in the form of deposits or shares or units are generally not close substitutes for financial instruments (such as short-term certificates of deposits. They are not transferable by means of cheque or deposit) that are close substitutes for deposits. The direct third-party payments. Table 4.2:Subsectors of the financial corporations sector 1. Central Bank 2. Deposit-taking corporations except the Central Bank 3. Money market funds (MMF) 4. Non-MMF investment funds 5. Other financial intermediaries except insurance corporations and pension funds (ICPF) 6. Financial auxiliaries 7. Captive financial institutions and money lenders 8. Insurance corporations (IC) 9. Pension funds (PF) 76 Institutional units and sectors 5. Other financial intermediaries, except a. Insurance brokers, salvage and claims adjusters insurance corporations and pension funds (whether employed by the insurance company, an independent adjuster or a public adjuster employed by (ICPFs) the policyholder), insurance and pension consultants; 4.109 Other financial intermediaries except insurance b. Loan brokers, securities brokers, investment advisers, corporations and pension funds consist of financial etc.; corporations that are engaged in providing financial services by incurring liabilities, in forms other than c. Flotation corporations that manage the issue of currency, deposits or close substitutes for deposits, on securities; their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. It is a feature of a financial intermediary that d. Corporations whose principal function is to guarantee, transactions on both sides of the balance sheet are carried by endorsement, bills and similar instruments; out in open markets. e. Corporations that arrange derivative and hedging 4.110 In general, the following financial intermediaries are instruments, such as swaps, options and futures classified in this subsector: (without issuing them); a. Financial corporations engaged in the securitization of f. Corporations providing infrastructure for financial assets; markets; b. Security and derivative dealers (operating on own g. Managers of pension funds, mutual funds, etc. (but not account); the funds they manage); h. Corporations providing stock exchange and insurance c. Financial corporations engaged in lending, including exchange; the finance associates of retailers, who may be responsible for financial leasing and both personal or commercial finance; i. Foreign exchange bureaux; d. Central clearing counterparties. These organizations j. Non-profit institutions recognized as independent legal provide clearing and settlement transactions in entities serving financial corporations,; securities and derivatives. Clearing relates to identifying the obligations of both parties to the k. Head offices of financial corporations that are transaction, while settlement is the exchange of the principally engaged in controlling financial securities or derivatives and the corresponding corporations or groups of financial corporations but payment. The central clearing counterparties involve that do not themselves conduct the business of financial themselves in the transaction and mitigate counterparty corporations; risk; l. Central supervisory authorities of financial e. Specialized financial corporations that provide: intermediaries and financial markets when they are separate institutional units. · Short-term financing for corporate mergers and takeovers; 7. Captive financial institutions and money lenders · Export/import finance; 4.113 Captive financial institutions and money lenders consist · Factoring services; of institutional units providing financial services, where most of either their assets or liabilities are not transacted on open financial markets. It includes entities transacting · Venture capital and development capital firms. within only a limited group of units (such as with subsidiaries) or subsidiaries of the same holding 6. Financial auxiliaries corporation or entities that provide loans from own funds provided by only one sponsor. 4.111 Financial auxiliaries consist of financial corporations that are principally engaged in activities associated with 4.114 In general, the following financial corporations are transactions in financial assets and liabilities or with classified in this subsector: providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary a. Units which are legal entities such as trusts, estates, taking ownership of the financial assets and liabilities agencies accounts or brass plate companies. being transacted. b. Holding corporations that hold only the assets (owning 4.112 In general, the following financial auxiliaries are classified controlling-levels of equity) of a group of subsidiary in this subsector: corporations and whose principal activity is owning the 77 System of National Accounts group without providing any other service to the life, accident, sickness, fire or other forms of insurance to enterprises in which the equity is held, that is, they do individual institutional units or groups of units or not administer or manage other units. reinsurance services to other insurance corporations. Captive insurance is included, that is, an insurance c. SPEs or conduits that qualify as institutional units and company that serves only its owners. Deposit insurers, raise funds in open markets to be used by their parent corporation. issuers of deposit guarantees and other issuers of standardized guarantees that are separate entities and act d. Units which provide financial services exclusively with like insurers by charging premiums and have reserves, are own funds, or funds provided by a sponsor to a range of classified as insurance corporations. clients and incur the financial risk of the debtor defaulting, including 9. Pension funds (PFs) · Moneylenders. 4.116 Pension liabilities arise when an employer or government · Corporations engaged in lending (for example obliges or encourages members of households to participate providing student loans, import/export loans) from in a social insurance scheme that will provide income in funds received from a sponsor such as a government unit or non-profit institution. retirement. The social insurance schemes may be organized by employers or by government, they may be organized by · Pawnshops that predominantly engage in lending. insurance corporations on behalf of employees or separate institutional units may be established to hold and manage 8. Insurance corporations (ICs) the assets to be used to meet the pensions and to distribute the pensions. The pension fund subsector consists of only 4.115 Insurance corporations consist of incorporated, mutual those social insurance pension funds that are institutional and other entities whose principal function is to provide units separate from the units that create them. F. The general government sector and its subsectors 1. Government units as institutional units · The first group consists of actual or imputed expenditures on the free provision to the community of collective services such as public administration, 4.117 Government units are unique kinds of legal entities defence, law enforcement, public health, etc. that are established by political processes that have legislative, organized collectively by government and financed out judicial or executive authority over other institutional units of general taxation or other income; within a given area. Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the · The second group consists of expenditures on the community or to individual households and to finance their provision of goods or services free, or at prices that are provision out of taxation or other incomes, to redistribute not economically significant, to individual households. income and wealth by means of transfers, and to engage in These expenditures are deliberately incurred and non-market production. In general terms: financed out of taxation or other income by government in the pursuit of its social or political objectives, even a. A government unit usually has the authority to raise though individuals could be charged according to their funds by collecting taxes or compulsory transfers from usage; other institutional units. In order to satisfy the basic requirements of an institutional unit in the SNA, a · The third group consists of transfers paid to other government unit, whether at the level of the total institutional units, mostly households, in order to economy, a region or a locality, must have funds of its redistribute income or wealth. own either raised by taxing other units or received as transfers from other government units and the authority to disburse some, or all, of such funds in the pursuit of 4.118 Within a single territory there may be many separate its policy objectives. It must also be able to borrow government units when there are different levels of funds on its own account; government, specifically central, state or local governments. In addition, social security funds also constitute government units. These different kinds of b. Government units typically make three different kinds government units are described later when the subsectoring of final outlays: of the general government sector is explained. 78 Institutional units and sectors Government units as producers some or all of their capital formation out of their own savings, depreciation reserves or borrowing. The ability to distinguish flows of income and capital between quasi- 4.119 The fact that governments choose to supply not only corporations and government implies that their operating collective services but also many goods and individual and financing activities are not fully integrated with services free, or at prices that are not economically government revenue or finance statistics in practice, despite significant, to households or other units does not the fact that they are not separate legal entities. necessitate that they produce them themselves. Even in the case of most collective services, or so-called "public goods", governments are obliged only to assume 4.123 Producer units of government that cannot be treated as responsibility for organizing and financing their quasi-corporations, like all unincorporated enterprises that production. They are not obliged to produce them. cannot be separated from their owners, remain in the same However, government units do usually engage in a wide institutional unit as the owner, in this case within the range of productive activities in practice, covering not only general government sector. They are likely to consist collective services but also many other goods and largely, or entirely, of non-market producers: that is, individual services. Because it is largely a matter of producers most or all of whose output is supplied to other political choice, the range of goods and services produced units free, or at prices that are not economically significant. by government units varies greatly from one country to In addition to providing non-market goods or services to another. Apart from some collective services such as public the general public, such units may include government administration and defence, it is therefore difficult to producers supplying non-market goods or services to other categorize certain types of production, such as the government units for purposes of intermediate consumption production of education or health services, as intrinsically or gross fixed capital formation: for example, munitions governmental, even though they are often produced by factories, government printing offices, transport agencies, government units. computer or communications agencies, etc. However, it is possible for an unincorporated enterprise within a 4.120 When a government unit wishes to intervene in the sphere government to be a market producer. The example often of production it has three options: quoted is that of a bookshop within a museum. a. it may create a public corporation whose corporate Social security schemes and social security policy, including pricing and investment, it is able to funds control; b. it may create an NPI that it controls; 4.124 Social security schemes are social insurance schemes that cover the community as a whole or large sections of the c. it may produce the goods or services itself in an community and are imposed and controlled by government establishment that it owns but that does not exist as a units. The schemes cover a wide variety of programmes, separate legal entity from the government unit itself. providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc. There is 4.121 However, a government establishment, or group of not necessarily a direct link between the amount of the establishments engaged in the same kind of production contribution paid by an individual and the benefits he or under common management, should be treated as a quasi- she may receive. corporation if the following three criteria hold: a. the unit charges prices for its outputs that are 4.125 When social security schemes are separately organized economically significant; from the other activities of government units and hold their assets and liabilities separately from the latter and engage in financial transactions on their own account, they qualify b. the unit is operated and managed in a similar way to a as institutional units that are described as social security corporation; and funds. However, institutional arrangements in respect of social security schemes differ from country to country and c. the unit has a complete set of accounts that enable its in some countries they may become so closely integrated operating surpluses, savings, assets and liabilities to be with the other finances of government as to bring into separately identified and measured. question whether they should be treated as separate institutional units. Such quasi-corporations are market producers that are treated as separate institutional units from the government 4.126 The amounts raised, and paid out, in social security units that own them. They are classified, sectored and contributions and benefits may be deliberately varied in subsectored in the same way as public corporations. order to achieve objectives of government policy that have no direct connection with the concept of social security as a 4.122 In order to be treated as a quasi-corporation the government scheme to provide social benefits to members of the must allow the management of the enterprise considerable community. They may be raised or lowered in order to discretion not only with respect to the management of the influence the level of aggregate demand in the economy, production process but also the use of funds. Government for example. Nevertheless, so long as they remain quasi-corporations must be able to maintain their own separately constituted funds, they must be treated as working balances and business credit and be able to finance separate institutional units in the SNA. 79 System of National Accounts 2. The general government sector where it is understood that each of the subsectors a, b and c include both NPIs and social security funds at that level of government. 4.127 The general government sector consists of the following groups of resident institutional units: 4.131 Under either method of subsectoring, NPIs should be shown as an "of which" heading under the appropriate level a. All units of central, state or local government (as of government. described immediately below); 4.132 The choice between the two methods of subsectoring b. All non-market NPIs that are controlled by government depends mainly on the size, or importance, of social units. security funds within a country and on the way in which they are managed. The sector also includes social security funds, either as separate institutional units or as part of any or all of central, 4.133 In some countries there may not exist a proper intermediate state or local government. The sector does not include level of government between central and local government, public corporations, even when all the equity of such in which case the subsector "state government" is not corporations is owned by government units. Nor does it distinguished. In others there may be more than two levels include quasi-corporations that are owned and controlled of government below the central government. In that case, by government units. However, unincorporated enterprises the lower levels should be aggregated with state or local owned by government units that are not quasi-corporations government as appropriate. remain integral parts of those units and, therefore, must be included in the general government sector. Central government 3. Subsectors of the general government 4.134 The central government subsector consists of the sector institutional unit or units making up the central government plus those non-market NPIs that are controlled by central government. 4.128 A full subsectoring of the general government would allow for both NPIs and social security funds to be distinguished for each of central, state and local government. In practice, 4.135 The political authority of central government extends over though, it is usual to show all social security funds together the entire territory of the country. Central government has as one subsector or to merge them all with their appropriate therefore the authority to impose taxes on all resident and level of government and not show social security funds by non-resident units engaged in economic activities within level of government separately. Further, NPIs may be the country. Its political responsibilities include national shown as an "of which" item for general government as a defence, the maintenance of law and order and relations whole or for central, state and local government with foreign governments. It also seeks to ensure the individually. efficient working of the social and economic system by means of appropriate legislation and regulation. It is responsible for providing collective services for the benefit 4.129 The first method of subsectoring general government is as of the community as a whole, and for this purpose incurs follows: expenditures on defence and public administration. In addition it may incur expenditures on the provision of a. Central government; services, such as education or health, primarily for the benefit of individual households. Finally, it may make transfers to other institutional units, namely to households, b. State government; NPIs, corporations and other levels of government. c. Local government; 4.136 Central government is a large and complex subsector in most countries. It is generally composed of a central group d. Social security funds; of departments or ministries that make up a single institutional unit plus, in many countries, other institutional units. The departments may be responsible for considerable where it is understood that each of the subsectors a, b and c amounts of expenditure within the framework of the include NPIs but exclude social security funds at that level government's overall budget, but often they are not of government. separate institutional units capable of owning assets, incurring liabilities, engaging in transactions, etc., 4.130 The second method of subsectoring general government is independently of central government as a whole. as follows: 4.137 The departments of central government are often a. Central government; deliberately dispersed geographically and located in different parts of the country, but they nevertheless remain parts of a single institutional unit. Similarly, if the central b. State government; government maintains branch offices or agencies in different parts of the country to meet local needs, including c. Local government; military bases or installations that serve national defence 80 Institutional units and sectors purposes, these must also be counted as parts of a single 4.142 A state government usually has the fiscal authority to levy institutional unit for central government. taxes on institutional units that are resident in, or engage in economic activities or transactions within, its area of competence (but not other areas). In order to be recognized 4.138 In addition to government departments and ministries, there as an institutional unit it must be able to own assets, raise may be agencies of central government with separate legal funds and incur liabilities on its own account. It must also identity and substantial autonomy; they may have be entitled to spend or allocate some, or possibly all, of the discretion over the volume and composition of their taxes or other income that it receives according to its own expenditures and may have a direct source of revenue such policies, within the general rules of law of the country, as earmarked ("hypothecated") taxes. Such agencies are although some of the transfers it receives from central often established to carry out specific functions such as government may be tied to certain specified purposes. It road construction or the non-market production of health or should also be able to appoint its own officers, education services. These should be treated as separate independently of external administrative control. On the institutional units if they maintain full sets of accounts but other hand, if a regional unit is entirely dependent on funds are part of the central government subsector if the services from central government, and if the central government they produce are non-market and if they are controlled by also dictates the ways in which those funds are to be spent central government. at the regional level, it should be treated as an agency of central government rather than as a separate institutional unit. 4.139 In some countries, the central government may include units that engage in financial transactions that in other countries would be performed by central banks. In 4.143 State governments, when they exist, are distinguished by particular, units of central government may be responsible the fact that their fiscal authority extends over the largest for the issue of currency, the maintenance of international geographical areas into which the country as a whole may reserves and the operation of exchange stabilization funds, be divided for political or administrative purposes. In a few and also transactions with the International Monetary Fund countries more than one level of government exists (IMF). When the units in question remain financially between the central government and the smallest governmental institutional units at a local level; in such integrated with central government and under the direct cases, for purposes of sectoring within the SNA, these control and supervision of central government, they cannot intermediate levels of government are grouped together be treated as separate institutional units. Moreover, with the level of government, either state or local, with whatever monetary authority functions are carried out by which they are most closely associated. central government are recorded in the government sector and not the financial corporations sector. However, because of the analytical importance that is attached to obtaining 4.144 State governments may own, or control, corporations in the accounts covering the monetary authorities as a whole, and same way as central government. Similarly, they may have in order to provide links with other statistical systems, such units that engage in market production, in which case the as the BPM6, the GFSM2001 and the Monetary and relevant producer units should be treated as quasi- Financial Statistics Manual (International Monetary Fund corporations whenever their operations and accounting (IMF) 2000, known as MSFM), it is recommended that the records justify this. transactions of central government agencies carrying out monetary authority and deposit-taking functions should be Local government separately identified, so that they can be combined with those of the central bank and other deposit-taking corporations in special tabulations if desired. 4.145 The local government subsector consists of local governments that are separate institutional units plus those non-market NPIs that are controlled by local governments. State government In principle, local government units are institutional units whose fiscal, legislative and executive authority extends over the smallest geographical areas distinguished for 4.140 The state government subsector consists of state administrative and political purposes. The scope of their governments that are separate institutional units plus those authority is generally much less than that of central non-market NPIs that are controlled by state governments. government or state governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas. They are often heavily dependent on grants 4.141 State governments are institutional units exercising some of or transfers from higher levels of government, and they the functions of government at a level below that of central may also act as agents of central or regional governments to government and above that of the governmental some extent. However, in order to be treated as institutional institutional units existing at a local level. They are units they must be entitled to own assets, raise funds and institutional units whose fiscal, legislative and executive incur liabilities by borrowing on their own account; authority extends only over the individual "states" into similarly, they must have some discretion over how such which the country as a whole may be divided. Such "states" funds are spent. They should also be able to appoint their may be described by different terms in different countries. own officers, independently of external administrative In some countries, especially small countries, individual control. The fact that they may also act as agents of central states and state governments may not exist. However, in or state governments to some extent does not prevent them large countries, especially those that have federal from being treated as separate institutional units provided constitutions, considerable powers and responsibilities may they are also able to raise and spend some funds on their be assigned to state governments. own initiative and own responsibility. 81 System of National Accounts 4.146 As they are the government units that are in closest contact operating at each level of government with the with the institutional units resident in their localities, they corresponding government units and government typically provide a wide range of services to local residents, controlled and financed NPIs at that level of government. some of which may be financed out of transfers from The two alternative methods of subsectoring are designed higher levels of government. The same rules govern the to accommodate different analytical needs. The decision as treatment of the production of goods and services by local government units as are applied to central and state to which method is more appropriate in a given country governments. Units such as municipal theatres, museums, cannot be made a priori. It depends on how important social swimming pools, etc., that supply goods or services on a security funds are and on the extent to which they are market basis should be treated as quasi-corporations managed independently of the government units with whenever the appropriate accounting information is which they are associated. If the management of social available and classified to the non-financial corporations security funds is so closely integrated with the short- or sector. Other units supplying goods and services on a medium-term requirements of the government's general market basis are treated as unincorporated enterprises economic policy that contributions and benefits are within local government. Units supplying services such as education or health on a non-market basis remain an deliberately adjusted in the interests of overall economic integral part of the local government unit to which they policy, it becomes difficult, at a conceptual level, to draw belong. any clear distinction between the management of social security and the other economic functions of government. Social security funds Alternatively, in some countries, social security funds may exist in only a very rudimentary form. In either of these 4.147 The social security funds subsector consists of the social circumstances it is difficult to justify treating social security funds operating at all levels of government. security funds as a separate subsector on a par with central, state and local government, and it is more appropriate to 4. The alternative method of subsectoring use the alternative method of subsectoring in which they are grouped with the corresponding government units at 4.148 The alternative method of subsectoring the general each level of government. This is the approach generally government sector is to group the social security funds favoured in the GFSM 2001. G. The households sector and its subsectors 1. Households as institutional units and meals as remuneration in kind. Paid domestic employees have no claim upon the collective resources of their employers' households and the accommodation and 4.149 For the purposes of the SNA, a household is defined as a food they consume are not included with their employer's group of persons who share the same living consumption. They should therefore be treated as accommodation, who pool some, or all, of their income and belonging to separate households from their employers. wealth and who consume certain types of goods and services collectively, mainly housing and food. In general, each member of a household should have some claim upon 4.152 Persons living permanently in an institution, or who may be the collective resources of the household. At least some expected to reside in an institution for a very long, or decisions affecting consumption or other economic indefinite, period of time are treated as belonging to a activities must be taken for the household as a whole. single institutional household when they have little or no autonomy of action or decision in economic matters. Some examples of persons belonging to institutional households 4.150 Households often coincide with families, but members of are the following: the same household do not necessarily have to belong to the same family so long as there is some sharing of resources a. Members of religious orders living in monasteries, and consumption. Households may be of any size and take convents or similar institutions; a wide variety of different forms in different societies or cultures depending on tradition, religion, education, climate, geography, history and other socio-economic b. Long-term patients in hospitals, including mental factors. The definition of a household that is adopted by hospitals; survey statisticians familiar with the socio-economic conditions within a given country is likely to approximate c. Prisoners serving long sentences; closely to the concept of a household as defined in the SNA, although survey statisticians may add more precise, d. Persons living permanently in retirement homes. or operational, criteria within a particular country. 4.153 On the other hand, persons who enter hospitals, clinics, 4.151 Domestic staff who live on the same premises as their convalescent homes, religious retreats, or similar employer do not form part of their employer's household institutions for short periods, who attend residential even though they may be provided with accommodation schools, colleges or universities, or who serve short prison 82 Institutional units and sectors sentences should be treated as members of the individual 4.159 The SNA has to be applied flexibly, not rigidly. In order to households to which they normally belong. implement any of the possible methods of subsectoring the households sector suggested below, individual countries are obliged to make their own decisions about what they 4.154 The residence of individual persons is determined by that consider to be the most relevant classification. Thus, the of the household of which they form part and not by their fact that a specific, detailed classification according to a place of work. All members of the same household have the criterion of interest is proposed here should not be same residence as the household itself, even though they interpreted as implying that the characteristics proposed are may cross borders to work or otherwise spend periods of necessarily or always the most important for purposes of time abroad. If they work and reside abroad so long that economic analysis and policymaking. they acquire a centre of economic interest abroad, they cease to be members of their original households. Subsectoring according to income 2. Unincorporated enterprises within households 4.160 Households may be grouped into subsectors according to the nature of their largest source of income. For this purpose, the following types of household income need to 4.155 As noted in the introduction, households are unlike be distinguished: corporations in that they undertake final consumption. However, like corporations, they may also engage in a. Income accruing to the owners of household production. Household unincorporated market enterprises unincorporated enterprises with paid employees are created for the purpose of producing goods or services (employers' mixed income); for sale or barter on the market. They can be engaged in virtually any kind of productive activity: agriculture, mining, manufacturing, construction, retail distribution or b. Incomes accruing to the owners of household the production of other kinds of services. They can range unincorporated enterprises without paid employees from single persons working as street traders or shoe (own-account workers mixed income); cleaners with virtually no capital or premises of their own through to large manufacturing, construction or service c. Compensation of employees; enterprises with many employees. d. Property and transfer incomes. 4.156 Household unincorporated market enterprises also include unincorporated partnerships that are engaged in producing goods or services for sale or barter on the market. The 4.161 Households are allocated to subsectors according to which partners may belong to different households. When the of the four categories of income listed above is the largest liability of the partners for the debts of the enterprises is for the household as a whole, even if it does not always unlimited, the partnerships must be treated as account for more than half of total household income. unincorporated enterprises and remain within the When more than one income of a given category is household sector since all the assets of the household, received within the same household, for example, because including the dwelling itself, are at risk if the enterprise more than one member of the household earns goes bankrupt. However, unincorporated partnerships with compensation of employees or because more than one many partners, such as some large legal, accounting or property or transfer income is received, the classification architectural firms, are likely to behave like corporations should be based on the total household income within each and should be treated as quasi-corporations assuming category. The four subsectors are described as follows: complete sets of accounts are available for the partnerships. Partnerships whose partners enjoy limited liability are a. Employers; effectively separate legal entities and, as already noted, are treated as corporations. b. Own-account workers; 4.157 An unincorporated enterprise can only be treated as a c. Employees; corporation if it is possible to separate all assets, including financial assets down to the level of cash, into those that belong to the household in its capacity as a consumer from d. Recipients of property and transfer incomes. those belonging to the household in its capacity as a producer. 4.162 The fourth subsector, households for which property and transfer incomes make up the largest source of income, constitutes a heterogeneous group and it is recommended 3. The household sector and its subsectors that it should be divided into three further subsectors when possible. These subsectors are defined as follows: 4.158 The household sector consists of all resident households. There are many useful ways in which the households sector · Recipients of property incomes; may be subsectored and statistical agencies are advised to give due consideration to the various possibilities. More than one method may be adopted if there is a demand for · Recipients of pensions; different breakdowns of the households sector from different users, analysts or policymakers. · Recipients of other transfer incomes. 83 System of National Accounts Subsectoring according to characteristics of a Each of the criteria listed above provides its own possible reference person scheme of subsectoring. It would also be possible to group households into subsectors according to the main income of the reference person if, for some reason, it was not possible 4.163 Other methods of subsectoring usually require a reference to group on the basis of the largest income received by the person to be identified for each household. The reference household. For this purpose, the same income categories person is not necessarily the person that other members of may be used as those recommended for the household's the household regard as the "head of the household", as the largest income. reference person should be decided on grounds of economic importance rather than age or seniority. The reference person should normally be the person with the Subsectoring according to household size and largest income although the reference person could also be location the person who makes the major decisions with regard to the consumption of the household. 4.165 Finally, it may be noted that households may be subsectored using criteria that apply to the household as a 4.164 Once a reference person has been identified, it is possible to whole. For example, subsectors may be defined according group households into subsectors on the basis of the to: reference person's characteristics. For example, subsectors may be defined according to: a. Size of the total income of the household; a. Occupation of the reference person; b. Size of the household as measured by number of persons; b. Industry, if any, in which the reference person works; c. Type of area in which the household is located. c. Educational attainment of the reference person; The last criterion enables households living in agricultural, urban or metropolitan areas to be distinguished from each d. Qualifications or skills possessed by the reference other, or from households located in different geographical person. regions. H. The non-profit institutions serving households sector 4.166 Previous sections have explained that NPIs are allocated to They should be treated as NPISHs when they perform the the corporations sectors when they are engaged in market same kinds of functions as the societies, political parties, production and to the general government sector if they are trades unions, etc., described above, even if they are not engaged in non-market production but subject to legally constituted as NPISHs. However, when groups of government control. The remaining NPIs are termed non- households collaborate on communal construction projects profit institutions serving households (NPISHs). All (such as construction of buildings, roads, bridges, ditches, provide goods and services free or at prices that are not dykes, etc.), they should be treated as informal partnerships economically significant. engaged on own-account construction rather than NPISHs. NPISHs should normally have a continuing role to play and 4.167 One type of NPISHs consists of those that are created by not be deemed to be created for single projects of limited associations of persons to provide goods or, more often, duration. services primarily for the benefit of the members themselves. The services are usually provided free, being 4.169 A second type of NPISH consists of charities, relief or aid financed by regular membership subscriptions or dues. agencies that are created for philanthropic purposes and not They include NPISHs such as professional or learned to serve the interests of the members of the association societies, political parties, trades unions, consumers' controlling the NPISH. Such NPISHs provide goods or associations, churches or religious societies, and social, services on a non-market basis to households in need, cultural, recreational or sports clubs. They do not include including households affected by natural disasters or war. bodies serving similar functions that are controlled by The resources of such NPISHs are provided mainly by government units. Religious institutions are treated as donations in cash or in kind from the general public, NPISHs even when mainly financed by government units if corporations or governments. They may also be provided this majority financing is not seen as empowering control by transfers from non-residents, including similar kinds of by government. Political parties in countries with one-party NPISHs resident in other countries. political systems that are controlled by government units by means of providing the necessary finance are included in the general government sector. 4.170 The third type of NPISHs consist of those that provide collective services, such as research institutions that make 4.168 In some communities, NPISHs may be found that do not their results freely available, environmental groups, etc. possess any legal status or formal articles of association. These are less common that the first two types of NPISHs 84 Institutional units and sectors and may not always be significantly represented in a 4.171 If the number or size of NPISHs funded from abroad is country. significant, it may be useful to disaggregate NPISHs into those that are mainly funded domestically and those that are mainly funded from abroad. I. The rest of the world 4.172 For purposes of the SNA, the rest of the world consists of institutional units of the countries in which they are all non-resident institutional units that enter into located; transactions with resident units, or have other economic links with resident units. It is not a sector for which complete sets of accounts have to be compiled, although it d. International organizations are created for various is often convenient to describe the rest of the world as if it purposes including, among others, the following types were a sector. The accounts, or tables, for the rest of the of activities: world are confined to those that record transactions between residents and non-residents or other economic · The provision of non-market services of a collective relationships, such as claims by residents on non-residents, nature for the benefit of their members; and vice versa. The rest of the world includes certain institutional units that may be physically located within the geographic boundary of a country; for example, foreign · Financial intermediation at an international level, that enclaves such as embassies, consulates or military bases, is, channelling funds between lenders and borrowers in and also international organizations. different countries. 1. International organizations 4.174 Formal agreements concluded by all the member countries of an international organization may sometimes carry the force of law within those countries. 4.173 Certain international organizations have all the essential attributes of institutional units. The special characteristics of an "international organization" as this term is used in the 4.175 Most international organizations are financed wholly or SNA may be summarized as follows: partly by contributions (transfers) from their member countries, but some organizations may raise funds in other ways such as borrowing on financial markets or by a. The members of an international organization are either subscriptions to the capital stock of international national states or other international organizations whose members are national states; they thus derive organizations and lending by member countries. For their authority either directly from the national states purposes of the SNA, international organizations are that are their members or indirectly from them through treated as units that are resident in the rest of the world. other international organizations; 2. Central banks of currency unions b. They are entities established by formal political agreements between their members that have the status 4.176 The central bank of a currency union is treated as a special of international treaties; their existence is recognized kind of international organization. The members of the by law in their member countries; international organization of which the central bank is part are the governments or the national central banks of the c. Because they are established by international countries in the currency union. The central bank is treated agreement, they are accorded sovereign status; that is, as being non-resident in any of the member countries of the international organizations are not subject to the laws currency union but is resident in the currency area as a or regulations of the country, or countries, in which whole. More on the treatment of currency and economic they are located; they are not treated as resident unions can be found in appendix 3 of BPM6. 85 System of National Accounts 86 Chapter 5: Enterprises, establishments and industries A. Introduction 5.1 Institutional units are defined in chapter 4. The present which the technology of production plays an important chapter is concerned with production activities and the role, it is necessary to work with groups of producers that units that undertake them, starting with institutional units are engaged in essentially the same kind of production. and then considering parts of institutional units. An This requirement means that some institutional units must enterprise is the view of an institutional unit as a be partitioned into smaller and more homogeneous units, producer of goods and services. The term enterprise may which the SNA defines as establishments. An refer to a corporation, a quasi-corporation, an NPI or an establishment is an enterprise, or part of an enterprise, unincorporated enterprise. Since corporations and NPIs that is situated in a single location and in which only a other than NPISHs are primarily set up to engage in single productive activity is carried out or in which the production, the whole of their accounting information principal productive activity accounts for most of the relates to production and associated accumulation value added. Further, the SNA defines industries in terms activities. Government, households and NPISHs of establishments. An industry consists of a group of necessarily engage in consumption and may engage in establishments engaged in the same, or similar, kinds of production also; indeed government and NPISHs always activity. In the SNA, production accounts and generation of engage in production and many, but not all, households do. income accounts are compiled for industries as well as As explained in chapter 4, whenever the necessary sectors. accounting information exists, the production activity of these units is separated from their other activities into a quasi-corporation. It is when this separation is not possible 5.3 This chapter first discusses productive activity and its that an unincorporated enterprise exists within the classification in order to lay the ground for defining government unit, household or NPISH. It is thus possible to establishments and subsequently industries. All enterprises define an unincorporated enterprise as follows. An require some basic, routine services to support their unincorporated enterprise represents the production production activities. When they are provided in house they activity of a government unit, NPISH or household that are called ancillary activities. The recording of ancillary cannot be treated as the production activity of a quasi- activities follows a number of conventions depending on corporation. exactly how they are provided. Ancillary activities are described in section D. 5.2 The majority of enterprises by number engages in only one sort of production. The majority of production, though, is carried out by a relatively small number of large 5.4 The definitions that emerge, as well as the underlying corporations that undertake many different kinds of definitions of kinds of activities and of statistical units production, there being virtually no upper limit to the other than establishments, are consistent with the extent of diversity of production in a large enterprise. If definitions in ISIC, Rev. 4. Any slight differences in enterprises are grouped together on the basis of their wording between this chapter and the "Introduction" to the principal activities, at least some of the resulting groupings ISIC are noted and explained in the appropriate places are likely to be very heterogeneous with respect to the type below. Here and elsewhere reference is also made to the of production processes carried out and also the goods and CPC 2, which is the classification of products used in the services produced. Thus, for analyses of production in SNA. B. Productive activities 5.5 Production in the SNA, as will be discussed in detail in may be described, and classified, with reference to various chapter 6, consists of processes or activities carried out characteristics, for example: under the control and responsibility of institutional units that use inputs of labour, capital, goods and services to a. Type of goods or services produced as outputs, produce outputs of goods and services. Any such activity b. Type of inputs used or consumed, 87 System of National Accounts c. Technique of production employed, carried out within the same unit. (The producer unit may be an enterprise or an establishment as defined below.) The d. Ways in which the outputs are used. classification of the principal activity is determined by reference to ISIC, first at the highest level of the The same goods or services may be produced using classification and then at more detailed levels. The different methods of production. Certain types of goods principal activity of an enterprise consists of the principal may be produced from quite different inputs; for example, product and any by-products, that is, products necessarily sugar may be produced from sugar cane or from sugar beet, produced together with principal products. The output of or electricity from coal, oil, nuclear power stations or from hydroelectric plants. Many production processes also the principal activity must consist of goods or services that produce joint products, such as meat and hides, whose uses are capable of being delivered to other units even though are quite different. they may be used for own consumption or own capital formation. 1. The classification of activities in the SNA Secondary activities 5.6 The classification of production activities used in the SNA is ISIC (Rev.4). The criteria used in ISIC to delineate each of its four levels of the classification are complex. The 5.9 A secondary activity is an activity carried out within a structure consists of 21 Sections, 88 Divisions, 238 Groups single producer unit in addition to the principal activity and 419 Classes. At the Division and Group levels, and whose output, like that of the principal activity, must substantial weight is placed on the nature of the good or be suitable for delivery outside the producer unit. The service that is produced as the principal product of the activity in question by referring to the physical composition value added of a secondary activity must be less than that and stage of fabrication of the item and the needs served by of the principal activity, by definition of the latter. The the item. This criterion furnishes the basis for grouping output of the secondary activity is a secondary product. producer units according to similarities in, and links Most producer units produce at least some secondary between, the raw materials consumed and the sources of products. demand for the items. As well, two other major criteria are considered at these levels: the uses to which the goods and services are put, and the inputs, the process and the 3. Ancillary activities technology of production. 5.7 While it is not necessary for purposes of this chapter to 5.10 As its name implies, an ancillary activity is incidental to the explain the concept of an activity in any detail, it is main activity of an enterprise. It facilitates the efficient necessary to clarify the fundamental distinction between running of the enterprise but does not normally result in principal and secondary activities on the one hand and goods and services that can be marketed. For enterprises ancillary activities on the other. that are relatively small and have only a single location, ancillary activities are not separately identified. For larger 2. Principal and secondary activities enterprises with multiple locations, it may be useful to treat ancillary activities in the same way as a secondary or even Principal activities a principal product. A detailed discussion of the recording of ancillary activities is given in section D after the 5.8 The principal activity of a producer unit is the activity discussion on the recording of primary and secondary whose value added exceeds that of any other activity production is complete. C. Partitioning enterprises into more homogeneous units 5.11 Although it is possible to classify enterprises according to 1. Types of production units their principal activities using the ISIC and to group them into "industries", some of the resulting "industries" are likely to be very heterogeneous because some enterprises Kind-of-activity units may have several secondary activities that are quite different from their principal activities. In order to obtain 5.12 One way to partition an enterprise is by reference to groups of producers whose activities are more activities. A unit resulting from such a partitioning is called homogeneous, enterprises have to be partitioned into a kind-of-activity unit (KAU). A kind-of-activity unit is an smaller and more homogeneous units. enterprise, or a part of an enterprise, that engages in only one kind of productive activity or in which the principal productive activity accounts for most of the value added. Each enterprise must, by definition, consist of one or more kind-of-activity units. When partitioned into two or more 88 Enterprises, establishments and industries kind-of-activity units, the resulting units must be more c. Estimates of the stock of non-financial capital and homogeneous with respect to output, cost structure and natural resources used; technology of production than the enterprise as a whole. d. Estimates of changes in inventories and gross fixed Local units capital formation undertaken. 5.13 Enterprises often engage in productive activity at more than 5.19 The compilation of a production account and a generation one location, and for some purposes it may be useful to of income account implies that it must be feasible to partition them accordingly. Thus, a local unit is an calculate output and intermediate consumption and thus enterprise, or a part of an enterprise, that engages in value added and also compensation of employees, taxes on productive activity at or from one location. The definition production and imports, subsidies and the operating surplus has only one dimension in that it does not refer to the kind or mixed income. In principle, it must be feasible to collect of activity that is carried out. Location may be interpreted at least the above kinds of statistics for an establishment, according to the purpose, narrowly, such as a specific even if they may not always be available, or needed, in address, or more broadly, such as within a province, state, practice. county, etc. 3. Application of the principles in specific Establishments situations 5.14 The establishment combines both the kind-of-activity 5.20 The application of the principles given above for dimension and the locality dimension. An establishment is partitioning an enterprise into establishments is not always an enterprise, or part of an enterprise, that is situated in a straightforward. This section discusses several situations in single location and in which only a single productive which the organization of production is such that the activity is carried out or in which the principal productive application is particularly difficult. activity accounts for most of the value added. Establishments are sometimes referred to as local kind-of activity units (local KAUs). Establishments within integrated enterprises 5.15 Although the definition of an establishment allows for the 5.21 A horizontally integrated enterprise is one in which possibility that there may be one or more secondary several different kinds of activities that produce different activities carried out, they should be on a small scale kinds of goods or services for sale on the market are compared with the principal activity. If a secondary activity carried out simultaneously using the same factors of within an enterprise is as important, or nearly as important, production. This definition is consistent with ISIC Rev.4 as the principal activity, then that activity should be treated which reads in part: as taking place within a separate establishment from that in which the principal activity takes place. Horizontal integration occurs when an activity results in end-products with different characteristics. This could 5.16 Thus, establishments are designed to be units that provide theoretically be interpreted as activities carried out data that are more suitable for analyses of production in simultaneously using the same factors of production. In this which the technology of production plays an important case, it will not be possible to separate them statistically role. However, it may still be necessary to transform the into different processes, assign them to different units or resulting data subsequently for purposes of input-output generally provide separate data for these activities. analysis, as explained briefly below in describing the unit Another example would be the production of electricity of homogeneous production and in more detail in chapter through a waste incineration process. The activity of waste 28. disposal and the activity of electricity production cannot be separated in this case. 5.17 In practice, an establishment may usually be identified with an individual workplace in which a particular kind of 5.22 Within the SNA, a separate establishment should be productive activity is carried out: an individual farm, mine, identified for each different kind of activity wherever quarry, factory, plant, shop, store, construction site, possible. transport depot, airport, garage, bank, office, clinic, etc. 5.23 A vertically integrated enterprise is one in which different 2. Data and accounts for establishments stages of production, which are usually carried out by different enterprises, are carried out in succession by different parts of the same enterprise. The output of one 5.18 The only data that can meaningfully be compiled for an stage becomes an input into the next stage, only the output establishment relate to its production activities. They from the final stage being actually sold on the market. ISIC include the following: describes vertically integrated enterprises as follows: a. The items included in the production account and the Vertical integration of activities occurs where the different generation of income account; stages of production are carried out in succession by the same unit and where the output of one process serves as b. Statistics of numbers of employees, types of employees input to the next. Examples of common vertical integration and hours worked; include tree felling and subsequent on-site sawmilling, a 89 System of National Accounts clay pit combined with a brickworks, or production of agriculture, fishing, mining and quarrying, manufacturing, synthetic fibres in a textile mill. etc. 5.24 In ISIC Rev.4, vertical integration should be treated like Establishments owned by general government any other form of multiple activities. A unit with a vertically integrated chain of activities should be classified to the class corresponding to the principal activity within 5.29 Government units, especially central governments, may be this chain, that is, to the activity accounting for the largest particularly large and complex in terms of the kinds of share of value added, as determined by the top-down activities in which they engage. The principles outlined method. This treatment has changed from previous versions above have to be applied consistently and systematically to of ISIC. It should be noted that the term "activity" in this government units. The procedures to be followed when context is used for each step in the production process that dealing with the main kinds of producer units owned by is defined in a separate ISIC class, even though the output government may be summarized as follows. of each step may not be intended for sale. 5.30 If an unincorporated enterprise of government is a market 5.25 If value added or substitutes for the individual steps in a producer and there is sufficient information available to vertically integrated process cannot be determined directly treat it as a quasi-corporation, it should be treated as a from accounts maintained by the unit itself, comparisons publicly controlled unit in the non-financial or financial with other units (for example, based on market prices for corporations sectors as appropriate. The usual conventions intermediate and final products) could be used. The same about distinguishing different establishments within the precautions for using substitutes as listed above apply here. quasi-corporation apply. If it is still impossible to determine the share of value added for the different stages in the chain of production activities, 5.31 An example of an unincorporated market enterprise that default assignments for typical forms of vertical integration can be treated as a quasi-corporation is a municipal can be applied. The Companion Guide to ISIC and CPC swimming pool that is independently managed and whose (United Nations (forthcoming)) provides a set of examples accounts permit its income, saving and capital to be for such cases. measured separately from government so that flows of income, or capital, between the unit and government can be 5.26 While the procedure for the treatment of vertically identified. integrated activities could be applied to any unit, it should be noted that the SNA recommends that when a vertically 5.32 If an unincorporated enterprise of government is a market integrated enterprise spans two or more sections of ISIC, at producer and there is insufficient information to treat it as a least one establishment must be distinguished within each quasi-corporation, or if the unincorporated enterprise is a section. With such a treatment, activities of units engaged non-market producer, then it remains within the general in vertically integrated activities will not cross section government sector but it should be treated as an boundaries of ISIC. establishment in its own right and allocated to the appropriate industry. 5.27 From an accounting point of view it can be difficult to partition a vertically integrated enterprise into 5.33 Non-market producers such as public administration, establishments because values have to be imputed for the defence, health and education providing final goods or outputs from the earlier stages of production which are not services should be partitioned into establishments using the actually sold on the market and which become intermediate activity classification given in Sections O, P and Q of ISIC inputs into later stages. Some of these enterprises may Rev. 4. Agencies of central government may be dispersed record the intra-enterprise deliveries at prices that reflect over the country as a whole in which case it will be market values, but others may not. Even if adequate data necessary to distinguish different establishments for are available on the costs incurred at each stage of activities that are carried out in different locations. production, it may be difficult to decide what is the appropriate way in which to allocate the operating surplus of the enterprise among the various stages. One possibility 5.34 When a government agency supplies goods to other is that a uniform rate of operating surplus be applied to the government agencies it should be treated as a separate costs incurred at each stage. establishment and classified under the appropriate heading of ISIC. This applies to the production of munitions or weapons, printed documents or stationery, roads or other 5.28 Despite the practical difficulties involved in partitioning structures, etc. A government that produces its own vertically integrated enterprises into establishments, it is weapons to supply to its own armed forces is, in effect, a recommended in the SNA, as noted in the section of ISIC vertically integrated enterprise that spans two or more quoted above, that when a vertically integrated enterprise sections of ISIC. Therefore, at least one separate spans two or more sections of the ISIC, at least one establishment should be distinguished in each heading. The establishment must be distinguished within each section. same argument applies to a government printing office and ISIC sections correspond to broad industry groups such as other goods producers owned by government. 90 Enterprises, establishments and industries D. Ancillary activities 5.35 As noted in section B, ancillary activities require special 5.38 Certain activities, although common, are not so common as consideration because of the different ways of recording to be considered ancillary. Many enterprises produce their that are recommended depending on circumstances. As a own machinery and equipment, build their own structures preliminary step, though, it is as well to review exactly and carry out their own research and development. These what is meant by an ancillary activity. Essentially, they are activities are not to be treated as ancillary, whether carried the basic services that every enterprise needs to have in out centrally or not, as they are not found frequently and order to operate effectively. The sorts of services referred extensively in all kinds of enterprises, small as well as to include keeping records, files or accounts in written form large. or on computers; providing electronic and traditional written communication facilities; purchasing materials and Recording (or not) the output of ancillary equipment; hiring, training, managing and paying activities employees; storing materials or equipment: warehousing; transporting goods or persons inside or outside the producer unit; promoting sales; cleaning and maintenance of 5.39 An ancillary activity is not undertaken for its own sake but buildings and other structures; repairing and servicing purely in order to provide supporting services for the machinery and equipment; and providing security and principal or secondary activities with which it is associated. surveillance. If all the ancillary activity is undertaken in the establishment where its output is used, the ancillary activity is regarded as an integral part of the principal or secondary 5.36 These types of services can be produced in house or can be activities with which it is associated. As a result: purchased on the market from specialist service producers though, in practice, the requisite services may not be readily available in the right quantities on local markets. a. The output of an ancillary activity is not explicitly When the services are produced in house, they are termed recognized and recorded separately in the SNA. It ancillary activities. An ancillary activity is a supporting follows that the use of this output is also not recorded. activity undertaken within an enterprise in order to create the conditions within which the principal or secondary b. All the inputs consumed by an ancillary activity, activities can be carried out. In addition, ancillary materials, labour, consumption of fixed capital, etc., are activities have certain common characteristics related to treated as inputs into the principal or secondary activity their output. These additional characteristics include: that it supports. a. The output of an ancillary activity is not intended for In this case it is not possible to identify the value added of use outside the enterprise. an ancillary activity because that value added is combined with the value added of the principal or secondary activity. b. Ancillary activities typically produce outputs that are commonly found as inputs into almost any kind of 5.40 When the production of an enterprise takes place in two or productive activity; more different establishments, certain ancillary activities may be carried out centrally for the benefit of all the establishments collectively. For example, the purchasing, c. Ancillary activities produce services (and, as sales, accounts, computing, maintenance or other exceptions, goods that do not become a physical part of departments of an enterprise may all be the responsibility the output of the principal or secondary activity) as of a head office located separately from the establishments output; in which the principal or secondary activities of the enterprise are carried out. d. The value of ancillary activity output is likely to be small compared with that of the principal or secondary 5.41 If an establishment undertaking purely ancillary activities is activities of an enterprise. statistically observable, in that separate accounts for the production it undertakes are readily available, or if it is in a 5.37 The defining characteristics that ancillary activities support geographically different location from the establishments it the principal and secondary activities of an enterprise and serves, it may be desirable and useful to consider it as a are used within the enterprise are by no means sufficient to separate unit and allocate it to the industrial classification identify an ancillary activity. There are many kinds of corresponding to its principal activity. However, it is activities whose outputs are entirely consumed within the recommended that statisticians do not make extraordinary same enterprise but which could not possibly be considered efforts to create separate establishments for these activities as ancillary. Goods are not commonly used as inputs in the artificially in the absence of suitable basic data being same way as services such as accounting, transportation or available. cleaning. For example, an enterprise may produce milk, all of which is processed into butter or cheese within the same 5.42 When such a unit is recognized, the ancillary activity is enterprise. However, milk production cannot be considered recognized as a primary output. The value of its output an ancillary activity, because milk is a particular kind of should be derived on a sum of costs basis, including the input found only in special types of productive activity. In cost of the capital used in the unit. The output will be general, goods that become embodied in the output of the deemed to be non-market output when the parent enterprise principal or secondary activities are not outputs of ancillary is a non-market enterprise and market otherwise. If the activities. output is treated as non-market, the cost of capital should 91 System of National Accounts be replaced by the consumption of fixed capital when The role of ancillary activities in the SNA summing costs to determine the value of output. The output of the ancillary unit is treated as intermediate consumption 5.45 The production accounts of the SNA do not provide of the establishments it serves and should be allocated comprehensive information about the production of across them using an appropriate indicator such as the services treated in some cases as ancillary services. It is output, value added or employment of these establishments. therefore difficult to obtain information about their role in the economy. For example, it is difficult to know how much output is produced, how many persons are engaged in 5.43 It is appropriate to treat specialized agencies serving central such activities, how many resources are consumed, etc. government as a whole, for example, computer or This may be regarded as a serious disadvantage for certain communications agencies, which tend to be large, as purposes, such as analysing the impact of "information separate establishments. technology" on productivity when the processing and communication of information are typical ancillary activities or when looking at the role of freight transport. 5.44 Even when an ancillary activity is undertaken in the For some purposes, a satellite account may be compiled establishment where it is used, it may grow to the point that that makes estimates of all activities of a certain type it has the capacity to provide services outside the regardless of whether they are ancillary or not. The overall enterprise. For example, a computer processing unit may measure of value added does not alter because both output develop in-house capabilities for which there is an outside and intermediate consumption increase by the same amount demand. When an activity starts to provide a proportion of but a more inclusive picture of the role of the activity in the its services to outsiders, the part of the output that is sold economy can be obtained. There is a discussion on the role has to be treated as secondary rather than ancillary output. of satellite accounts in chapter 29. E. Industries 5.46 Industries are defined in the SNA in the same way as in between industries and products. Certain activities produce ISIC: an industry consists of a group of establishments more than one product simultaneously, while the same engaged in the same, or similar, kinds of activity. At the product may sometimes be produced by using different most detailed level of classification, an industry consists of techniques of production. all the establishments falling within a single Class of ISIC. At higher levels of aggregation corresponding to the 5.49 When two or more products are produced simultaneously Groups, Divisions and, ultimately, Sections of the ISIC, by a single productive activity they are "joint products". industries consist of a number of establishments engaged Examples of joint products are meat and hides produced by on similar types of activities. slaughtering animals or sugar and molasses produced by refining sugar canes. The by-product from one activity may 1. Market, own account and non-market also be produced by other activities, but there are examples producers of by-products, such as molasses, that are produced exclusively as the by-products of one particular activity. 5.47 The term "industry" is not reserved for market producers. An industry, as defined in the ISIC and in the SNA, consists 5.50 The relationship between an activity and a product of a number of establishments engaged in the same type of classification is exemplified by that between the ISIC and production, whether the institutional units to which they the CPC. The CPC is a classification based on the physical belong are market producers or not. The distinction characteristics of goods or on the nature of the services between market and other production is a different rendered, while the ISIC also takes into account the inputs dimension of production and economic activity. For in the production process and the technology used in the example, the health industry in a particular country may production process. In the development of the CPC, it is consist of a number of establishments, some of which are intended that each good or service distinguished in the CPC market producers while others are non-market producers. is defined in such a way that it is normally produced by Because the distinction between market and other kinds of only one activity as defined in ISIC. However, due to production is based on a different criterion from the nature different types of criteria employed, this is not always of activity itself, it is possible to cross-classify possible. An example would be the product of mushrooms, establishments by type of activity and by whether they are which can be produced by controlled growing, that is, an market producers, non-market producers or producers for activity classified in Agriculture in ISIC, or by simply own final use. gathering wild growing mushrooms, an activity classified in Forestry. More detailed national classifications may distinguish different forms of energy production in ISIC, 2. Industries and products based on different technologies, resulting in separate activities for the operation of hydroelectric power plants, 5.48 As already mentioned, a one-to-one correspondence does nuclear power plants etc. The output of all these activities, not exist between activities and products and hence however, would be the single product electricity. 92 Enterprises, establishments and industries 5.51 Conversely, each activity of the ISIC, no matter how outlined above, this typically does not result in a one-to-one narrowly defined, will tend to produce a number of correspondence. The majority of links between ISIC and products as defined in the CPC, although they are often CPC will tend to be one-to-many links, with a few cases clustered within the CPC structure and could be perceived requiring many-to-one links. It is possible to force this as one "type" of product. As far as practically possible, an attempt is made to establish a correspondence between the correspondence into a stricter relationship by selecting one two classifications, by allocating to each category of the link out of the many-to-one correspondence. This selection CPC a reference to the ISIC class in which the good or may facilitate data conversion, but is not a real description service is mainly produced. However, due to the reasons of the link between the two classifications. F. Units of homogeneous production 5.52 In most fields of statistics the choice of statistical unit, and enterprises on the basis of various assumptions or methodology used, are strongly influenced by the purposes hypotheses. Units that are constructed by statistical for which the resulting statistics are to be used. For manipulation of the data collected by the agency are called purposes of input-output analysis, the optimal situation analytical units. would be one in which each producer unit were engaged in only a single productive activity so that an industry could be formed by grouping together all the units engaged in a 5.54 If a producer unit carries out a principal activity and also particular type of production without the intrusion of any one or more secondary activities, it will be partitioned into secondary activities. Such a unit is called a "unit of the same number of units of homogeneous production. If it homogeneous production". is desired to compile production accounts and input-output tables by region, it is necessary to treat units of 5.53 Although the unit of homogeneous production may be the homogeneous production located in different places as optimal unit for purposes of certain kinds of analysis, separate units even though they may be engaged in the particularly input-output analysis, it may not be possible to same activity and belong to the same institutional unit. collect directly from the enterprise or establishment the accounting data corresponding to units of homogeneous production. Such data may have to be estimated 5.55 Chapter 28 discusses the estimation of analytical units for subsequently by transforming the data supplied by use in an input-output context. 93 System of National Accounts 94 Chapter 6: The production account A. Introduction 6.1 The production account is the starting point for the uses are deducted, a balancing item is left. Because the sequence of accounts for institutional units and sectors production account is the first in the sequence of accounts, displaying how income is generated, distributed and used it is the first time the concept of a balancing item appears. throughout the economy. Activities defined as production The importance of balancing items in general and the one therefore determine the extent of GDP and the level of in this account in particular is also discussed before income for the economy. In concept, the economy-wide considering each of the entries of the production account in production account is the aggregation of a similar account turn. for each production unit. Importantly, while production accounts can be compiled for an individual institutional unit as well as for sectors, they can also be compiled for 6.7 The production account for institutional units and sectors is establishments and thus for industries. It is this feature that illustrated in table 6.1. It contains only three items apart allows the study of industrial activity in the economy and from the balancing item. The output from production is permits the compilation of supply and use tables and input- recorded under resources on the right-hand side of the output tables. account. This item may be disaggregated to distinguish different kinds of output. For example, non-market output 6.2 The production account is linked to the definition of should be shown separately from market output and output production. Production is an activity, carried out under for own final use in the sector accounts, when possible. The the responsibility, control and management of an uses recorded on the left-hand side of the account consist of institutional unit, that uses inputs of labour, capital, and intermediate consumption and consumption of fixed goods and services to produce outputs of goods and capital. Both of these may also be disaggregated. services. The production account shows the output of production and the various inputs to it. To do this, three concepts need clarifying. 6.8 The balancing item in the production account is value added. It can be measured either gross or net, that is, before or after deducting consumption of fixed capital: 6.3 The first concept to be clarified is what constitutes production within the SNA. This delineation is referred to as the production boundary of the SNA. Thereafter several a. Gross value added is the value of output less the value key types of production need to be identified depending on of intermediate consumption; whether production is for sale, for own use or is made available to others at little or no cost. b. Net value added is the value of output less the values of both intermediate consumption and consumption 6.4 The next concept to be addressed is how output is to be of fixed capital. valued. Key to this question is the role played by the various types of taxes imposed by (and subsidies given by) government on products and on the activity of production. 6.9 As value added is intended to measure the value created by a process of production, it ought to be measured net, since the consumption of fixed capital is a cost of production. 6.5 The third major concept to be considered is how the However, as explained later, consumption of fixed capital production process adds to the value of goods and services can be difficult to measure in practice and it may not and leads to the generation of income. Does the whole always be possible to make a satisfactory estimate of its contribution of labour and capital add to the value of these value and hence of net value added. Provision has therefore goods and services or should the fact that most capital to be made for value added to be measured gross as well as declines in value as it is used need to be taken into account? net. It follows that provision has also to be made for the balancing items in subsequent accounts of the SNA to be 6.6 The general format of an account in the sequence of measured either gross or net of the consumption of fixed accounts is to show how resources are received and, after capital. 95 System of National Accounts B. The concept of production 1. Production as an economic activity Goods 6.10 Production can be described in general terms as an activity 6.15 Goods are physical, produced objects for which a demand in which an enterprise uses inputs to produce outputs. The exists, over which ownership rights can be established economic analysis of production is mainly concerned with and whose ownership can be transferred from one activities that produce outputs of a kind that can be institutional unit to another by engaging in transactions delivered or provided to other institutional units. Unless on markets. They are in demand because they may be used outputs are produced that can be supplied to other units, to satisfy the needs or wants of households or the either individually or collectively, there can be no division community or used to produce other goods or services. The of labour, no specialization of production and no gains production and exchange of goods are quite separate from trading. There are two main kinds of output, namely activities. Some goods may never be exchanged while goods and services, and it is necessary to examine their others may be bought and sold numerous times. The characteristics in order to be able to delineate activities that production of a good can always be separated from its are productive in an economic sense from other activities. subsequent sale or resale. Collectively, goods and services are described as products. Services 6.11 In the SNA, it is seldom if ever necessary to make a clear distinction between goods and services but in making the 6.16 The production of services must be confined to activities link to other data sets it is often necessary to understand that are capable of being carried out by one unit for the which products have been treated as goods and which as benefit of another. Otherwise, service industries could not services. develop and there could be no markets for services. It is also possible for a unit to produce a service for its own 6.12 Industrial classifications, such as ISIC, identify a group of consumption provided that the type of activity is such that manufacturing industries. However, many of these it could have been carried out by another unit. industries also produce services. For example, some aircraft engine manufacturers may both fabricate aircraft engines 6.17 Services are the result of a production activity that and repair and service existing engines. When goods changes the conditions of the consuming units, or dispatched to another unit for processing do not change facilitates the exchange of products or financial assets. ownership, the work done on them constitutes a service These types of service may be described as change- even though it may be undertaken by a manufacturing effecting services and margin services respectively. industry. The fact that the processing is classified as a Change-effecting services are outputs produced to order service does not prevent the processor from being classified and typically consist of changes in the conditions of the within manufacturing. consuming units realized by the activities of producers at the demand of the consumers. Change-effecting services 6.13 Similarly, some service-producing industries may produce are not separate entities over which ownership rights can be products that have many of the characteristics of goods. For established. They cannot be traded separately from their convenience, the products of these industries are described production. By the time their production is completed, they in the SNA as knowledge-capturing products. must have been provided to the consumers. 6.14 Products are goods and services (including knowledge- 6.18 The changes that consumers of services engage the capturing products) that result from a process of producers to bring about can take a variety of different production. forms as follows: Table 6.1:The production account - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Output 3 604 3 604 Market output 3 077 3 077 Output for own final use 147 147 Non-market output 380 380 Intermediate consumption 1 477 52 222 115 17 1 883 1 883 Taxes on products 141 141 Subsidies on products (-) -8 -8 Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 Consumption of fixed capital 157 12 27 23 3 222 222 Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 96 The production account a. Changes in the condition of the consumer's goods: the ownership rights can be established. They cannot be traded producer works directly on goods owned by the separately from their production. By the time their consumer by transporting, cleaning, repairing or production is completed they must have been provided to otherwise transforming them; the consumers. b. Changes in the physical condition of persons: the Knowledge-capturing products producer transports the persons, provides them with accommodation, provides them with medical or surgical treatments, improves their appearance, etc.; 6.22 Knowledge-capturing products concern the provision, storage, communication and dissemination of information, advice and entertainment in such a way that the consuming c. Changes in the mental condition of persons: the unit can access the knowledge repeatedly. The industries producer provides education, information, advice, that produce the products are those concerned with the entertainment or similar services in a face to face provision, storage, communication and dissemination of manner. information, advice and entertainment in the broadest sense of those terms including the production of general or 6.19 The changes may be temporary or permanent. For example, specialized information, news, consultancy reports, medical or education services may result in permanent computer programs, movies, music, etc. The outputs of changes in the condition of the consumers from which these industries, over which ownership rights may be benefits may be derived over many years. On the other established, are often stored on physical objects (whether hand, attending a football match is a short-lived experience. on paper or on electronic media) that can be traded like In general, the changes may be presumed to be ordinary goods. They have many of the characteristics of improvements, as services are produced at the demand of goods in that ownership rights over these products can be the consumers. The improvements usually become established and they can be used repeatedly. Whether embodied in the persons of the consumers or the goods they characterized as goods or services, these products possess own and are not separate entities that belong to the the essential common characteristic that they can be producer. Such improvements cannot be held in inventories produced by one unit and supplied to another, thus making by the producer or traded separately from their production. possible division of labour and the emergence of markets. 6.20 A single process of production may provide services to a 2. The production boundary group of persons, or units, simultaneously. For example, groups of persons or goods belonging to different 6.23 Given the general characteristics of the goods and services institutional units may be transported together in the same produced as outputs, it becomes possible to define plane, ship, train or other vehicle. People may be instructed production. A general definition of production is given or entertained in groups by attending the same class, lecture first, followed by the rather more restricted definition that or performance. Certain services are provided collectively is used in the SNA. Following this there is a discussion of to the community as a whole, or large sections of the the production boundary as it affects household activities community, for example, the maintenance of law and order, and non-observed activities. and defence. 6.21 Margin services result when one institutional unit facilitates The general production boundary the change of ownership of goods, knowledge-capturing products, some services or financial assets between two 6.24 Economic production may be defined as an activity carried other institutional units. Margin services are provided by out under the control and responsibility of an institutional wholesalers and retailers and by many types of financial unit that uses inputs of labour, capital, and goods and institutions. Margin services resemble change-effecting services to produce outputs of goods or services. There services in that they are not separate entities over which must be an institutional unit that assumes responsibility for Table 6.1 (cont):The production account - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Output 2 808 146 348 270 32 3 604 3 604 Market output 2 808 146 0 123 0 3 077 3 077 Output for own final use 0 0 0 147 0 147 147 Non-market output 348 32 380 380 Intermediate consumption 1 883 1 883 Taxes on products 141 141 Subsidies on products (-) -8 -8 97 System of National Accounts the process of production and owns any resulting goods or The production boundary within households knowledge-capturing products or is entitled to be paid, or otherwise compensated, for the change-effecting or margin The exclusion of most services produced for own use services provided. A purely natural process without any human involvement or direction is not production in an by households economic sense. For example, the unmanaged growth of fish stocks in international waters is not production, 6.28 The production of services by members of the household whereas the activity of fish farming is production. for their own final consumption has traditionally been excluded from measured production in national accounts and it is worth explaining briefly why this is so. It is useful 6.25 While production processes that produce goods can be to begin by listing those services for which no entries are identified without difficulty, it is not always so easy to recorded in the accounts when they are produced by distinguish the production of services from other activities household members and consumed within the same that may be both important and beneficial. Activities that household: are not productive in an economic sense include basic human activities such as eating, drinking, sleeping, taking a. The cleaning, decoration and maintenance of the exercise, etc., that it is impossible for one person to employ dwelling occupied by the household, including small another person to perform instead. Paying someone else to repairs of a kind usually carried out by tenants as well take exercise is no way to keep fit. On the other hand, as owners; activities such as washing, preparing meals, caring for children, the sick or aged are all activities that can be provided by other units and, therefore, fall within the b. The cleaning, servicing and repair of household general production boundary. Many households employ durables or other goods, including vehicles used for paid domestic staff to carry out these activities for them. household purposes; c. The preparation and serving of meals; The production boundary in the SNA d. The care, training and instruction of children; 6.26 The production boundary in the SNA is more restricted than the general production boundary. For reasons e. The care of sick, infirm or old people; explained below, activities undertaken by households that produce services for their own use are excluded from the f. The transportation of members of the household or concept of production in the SNA, except for services their goods. provided by owner-occupied dwellings and services produced by employing paid domestic staff. Otherwise, the 6.29 In most countries a considerable amount of labour is production boundary in the SNA is the same as the more devoted to the production of these services, and their general one defined in the previous paragraphs. consumption makes an important contribution to economic welfare. However, national accounts serve a variety of analytical and policy purposes and are not compiled 6.27 The production boundary of the SNA includes the simply, or even primarily, to produce indicators of welfare. following activities: The reasons for not imputing values for unpaid domestic or personal services produced and consumed within a. The production of all goods or services that are households may be summarized as follows: supplied to units other than their producers, or intended to be so supplied, including the production a. The own-account production of services within of goods or services used up in the process of households is a self-contained activity with limited producing such goods or services; repercussions on the rest of the economy. The decision to produce a household service entails a simultaneous decision to consume that service. This is not true for b. The own-account production of all goods that are goods. For example, if a household engages in the retained by their producers for their own final production of agricultural goods, it does not follow that consumption or gross capital formation; it intends to consume them all. Once the crop has been harvested, the producer has a choice about how much to consume, how much to store for future consumption or c. The own-account production of knowledge-capturing production and how much to offer for sale or barter on products that are retained by their producers for their the market. Indeed, although it is customary to refer to own final consumption or gross capital formation but the own-account production of goods, it is not possible excluding (by convention) such products produced by to determine at the time the production takes place how households for their own use; much of it will eventually be consumed by the producer. For example, if an agricultural crop turns out d. The own-account production of housing services by to be better than expected, the household may dispose owner occupiers; and of some of it on the market even though it may have originally supposed it would consume it all. This kind of possibility is non-existent for services; it is not e. The production of domestic and personal services by possible to produce a service and then decide whether employing paid domestic staff. to offer it for sale or not. 98 The production account b. As the vast majority of household services are not c. The processing of agricultural products; the production produced for the market, there are typically no suitable of grain by threshing; the production of flour by market prices that can be used to value such services. It milling; the curing of skins and the production of is therefore extremely difficult to estimate values not leather; the production and preservation of meat and only for the outputs of the services but also for the fish products; the preservation of fruit by drying, associated incomes and expenditures that can be bottling, etc.; the production of dairy products such as meaningfully added to the values of the monetary butter or cheese; the production of beer, wine, or transactions on which most of the entries in the spirits; the production of baskets or mats; etc.; accounts are based. d. Other kinds of processing such as weaving cloth; dress c. With the exception of the imputed rental of owner- making and tailoring; the production of footwear; the occupied dwellings, the decision to produce services production of pottery, utensils or durables; making for own consumption is not influenced by and does not furniture or furnishings; etc.; influence economic policy because the imputed values are not equivalent to monetary flows. Changes in the levels of household services produced do not affect the e. The supply of water is also considered a goods- tax yield of the economy or the level of the exchange producing activity in this context. In principle, rate, to give two examples. supplying water is a similar kind of activity to extracting and piping crude oil. 6.30 Thus, the reluctance of national accountants to impute values for the outputs, incomes and expenditures associated 6.33 It is not feasible to draw up a complete, exhaustive list of with the production and consumption of services within all possible productive activities but the above list covers households is explained by a combination of factors, the most common types. When the amount of a good namely the relative isolation and independence of these produced within households is believed to be quantitatively activities from markets, the extreme difficulty of making important in relation to the total supply of that good in a economically meaningful estimates of their values, and the country, its production should be recorded. Otherwise, it adverse effects it would have on the usefulness of the may not be worthwhile trying to estimate it in practice. accounts for policy purposes and the analysis of markets and market disequilibria. Services of owner-occupied dwellings 6.31 The exclusion of household services from the production boundary has consequences for labour force and 6.34 The production of housing services for their own final employment statistics. According to International Labour consumption by owner occupiers has always been included Organization (ILO) guidelines, economically active within the production boundary in national accounts, persons are persons engaged in production included within although it constitutes an exception to the general exclusion the boundary of production of the SNA. If that boundary of own-account service production. The ratio of owner- were to be extended to include the production of own- occupied to rented dwellings can vary significantly account household services, virtually the whole adult between countries, between regions of a country and even population would be economically active and over short periods of time within a single country or region, unemployment eliminated. In practice, it would be so that both international and inter-temporal comparisons necessary to revert to the existing boundary of production of the production and consumption of housing services in the SNA, if only to obtain meaningful employment could be distorted if no imputation were made for the value statistics. of own-account housing services. The imputed value of the income generated by such production is taxed in some countries. Own-account production of goods Production of domestic and personal services by 6.32 Although services produced for own consumption within employing paid domestic staff households fall outside the boundary of production used in the SNA, it is nevertheless useful to give further guidance with respect to the treatment of certain kinds of household 6.35 Although paid domestic staff produce many of the services activities which may be particularly important in some excluded from the production boundary of the SNA when developing countries. The SNA includes the production of undertaken by household members, paying a person who all goods within the production boundary. The following comes to the house to wash, cook or look after children, for types of production by households are included whether example, is as much a market activity as taking clothes to a intended for own final consumption or not: laundry, eating at a restaurant or paying a nursery to care for children. By convention, though, only the wages of the domestic staff are treated as the value of output. Other a. The production of agricultural products and their materials used in their work are treated as household subsequent storage; the gathering of berries or other consumption expenditure because of the difficulty of uncultivated crops; forestry; wood-cutting and the identifying what is used by the staff and what by household collection of firewood; hunting and fishing; members. Nor are payments to other household members treated as payments for services even if the payments are b. The production of other primary products such as nominally for the performance of chores, for example mining salt, cutting peat, etc.; pocket-money paid to children. 99 System of National Accounts "Do-it-yourself" decoration, maintenance and small c. To avoid having to meet certain legal standards such as repairs minimum wages, maximum hours, safety or health standards, etc.; 6.36 "Do-it-yourself" repairs and maintenance to consumer durables and dwellings carried out by members of the d. To avoid complying with certain administrative household constitute the own-account production of procedures, such as completing statistical services and are excluded from the production boundary of questionnaires or other administrative forms. the SNA. The materials purchased are treated as final consumption expenditure. 6.41 Because certain kinds of producers try to conceal their activities from public authorities, it does not follow that 6.37 In the case of dwellings, "do-it-yourself" activities cover they are not included in national accounts in practice. Many decoration, maintenance and small repairs, including countries have had considerable success in compiling repairs to fittings, of types that are commonly carried out estimates of production that cover the non-observed by tenants as well as by owners. On the other hand, more economy as well as the ordinary economy. In some substantial repairs, such as replastering walls or repairing industries, such as agriculture or construction, it may be roofs, carried out by owners, are essentially intermediate possible by using various kinds of surveys and the inputs into the production of housing services. However, commodity flow method to make satisfactory estimates of the production of such repairs by an owner-occupier is only the total output of the industry without being able to a secondary activity of the owner in his capacity as a identify or measure that part of it that is not observed. producer of housing services. The production accounts for Because the non-observed economy may account for a the two activities may be consolidated so that, in practice, significant part of the total economy of some countries, it is the purchases of materials for repairs become intermediate particularly important to try to make estimates of total expenditures incurred in the production of housing production that include it, even if it cannot always be services. Major renovations or extensions to dwellings are separately identified as such. fixed capital formation and recorded separately. 6.42 There may be no clear borderline between the non- observed economy and illegal production. For example, The use of consumption goods production that does not comply with certain safety, health or other standards could be described as illegal. Similarly, 6.38 The use of goods within the household for the direct the evasion of taxes is itself usually a criminal offence. satisfaction of human needs or wants is not treated as However, it is not necessary for the purposes of the SNA to production. This applies not only to materials or equipment try to fix the precise borderline between non-observed and purchased for use in leisure or recreational activities but illegal production as both are included within the also to foodstuffs purchased for the preparation of meals. production boundary in any case. It follows that The preparation of a meal is a service activity and is treated transactions on unofficial markets that exist in parallel with as such in the SNA and ISIC Rev.4. It therefore falls outside official markets (for example, for foreign exchange or the production boundary when the meal is prepared for own goods subject to official price controls) must also be consumption within the household. The use of a durable included in the accounts, whether or not such markets are good, such as a vehicle, by persons or households for their actually legal or illegal. own personal benefit or satisfaction is intrinsically a consumption activity and should not be treated as if it were 6.43 There are two kinds of illegal production: an extension, or continuation, of production. a. The production of goods or services whose sale, The "non-observed" economy distribution or possession is forbidden by law; 6.39 There is considerable interest in the phenomenon of the b. Production activities that are usually legal but become non-observed economy. This term is used to describe illegal when carried out by unauthorized producers; for activities that, for one reason or another, are not captured in example, unlicensed medical practitioners. regular statistical enquiries. The reason may be that the activity is informal and thus escapes the attention of 6.44 Examples of activities that may be illegal but productive in surveys geared to formal activities; it may be that the an economic sense include the manufacture and distribution producer is anxious to conceal a legal activity, or it may be of narcotics, illegal transportation in the form of smuggling that the activity is illegal. Chapter 25 discusses of goods and of people, and services such as prostitution. measurement of the informal economy within households. 6.45 Both kinds of illegal production are included within the 6.40 Certain activities may clearly fall within the production production boundary of the SNA provided they are genuine boundary of the SNA and also be quite legal (provided production processes whose outputs consist of goods or certain standards or regulations are complied with) but services for which there is an effective market demand. The deliberately concealed from public authorities for the units that purchase smuggled goods, for example, may not following kinds of reasons: be involved in any kind of illegal activities and may not even be aware that the other party to the transaction is a. To avoid the payment of income, value added or other behaving illegally. Transactions in which illegal goods or taxes; services are bought and sold need to be recorded not simply to obtain comprehensive measures of production and b. To avoid the payment of social security contributions; consumption but also to prevent errors appearing elsewhere 100 The production account in the accounts. The incomes generated by illegal of the output of the street trader is still calculated as the production may be disposed of quite legally, while difference between the value received for the goods and the conversely, expenditures on illegal goods and services may value paid for them. In this case, though, if nothing is paid be made out of funds obtained quite legally. The failure to for the goods, the whole of the sales value appears as the record illegal transactions may lead to significant errors margin. within the accounts if the consequences of the activity are recorded in the financial account and the external accounts, say, but not in the production and income accounts. 6.47 Illegal production does not refer to the generation of externalities such as the discharge of pollutants. Externalities may result from production processes that are 6.46 Regular thefts of products from inventories are not included themselves quite legal. Externalities are created without the in the value of output. Suppose a shop suffers regular theft consent of the units affected and no values are imputed for from inventories. In calculating the value of output of the them in the SNA. shop, part of the margin on the goods sold must cover the cost of the goods stolen. Thus the margin is calculated as the value received for the goods sold less the cost of both 6.48 Although non-observed and illegal activities require special the goods sold and the goods stolen. If the stolen products consideration, it is not necessarily the case that they are are sold elsewhere, for example on a street stall, the value excluded from normal data collection processes. C. Basic, producers' and purchasers' prices 6.49 More than one set of prices may be used to value outputs any transport charges invoiced separately by the and inputs depending upon how taxes and subsidies on producer. products, and also transport charges, are recorded. Moreover, value added taxes (VAT), and similar deductible Neither the producer's nor the basic price includes any taxes may also be recorded in more than one way. The amounts receivable in respect of VAT, or similar methods of valuation used in the SNA are explained in this deductible tax, invoiced on the output sold. section. 6.52 Unlike the basic price, the producer's price includes taxes 6.50 The detailed discussion of taxes related to production on products (taxes payable per unit of output) and excludes appears in section C of chapter 7 but it is important in the subsidies on products (subsidies receivable per unit of context of discussing alternative price measures to make output). The producer's price is the price, excluding VAT, the distinction between taxes (and subsidies) on products that the producer invoices to the purchaser. The basic price and other taxes (and subsidies) on production. As the name measures the amount retained by the producer and is, implies, taxes on products are payable per unit of the therefore, the price most relevant for the producer's product. The tax may be a flat amount dependent on the decision-taking. It is becoming increasingly common in physical quantity of the product or may be a percentage of many countries for producers to itemize taxes separately on the value at which the product is sold. Other taxes on their invoices so that purchasers are informed about how production are taxes imposed on the producer that do not much they are paying to the producer and how much as apply to products nor are levied on the profits of the taxes to the government. producer. Examples include taxes on land or premises used in production or on the labour force employed. The distinction between subsidies on products and other 6.53 Basic prices exclude any taxes on products the producer subsidies on production is made on similar grounds. receives from the purchaser and passes on to government but include any subsidies the producer receives from government and uses to lower the prices charged to 1. Basic and producers' prices purchasers. 6.51 The SNA utilizes two kinds of prices to measure output, 6.54 Both producers' and basic prices are actual transaction namely, basic prices and producers' prices: prices that can be directly observed and recorded. Basic prices are often reported in statistical inquiries and some official "producer price" indices actually refer to basic a. The basic price is the amount receivable by the prices rather than to producers' prices as defined here. producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, by the producer as a VAT and similar deductible taxes consequence of its production or sale. It excludes any transport charges invoiced separately by the producer. 6.55 Many countries have adopted some form of VAT. VAT is a wide-ranging tax usually designed to cover most or all b. The producer's price is the amount receivable by the goods and services. In some countries, VAT may replace producer from the purchaser for a unit of a good or most other forms of taxes on products, but VAT may also service produced as output minus any VAT, or similar be levied in addition to some other taxes on products, such deductible tax, invoiced to the purchaser. It excludes as excise duties on tobacco, alcoholic drink or fuel oils. 101 System of National Accounts 6.56 VAT is a tax on products collected in stages by enterprises. operation of VAT over many years in a number of Producers are required to charge certain percentage rates of countries has shown it may be difficult, if not impossible, VAT on the goods or services they sell. The VAT is shown to utilize the gross system because of the way business separately on the sellers' invoices so that purchasers know accounts are computed and records are kept. Sales are the amounts they have paid. However, producers are not normally reported excluding invoiced VAT in most required to pay to the government the full amounts of the industrial inquiries and business surveys. Conversely, VAT invoiced to their customers because they are usually purchases of goods and services by producers are usually permitted to deduct the VAT that they themselves have recorded excluding deductible VAT. Although the gross paid on goods and services purchased for their own system has been tried in some countries, it has had to be intermediate consumption, resale or gross fixed capital abandoned for these reasons. Further, it can be argued that formation. Producers are obliged to pay only the difference the gross system distorts economic reality to the extent that between the VAT on their sales and the VAT on their it does not reflect the amounts of VAT actually paid by purchases for intermediate consumption or capital businesses. Large amounts of invoiced VAT are deductible formation, hence the expression value added tax. The and thus represent only notional or putative tax liabilities. percentage rate of VAT is liable to vary between different categories of goods and services and also according to the 6.61 The SNA therefore requires that the net system of type of purchaser. For example, sometimes goods recording VAT should be followed. In the net system: purchased by visiting non-residents, which count as exports, may be exempt from VAT. a. Outputs of goods and services are valued excluding invoiced VAT; imports are similarly valued excluding 6.57 Other tax regimes exist, not called VAT, that operate in a invoiced VAT; similar manner. Within the SNA, the term VAT is used to apply to any similar deductible tax scheme even if the scope is narrower than a full system of VAT. b. Purchases of goods and services are recorded including non-deductible VAT. 6.58 The following terminology needs to be defined: Under the net system, VAT is recorded as being payable by purchasers, not sellers, and then only by those purchasers a. Invoiced VAT is the VAT payable on the sales of a who are not able to deduct it. Almost all VAT is therefore producer; it is shown separately on the invoice that recorded in the SNA as being paid on final uses, mainly on the producer presents to the purchaser. household consumption. However, small amounts of VAT may be paid by businesses in respect of certain kinds of b. Deductible VAT is the VAT payable on purchases of purchases on which VAT may not be deductible. goods or services intended for intermediate consumption, gross fixed capital formation or for 6.62 The disadvantage of the net system is that different prices resale that a producer is permitted to deduct from his must be recorded for the two parties to the same transaction own VAT liability to the government in respect of when the VAT is not deductible. The price recorded for the VAT invoiced to his customers. producer does not include invoiced VAT whereas the price recorded for the purchaser does include the invoiced VAT c. Non-deductible VAT is VAT payable by a purchaser to the extent that it is not deductible. Thus, in aggregate, the that is not deductible from his own VAT liability, if total value of the expenditures recorded for purchasers must any. exceed the total value of the corresponding sales receipts recorded for producers by the total amount raised as non- Thus, a market producer is able to recover the costs of any deductible VAT. deductible VAT payable on his own purchases by reducing the amount of his own VAT liability in respect of the VAT 6.63 The producer's price thus defined is a hybrid that excludes invoiced to his own customers. On the other hand, the VAT some, but not all, taxes on products. The basic price, which paid by households for purposes of final consumption or does not include any taxes on the product (but includes fixed capital formation in dwellings is not deductible. The subsidies on the product) becomes a clearer concept in VAT payable by non-market producers owned by these circumstances and is the preferred method for valuing government units or NPISHs may also not be deductible. the output of producers. Gross and net recording of VAT 2. Purchasers' prices 6.59 There are two alternative systems that may be used to 6.64 The purchaser's price is the amount paid by the record VAT, the "gross" or "net" systems. Under the gross purchaser, excluding any VAT or similar tax deductible system, all transactions are recorded including the amounts by the purchaser, in order to take delivery of a unit of a of any invoiced VAT. Thus, the purchaser and the seller good or service at the time and place required by the record the same price, irrespective of whether or not the purchaser. The purchaser's price of a good includes any purchaser is able to deduct the VAT subsequently. transport charges paid separately by the purchaser to take delivery at the required time and place. 6.60 While the gross system of recording seems to accord with the traditional notion of recording at "market" prices, it 6.65 When a purchaser buys directly from the producer, the presents some difficulties. Practical experience with the purchaser's price may exceed the producer's price by: 102 The production account a. The value of any non-deductible VAT, payable by the and another from the purchaser's, depending upon whether purchaser; and or not the tax is deductible. It is recommended in the SNA that the term "market prices" should be avoided when b. The value of any transport charges on a good paid referring to value added and the price basis used, (basic, separately by the purchaser and not included in the producers' or purchasers'), be specified to avoid ambiguity. producer's price. 3. Basic, producers' and purchasers' prices ­ a It follows that the purchaser's price may exceed the basic summary price by the amount of the two items just listed plus the value of any taxes less subsidies on the product (other than 6.69 Figure 1 gives an overview of the essential differences VAT). between basic, producers' and purchasers' prices. 6.66 If purchasers buy output not from the producer directly but Figure 6.1:Basic, producers' and purchasers' from a wholesaler or retailer, it is necessary to include their prices margins in the difference between basic and purchasers' prices also. Basic prices 6.67 For certain purposes, including input-output analysis, it + may be convenient to consider that the purchase of a Taxes on products excluding invoiced VAT product consists of two separate transactions. The first of - these is the purchase of the product from the producer and Subsidies on products the second is the margin paid to the wholesaler or retailer of = the product. The margin represents the difference between Producers' prices the price paid by the final purchaser of a product after it has + passed through the wholesale and retail distribution chains VAT not deductible by the purchaser and the producer's price received by its original producer. + Separately invoiced transport charges 6.68 The traditional concept of the ""market" price becomes + somewhat blurred under a system of VAT or similar Wholesalers' and retailers' margins deductible taxes because there may be two different prices = for a single transaction: one from the seller's point of view Purchasers' prices D. Value added and GDP 1. Gross and net value added 6.72 Consumption of fixed capital is one of the most important elements in the SNA. In most cases, when a distinction is drawn between "gross" and "net" recording, "gross" means 6.70 The balancing item of a current account is the excess of without deducting consumption of fixed capital while resources over uses. The rationale for dividing transactions recording "net" means after deducting consumption of into sets of accounts is that the balancing item of each fixed capital. In particular, all the major balancing items in account is of economic interest. The balancing item of the the accounts from value added through to saving may be production account is value added, so called because it recorded gross or net, that is, before or after deducting measures the value created by production. Because a consumption of fixed capital. It should also be noted that production account may be compiled for an institutional consumption of fixed capital is typically quite large unit or sector, or establishment or industry, so value added compared with most of the net balancing items. It may may be derived for any of these. Value added is of account for 10 per cent or more of GDP. analytical interest because when the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross 6.73 Consumption of fixed capital is one of the most difficult domestic product (GDP). items in the accounts to define conceptually and to estimate in practice. Further, consumption of fixed capital does not 6.71 Value added represents the contribution of labour and represent the aggregate value of a set of transactions. It is capital to the production process. Once the amount of value an imputed value whose economic significance is different added appropriated by government in the form of other from entries in the accounts based mainly on market taxes on production is deducted from value added and the transactions. For these reasons, the major balancing items value of subsidies is added, the compensation of labour and in national accounts have always tended to be recorded capital is revealed. However, capital in the form of fixed both gross and net of consumption of fixed capital. This capital has a finite life length. Some part of value added tradition is continued in the SNA where provision is made should therefore be regarded as the reduction in value of for balancing items from value added through to saving to fixed capital due to its use in production. This allowance is be recorded both ways. In general, the gross figure is the called consumption of fixed capital. easier to estimate and so may be more reliable, but the net 103 System of National Accounts figure is usually the one that is conceptually more inappropriate to describe this measure as being at "market" appropriate and relevant for analytical purposes. prices. 6.74 As stated above: 6.79 Both this measure of gross value added and that described in the previous section use purchasers' prices to value a. Gross value added is defined as the value of output less intermediate inputs. The difference between the two the value of intermediate consumption; measures is entirely attributable to their differing treatments of taxes or subsidies on products payable on b. Net value added is defined as the value of output less outputs (other than invoiced VAT). By definition, the value the values of both intermediate consumption and of output at producers' prices exceeds that at basic prices consumption of fixed capital. by the amount, if any, of the taxes on products, less subsidies on products so that the two associated measures of gross value added must differ by the same amount. To avoid repetition, only gross value added will be cited in the following sections when the corresponding conclusions for net value added are obvious. Gross value added at factor cost 2. Alternative measures of value added 6.80 Gross value added at factor cost is not a concept used explicitly in the SNA. Nevertheless, it can easily be derived from either of the measures of gross value added presented 6.75 In the SNA, intermediate inputs are valued and recorded at above by subtracting the value of any taxes on production, the time they enter the production process, while outputs less subsidies on production, payable out of gross value are recorded and valued as they emerge from the process. added as defined. For example, the only taxes on Intermediate inputs are normally valued at purchasers' production remaining to be paid out of gross value added at prices and outputs at basic prices, or alternatively at basic prices consist of "other taxes on production". These producers' prices if basic prices are not available. The consist mostly of current taxes (or subsidies) on the labour difference between the value of the intermediate inputs and or capital employed in the enterprise, such as payroll taxes the value of the outputs is gross value added against which or current taxes on vehicles or buildings. Gross value added must be charged consumption of fixed capital, taxes on at factor cost can thus be derived from gross value added at production (less subsidies) and compensation of basic prices by subtracting other taxes on production, less employees. The positive or negative balance remaining is subsidies on production. the net operating surplus or mixed income. 6.81 The conceptual difficulty with gross value added at factor 6.76 As indicated above, alternative measures of gross value cost is that there is no observable set of prices such that added may be obtained by associating different sets of gross value added at factor cost is obtained directly by prices with a set of quantities of inputs and outputs. The multiplying this set of prices by the sets of quantities of various measures that may be derived using the different outputs. By definition, other taxes or subsidies on sets of prices recognized in the SNA are considered below. production are not taxes or subsidies on products that can be eliminated from the input and output prices. Thus, Gross value added at basic prices despite its traditional name, gross value added at factor cost is not strictly a measure of value added; it is essentially a 6.77 Gross value added at basic prices is defined as output measure of income and not output. It represents the amount valued at basic prices less intermediate consumption remaining for distribution out of gross value added, valued at purchasers' prices. Although the outputs and however defined, after the payment of all taxes on inputs are valued using different sets of prices, for brevity production and the receipt of all subsidies on production. It the value added is described by the prices used to value the makes no difference which measure of gross value added is outputs. From the point of view of the producer, used to derive this income measure because the alternative purchasers' prices for inputs and basic prices for outputs measures of value added considered above differ only in represent the prices actually paid and received. Their use respect of the amounts of the taxes or subsidies on leads to a measure of gross value added that is particularly production that remain payable out of gross value added. relevant for the producer. 3. Gross domestic product (GDP) Gross value added at producers' prices 6.82 The underlying rationale behind the concept of gross 6.78 Gross value added at producers' prices is defined as domestic product (GDP) for the economy as a whole is that output valued at producers' prices less intermediate it should measure the total gross value added from all consumption valued at purchasers' prices. As already institutional units resident in the economy. However, while explained, in the absence of VAT, the total value of the the concept of GDP is based on this principle, GDP as intermediate inputs consumed is the same whether they are defined in the SNA is such that an identity exists between a valued at producers' or at purchasers' prices, in which case measure built on value added, a measure built on income this measure of gross value added is the same as one that and one based on final expenditures. To achieve this, it is uses producers' prices to value both inputs and outputs. It is important that the same contribution to GDP is made by an economically meaningful measure that is equivalent to taxes on production under all three measures. The the traditional measure of gross value added at market expenditure measure of GDP includes all taxes on prices. However, in the presence of VAT, the producer's production and taxes on imports since ultimately these are price excludes invoiced VAT, and it would be included in the purchasers' prices of the final users. 104 The production account 6.83 Given this definition of GDP, the following identities hold In cases (b) and (c), the items taxes on products and when the summations are taken over all resident producers: subsidies on products includes taxes and subsidies on imports as well as on outputs. a. GDP = the sum of the gross value added at producers' prices, 4. Domestic production plus taxes on imports, 6.84 GDP measures the production of all resident producers. This does not necessarily coincide with all production taking place within the geographical boundary of the less subsidies on imports, economic territory. Some of the production of a resident producer may take place abroad, while some of the plus non-deductible VAT. production taking place within the geographical boundary of the economy may be carried out by non-resident producer units. For example, a resident producer may have b. GDP = the sum of the gross value added at basic prices, teams of employees working abroad temporarily on the installation, repair or servicing of equipment. This output is plus all taxes on products, an export of a resident producer and the productive activity does not contribute to the GDP of the country in which it takes places. Thus, the distinction between resident and less all subsidies on products. non-resident institutional units is crucial to the definition and coverage of GDP. In practice most of the productive c. GDP = the sum of the gross value added at factor cost activity of resident producers takes place within the country in which they are resident. However, producers in service industries that typically have to deliver their outputs plus all taxes on products, directly to their clients wherever they are located are increasingly tending to engage in production in more than less all subsidies on products, one country, a practice that is encouraged by rapid transportation and instantaneous communication facilities. Geographical boundaries between adjacent countries are plus all other taxes on production, becoming less significant for mobile service producers, especially in small countries bordered by several other less all other subsidies on production. countries. E. The measurement of output 1. Production versus output principle of transferring risk, which accompanies change of ownership, can still be applied. Suppose, for example, that 6.85 Production is an activity carried out by an establishment. It an establishment receives coal from another establishment may not always be clear whether an establishment is in the same enterprise, uses it to generate electricity and producing a good or is providing a service. For example, an then sells the electricity on the open market. The electricity oil refinery processing crude oil that it owns is producing a generator has discretion about the amount of coal it good (refined petroleum); if the same refinery processes demands, the amount of electricity to be generated and the crude oil belonging to another unit, then it is providing a prices to be charged. In such a case, the value of electricity refinery service to that unit. This lack of clarity may often generated should be measured including the cost of the coal appear for goods passing between establishments of the consumed in the process even though there is no legal same enterprise and it is important to know when to record change in ownership given that both establishments belong the output of a good and when of a change-effecting to the same enterprise. service. When the establishments belong to different enterprises (that is to different institutional units), the defining principle is that of economic ownership. If an 6.87 In general, all goods and services that are produced and establishment has no discretion about the level of used by the same establishment are excluded from the production, the price to be charged for the good or the measure of output. However, there are exceptions here also. destination of the good, there is evidence that the For example, output is recorded if the goods and services establishment has not taken economic ownership of the being produced are used for capital formation of the goods being processed and the value of the output should establishment. Similarly output is recorded for products be treated as the processing element only. This is the case entering inventories even if eventually they are withdrawn for the refinery service cited above. from inventories for use as intermediate consumption in the same establishment in a later period. If the establishment is 6.86 When the establishments involved belong to the same a household unincorporated enterprise growing maize, the enterprise, there is no change of ownership since both value of maize produced includes maize kept for household establishments have the same owner. However, the consumption. 105 System of National Accounts 6.88 An establishment may produce goods and services that are 6.93 Output produced by market producers for own final use used as its own intermediate consumption. An example is should be valued at the average basic prices of the same unglazed china that is only delivered to other units after goods or services sold on the market, provided they are sold glazing. In general the unglazed china is not recorded as in sufficient quantities to enable reliable estimates to be output but if there is some china remaining unglazed at the made of those average prices. If not, the output should be end of the production period, it should be recorded as being valued by the total production costs incurred, including produced and entering inventories. In the subsequent consumption of fixed capital, plus any taxes (less subsidies) period, the unglazed china is withdrawn from inventories on production other than taxes or subsidies on products, and the act of glazing constitutes output in the second plus a net return on the fixed capital and natural resources period. used in production. The concept of the net return to capital is introduced in section H and discussed more fully in 6.89 Although production is related to activities and thus the chapter 20. output of one production process is one set of products, output is measured for an establishment and may include 6.94 The non-market output produced by government units and the output of several production processes. Thus output is NPISHs that is supplied free, or at prices that are not defined as the goods and services produced by an economically significant, to other institutional units or the establishment, community as a whole is valued by total production costs, including consumption of fixed capital, plus taxes (less subsidies) on production other than taxes or subsidies on a. excluding the value of any goods and services used in products. By convention, no net return to capital is included an activity for which the establishment does not for non-market production. Similarly, no net return to assume the risk of using the products in production, capital is included in the estimates of production for own and final use by non-market producers when these are estimated as the sum of costs. b. excluding the value of goods and services consumed by the same establishment except for goods and 4. Market output, output for own final use and services used for capital formation (fixed capital or non-market output changes in inventories) or own final consumption. 6.95 A fundamental distinction is drawn in the SNA between 2. Time of recording market output and non-market output because of the way the output of each is valued. Market output is the normal 6.90 The output of most goods or services is usually recorded situation in a market economy where producers make when their production is completed. However, when it decisions about what to produce and how much to produce takes a long time to produce a unit of output, it becomes in response to expected levels of demand and expected necessary to recognize that output is being produced costs of supply. The determining factor behind production continuously and to record it as "work-in-progress". For decisions is that economically significant prices prevail. example, the production of certain agricultural goods or Economically significant prices are prices that have a large durable goods such as ships or buildings may take significant effect on the amounts that producers are months or years to complete. In such cases, it would distort willing to supply and on the amounts purchasers wish to economic reality to treat the output as if it were all buy. These prices normally result when: produced at the moment of time when the process of production happens to terminate. Whenever a process of a. The producer has an incentive to adjust supply either production extends over two or more accounting periods, it with the goal of making a profit in the long run or, at is necessary to calculate the work-in-progress completed a minimum, covering capital and other costs; and within each of the periods in order to be able to measure how much output is produced in each period. b. Consumers have the freedom to purchase or not purchase and make the choice on the basis of the 6.91 On the other hand, goods and services may be completed in prices charged. an accounting period but not delivered (sold) to a user in that period. Output is recorded when the work is completed 6.96 There is further discussion on economically significant and not when sold. There is thus a significant difference prices in chapter 22. between the value of output in a period and the value of sales, the difference being accounted for by changes in 6.97 Non-market output is output undertaken by general inventories of finished goods and work-in-progress. government and NPISHs that takes place in the absence of economically significant prices. A price is said to be not 3. Valuation of output economically significant when it has little or no influence on how much the producer is prepared to supply and is expected to have only a marginal influence on the 6.92 Goods and services produced for sale on the market at quantities demanded. It is a price that is not quantitatively economically significant prices may be valued either at significant from the point of view of either supply or basic prices or at producers' prices. The preferred method demand. Such prices are likely to be charged in order to of valuation is at basic prices, especially when a system of raise some revenue or achieve some reduction in the excess VAT, or similar deductible tax, is in operation. Producers' demand that may occur when services are provided prices should be used only when valuation at basic prices is completely free, but they are not intended to eliminate such not feasible. excess demand. Once a decision has been taken on 106 The production account administrative, social or political grounds about the total Recording of sales amount of a particular non-market good or service to be supplied, its price is deliberately fixed below the equilibrium price that would clear the market. The 6.100 The times at which sales are to be recorded are when the difference between a price that is not economically receivables and payables are created: that is, when the significant and a zero price is, therefore, a matter of degree. ownership of the goods passes from the producer to the The price merely deters those units whose demands are the purchaser or when the services are provided to the least pressing without greatly reducing the total level of purchaser. Goods or services are valued at the basic prices demand. at which they are sold. If valuation at basic prices is not feasible, they may be valued at producers' prices instead. If it is necessary to value the sale of goods at producers' 6.98 Non-market output may be produced for two reasons: prices rather than basic prices, then the implicit value of margin services should also include any applicable taxes on a. It may be technically impossible to make individuals products. For some margin services, especially those pay for collective services because their consumption concerning financial assets, the value of the service cannot be monitored or controlled. The pricing provided may be implicit. mechanism cannot be used when transactions costs are too high and there is market failure. The production of 6.101 The values of sales are determined by the amounts such services has to be organized collectively by government units and financed out of funds other than receivable and payable by the producers and purchasers, receipts from sales, namely taxation or other suitably adjusted for trade and transport margins. The government incomes; amounts receivable and payable do not always coincide with the amounts actually received and paid. The amount payable should be shown in the production account and the b. Government units and NPISHs may also produce and difference between amounts payable and paid should be supply goods or services to individual households for shown as accounts payable or receivable in the financial which they could charge but choose not to do so as a account. Subsequent payments of these amounts matter of social or economic policy. The most common outstanding are recorded as financial transactions and not examples are the provision of education or health as part of the production account. If payments made in services, free or at prices that are not economically advance or in arrears attract interest charges, these should significant, although other kinds of goods and services be shown as separate transactions and not included in the may also be supplied. value of sales. Market output Recording of barter 6.99 Market output consists of output intended for sale at 6.102 Barter occurs when goods and services are exchanged for economically significant prices. The value of market other goods, services or assets. The value of goods or output is determined as the sum of the following items: services bartered should be recorded when the ownership of the goods is transferred or the services are provided. The output of goods bartered is valued at the basic prices that a. The value of goods and services sold at economically would have been received if they had been sold. significant prices; b. The value of goods or services bartered in exchange for Recording of compensation in kind or other other goods, services or assets; payments in kind c. The value of goods or services used for payments in 6.103 Goods or services provided to employees as compensation kind, including compensation in kind; in kind, or used for other payments in kind, should be recorded when the legal ownership of the goods is transferred or the services are provided. They should be d. The value of goods or services supplied by one valued at the basic prices that would have been received if establishment to another belonging to the same market they had been sold. enterprise to be used as intermediate inputs where the risk associated with continuing the production process is transferred along with the goods; Recording of intra-enterprise deliveries e. The value of changes in inventories of finished goods and work-in-progress intended for one or other of the 6.104 Intra-enterprise deliveries are recorded only when the above uses; establishment receiving the goods assumes responsibility for making the decisions about the levels of supply and prices at which their output is delivered to the market. f. The margins charged on the supply of goods and When incoming deliveries are recorded, they should be services, transport margins, margins on the acquisition valued at the basic prices that would have been received if and disposal of financial assets, etc. they had been sold. 107 System of National Accounts Changes in inventories of finished goods wastage, theft and accidental damage are treated in the same way as withdrawals from inventories and thus reduce 6.105 The basic principle underlying the measurement of changes the value of output. This practice is followed even if the in inventories of finished goods is that output should be losses are high relative to output as long as they are recorded at the time it is produced and valued at the same recurrent. The total value of the changes in inventories of price whether it is sold, otherwise used or entered into finished goods recorded within a specified accounting inventories for sale or use later. In effect, goods only enter period is then given by: inventories when they are not immediately used for sale or other use in the period they are produced. Similarly, goods the sum of the values of all goods entering inventories are withdrawn from inventories when the demand for the goods exceeds the amount produced in a period. No output less the sum of the values of all goods withdrawn from is recorded when goods produced previously are withdrawn inventories from inventories and sold or otherwise used unless a storage activity as described below in section F takes place. less the value of any recurrent losses of goods held in inventories. 6.106 Inventories of finished goods therefore explain the difference between production and sales (or other use) in a Changes in inventories of work-in-progress single period. It follows that entries into inventories must be valued at the basic prices prevailing at the time of entry, while withdrawals must be valued at the prices at which 6.110 When the process of production takes a long time to they are then sold. This method of valuing changes in complete, output must be recognized as being produced inventories, which may be described as the "perpetual continuously as work-in-progress. As the process of inventory method" or PIM, is not always easy to implement production continues, intermediate inputs are continually in practice, however, and it sometimes leads to results that being consumed so that it is necessary to record some may be counter intuitive. corresponding output. Otherwise, recording the inputs and outputs as if they took place at different times, or even in different accounting periods would give meaningless 6.107 When prices are stable, the measurement of changes in figures for value added. Work-in-progress is essentially inventories is relatively simple. However, when there is incomplete output that is not yet marketable: that is, output inflation (or deflation), significant price increases that is not sufficiently processed to be in a state in which it (decreases) may occur while goods are held in inventories. can easily be supplied or sold to other institutional units. It Holding gains (losses) accruing on goods held in is essential to record such output whenever the process of inventories after they have been produced must not be production is not completed within a single accounting included in the value of output. It follows from the period so that work-in-progress is carried forward from one valuation method used that, when prices are changing, period to the next. In this case, the current value of the goods entering and leaving inventories at different times work-in-progress completed up to the end of one period is are valued at different prices, even within the same recorded in the closing balance sheet, which also serves as accounting period (as also are goods sold at different the opening balance sheet for the next period. times). This requires that, in principle, all entries to, and withdrawals from, inventories be recorded continuously as they occur, and helps explain the complexity of the 6.111 Work-in-progress may need to be recorded in any industry, perpetual inventory method. The perpetual inventory including service industries such as the production of method ensures their exclusion by valuing goods movies, depending upon the length of time it takes to withdrawn from inventories at the prices prevailing at the produce a unit of output. It is particularly important in time they are withdrawn and not at the prices at which they industries with long gestation periods, such as certain types are entered, or their "historic costs". This method of of agricultural production or durable producers' goods valuation can lead to much lower figures for both output production, where the period of production may extend and profits in times of inflation than those obtained by over several years. business accounting methods based on historic costs. Further discussion on the valuation of inventories appears 6.112 Work-in-progress is treated in the SNA as one component in chapter 10. of inventories of outputs held by producers. However, the borderline between inventories of partially completed 6.108 It follows from the general principles outlined in the buildings and structures and gross fixed capital formation previous section that: may not always be clear. Gross fixed capital formation is undertaken by users of fixed assets so gross fixed capital formation cannot be recorded until the legal ownership of a. Goods entering inventories are valued at the basic the assets is transferred from their producers to their users. prices prevailing at that time: that is, at the prices at This transfer does not usually occur until the process of which they could have been sold when first produced; production is completed. However, when a contract of sale has been concluded in advance, the transfer of legal b. Goods withdrawn from inventories are valued at the ownership may be deemed to occur in stages as value is put basic prices prevailing at that time: that is, at the prices in place. In such cases, stage payments made by the at which they can then be sold. purchaser can often be used to approximate the value of the gross fixed capital formation although stage payments may 6.109 Goods held in inventories are subject to deterioration sometimes be made in advance or in arrears of the through the passage of time and are at risk from theft or completion of the stage, in which case short-term credits accidental damage. Recurrent losses due to normal rates of are also extended from the purchaser to the producer, or 108 The production account vice versa. In the absence of a contract of sale, the output The services produced are consumed by the same unit that produced must be treated as additions to the producer's produces them and they constitute a form of own-account inventories, that is, as work-in-progress, however large the production. By convention, any intermediate costs in the partially completed structure may be. When the production production of the domestic services are treated not as process is terminated, the whole of the work-in-progress intermediate consumption of the output of the domestic accumulated up to that point is effectively transformed into services but as final consumption expenditure of the inventories of finished product ready for delivery or sale. household. Thus the value of the output produced is When a sale takes place, the value of the sale must be deemed to be equal to the compensation of employees paid, cancelled by a withdrawal from inventories of equal value including any compensation in kind such as food or so that only the additions to work-in-progress recorded accommodation. while production was taking place in the period in question remain as measures of output. In this way, the output is Services of owner-occupied dwellings distributed over the entire period of production. 6.113 Additions to, and withdrawals from, work-in-progress are 6.117 Households that own the dwellings they occupy are treated in the accounts in the same way as entries to, and formally treated as owners of unincorporated enterprises withdrawals from, inventories of finished goods. They must that produce housing services consumed by those same be recorded at the times they take place and at the basic households. When well-organized markets for rented prices prevailing at those times. However, further housing exist, the output of own-account housing services explanation is needed of the valuation in view of the special can be valued using the prices of the same kinds of services characteristics of work-in-progress. This explanation sold on the market in line with the general valuation rules appears in chapter 20. adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner occupiers is valued at the estimated rental that a Output for own final use tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, 6.114 Output for own final use consists of products retained by etc. as well as the size and quality of the dwelling itself. the producer for his own use as final consumption or The same figure is recorded under household final capital formation. The value of output for own final use is consumption expenditures. In many instances, no well- determined as the sum of the following: organized markets exist and other means of estimating the value of housing services must be developed. a. The value of goods produced by an unincorporated enterprise and consumed by the same household; Own gross fixed capital formation b. The value of services provided to households by paid 6.118 Goods or services used for own gross fixed capital domestic staff; formation can be produced by any kind of enterprise, whether corporate or unincorporated. They include, for c. The value of the imputed services of owner-occupied example, the special machine tools produced for their own dwellings; use by engineering enterprises, or dwellings, or extensions to dwellings, produced by households. A wide range of d. The value of the fixed assets produced by an construction activities may be undertaken for the purpose establishment that are retained within the same of own gross fixed capital formation in rural areas in some enterprise for use in future production (own-account countries, including communal construction activities gross fixed capital formation); undertaken by groups of households. In addition, intellectual property products such as R&D and software e. The value of changes in inventories of finished goods products may be produced on own account. and work-in-progress intended for one or other of the above uses; Changes in inventories f. In exceptional cases, as described later in this section, 6.119 Additions to work-in-progress on structures intended for there may be output for own intermediate use. own use are treated as acquisitions of fixed assets by their producers. Goods or services produced for own final use Goods produced by households may be placed in inventories of finished products for use later. They are valued at the basic prices of similar products 6.115 All goods produced by households are within the sold on the market at the time they enter inventories or by production boundary and those that are not delivered to their costs of production if no suitable basic prices are other units should be treated as either being consumed available. immediately or stored in inventories for later use. Own intermediate consumption Services of domestic staff 6.120 It is unusual to record goods and services used as 6.116 Paid domestic staff (child minders, cooks, gardeners, intermediate consumption within the same establishment chauffeurs, etc.) are formally treated as employees of an but there are occasions where it may be desirable. If such unincorporated enterprise that is owned by the household. recording is made, the goods and services in question add 109 System of National Accounts to both intermediate consumption and output so value c. Consumption of fixed capital; added is unaffected by this practice. d. A net return to fixed capital; 6.121 If an activity such as delivery services is of particular interest and there is a diversity of practice about whether it e. Other taxes (less subsidies) on production. is treated as secondary output (that is, is charged for) or as being for own use (not charged for) then it may be desirable By convention, no net return to capital is included when to show all delivery services as if they were secondary own-account production is undertaken by non-market products with the output shown as own intermediate producers. consumption where appropriate. 6.126 For unincorporated enterprises, it may not be possible to 6.122 As explained in paragraph 6.104 if a product is delivered by estimate compensation of employees, consumption of fixed one establishment to another within the same enterprise, the capital and a return to capital separately in which case an delivery is recorded as output of the first establishment and estimate of mixed income, covering all these items, should intermediate consumption of the second only when the be made. second establishment assumes the responsibility for making the decisions about the level of supply and prices at which 6.127 It will usually be necessary to value the output of own- the output is delivered to the market. When this is not the account construction on the basis of costs as it is likely to case, the output of the first establishment is shown as be difficult to make a direct valuation of an individual and entering inventories while the second establishment specific construction project that is not offered for sale. delivers a processing service and charges for it. If a When the construction is undertaken for itself by an production account is being compiled for the enterprise, in enterprise, the requisite information on costs may be easily the first case it may be preferable to show the product as ascertained, but not in the case of the construction of both output and intermediate consumption of the enterprise dwellings by households or communal construction for the rather than to consolidate it out. In the second case, the benefit of the community undertaken by informal output of the enterprise will be the value of the product as associations or groups of households. Most of the inputs produced by the first establishment plus the processing fee into communal construction projects, including labour for the second. inputs, are likely to be provided free so that even the valuation of the inputs may pose problems. As unpaid 6.123 In some cases, part of the current output may be placed in labour may account for a large part of the inputs, it is inventories for use as intermediate consumption in future. important to make some estimate of its value using wage An example is agriculture where some of the current crop rates paid for similar kinds of work on local labour markets. may be used for seed in future. While it may be difficult to find an appropriate rate, it is likely to be less difficult than trying to make a direct valuation of a specific construction project itself. The fact Valuation of output for own final use that an imputation is made for the value of labour input is a means to approximate the market price for the construction. 6.124 Output for own final use should be valued at the basic It does not imply that these labour costs should also be prices at which the goods and services could be sold if treated as compensation of employees. As explained in offered for sale on the market. In order to value them in this chapter 7, when labour is provided on a voluntary basis to a way, goods or services of the same kind must actually be producer unit other than the labourer's own household, no bought and sold in sufficient quantities on the market to imputation for compensation of employees is made. If enable reliable market prices to be calculated for use for labour is provided for a nominal payment, only the nominal valuation purposes. The expression "on the market" means payment is recorded as compensation of employees. The the price that would prevail between a willing buyer and other labour costs are treated as mixed income. willing seller at the time and place that the goods and services are produced. In the case of agricultural produce, Non-market output for example, this does not necessarily equate to the prices in the local market where transportation costs and possibly 6.128 Non-market output consists of goods and individual or wholesale margins may be included. The nearest equivalent collective services produced by non-profit institutions price is likely to be the so-called "farm-gate" price; that is, serving households (NPISHs) or government that are the price that the grower could receive by selling the supplied free, or at prices that are not economically produce to a purchaser who comes to the farm to collect the significant, to other institutional units or the community produce. as a whole. Although this output is shown as being acquired by government and NPISHs in the use of income 6.125 When reliable market prices cannot be obtained, a second account, it should not be confused with production for own best procedure must be used in which the value of the use. The expenditure is made by government and by output of the goods or services produced for own final use NPISHs but the use of individual goods and services is by is deemed to be equal to the sum of their costs of households, and the use of collective services by production: that is, as the sum of: households or other resident institutional units. Thus non- market output should never be confused with output for own use where the producer unit not only has imputed a. Intermediate consumption; expenditure on the output but also actually uses the output. Chapter 9 discusses the difference between expenditure and b. Compensation of employees; use in more detail. 110 The production account 6.129 As explained above, government units or NPISHs may constituting final consumption expenditures by government engage in non-market production because of market failure units or NPISHs. or as a matter of deliberate economic or social policy. Such output is recorded at the time it is produced, which is also 6.132 Government units and NPISHs may be engaged in both the time of delivery in the case of non-market services. In market and non-market production. Whenever possible, general, however, it cannot be valued in the same way as separate establishments should be distinguished for these goods or services produced for own final consumption or two types of activities, but this may not always be feasible. own capital formation that are also produced in large Thus, a non-market establishment may have some receipts quantities for sale on the market. There are no markets for from sales of market output produced by a secondary collective services such as public administration and activity: for example, sales of reproductions by a non- defence, but even in the case of non-market education, market museum. However, even though a non-market health or other services provided to individual households, establishment may have sales receipts, its total output suitable prices may not be available. It is not uncommon for covering both its market and its non-market output is still similar kinds of services to be produced on a market basis valued by the production costs. The value of its market and sold alongside the non-market services but there are output is given by its receipts from sales of market usually important differences between the types and quality products, the value of its non-market output being obtained of services provided. In most cases it is not possible to find residually as the difference between the values of its total enough market services that are sufficiently similar to the output and its market output. The value of receipts from the corresponding non-market services to enable their prices to sale of non-market goods or services at prices that are not be used to value the latter, especially when the non-market economically significant remains as part of the value of its services are produced in very large quantities. non-market output. 6.130 The value of the non-market output provided without charge to households is estimated as the sum of costs of Market and non-market producers production, as follows: 6.133 Market producers are establishments, all or most of a. Intermediate consumption; whose output is market production. Non-market producers consist of establishments owned by government units or NPISHs that supply goods or services free, or at b. Compensation of employees; prices that are not economically significant, to households or the community as a whole. These producers c. Consumption of fixed capital; may also have some sales of secondary market output whose prices are intended to cover their costs or earn a surplus: for example, sales of reproductions by non-market d. Other taxes (less subsidies) on production. museums. Though government and NPISHs may have establishments undertaking market production, including own account capital construction, most of their activity will 6.131 If the output is made available at nominal cost, the prices be undertaken on a non-market basis. are not economically significant prices and may reflect neither relative production costs nor relative consumer preferences. They therefore do not provide a suitable basis 6.134 When production for own final use is undertaken by a unit for valuing the outputs of the goods or services concerned. in the general government or NPISHs sector it is treated as The non-market output of goods or services sold at these being undertaken by a non-market producer. It may also be prices is valued in the same way as goods or services undertaken by market producers or by units outside general provided free, that is, by their costs of production. Part of government and NPISHs who produce only for own final this output is purchased by households, the remainder use. F. The output of particular industries 1. Introduction 2. Agriculture, forestry and fishing 6.135 The rules governing the recording and valuation of output 6.136 The growth and regeneration of crops, trees, livestock or are not sufficient to determine the way in which the output fish which are controlled by, managed by and under the of certain kinds of industries, mostly service industries, responsibility of institutional units constitute a process of such as wholesale and retail trade and financial institutions, production in an economic sense. Growth is not to be is measured. The following sections provide further construed as a purely natural process that lies outside the information about the measurement of the output of a production boundary. Many processes of production number of specific industries. For convenience, the exploit natural forces for economic purposes, for example, industries concerned are given in the same order as they hydroelectric plants exploit rivers and gravity to produce appear in the ISIC. electricity. 111 System of National Accounts 6.137 The measurement of the output of agriculture, forestry and 4. Transportation and storage fishing is complicated by the fact that the process of production may extend over many months, or even years. Many agricultural crops are annual with most costs Transportation incurred at the beginning of the season when the crop is sown and again at the end when it is harvested. However, 6.141 The output of transportation is measured by the value of the immature crops have a value depending on their closeness amounts receivable for transporting goods or persons. In to harvest. The value of the crop has to be spread over the economics a good in one location is recognized as being a year and treated as work-in-progress. Often the final value different quality from the same good in another location, so of the crop will differ from the estimate made of it and that transporting from one location to another is a process imputed to the growing crop before harvest. In such cases of production in which an economically significant change takes place even if the good remains otherwise unchanged. revisions to the early estimates will have to be made to The volume of transport services may be measured by reflect the actual outcome. When the crop is harvested, the indicators such as tonne-kilometres or passenger- cumulated value of work-in-progress is converted to kilometres, which combine both the quantities of goods, or inventories of finished goods that is then run down as it is numbers of persons, and the distances over which they are used by the producer, sold or is lost to vermin. transported. Factors such as speed, frequency or comfort also affect the quality of services provided. 6.138 Some plants and many animals take some years to reach maturity. In this case, the increase in their value is shown as Storage output and treated as increases in fixed capital or inventories depending on whether the plant or animal yields 6.142 Although the production of storage for the market may not repeat products or not. (There is more discussion of this be very extensive, the activity of storage is important in the distinction in chapter 10.) The value of the increase in the economy as a whole as it is carried out in many enterprises. plants or animals should take account of the delay before During storage the inventories of goods have to be the yield from them is realized as explained in chapter 20. physically stored somewhere. Many goods have to be Once the plant or animal has reached maturity, it will stored in a properly controlled environment and the activity decline in value and this decline should be recorded as of storage can become an important process of production consumption of fixed capital. in its own right whereby goods are "transported" from one point of time to another. In economics, it is generally recognized that the same goods available at different times, 3. Machinery, equipment and construction or locations, may be qualitatively different from each other and command different prices for this reason. The increase in price of a product due to the fact that it has been in 6.139 The production of high value capital goods such as ships, storage and storage costs have been incurred is a production heavy machinery, buildings and other structures may take process. However, it is important that the increase in price several months or years to complete. The output from such due to storage is clearly distinguished from holding gains production must usually be measured by work-in-progress and losses, which must be excluded from the value of and cannot be recorded simply at the moment in time when production in the case of storage as in other activities. the process of production is completed. The way in which work-in-progress is to be recorded and valued is explained 6.143 When goods are first produced, they may be held in store in chapter 20. for a time in the expectation that they may be sold, exchanged or used more advantageously in the future. If the increase in value simply reflects a rise in price with no 6.140 When a contract of sale is agreed in advance for the change in quality resulting from being held in storage, then construction of buildings and structures, but not for other there is no further production during the period in addition production spreading over several periods, the output to the costs of storage just described. However, there are produced each period is treated as being sold to the three reasons why the increase in value can be construed as purchaser at the end of each period, that is, as a sale rather further production. The first is that the production process than work-in-progress. In effect, the output produced by the is sufficiently long that discounting factors should be construction contractor is treated as being sold to the applied to work put in place significantly long before purchaser in stages as the latter takes legal possession of delivery. The second reason is that the quality of the good the output. It is recorded as gross fixed capital formation by may improve with the passage of time (such as wine). The the purchaser and not as work-in-progress by the producer. third reason is that there may be seasonal factors affecting When the contract calls for stage payments, the value of the the supply or the demand for the good that lead to regular, predictable variations in its price over the year, even though output may often be approximated by the value of stage its physical qualities may not have changed otherwise. In payments made each period. In the absence of a contract of all these circumstances, storage can be regarded as an sale, however, the incomplete output produced each period extension of the production process over time. The storage must be recorded as work-in-progress of the producer. services become incorporated in the goods, thereby Dwellings built speculatively (that is, without a prior increasing their value while being held in store. Thus, in contract of sale) remain in the inventories of the principle, the values of additions to inventories should construction company until sold, changing status within include not only the values of the goods at the time they are inventories from work-in-progress to finished products if stored but also the value of the additional output produced they remain unsold on completion. while the goods are held in store. 112 The production account 6.144 However, most manufactured goods are produced and sold plus the value of additions to inventories of goods for continuously throughout the year and are not subject to resale, regular changes in supply or demand conditions. Nor do they "mature" while being stored. Changes in the prices of minus the value of goods withdrawn from inventories of such goods while in inventories cannot be treated as goods for resale, additions to work-in-progress. In order to estimate the increase in the value of goods stored over and above the storage costs, use may be made of the expected increase in minus the value of recurrent losses due to normal rates of value over and above the general rate of inflation over a wastage, theft or accidental damage. predetermined period. Any gain that occurs outside the predetermined period continues to be recorded as a holding 6.148 The following points should be noted: gain or loss. Further explanation of the calculation of the value of storage and its separation from holding gains and a. Goods sold are valued at the prices at which they are losses is given in the annex to this chapter. actually sold, even if the trader has to mark their prices down to get rid of surpluses or avoid wastage. 6.145 This inclusion of output due to storage applies only to Allowance should also be made for the effect of goods that take a long time to complete, those that have an reductions in price due to loyalty programmes or other established annual seasonal pattern or those where schemes to offer reduced prices to certain customers in maturing is part of the regular production process. It does certain circumstances. not apply to holding financial assets, valuables or other non-financial assets including land and buildings. Even if b. Goods provided to employees as remuneration in kind anticipated increases in value result in these cases, the should be valued at the current purchasers' prices motive for holding the items is speculation. The increases payable by the traders to replace them; that is, the in value are treated as holding gains and not as part of the realized margins are zero. Similarly, goods withdrawn production process. by the owners of unincorporated enterprises for their own final consumption should be valued at the current purchasers' prices payable by the traders to replace 5. Wholesale and retail distribution them. 6.146 Although wholesalers and retailers actually buy and sell c. Goods purchased for resale should be valued excluding goods, the goods purchased are not treated as part of their any transport charges invoiced separately by the intermediate consumption when they are resold with only suppliers or paid to third parties by wholesalers or minimal processing such as grading, cleaning, packaging, retailers: these transport services form part of the etc. Wholesalers and retailers are treated as supplying intermediate consumption of the wholesalers or services to their customers by storing and displaying a retailers. selection of goods in convenient locations and making them easily available for customers to buy. Their output is d. Additions to inventories of goods for resale should be measured by the total value of the trade margins realized on valued at the prices prevailing at the time of entry into the goods they purchase for resale. A trade margin is inventories. defined as the difference between the actual or imputed price realized on a good purchased for resale and the price that would have to be paid by the distributor to e. The value of goods withdrawn from inventories of replace the good at the time it is sold or otherwise goods for resale depends on whether the goods were disposed of. The margins realized on some goods may be acquired with the intention of making a real holding negative if their prices have to be marked down. They must gain over a given period in storage. In the general case, also be negative on goods that are never sold because they when the goods being resold were not expected to go to waste or are stolen. realize a real holding gain while in storage, the value of the goods on withdrawal from inventories should be the cost to the wholesaler or retailer at the time of the 6.147 The standard formula for measuring output has to be withdrawal of acquiring exactly similar replacement modified for wholesalers or retailers by deducting from the goods for later sale. This valuation is necessary to value of the goods sold or otherwise used the value of the exclude holding gains and losses from the measurement goods that would need to be purchased to replace them. The of output, as is the general rule in the SNA. However, latter includes the additional goods needed to make good when the goods have been stored for reasons of recurrent losses due to normal wastage, theft or accidental seasonal variation in prices or as part of the maturing damage. In practice, the output of a wholesaler or retailer is process, the expected real holding gain over the given by the following identity: anticipated period is deducted from the replacement value of goods withdrawn from inventories. This the value of output = the value of sales, deduction is fixed in value at the time the goods enter storage and is not altered in the light of actual holding gains, real or nominal. plus the value of goods purchased for resale and used for intermediate consumption, compensation of employees, f. The value of recurrent losses due to wastage, theft or etc., accidental damage; goods lost are valued in the same way as goods withdrawn from inventories. For this minus the value of goods purchased for resale, reason, the two terms are often combined. 113 System of National Accounts 6.149 The costs of storage incurred by wholesalers and retailers 6.154 However, one could also argue that government's are not added to the value of the goods when they are regulatory services are to the benefit of the financial withdrawn from inventories but are treated as part of intermediaries, because these services contribute to the intermediate consumption. functioning and financial performance of these institutions. From this perspective, they are comparable to regulatory 6.150 The margins realized on goods purchased for resale thus services of government such as quality control on food and vary according to their eventual use. The margins realized drugs, which the national accounts record as intermediate on goods sold at the full prices intended by the traders consumption of producers. The fact that financial could be described as the normal margins. In fixing these intermediaries pay a fee for these services in some margins, traders take account not only of their ordinary countries (for example in a number of countries in Latin costs such as intermediate consumption and compensation America) supports this view. Following this reasoning, of employees but also of the fact that some goods may surveillance services are not collective services but should ultimately have to be sold off at reduced prices while others be recorded as intermediate consumption of financial may go to waste or be stolen. The margins realized on intermediaries. However, even if the view is taken that goods whose prices have to be marked down are obviously supervisory services are market output because a fee is less than the normal margins and could be negative. The charged, if the fees are not sufficient to cover the margins on goods used to pay employees as compensation supervisory costs incurred by the bank, then the services in kind or withdrawn for final consumption by owners are should be treated as non-market output and part of zero because of the way these goods are valued. Finally, the government consumption expenditure. margins on goods wasted or stolen are negative and equal to the current purchasers' prices of replacements for them. Provision of non-market output The average margin realized on goods purchased for resale may be expected to be less than the normal margin, 6.155 As long as it can be identified as a separate institutional possibly significantly less for certain types of goods such as unit, the central bank is always included in the financial fashion goods or perishable goods. institutions sector and never in general government. The collective consumption represented by monetary policy 6. Output of the central bank services is recorded as expenditure by general government but government does not incur the costs incurred by the 6.151 Before discussing financial services more generally, it is central bank. Therefore a current transfer of the value of the helpful to discuss the output of the central bank. There are non-market output should be recorded as payable by the three broad groups of central bank services. These are central bank and receivable by the general government to monetary policy services, financial intermediation and cover the purchase of the non-market output of the central borderline cases. Monetary policy services are collective in bank by government. This is described in paragraph 8.130. nature, serving the community as a whole, and thus represent non-market output. Financial intermediation Provision of market output services are individual in nature and in the absence of policy intervention in the interest rates charged by the 6.156 If the financial intermediation services provided by the central banks, would be treated as market production. The central bank are significant, and if it is possible and borderline cases, such as supervisory services may be worthwhile to compile data for a separate establishment classified as market or non-market services depending on providing them, these services should be shown as payable whether explicit fees are charged that are sufficient to cover by the units to whom they are delivered. Supervisory the costs of providing the services. services treated as market output are recorded similarly. 6.152 In principle, a distinction should be made between market and non-market output but in practice the possible resource 7. Financial services other than those intensiveness of the exercise and the relative importance of associated with insurance and pension making the distinction should be considered before funds implementing the conceptual recommendations. In cases where market output is not separated from non-market 6.157 A comprehensive discussion of the contribution of financial output, the whole of the output of the central bank should assets and liabilities to the generation and distribution of be treated as non-market and valued at the sum of costs. income and changes in wealth in an accounting period is given in part 4 of chapter 17. What follows is a summary of Borderline cases such as supervisory services the main aspects affecting the measurement of the output of financial services. There are three types of financial 6.153 Central banks frequently provide supervisory services activities; financial intermediation, the services of financial overseeing the financial corporations. One could argue that auxiliaries and other financial services. Financial services this is for the benefit of society in general and the national include monitoring services, convenience services, accounts should record them as government final liquidity provision, risk assumption, underwriting and consumption. In support of this view, one could draw a trading services. parallel with government performing market regulation policies, which it also may entrust to a specialized agency, 6.158 Financial intermediation involves financial risk or to government providing for roads, dams and bridges. management and liquidity transformation, activities in From this point of view, surveillance services are collective which an institutional unit incurs financial liabilities for the services and should be recorded as government purpose of acquiring mainly financial assets. Corporations consumption expenditure. engaged in these activities obtain funds, not only by taking 114 The production account deposits but also by issuing bills, bonds or other securities. administer a restructuring of a group of corporations. They use these funds as well as own funds to acquire However, the most pervasive and probably largest direct mainly financial assets not only by making advances or fee is likely to be that charged by credit card issuers to the loans to others but also by purchasing bills, bonds or other units that accept credit cards as a means of payment for the securities. Auxiliary financial activities facilitate risk goods and services they provide. The charge is usually management and liquidity transformation activities. calculated as a percentage of the sale; in the case of Financial auxiliaries, which are the units primarily engaged retailers the sale value corresponds to turnover and not in auxiliary financial activities, typically act on behalf of output. Although the percentage is usually small in absolute other units and do not put themselves at risk by incurring terms, maybe one or two percent, the fact that it is applied financial liabilities or by acquiring financial assets as part to such large totals means that the total value of the charge of an intermediation service. is very large. The charge represents output of the credit card companies and intermediate consumption of the 6.159 Financial services are produced almost exclusively by corporations that accept credit cards as means of payment. financial institutions because of the usually stringent Ignoring the role of the credit card company does not affect supervision of the provision of those services. Similarly, the measurement of the expenditure (usually final financial institutions rarely produce other services. If a consumption or exports) on the goods and services retailer wishes to offer credit facilities to its customers, for concerned but does underestimate the costs of the provider example, the credit facilities are usually offered by a of goods and services and the output of the credit card subsidiary of the retailer, the subsidiary being treated as a company. This in turn leads to a misallocation of value financial institution in its own right regardless of the added from the credit card company to the provider of the classification of the parent. Financial institutions may also goods and services paid for by credit card. create subsidiaries dealing with only particular forms of financial services. For example, a credit card operation may 6.162 The example of the credit card company is one that clearly be associated with a given bank but may be institutionally demonstrates that a financial corporation may provide separate. services that are paid for by different means by different customers or in different circumstances. The fee charged to 6.160 Financial services may be paid for explicitly or implicitly. the corporations accepting a credit card as means of Some transactions in financial assets may involve both payment has just been discussed. A card holder may also be explicit and implicit charges. Four main ways in which charged an explicit fee, usually each year, for holding the financial services are provided and charged for may be card. In addition, if a card holder uses the credit facilities considered: offered by the card, he will pay indirect charges associated with interest payable on the outstanding credit (which is treated as a loan in the SNA). a. Financial services provided in return for explicit charges; Financial services provided in association with b. Financial services provided in association with interest interest charges on loans and deposits charges on loans and deposits; 6.163 One traditional way in which financial services are c. Financial services associated with the acquisition and provided is by means of financial intermediation. This is disposal of financial assets and liabilities in financial understood to refer to the process whereby a financial markets; institution such as a bank accepts deposits from units wishing to receive interest on funds for which the unit has d. Financial services associated with insurance and no immediate use and lends them to other units whose pension schemes. funds are insufficient to meet their needs. The bank thus provides a mechanism to allow the first unit to lend to the The following sections look at each of these in turn. In second. Each of the two parties pays a fee to the bank for chapter 17 there is an overview of the transactions and the service provided, the unit lending funds by accepting a other flows associated with each type of financial rate of interest lower than that paid by the borrower, the instrument. The recording of investment income is difference being the combined fees implicitly charged by described in chapter 7 and the acquisition and disposal of the bank to the depositor and to the borrower. From this financial assets and liabilities in chapter 11. Changes in the basic idea the concept emerges of a "reference" rate of value of financial assets and liabilities not arising from interest. The difference between the rate paid to banks by transactions are described in chapter 12. borrowers and the reference rate plus the difference between the reference rate and the rate actually paid to depositors represent charges for financial intermediation Financial services provided in return for explicit services indirectly measured (FISIM). charges 6.164 However, it is seldom the case that the amount of funds lent 6.161 Many services come under this heading and may be by a financial institution exactly matches the amount provided by different categories of financial institutions. deposited with them. Some money may have been Deposit taking institutions, such as banks, may charge deposited but not yet loaned; some loans may be financed households to arrange a mortgage, manage an investment by the bank's own funds and not from borrowed funds. portfolio, give taxation advice, administer an estate, and so However, the depositor of funds receives the same amount on. Specialized financial institutions may charge non- of interest and service whether or not his funds are then lent financial corporations to arrange a flotation of shares or to by the bank to another customer, and the borrower pays the 115 System of National Accounts same rate of interest and receives the same service whether payable under the terms of a financial lease corresponds to his funds are provided by intermediated funds or the bank's bank interest and should be separated into SNA interest and own funds. For this reason an indirect service charge is to financial service charge as for any other loan. be imputed in respect of all loans and deposits offered by a financial institution irrespective of the source of the funds. 6.169 Even when a loan is described as non-performing, interest The reference rate applies to both interest paid on loans and and the associated service charge continue to be recorded in interest paid on deposits so that the amounts of interest the SNA. There is discussion on the treatment of non- recorded as such in the SNA are calculated as the reference performing loans in chapter 13. rate times the level of loan or deposit in question. The difference between these amounts and the amounts actually paid to the financial institution are recorded as service Financial services associated with the charges paid by the borrower or depositor to the financial acquisition and disposal of financial assets and institution. For clarity the amounts based on the reference liabilities in financial markets rate recorded in the SNA as interest are described as "SNA interest" and the total amounts actually paid to or by the financial institution are described as "bank interest". The 6.170 Debt securities such as bills and bonds are other forms of implicit service charge is thus the sum of the bank interest financial assets that give rise to interest payments, interest on loans less the SNA interest on the same loans plus the being payable to the owner of the security by the issuer. As SNA interest on deposits less the bank interest on the same described in chapter 17, some of these interest charges may deposits. The service charge is payable by or to the unit in themselves be imputed from changes in the value of receipt of the loan or owning the deposit as appropriate. securities as they approach maturity. When a financial institution offers a security for sale, a service charge is 6.165 By convention within the SNA, these indirect charges in levied, the purchase price (or ask price) representing the respect of interest apply only to loans and deposits and only estimated market value of the security plus a margin. when those loans and deposits are provided by, or Another charge is levied when a security is sold, the price deposited with, financial institutions. The financial offered to the seller (the bid price) representing the market institutions in question need not be resident; nor need the value less a margin. clients of the financial institution be resident. Thus imports and exports of this type of financial service are possible. 6.171 Prices of securities may change rapidly and to avoid Nor need the financial institution necessarily offer deposit- including holding gains and losses in the calculation of the taking facilities as well as making loans. The financial service margins, it is important to calculate the margins on subsidiaries of retailers are examples of financial sales and purchases in terms of mid-prices. The mid-price institutions that make loans without accepting deposits. A of a security is the average at a given point in time between money lender who has sufficiently detailed accounts to be the bid and ask price. Thus the margin on the purchase of a treated as an actual or quasi-corporation may receive this security is the difference between the ask price and mid- sort of charge; indeed since money lenders usually charge price at the time of the purchase and the margin on a sale is especially high rates of interest, their service charges may the difference between the mid-price and the bid price at exceed the SNA interest payments by significant amounts. the time of the sale. 6.166 The reference rate to be used in the calculation of SNA 6.172 It is important when measuring interest as the increase in interest is a rate between bank interest rates on deposits and value of a security between the date it is purchased and the loans. However, because there is no necessary equality date it matures (or is subsequently sold) to measure from between the level of loans and deposits, it cannot be one mid-point value to another and to treat the differences calculated as a simple average of the rates on loans or between mid-point price and bid or ask price at the time of deposits. The reference rate should contain no service purchase, sale or redemption as a service margin. Ignoring element and reflect the risk and maturity structure of the margins understates the value of output of financial deposits and loans. The rate prevailing for inter-bank institutions and may understate interest payments also. borrowing and lending may be a suitable choice as a reference rate. However, different reference rates may be needed for each currency in which loans and deposits are 6.173 Equities and investment fund shares or units give rise to denominated, especially when a non-resident financial property income other than interest but, like debt securities, institution is involved. For banks within the same economy, they are offered for sale and purchase at different prices. there is often little if any service provided in association The difference between the buying price and mid-price and with banks lending to and borrowing from other banks. the mid-price and selling price should be treated as the provision of financial services as in the case of securities. 6.167 Banks may offer loans that they describe as being fixed The same principles as for securities apply for the same interest loans. This is to be interpreted as a situation where reason. the level of bank interest is fixed but as the reference rate changes, the level of SNA interest and the service charge 6.174 Although no property income flows are involved, margins will vary. between buying and selling prices also apply to purchases of foreign currencies (including transactions denominated 6.168 When an enterprise acquires a fixed asset under the terms in foreign currencies such as payments for imports and of a financial lease, a loan is imputed between the lessor exports as well as the acquisition of physical notes and and the lessee. Regular payments under the lease are treated coins of a foreign currency). Again these margins should be as being payments of interest and repayment of capital. treated as the provision of financial services in a manner When the lessor is a financial institution, the interest similar to that described for securities. 116 The production account 8. Financial services associated with insurance pensions in retirement. Social insurance schemes have and pension schemes. much in common with direct insurance and may be run by insurance corporations. This is not necessarily the case, however, and there are special variations in how the 6.175 Five types of activities are covered under this heading: payment of contributions (corresponding to premiums in the case of direct insurance) and benefits are recorded. Non-life insurance; 6.182 In some circumstances a unit, possibly but not necessarily Life insurance and annuities; within general government, may offer very many guarantees of very similar nature. One example is export Reinsurance; guarantees and another is student loans. Because the guarantees are very similar and numerous, it is possible to Social insurance schemes; make robust statistical estimates of the number of defaults the guarantor will have to cover and so these also are Standardized guarantee schemes. treated in a manner similar to direct non-life insurance. 6.176 All these schemes lead to redistribution of funds, which are 6.183 The detailed recording for each of these activities, recorded in either the secondary distribution of income including the measurement of output, the recording of account or the financial account. For non-life insurance and flows between the insurance corporations or pension funds standardized guarantee schemes, most of the redistribution on the one hand and policyholders or beneficiaries on the takes place between different units in the same period. other, and the implications for changes in the balance Many client units pay relatively small policy premiums or sheets of both sets of institutions are described in part 3 of fees and a small number of them receive relatively large chapter 17. What follows is a summary of the key features claims or payments. For life insurance, annuities and of measuring output for the various activities listed above. pension schemes, the redistribution is primarily, though not entirely, between different periods for a single client. In Non-life insurance fulfilling their responsibilities as managers of these funds, insurance companies and pension funds are involved in 6.184 Under a non-life insurance policy, the insurance company both risk management and liquidity transformation, the accepts a premium from a client and holds it until a claim is prime functions of financial institutions. made or the period of the insurance expires. In the meantime, the insurance company invests the premium and 6.177 Non-life insurance provides cover to the policyholder the property income is an extra source of funds from which against loss or damage suffered as a result of an accident. A to meet any claim due. The property income represents premium is paid to the insurance corporation and a claim is income foregone by the client and so is treated as an paid to the policyholder only if the event insured against implicit supplement to the actual premium. The insurance occurs. If the event occurs then the maximum amount to be company sets the level of the actual premiums to be such paid is specified in the policy so that the uncertainty that the sum of the actual premiums plus the property concerns whether a payment will take place, not the amount income earned on them less the expected claim will leave a of it. margin that the insurance company can retain; this margin represents the output of the insurance company. Within the 6.178 Under a life insurance policy, many small payments are SNA, the output of the insurance industry is determined in made over a period of time and either a single lump sum or a manner intended to mimic the premium setting policies of a stream of payments is made at some pre-agreed time in the insurance corporations. the future. There is little conditionality involved in life insurance, usually the fact that a payment will be made is 6.185 The basic method for measuring non-life insurance output certain but the amount may be uncertain. is the following: 6.179 Annuities are offered by insurance corporations and are a Total premiums earned, means for an individual person to convert a lump sum into a stream of payments in the future. plus premium supplements, 6.180 Just as an individual may limit their exposure to risk by taking out an insurance policy, so may insurance less adjusted claims incurred. corporations themselves. Insurance between one insurance corporation and another is called reinsurance. (Insurance 6.186 The actual premium is the amount payable to the direct other than reinsurance is called direct insurance.) Many insurer or reinsurer to secure insurance cover for a reinsurance transactions are with specialized institutions in specific event over a stated time period. Cover is a few international financial centres. Reinsurers may also frequently provided for one year at a time with the take out a further reinsurance policy. This practice is premium due to be paid at the outset, though cover may be known as "retrocession". provided for shorter (or longer) periods and the premium may be payable in instalments, for example monthly. 6.181 A social insurance scheme is one where a third party, usually an employer or the government, encourages or 6.187 The premium earned is the part of the actual premium obliges individuals to participate in a scheme to provide that relates to cover provided in the accounting period. benefits for a number of identified circumstances, including For example, if an annual policy with a premium of 120 117 System of National Accounts units comes into force on April 1 and accounts are being Life insurance prepared for a calendar year, the premium earned in the calendar year is 90. The unearned premium is the amount 6.192 A life insurance policy is a sort of saving scheme. For a of the actual premium received that relates to the period number of years, the policyholder pays premiums to the past the accounting point. In the example just given, at the insurance corporation against a promise of benefits at some end of the accounting period there will be an unearned future date. These benefits may be expressed in terms of a premium of 30, intended to provide cover for the first three formula related to the premiums paid or may be dependent months of the next year. A claim (benefit) is the amount on the level of success the insurance corporation has in payable to the policyholder by the direct insurer or investing the funds. reinsurer in respect of an event covered by the policy occurring in the period for which the policy is valid. Claims normally become due when the event occurs, even 6.193 The insurance corporation cumulates premiums paid until if the payment is made some time later. (The exception to the promised date when benefits become payable and in the this time of recording is described in paragraph 8.121.) meantime uses the reserves to produce investment income. Claims that become due are described as claims incurred. Some of the investment income is added to the life In some contested cases the delay between the occurrence insurance reserves belonging to the policyholders to meet of the event giving rise to the claim and the settlement of benefits in future. This allocation is an asset of the the claim may be several years. Claims outstanding cover policyholders but is retained by the insurance corporation claims that have not been reported, have been reported which continues to invest the amounts until benefits but are not yet settled or have been both reported and become payable. The remainder of the investment income settled but not yet paid. not allocated to the policyholders is retained by the insurance corporation as its fee for the service they provide. 6.188 The insurance corporation has at its disposal reserves consisting of unearned premiums and claims outstanding. 6.194 The method of calculating output for life insurance follows These reserves are called technical reserves and are used by the same general principles as for non-life insurance but the insurance company to generate investment income. because of the time interval between when premiums are Because the technical reserves are a liability of the received and when benefits are paid, special allowances insurance corporation to the policyholders, the investment must be made for changes in the technical reserves. income they generate is treated as being attributed to the policyholders. However, the amounts remain with the 6.195 The output of life insurance is derived as: insurance corporation and are in effect a hidden supplement to the apparent premium. This income is therefore treated Premiums earned, as a premium supplement paid by the policyholder to the insurance corporation. plus premium supplements, 6.189 In setting the level of premiums, which obviously the less benefits due, insurance corporation must do ex ante, it makes an estimate of the level of claims it expects to be faced with. Within the less increases (plus decreases) in life insurance technical SNA there are two ways in which the appropriate level of reserves. claims (described as adjusted claims) can be determined. One is an ex ante method, described as the expectation method, and estimates the level of adjusted claims from a 6.196 Premiums are defined in exactly the same way for life model based on the past pattern of claims payable by the insurance as for non-life insurance. corporation. The other means of deriving adjusted claims is to use accounting information. Within the accounts for the 6.197 Premium supplements are more significant for life insurance corporations there is an item called "equalization insurance than for non-life insurance. They consist of all provisions" that gives a guide to the funds the insurance the investment income earned on the reserves of the corporation sets aside to meet unexpectedly large claims. policyholders. The amount involved is earnings forgone by Adjusted claims are derived ex post as actual claims the policyholders by putting the funds at the disposal of the incurred plus the change in equalization provisions. In insurance corporation and are thus recorded as property circumstances where the equalization provisions are income in the distribution of primary income account. insufficient to bring adjusted claims back to a normal level, some contribution from own funds must be added also. 6.198 Benefits are recorded as they are awarded or paid. There is no need under life insurance to derive an adjusted figure 6.190 On occasion, the levels of technical reserves and of since there is not the same unexpected volatility in the equalization provisions may be altered in response to payment due under a life policy. It is possible for the financial regulation and not because of changes in the insurance corporation to make robust estimates of the expected patterns of premiums and claims. Such changes benefits due to be paid even years in advance. should be recorded in the other changes in the volume of assets account and excluded from the formula to determine 6.199 Life insurance technical reserves increase each year output. because of new premiums paid, new investment income allocated to the policyholders (but not withdrawn by them) 6.191 In circumstances where information is not available for and decrease because of benefits paid. It is thus possible to either approach to deriving adjusted claims, it may be express the level of output of life insurance as the necessary to estimate output instead by the sum of costs difference between the total investment income earned on including an allowance for normal profits. the life insurance technical reserves less the part of this 118 The production account investment income actually allocated to the policyholders market producer, the value of output is calculated as the and added to the insurance technical reserves. sum of costs. Reinsurance 9. Research and development 6.200 The method of calculating the output of reinsurance is 6.207 Research and development is creative work undertaken on exactly the same as for non-life insurance, whether it is life a systematic basis to increase the stock of knowledge, and or non-life policies that are being reinsured. use this stock of knowledge for the purpose of discovering or developing new products, including improved versions Social insurance schemes or qualities of existing products, or discovering or developing new or more efficient processes of production. 6.201 There are four different ways in which social insurance Research and development is not an ancillary activity, and may be organized. a separate establishment should be distinguished for it when possible. The research and development undertaken by market producers on their own behalf should, in a. Some social insurance is provided by government principle, be valued on the basis of the estimated basic under a social security scheme; prices that would be paid if the research were subcontracted commercially, but in practice is likely to have to be valued b. An employer may organize a social insurance scheme on the basis of the total production costs including the costs for his employees; of fixed assets used in production. Research and development undertaken by specialized commercial c. An employer may have an insurance corporation run research laboratories or institutes is valued by receipts from the scheme for the employer in return for a fee; sales, contracts, commissions, fees, etc. in the usual way. Research and development undertaken by government units, universities, non-profit research institutes, etc. is non- d. An insurance corporation may offer to run a scheme for market production and is valued on the basis of the total several employers in return for any property income costs incurred. The activity of research and development is and holding gains they may make in excess of what is different from teaching and is classified separately in ISIC. owed to the participants in the scheme. The resulting In principle, the two activities ought to be distinguished arrangement is called a multiemployer scheme. from each other when undertaken within a university or other institute of higher education, although there may be The output for each of these modes of running a social considerable practical difficulties when the same staff insurance scheme is calculated in a different manner. divide their time between both activities. There may also be interaction between teaching and research which makes it 6.202 Social security schemes are run as part of the operation of difficult to separate them, even conceptually, in some general government. If separate units are distinguished, cases. The treatment of R&D as capital formation is their output is determined in the same way as all non- discussed in chapter 10. market output as the sum of costs. If separate units are not distinguished, the output of social security is included with the output of the level of government at which it operates. 10. The production of originals and copies 6.203 When an employer operates his own social insurance 6.208 The production of books, recordings, films, software, tapes, scheme, the value of the output is also determined as the disks, etc. is a two-stage process of which the first stage is sum of costs including an estimate for a return to any fixed the production of the original and the second stage the capital used in the operation of the scheme. Even if the production and use of copies of the original. The output of employer establishes a segregated pension fund to manage the first stage is the original itself over which legal or de the scheme, the value of output is still measured in the same facto ownership can be established by copyright, patent or way. secrecy. The value of the original depends on the actual or expected receipts from the sale or use of copies at the 6.204 When an employer uses an insurance corporation to second stage, which have to cover the costs of the original manage the scheme on his behalf, the value of the output is as well as costs incurred at the second stage. the fee charged by the insurance corporation. 6.209 The output of the first stage is a fixed asset that belongs to 6.205 For a multiemployer scheme, the value of output is the producer of the original (author, film company, measured as for life insurance policies; it is the excess of program writer, etc.). It may be produced for sale or for the investment income receivable by the schemes less the own-account gross fixed capital formation by the original amount added to the reserves to meet present and future producer. As the asset may be sold to another institutional pension entitlements. unit the owner of the asset at any given time need not be the original producer, although they are often one and the same unit. If the original is sold when it has been produced, the Standardized guarantee schemes value of the output of the original producer is given by the price paid. If it is not sold, its value may be estimated on 6.206 If a standardized guarantee scheme operates as a market the basis of its production costs with a mark-up. However, producer, the value of output is calculated in the same way the size of any mark-up must depend on the discounted as non-life insurance. If the scheme operates as a non- value of the future receipts expected from using it in 119 System of National Accounts production, so that it is effectively this discounted value, making the copies. Part of the cost of making the copies is however uncertain, that determines its value. the fee paid by the licensee to the owner or licensor. This fee represents both intermediate consumption of the 6.210 The owner of the asset may use it directly to produce copies licensee and output of the owner that is recorded as a in subsequent periods. The value of the copies made is also service sold to the licensee. The payments made for the recorded as production separately from the production licences may be described in various ways, such as fees, involved in the making of the original. Consumption of commissions or royalties, but however they are described fixed capital is recorded in respect of the use of the asset in they are treated as payments for services rendered by the the making of the copies the same way as for any other owner. fixed asset used in production. 6.211 The owner may also license other producers to make use of 6.212 In certain circumstances the licence to make copies may the original in production. The latter may produce and sell also be treated as an asset, distinct from the original. The copies, or use copies in other ways, for example, for film or conditions under which this applies and the consequences music performances. The copier undertakes production in are discussed in greater detail in chapter 17. G. Intermediate consumption 1. Coverage of intermediate consumption information is available. There is more discussion of the treatment of ancillary activities in chapter 5. 6.213 Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of 2. The timing and valuation of intermediate production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods or consumption services may be either transformed or used up by the production process. Some inputs re-emerge after having been transformed and incorporated into the outputs, for 6.216 The intermediate consumption of a good or service is example, grain may be transformed into flour which in turn recorded at the time when the good or service enters the may be transformed into bread. Other inputs are completely process of production, as distinct from the time it was consumed or used up, for example, electricity and most acquired by the producer. In practice, establishments do not services. usually record the actual use of goods in production directly. Instead, they keep records of purchases of materials and supplies intended to be used as inputs and 6.214 Intermediate consumption does not include expenditures by also of any changes in the amounts of such goods held in enterprises on valuables consisting of works of art, precious inventories. An estimate of intermediate consumption metals and stones and articles of jewellery fashioned out of during a given accounting period can then be derived by them. Valuables are assets acquired as stores of value: they subtracting the value of changes in inventories of materials are not used up in production and do not deteriorate and supplies from the value of purchases made. Changes in physically over time. Expenditures on valuables are inventories of materials and supplies are equal to entries recorded in the capital account. Intermediate consumption less withdrawals and recurrent losses on goods held in also does not include costs incurred by the gradual using up inventories. Thus, by reducing the value of changes in of fixed assets owned by the enterprise: the decline in their inventories, recurrent losses increase intermediate value during the accounting period is recorded as consumption. Even if they are consistently large, as long as consumption of fixed capital. However, intermediate they occur regularly, losses are treated as increasing consumption does include the rentals paid on the use of intermediate consumption. Goods entering and leaving fixed assets, whether equipment or buildings, that are inventories are valued at the purchasers' prices prevailing leased from other institutional units under an operating at the times the entries, withdrawals or recurrent losses take lease, and also fees, commissions, royalties, etc., payable place. This is exactly the same method as that used to value under licensing arrangements, as explained above. changes in inventories of goods produced as outputs from the production process. Thus, the earlier discussion of the 6.215 Where ancillary services are not shown as the output of a properties and behaviour of the PIM applies to inventories separate establishment, intermediate consumption includes of inputs. the value of all the goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, 6.217 A good or service consumed as an intermediate input is maintenance, security, etc. In this case, the goods and normally valued at the purchaser's price prevailing at the services consumed by these ancillary activities are not time it enters the process of production; that is, at the price distinguished from those consumed by the principal (or the producer would have to pay to replace it at the time it is secondary) activities of a producing establishment. When a used. As explained in more detail in section C, the unit provides only ancillary services, it continues to be purchaser's price can be regarded as being composed of shown as a separate unit as long as the necessary three elements: 120 The production account a. The basic price received by the producer of the good or 6.222 The following types of goods and services provided to service; employees must be treated as part of intermediate consumption: b. Any transportation costs paid separately by the purchaser in taking delivery of a good at the required a. Tools or equipment used exclusively, or mainly, at time and location plus the cumulative trade margin on a work; good that passes through the chain of wholesale or retail distribution; b. Clothing or footwear of a kind that ordinary consumers do not choose to purchase or wear and which are worn exclusively, or mainly, at work; for example, protective c. Any non-deductible tax on the product payable on the clothing, overalls or uniforms; good or service when it was produced or while in transit to the purchaser less any subsidy on the product. c. Accommodation services at the place of work of a kind that cannot be used by the households to which the For purposes of the input-output tables, it may be necessary employees belong: barracks, cabins, dormitories, huts, to distinguish all three elements but this is not necessary in etc.; the accounts for institutional sectors or the central supply and use table. d. Special meals or drinks necessitated by exceptional working conditions, or meals or drinks provided to 6.218 Intermediate inputs treated as being acquired from other servicemen or others while on active duty; establishments belonging to the same enterprise should be valued at the same prices as were used to value them as e. Transportation and hotel services including allowances outputs of those establishments plus any additional for meals provided while the employee is travelling on transport charges not included in the output values. business; 6.219 When goods or services produced within the same f. Changing facilities, washrooms, showers, baths, etc. establishment are fed back as inputs into the production necessitated by the nature of the work; within the same establishment, they are only recorded as part of the intermediate consumption if they have been g. First aid facilities, medical examinations or other health recorded as part of the output of that establishment. There checks required because of the nature of the work. is discussion on when this might be appropriate in section E. Deliveries of goods and services between different Employees may sometimes be responsible for purchasing establishments belonging to the same enterprise are the kinds of goods or services listed above and be recorded as outputs by the producing establishments and subsequently reimbursed in cash by the employer. Such intermediate inputs by the receiving establishments only cash reimbursements must be treated as intermediate when the receiving establishment effectively assumes all expenditures by the employer and not as part of the risks for completing the production process. employee's wages and salaries. 3. The boundary between intermediate 6.223 The provision of other kinds of goods and services, such as consumption and compensation of ordinary housing services, the services of vehicles or other durable consumer goods used extensively away from work, employees transportation to and from work, etc. should be treated as remuneration in kind, as explained more fully in chapter 7. 6.220 Certain goods and services used by enterprises do not enter directly into the process of production itself but are 4. The boundary between intermediate consumed by employees working on that process. In such consumption and gross fixed capital cases it is necessary to decide whether the goods and formation services are intermediate consumption or, alternatively, remuneration in kind of employees. In general, when the goods or services are used by employees in their own time 6.224 Intermediate consumption measures the value of goods and and at their own discretion for the direct satisfaction of services that are transformed or entirely used up in the their needs or wants, they constitute remuneration in kind. course of production during the accounting period. It does However, when employees are obliged to use the goods or not cover the costs of using fixed assets owned by the services in order to enable them to carry out their work, enterprise nor expenditures on the acquisition of fixed they constitute intermediate consumption. assets. The boundary between these kinds of expenditures and intermediate consumption is explained in more detail below. 6.221 It is immaterial to the employer whether they are treated as intermediate consumption or compensation of employees because they are both costs from the employer's viewpoint Small tools and the net operating surplus is the same. However, reclassifying such goods and services from remuneration in 6.225 Expenditures on durable producer goods that are small, kind to intermediate consumption, or vice versa, changes inexpensive and used to perform relatively simple value added and balance of primary incomes, and hence operations may be treated as intermediate consumption GDP as a whole. when such expenditures are made regularly and are very 121 System of National Accounts small compared with expenditures on machinery and sense, but a complete refitting or restructuring of the equipment. Examples of such goods are hand tools such as interior of a building, or ship, also qualifies. saws, spades, knives, axes, hammers, screwdrivers, and so on. However, in countries where such tools account for a Research and development significant part of the stock of producers' durable goods, they may be treated as fixed assets. 6.230 Research and development is treated as capital formation except in any cases where it is clear that the activity does Maintenance and repairs not entail any economic benefit for its owner in which case it is treated as intermediate consumption. 6.226 The distinction between maintenance and repairs and gross fixed capital formation is not clear-cut. The ordinary, Mineral exploration and evaluation regular maintenance and repair of a fixed asset used in production constitute intermediate consumption. Ordinary 6.231 Expenditures on mineral exploration and evaluation are not maintenance and repair, including the replacement of treated as intermediate consumption. Whether successful or defective parts, are typical ancillary activities but such not, they are needed to acquire new reserves and so are all services may also be provided by a separate establishment classified as gross fixed capital formation. within the same enterprise or purchased from other enterprises. Military equipment 6.227 The practical problem is to distinguish ordinary maintenance and repairs from major renovations, 6.232 Expenditures on military equipment, including large reconstructions or enlargements that go considerably military weapons systems, are treated as fixed capital beyond what is required simply to keep the fixed assets in formation. Expenditure on durable military goods such as good working order. Major renovations, reconstructions, or bombs, torpedoes and spare parts are recorded as enlargements of existing fixed assets may enhance their inventories until used when they are recorded as efficiency or capacity or prolong their expected working intermediate consumption and a withdrawal from lives. They must be treated as gross fixed capital formation inventories. as they add to the stock of fixed assets in existence. 5. Services provided by government to 6.228 Ordinary maintenance and repairs are distinguished by two producers features: 6.233 Government may provide services to producers. To the a. They are activities that owners or users of fixed assets extent that a charge is made for these services, the charges are obliged to undertake periodically in order to be able form part of the intermediate consumption of the producer. to utilize such assets over their expected service lives. However, when the charge does not represent an They are current costs that cannot be avoided if the economically significant price, the value of the service to fixed assets are to continue to be used. The owner or the producer is greater than the cost. However, no user cannot afford to neglect maintenance and repairs estimation of this benefit is made and the costs of the as the expected service life may be drastically services not covered by the charges made are included in shortened otherwise; collective consumption of government. b. Maintenance and repairs do not change the fixed asset 6. Social transfers in kind or its performance, but simply maintain it in good working order or restore it to its previous condition in 6.234 Expenditures by government or NPISHs on goods or the event of a breakdown. Defective parts are replaced services produced by market producers that are provided by new parts of the same kind without changing the directly to households, individually or collectively, without basic nature of the fixed asset. any further processing constitute final consumption expenditures by government or NPISHs and not 6.229 On the other hand, major renovations or enlargements to intermediate consumption. The goods and services in fixed assets are distinguished by the following features: question are treated as social transfers in kind and enter into the actual consumption of households. a. The decision to renovate, reconstruct or enlarge a fixed asset is a deliberate investment decision that may be 6.235 By convention, non-financial and financial corporations do undertaken at any time and is not dictated by the not make social transfers in kind, nor engage in final condition of the asset. Major renovations of ships, consumption. buildings or other structures are frequently undertaken well before the end of their normal service lives; 7. Services of business associations b. Major renovations or enlargements increase the 6.236 Non-profit institutions in the form of business associations performance or capacity of existing fixed assets or that exist to protect the interests of their members and are significantly extend their previously expected service financed by them are market producers. The subscriptions lives. Enlarging or extending an existing building or paid by the businesses constitute payments for services structure obviously constitutes a major change in this rendered. These services are consumed as intermediate 122 The production account inputs by the members of the association and are valued by with their use are not recorded under intermediate the amounts paid in subscriptions, contributions or dues. consumption. The consumption of fixed capital on the assets forms part of gross value added while interest costs, 8. Outsourcing both actual and implicit, have to be met out of the net operating surplus. Only the costs of the materials needed for maintenance and repairs appear under intermediate 6.237 It is increasingly common for producers to change the way consumption. Decisions to rent rather than purchase may be in which a production activity is completed. Different influenced by factors quite unrelated to the technology of stages in the process or different support activities such as production, such as taxation, the availability of finance, or office cleaning or assembly of electronic components may be contracted out to another producer, in the same country the consequences for the balance sheet. or abroad. This changes the pattern of intermediate inputs even though the underlying technology may be the same. 6.239 There is a significant difference between rentals of fixed The impact of this on input-output tables is discussed in assets under an operating lease and the acquisition of an chapters 14 and 28. asset under a financial lease. Under an operating lease, the lessor has a productive activity that involves the equipment 9. Leasing fixed assets in question and is responsible for the production risks associated with the operational status of the asset. 6.238 The decision to rent buildings, machinery or equipment Payments by the lessee are treated as payments for a under an operating lease, rather than purchase them, can service. Under a financial lease, the lessee accepts all risks have a major impact on the ratio of intermediate and rewards associated with the use of the asset in consumption to value added and the distribution of value production. A financial lease is thus treated as a loan by the added between producers. Rentals paid on buildings or on lessor to the lessee and purchase of the equipment by the machinery or equipment under an operating lease constitute lessee. Subsequent payments are treated as payments of purchases of services that are recorded as intermediate interest and repayments of principal by the lessee to the consumption. However, if an enterprise owns its buildings, lessor. Further details on the treatment of operating and machinery and equipment, most of the costs associated financial leases are given in chapter 17. H. Consumption of fixed capital 1. The coverage of consumption of fixed capital very long for some structures, such as roads, bridges, dams, etc., they cannot be assumed to be infinite. Thus, capital 6.240 Consumption of fixed capital is the decline, during the consumption needs to be calculated for all types of course of the accounting period, in the current value of structures, including those owned and maintained by the stock of fixed assets owned and used by a producer as government units, as well as machinery and equipment. a result of physical deterioration, normal obsolescence or normal accidental damage. The term depreciation is often 6.243 Losses of fixed assets due to normal or expected levels of used in place of consumption of fixed capital but it is accidental damage are also included under consumption of avoided in the SNA because in commercial accounting the fixed capital; that is, damage caused to assets used in term depreciation is often used in the context of writing off production resulting from their exposure to the risk of fires, historic costs whereas in the SNA consumption of fixed storms, accidents due to human error, etc. When these capital is dependent on the current value of the asset. kinds of accidents occur with predictable regularity they are taken into account in calculating the average service lives 6.241 Consumption of fixed capital is calculated for all fixed of the goods in question. For an individual unit, or group of assets owned by producers, but not for valuables (precious units, any difference between the average and the actual metals, precious stones, etc.) that are acquired precisely normal accidental damage within a given period is recorded because their value, in real terms, is not expected to decline in the other changes in the volume of assets account. over time. Fixed assets must have been produced as outputs However, at the level of the economy as a whole, the actual from processes of production as defined in the SNA. normal accidental damage within a given accounting period Consumption of fixed capital does not, therefore, cover the may be expected to be equal, or close, to the average. depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas, or 6.244 On the other hand, losses due to war or to major natural contracts, leases and licences. disasters that occur very infrequently, such as major earthquakes, volcanic eruptions, tidal waves or 6.242 The value of assets may decline not merely because they exceptionally severe hurricanes, are not included under deteriorate physically but because of a decrease in the consumption of fixed capital. There is no reason for such demand for their services as a result of technical progress losses to be charged in the production account as costs of and the appearance of new substitutes for them. In practice, production. The values of the assets lost in these ways are many structures, including roads and railway tracks, are recorded in the other changes in the volume of assets scrapped or demolished because they have become account. Similarly, although consumption of fixed capital obsolete. Even though the estimated service lives may be includes reductions in the value of fixed assets resulting 123 System of National Accounts from normal, expected rates of obsolescence, it should not Either procedure results in a present value expressed in include losses due to unexpected technological current period prices. developments that may significantly shorten the service lives of a group of existing fixed assets. Such losses are 6.247 Consumption of fixed capital is a forward-looking measure treated in the same way as losses due to above average rates that is determined by future, and not past, events namely, of normal accidental damage. the benefits that institutional units expect to derive in the future from using the asset in production over the 2. Consumption of fixed capital and rentals on remainder of its service life. Unlike depreciation as usually calculated in business accounts, consumption of fixed fixed assets capital is not, at least in principle, a method of allocating the costs of past expenditures on fixed assets over 6.245 It is possible to draw a comparison between consumption subsequent accounting periods. The value of a fixed asset at of fixed capital and rental of assets under an operating a given moment in time depends only on the remaining lease. The rental is the amount payable by the user of a benefits to be derived from its use and consumption of fixed asset to its owner, under an operating lease or fixed capital must be based on values calculated in this similar contract, for the right to use that asset in way. production for a specified period of time. The rental needs to be large enough to cover (i) any direct costs incurred by 3. The calculation of consumption of fixed the owner including the costs of maintaining the asset, (ii) capital the reduction in the value of the asset over that period (the consumption of fixed capital) and (iii) the interest costs on the value of the asset at the start of the period. The interest 6.248 Fixed assets may have been purchased in the past at times costs may consist either of actual interest paid on borrowed when both relative prices and the general price level were funds or the loss of interest incurred as a result of investing very different from prices in the current period. In order to own funds in the purchase of the fixed asset instead of a be consistent with the other entries in the same production financial asset. Whether owned or rented, the full cost of account, consumption of fixed capital must be valued with using the fixed asset in production is measured by the reference to the same overall set of current prices as that actual or imputed rental on the asset and not by used to value output and intermediate consumption. consumption of fixed capital alone. When the asset is Consumption of fixed capital should reflect underlying actually rented under an operating lease or similar contract, resource costs and relative demands at the time the the rental is recorded under intermediate consumption as production takes place. It should therefore be calculated the purchase of a service produced by the lessor. When the using the actual or estimated prices and rentals of fixed user and the owner are one and the same unit, the direct assets prevailing at that time and not at the times the goods costs are recorded as intermediate consumption. The were originally acquired. The "historic costs" of fixed consumption of fixed capital represents the second element assets, that is, the prices originally paid for them, become of the cost of using the asset. The third part of the cost, quite irrelevant for the calculation of consumption of fixed referred to above as the interest cost, is also known as the capital as prices change over time. return to fixed capital. Like consumption of fixed capital, the return to capital is part of value added. The sum of the 6.249 For these reasons, depreciation as recorded in business consumption of fixed capital and the value of the return to accounts may not provide the right kind of information for capital is known as the capital services rendered by the the calculation of consumption of fixed capital. If data on asset. Capital services are discussed in more detail in depreciation are used, they must, at the very least, be chapter 20. adjusted from historic costs to current prices. However, depreciation allowances for tax purposes have often been grossly manipulated in quite arbitrary ways to try to 6.246 The value of a fixed asset to its owner at any point of time influence rates of investment and are best ignored is determined by the present value of the future capital altogether in many cases. It is recommended that services (that is, the sum of the values of the stream of independent estimates of consumption of fixed capital future rentals less operating costs discounted to the present should be compiled in conjunction with estimates of the period) that can be expected over its remaining service life. capital stock. These can be built up from data on gross Consumption of fixed capital is measured by the decrease, fixed capital formation in the past combined with estimates between the beginning and the end of the current of the rates at which the efficiency of fixed assets decline accounting period, in the present value of the remaining over their service lives. sequence of expected future benefits. The extent of the decrease will be influenced not only by the amount by which the efficiency of the asset may have declined during 6.250 Whenever possible, the initial value of a new fixed asset the current period but also by the shortening of its service should be that prevailing on the market when the asset is life and the rate at which its economic efficiency declines acquired. If assets of all ages and specifications were over its remaining service life. The decrease is expressed in regularly traded on markets, these prices should be used to the average prices of the current period for an asset of value every asset as it ages. However, there is scarce exactly the same quality and should exclude holding gains information on the prices of second-hand assets and faced and losses. When the flow of future benefits that with this lack, a more theoretical approach to determining determines the present values used to derive consumption the price of an asset as it ages must be adopted. of fixed capital is expressed in terms of flows that include an element of inflation, then the discount factor should be 6.251 Conceptually, market forces should ensure that the nominal. When the flows are expressed in terms of current purchaser's price of a new fixed asset is equivalent to the period prices, then a real discount rate should be used. present value of the future benefits that can be derived from 124 The production account it. Given the initial market price, therefore, and knowledge another. The simplest case to consider is one where the of the characteristics of the asset in question, it is possible efficiency of the asset remains constant until it to project the stream of future benefits and continually disintegrates, like a light bulb. Other simple cases include update the remaining present value of these. This method of the case where the efficiency declines linearly or building up estimates of the capital stock and changes in exponentially over its life. Other methods employ a the capital stock over time is known as the perpetual hyperbolic rate of efficiency loss with relatively little inventory method, or PIM. Estimates of consumption of decline in the initial years but increasingly steeper decline fixed capital are obtained as a by-product of the PIM. as time progresses. However, in practice calculations are not undertaken asset by asset individually but for cohorts of 4. The perpetual inventory method assets of similar ages and characteristics. Individual assets within the cohort will retire at different moments but the efficiency-retirement profile for the cohort as a whole is 6.252 A brief explanation of how consumption of fixed capital typically convex to the origin. may be calculated as a by-product of the perpetual inventory method of calculating the capital stock is given in this section. An overview of the link between the 6.255 The efficiency profiles of fixed assets determine the calculation of consumption of fixed capital, the return to profiles of the benefits they command over their service capital and the stock of assets is given in chapter 20. Much lives. Once the profiles of the benefits over the service lives more guidance on the way to calculate capital stock of the fixed asset have been determined, it becomes estimates appears in the manual Measuring Capital. possible to calculate the consumption of fixed capital, (OECD, 2009). period by period. Calculation of the gross capital stock Rates of consumption of fixed capital 6.253 The perpetual inventory method requires an estimate to be 6.256 Consumption of fixed capital is derived as the reduction in made of the stock of fixed assets in existence and in the the present value of the remaining benefits, as explained hands of producers. The first step is to estimate how many earlier. This reduction, and the rate at which it takes place of the fixed assets installed as a result of gross fixed capital over time, must be clearly distinguished from the decline in formation undertaken in previous years have survived to the efficiency of the capital assets themselves. Although the the current period. Average service lives, or survival efficiency, and hence the benefit, of an asset with the functions, based on observations or technical studies may efficiency characteristics of a light bulb may remain be applied to past investments for this purpose. Fixed assets constant from period to period until it disintegrates, the purchased at different prices in the past have then to be value of the asset declines over time. It also follows that the revalued at the prices of the current period by utilizing consumption of fixed capital is not constant. It can easily be appropriate price indices for fixed assets. The construction shown in this case that the decline in the present value of of suitable price indices covering long periods of time the remaining benefits from period to period is raises difficult conceptual and practical problems, but these considerably lower earlier in the life of the asset than when technical problems of price measurement must be faced in the asset is approaching the end of its life. Consumption of any case in developing balance sheet values of assets. The fixed capital tends to increase as the asset gets older even stock of fixed assets surviving from past investment and though the efficiency and benefits remain constant to the revalued at the purchasers' prices of the current period is end. described as the gross capital stock. The gross capital stock can also be measured at the prices of a given base year if it Values of consumption of fixed capital is desired to have annual time series for the gross capital stock in volume terms. 6.257 Consumption of fixed capital should not be estimated in isolation from the derivation of a set of capital stock data. Relative efficiencies Such data are needed for the balance sheet and, as shown in chapter 20, trying to identify consumption of fixed capital 6.254 The inputs into production obtained from the use of a given in isolation from the level of the stock of the asset and its fixed asset tend to diminish over time. The rate at which the patterns of price and efficiency decline is likely to be error efficiency declines may vary from one type of asset to prone. 125 System of National Accounts 126 The production account Annex to chapter 6: Separating output due to storage from holding gains and losses A. Introduction A6.1 Paragraphs 6.142 to 6.145 recommend that, in some cases, A6.3 For most products, called "type I" products, this is the only the increase in value of goods held in inventories may be aspect of storage that is relevant. All the costs associated regarded as output due to storage rather than to holding with storage are included in production costs. The value of gains. This annex explores the topic further and gives the goods as they are withdrawn from inventories is valued examples of when it is appropriate to treat any of the at the costs of producing or acquiring replacement items at increase in value of a product as due to production and how that time. As a consequence, output is measured excluding this may be separated from any remaining holding gains any change in the value of products held in inventories; this and losses. change in value is treated as a holding gain or loss, as illustrated in the following example. 1. Storage costs and holding gains and losses A6.4 Suppose a wholesaler buys and sells 100 packets of washing powder every period and in order to allow for A6.2 Holding products in inventories always involves costs marginal variations in demand keeps an inventory of 10 whether they are being held by the original producer or a packets. At the beginning of a period the price paid per subsequent wholesaler or retailer. These costs include those packet is 2, so the value of his inventories is 20. During the associated with providing the physical storage capacity, period the acquisition cost per packet increases to 2.1. The maintaining information on levels and types of inventories, value of the 10 packets in inventories rises to 21 but the costs of supplying withdrawals to customers and costs increase in value of 1 reflects the fact only that if the 10 associated with renewing the level of inventories by packets were withdrawn from inventories for sale and acquiring replacement goods (other than the cost of the replaced by identical products, the new products would cost goods themselves). These costs form part of the basic price 21 to acquire. Because output is measured with all units, charged by a manufacturer or are recovered in the margins whether newly produced or withdrawn from inventories, charged by wholesalers and retailers. The costs incurred are valued at the new price of 2.1, the 1 increase in the value of included in intermediate consumption, compensation of inventories does not enter the measures of production but employees and the cost of capital. It may also be the case appears only in the revaluation account explaining how the that specialist storage producers provide a service to other value of a stock of 10 packets at the beginning of the producers and again their costs are included in intermediate period, valued at 20, is replaced by a similar stock of 10 consumption. packets at the end of the period now valued at 21. B. Goods whose real value changes over time A6.5 There are three specific cases where the treatment 1. Goods with a long production period described above is unsatisfactory because other factors intervene in the time while the goods are held in storage. A6.6 When a product is held in inventories for an extended Goods where this is the case are described as "type II" period of time because of the length of the production products. The three specific circumstances are the process, in principle, discount factors should be used when following: calculating the value of work put in place each period before the delivery date. For example, if a construction a. Goods that have a very long production process; project ultimately worth 200 is put in place steadily over four years, it is unrealistic to count 50 as the contribution to b. Goods that change their physical characteristics while production in the first year. Any purchaser would take in inventories; account of the fact that he would not be able to realize the value of this production for another three years and c. Goods that have seasonal patterns of supply or demand discount the value accordingly. As time passes, there is but not both. income arising to the unit holding the products as the discount factor unwinds. This case is described in chapter Each of these is discussed in turn below. 20, with the full details of this numerical example. A6.7 It is suggested that in practice it is necessary to make an allowance for the discount factor only for goods of a significantly high value and significantly long production 127 System of National Accounts process, where goods are recorded as work-in-progress or year mature product at the end of the year and the two year capital formation on own account for many periods before mature product at the same time gives the value of output completion. due to storage, and so on. 2. Goods whose physical characteristics A6.11 The identity in paragraph A6.10 holds in current values, change when each term contains (or consists of) nominal holding gains (or losses) or when each term is deflated by the A6.8 The second set of circumstances relates to goods whose general level of inflation so that each term contains or physical characteristics change during storage because consists of real holding gains (or losses). In volume terms, maturing is part of the production process. The goods as when there are no price increases, the increase in value is concerned are those that in the absence of any general or identified with the output due to storage. relative change in prices still increase in value because they improve in quality over the time held in storage. Examples A6.12 In practice it is very likely that robust time series of prices are fermentation affecting food products and the ageing of at different points in the maturing process do not exist. It is wine and spirits. When the product is withdrawn from possible that some close equivalent might be available but storage, it is physically different from a new item entering even this is not very likely. How can storage be separated the maturing phase and so it is not appropriate to use the from holding gains in the absence of these prices? acquisition cost of the new entry into inventories as the value of the product being withdrawn. The question is how A6.13 From long experience the producer may be able to make a to separate the increase in value due to maturing from the reasonable prediction about the increase in value due to overall price increases of the goods concerned. storage. Suppose in a particular case he expects the value in volume terms after three years to be two and a half times A6.9 Suppose a product takes three years to reach a sufficient the cost of producing the new product. If the new product is maturity to be sold and there is final demand for the worth 100, the three year old, mature, product is worth 250. product until it reaches this state. If the good is traded, even This suggests that the volume of output due to storage is 50 in its immature state, then prices will exist for the in each of the next three years. (Like the long construction immature, newly manufactured product, for the one year product discussed above, in principle, a discount factor old product, the two year old product and the mature should be applied to the initial 100 and the first two product. Supposing the product is well-established, at any tranches of 50 because the product is not ready for sale point in time there will be a mix of newly manufactured until the end of the third year.) In the absence of items and those of maturities of one, two and three years. If information about the increase in the price of the product prices exist for these different maturities, separating the relative to the general increase in prices, it may be value of storage is not difficult. In the first year the new necessary to assume there are no real holding gains in the product is transformed into a product of one year's product and the actual increase in value must be taken as maturity. If the price when the product is brand new is P0 the value of the output due to storage in current values. and when it is one year old is P1, and t is the first year and Once the price of the fully mature product is known, some t+1 the second, the change in value of a quantity Q of the adjustment could be made or, pragmatically, the difference product is Q(P1,t+1 ­ P0,t). The increase in value is due to between the original prediction and the outturn, adjusted two factors, the increase in the price of the new product for general inflation, may be taken as a real holding gain or made last year to the price of a similar new product made loss. this year (Q(P0,t+1 ­ P0,t)) and the difference between the price of a similar new product made this year and the price A6.14 It is not ideal that the output due to storage is assumed to be of the one year mature product this year (Q(P1,t+1 ­ P0,t+1)). invariant to fluctuations in relative prices, but in By applying the price differences to the volumes involved, circumstances where most of the price increase will be due the first difference gives rise to a holding gain; the second to storage and better basic data are not available, this to the value of output due to storage. approach gives a pragmatic estimate of output due to storage that is superior to the assumption that the whole of A6.10 The identity that: the increase in value is simply a holding gain. the increase in value from period t to period t+1, 3. Goods with seasonal patterns of supply and demand is equal to the change in value between products of the same maturity (or vintage) from period t to period t+1 A6.15 The third case where there is a change in value that is not (treated as a holding gain), attributable solely to holding gains and losses is when goods are placed in storage to take advantage of changes in plus the change in value between products of successive the pattern of supply and demand over a year. The most maturities (or vintages) in period t+1 treated as the output common case is storage of a staple crop, such as maize, due to storage, where there is a relatively short harvest period but demand is fairly constant throughout the year. As a result, the price is true for any two successive time periods. Thus, in the rises as inventories decrease until the next harvest when an second year the increase in price between the one year increase in supply causes the price to fall again. It is mature product at the beginning of the year and the price of possible to envisage the opposite case where demand is a one year mature product at the end of the year gives rise seasonal but it is cost effective for producers to produce the to a holding gain and the difference in price between a one good for the whole, or most, of the year, even though for 128 The production account much of that time the production goes straight into type II goods and the holder is a wholesaler or retailer, he inventories and stays there until demand peaks. may have output just as the original producer may. A6.16 The reason that this type of product is different from a type 5. When is output due to storage recorded? I product is that, as with the goods that change characteristics due to maturing, the price increases, relative A6.20 Output due to storage is produced on a continuous basis. In to the general level of inflation, in a more or less order to have an articulated set of information on predictable way because of the effect of transporting the production and inventories, output from storage must be goods through time, from a period of abundance to one of calculated period by period. If the goods that are changing relative scarcity. This is a quite different motivation from value remain in inventories, the owner of the goods has holding items in store for purely speculative reasons when output that is treated as an addition to inventories. Even there is no pattern established for the probable increase in though the quantity of the inventories may not change, the prices and no predetermined time over which the goods quality-adjusted measures do change to reflect the increase might be held. in price that is treated as a quality change and not as a holding gain. A6.17 The ideal situation is one where there is a well-established and robust seasonal pattern for the expected price increases 1. Some examples in the crop. In such a case, the seasonal pattern of the prices can be used to establish the output due to storage and the A6.21 These simple examples show how the approximate remaining increase in value represents holding gains and approach to calculating storage works under different losses that can be separated into real and neutral elements assumptions. as normal. Example 1 A6.18 However, given that the total level of a harvest can be quite different year on year and the actual time of harvest may A6.22 Unit A purchases goods to the value of 100 and they rise in vary slightly from year to year depending on climatic value to 110 by the middle of year 2 when he sells them. At conditions, establishing a robust seasonal pattern of prices the end of the year the value of the goods is 108. There is may not be easy. In such a case, the pragmatic suggestion is no general inflation in the period. similar to that for maturing goods when there is imperfect information. The premise is that the increase in price will be attributable to two factors; the first is an increase A6.23 In year 1, A records output of 8 and additions to inventories matching the general increase in prices. The element of of 108 in total. In year 2, A records output of 2, additions to increase in the value of inventories corresponding to this inventories of 2 and sales of the withdrawals from should be treated as nominal holding gains and losses. The inventories of 110. second factor leading to the increase in prices is a seasonal scarcity value and this element should be treated as giving Example 2 rise to output due to storage. Assuming that all the increase other than that matching average price increases is due to A6.24 The goods bought in example 1 also increase in line with storage implies that there are no real holding gains. inflation so that they are worth 115 by the end of year 1 and 120 on disposal. 4. Who benefits from the increase in value of goods in storage? A6.25 The recordings in year 1 are complemented by holding gains of 7 in year 1. At the end of year 1, it is necessary to re-estimate the expected price level on disposal. If this is A6.19 The fact that type II products give rise to production of estimated to be 117, showing the same absolute increase as storage depends only on the type of product, not on the previously expected, for example, then a holding gain of 3 producer. If a farmer produces a seasonal crop and then will be recorded in year 2. stores most of it to sell bit by bit throughout the year, he records the benefits of the increase in value due to storage Example 3 in his output. However, if he sells all of his crop at harvest time to another unit (for example, a wholesaler) and that unit puts it in inventories and sells it continuously A6.26 The goods in example 1 are sold to unit B for 105 part way throughout the year, then that unit derives the benefits from through the year. B then holds the goods until selling them holding the crop in storage and records in his output these at the same point in time in year 2 for 110. benefits that would otherwise have been recorded by the farmer as output. However many times a type II good A6.27 In year 1, A has output of 5 and acquisition of inventories changes hands between its production and sale, the value of of 105. A withdraws inventories of 105 and sells them to B. output due to storage will be the same. It is likely that every B has output in year 1 of 3, which is recorded as an addition time it changes hands, the associated intermediate to inventories. The value of B's total additions to consumption will increase so that value added will decrease inventories in year 1 is thus 108. In year 2, B has output of but the level of output will not be affected. Thus an increase 2, additions to inventories of 2 and sales that represent in value accrues to the unit holding the goods, if they are withdrawals from inventories of 110. 129 System of National Accounts 130 Chapter 7: The distribution of income accounts A. Introduction 7.1 There are two accounts that record how income arising unincorporated enterprises owned by households. This item from involvement in processes of production or from is very different from the compensation of employees ownership of assets needed for production are distributed receivable by the household sector, which is recorded in the among institutional units and the second of these is further account below, the allocation of primary income account. subdivided in two also: 7.4 The resources, listed on the right-hand side of the a. The generation of income account; generation of income account, consist of only a single item, value added, the balancing item carried forward from the b. The allocation of primary income account; production account. As stated in chapter 6, value added may be measured before the deduction of consumption of · The entrepreneurial income account; and fixed capital (gross) or after the deduction of consumption of fixed capital (net). Provision must also be made throughout the remaining accounts of the SNA for the · The allocation of other primary income account. relevant balancing items to be measured gross or net of consumption of fixed capital. The concept and 7.2 Basic to all these accounts is the concept of primary measurement of consumption of fixed capital have already income. Primary incomes are incomes that accrue to been explained in detail in chapter 6. For simplicity, it will institutional units as a consequence of their involvement be assumed that value added is measured net, except when in processes of production or ownership of assets that the context requires gross value added to be referred to may be needed for purposes of production. A major item explicitly. of primary income is compensation of employees that represents the income accruing to individuals in return for 7.5 The left-hand side of the generation of income account their labour input into production processes. Property records the uses of value added. There are only two main income is that part of primary incomes that accrues by types of charges that producers have to meet out of value lending or renting financial or natural resources, including added: compensation of employees payable to workers land, to other units for use in production. Receipts from employed in the production process and any taxes, less taxes on production and imports (less subsidies on subsidies, on production payable or receivable as a result of production and imports) are treated as primary incomes of engaging in production. Compensation of employees is governments even though not all of them may be recorded defined as the total remuneration, in cash or in kind, as payable out of the value added of enterprises. Primary payable by an enterprise to an employee in return for incomes do not include the payments of social work done by the latter during the accounting period. contributions to social insurance schemes and the receipt of Taxes less subsidies on production consist of taxes benefits from them, current taxes on income, wealth, etc. payable or subsidies receivable on goods or services and other current transfers, such current transfers being produced as outputs and other taxes or subsidies on recorded in the secondary distribution of income account. production, such as those payable on the labour, machinery, buildings or other assets used in production. 1. The generation of income account Taxes on production do not include any income taxes payable by the recipients of incomes accruing from 7.3 The generation of income account (shown in table 7.1) production, whether employers or employees. represents a further extension or elaboration of the production account in which the primary incomes accruing 7.6 The content of the item taxes less subsidies on production to government units and to the units participating directly payable out of value added varies according to the way in in production are recorded. Like the production account, it which output is valued. Value added tax (VAT), or other may be compiled for establishments and industries as well similar deductible tax, invoiced on output is never treated as for institutional units and sectors. The generation of as part of the price receivable by the producer from the income account shows the sectors, subsectors or industries purchaser. Invoiced VAT is always omitted from value of in which the primary incomes originate, as distinct from the output, whether output is valued at producers' or basic sectors or subsectors destined to receive such incomes. For prices. Hence, invoiced VAT is not a charge against value example, the only compensation of employees recorded in added and is not recorded as a payable in the producer's the generation of income account for the household sector generation of income account. However, when output is consists of the compensation of employees payable by valued at producers' prices, any other tax on products 131 System of National Accounts payable on the output is treated as an integral part of the case, the balancing item is described as mixed income price receivable by the producer from the purchaser. The because it implicitly contains an element of remuneration tax is recorded as being payable by the producer out of for work done by the owner, or other members of the value added at producers' prices in the generation of household, that cannot be separately identified from the income account, that is, as a component of the item "taxes return to the owner as entrepreneur. In many cases, though, less subsidies on production". Similarly, any subsidy on the element of remuneration may dominate the value of products receivable on the output is recorded as being mixed income. In practice, all unincorporated enterprises receivable by the producer from government in the owned by households that are not quasi-corporations are generation of income account as a supplement to value deemed to have mixed income as their balancing item, added at producers' prices. By convention, it is not except owner-occupiers in their capacity as producers of recorded under resources but as a component of "taxes less housing services for own final consumption, households subsidies on production" as if it were a negative tax on leasing dwellings and households employing paid domestic output. staff. For owner-occupiers and those leasing dwellings, all value added is operating surplus. For domestic staff all 7.7 As explained in chapter 6, the basic price is obtained from value added is compensation of employees (unless any the producer's price by deducting any tax on products taxes or subsidies on production are payable or receivable payable on a unit of output (other than invoiced VAT on the output). already omitted from the producer's price) and adding any subsidy on products receivable on a unit of output. In 7.10 As noted in chapter 6, gross domestic product (GDP) at consequence, no taxes on products or subsidies on products market prices is equal to the sum of the gross value added are to be recorded as payables or receivables in the of all resident enterprises plus those taxes, less subsidies, producer's generation of income account when value added on products that are not payable on the values of the is measured at basic prices, the preferred valuation basis in outputs of those enterprises, that is, taxes or subsidies on the SNA. When basic prices are used to value output, the imports plus non-deductible VAT when output is valued at item "taxes less subsidies on production" refers only to producers' prices, and all taxes or subsidies on products other taxes or subsidies on production. when output is valued at basic prices. For this reason, taxes and subsidies on imports and VAT must also be recorded 7.8 After deducting compensation of employees and taxes, less under uses of GDP in the generation of income account for subsidies, on production from value added, the balancing the total economy, even though they do not appear in the item of the generation of income account is obtained. The generation of income account for individual institutional balancing item is shown on the left-hand side of the units or sectors. account under uses. It measures the surplus or deficit accruing from production before taking account of any interest, rent or similar charges payable on financial assets 7.11 As already noted, the preferred measure of value added is or natural resources borrowed or rented by the enterprise, after deducting consumption of fixed capital, that is, net or any interest, rent or similar receipts receivable on value added. However, provision is made in the accounts of financial assets or natural resources owned by the the SNA for value added, and all subsequent balancing enterprise. items that depend on value added, to be measured gross or net of consumption of fixed capital. Operating surplus and Operating surplus and mixed income mixed income may therefore both be expressed as gross or net. 7.9 The balancing item is described as operating surplus except for unincorporated enterprises owned by households in 7.12 Operating surplus or mixed income is a measure of the which the owner(s) or members of the same household may surplus accruing from processes of production before contribute unpaid labour inputs of a similar kind to those deducting any explicit or implicit interest charges, rent or that could be provided by paid employees. In the latter other property incomes payable on the financial assets, land Table 7.1:The generation of income account - concise form - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 986 44 98 11 11 1 150 1 150 Taxes on production and imports 235 235 Subsidies - 44 - 44 Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Consumption of fixed capital on gross operating surplus 157 12 27 15 3 214 Consumption of fixed capital on gross mixed income 8 8 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 132 The distribution of income accounts or other natural resources required to carry on the 2. The allocation of primary income account production. It is, therefore, invariant as to whether: 7.15 Whereas the generation of income account focuses on a. The land or other natural resources used in production resident institutional units or sectors in their capacity as are owned or rented by the enterprise; and producers whose activities generate primary incomes, the allocation of primary income account (shown in table 7.2) b. The inventories, fixed assets, land or other natural focuses on resident institutional units or sectors in their resources owned by the enterprise and used in capacity as recipients of primary incomes. The allocation of production are financed out of own funds (or equity primary income account shows where the items payable in capital) or out of borrowed funds (or loan capital). the generation of income account are receivable and also includes the amounts of property incomes receivable and payable by institutional units or sectors. As already noted, 7.13 Although operating surplus or mixed income is invariant to the generation of income account, being related to the extent to which land is owned or assets in general are production activities, can be compiled for establishments financed, it needs to be sufficient to cover both any explicit, and industries as well as for institutional units and sectors. or implicit, rent on land and the explicit, or implicit, interest However, the allocation of primary income account has no charges on the value of all the assets owned by the such direct link with production and can only be compiled enterprise in order to justify their continued use in for institutional units and sectors. production. The implicit interest costs of using the enterprise's own funds to purchase inventories, fixed assets 7.16 Enterprises may invest surplus funds in financial assets or or other assets are the opportunity costs of using the funds even land, especially in times of uncertainty and high in this way rather than to acquire financial assets on which interest rates. Considerable property income may be interest could be earned. These costs are captured in received from such investments. The property income paid estimates of capital services. The amounts of rent and out by a corporation will be influenced by the amount of interest actually payable on rented land and borrowed funds property income received as well as by its operating are recorded in the allocation of primary income account surplus. Thus, it is not appropriate to record all the property and the entrepreneurial income account. income paid out by an enterprise as if it were chargeable against operating surplus. Some interest costs, especially 7.14 The operating surplus or mixed income of an individual implicit costs, may be attributable to assets other than those producer unit is not invariant, however, to the extent to used in production. For this reason, the explicit and implicit which the fixed assets used in production are owned or interest costs payable by an enterprise ought not to be rented. When buildings, other structures, machinery or recorded in the generation of income account in which the equipment are rented by an enterprise, the payments of resources consist only of value added accruing from rentals under an operating lease are recorded as purchases production. They are recorded in the allocation of primary of services. These services form part of intermediate income account along with any property income receivable consumption. Thus, as explained in chapter 17, the as well as the operating surplus. payment of the rental on a fixed asset tends to reduce gross value added below what it would be if the producer owned 7.17 There are two kinds of income listed under resources on the the asset. The impact on net value added is mitigated by the right-hand side of the allocation of primary income fact that a tenant, or lessee, incurs no consumption of fixed account. The first shows where primary incomes already capital. However, even net value added will tend to be recorded in the generation of income account are lower when a fixed asset is rented as the rental has to cover receivable, as follows: the lessor's operating and interest costs. At the level of the total economy, the lower surpluses accruing to tenants or lessees will tend to be counterbalanced by the operating a. Compensation of employees receivable by households surpluses earned by the lessors. or non-resident households; Table 7.1 (cont):The generation of income account - concise form - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 Compensation of employees Taxes on production and imports Subsidies 133 System of National Accounts b. Taxes (less subsidies) on production or imports b. The balance of primary incomes of the general receivable (or payable) by government units or a government sector consists of taxes on production and foreign government; on imports receivable less subsidies on production payable, plus property income receivable less property c. Operating surplus, or mixed income, of enterprises income payable. It may also include a small amount of carried forward from the generation of income account. operating surplus from units within general government undertaking market production. The second kind of income consists of property incomes receivable from the ownership of financial assets or natural c. The balance of primary incomes of the household resources: sector consists of compensation of employees and mixed incomes accruing to households, plus property d. Investment income receivable by the owners of income receivable less property income payable. It also financial assets from either resident or non-resident includes the operating surplus from housing services units; produced for own consumption by owner-occupiers. e. Rent receivable by owners of natural resources leased d. The balance of primary incomes of the non-profit to other units. institutions serving households (NPISHs) sector consists almost entirely of property income receivable less property income payable. The balancing items and national income 7.18 The uses, listed on the left-hand side of the allocation of Net national income and gross national income primary income account, consist only of the property incomes payable by institutional units or sectors to 7.20 Net national income (NNI) is the aggregate value of the creditors, shareholders, landowners, etc. Except for rent on net balances of primary incomes summed over all sectors. natural resources, these may be payable to non-residents as Similarly, gross national income (GNI) is the aggregate well as residents. The remaining item recorded under uses value of the gross balances of primary incomes for all is the balancing item, the balance of primary incomes, sectors. defined as the total value of the primary incomes receivable by an institutional unit or sector less the total 7.21 Gross value added is strictly a production measure defined of the primary incomes payable. At the level of the total only in terms of output and intermediate consumption. It economy it is described as national income. follows that GDP is also a production measure as it is obtained by summing the gross value added of all resident 7.19 The composition of the balance of primary incomes varies institutional units, in their capacities as producers, and considerably from one sector to another as certain types of adding the values of any taxes, less subsidies, on primary incomes are receivable by certain sectors only or production or imports not already included in the values of by non-residents. In particular, taxes are received only by the outputs, and value added, of resident producers. GNI is the general government sector and non-residents while obtained by summing the balance of primary incomes of compensation of employees is received only by the the same resident institutional units. It follows that the household sector and non-residents. These balances are difference between the numerical values of GNI and GDP described below. is equal to the difference between the total primary incomes receivable by residents from non-residents and the total a. The balance of primary incomes of the non-financial primary incomes payable by residents to non-residents (that and financial corporate sectors consists only of is, net income from abroad). However, as both GDP and operating surplus plus property income receivable less GNI are obtained by summing over the same set of resident property income payable. institutional units, there is no justification for labelling one Table 7.2:The allocation of primary income account - concise form - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 6 6 Taxes on production and imports 0 Subsidies 0 Property income 134 168 42 41 6 391 44 435 Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 134 The distribution of income accounts as "domestic" and the other as "national". Both aggregates also difficult. (If the assets and property income could be refer to the total economy defined as the complete set of identified, it is probable that the unincorporated enterprise resident institutional units or sectors. The difference could be treated as a quasi-corporation and included in one between them is not one of coverage but the fact that one of the corporate sectors.) measures production while the other measures income. Both have an equal claim to be described as domestic or as 7.24 Entrepreneurial income is an income concept that is close national. However, as the terms "gross domestic product" and "gross national income" are deeply embedded in to the concept of profit or loss as understood in business economic usage, it is not proposed to change them. accounting (at least when there is no inflation). On the Emphasis should be given, however, to the third rather than other hand, it should be remembered that when profits are second letter of the acronym to emphasize the fact that calculated at historic costs in business accounts, they also GDP refers to production (output) and GNI to income. include nominal holding gains on the inventories and other assets owned by the enterprise; these holding gains and losses may be quite substantial during inflationary 3. The entrepreneurial income account conditions. 7.22 The allocation of primary income account may be 4. The allocation of other primary income partitioned into two sub-accounts: the entrepreneurial account income account and the allocation of other primary income account. The purpose is to identify an additional balancing item, entrepreneurial income, that may be useful for market 7.25 When the entrepreneurial income account is compiled for producers. Like operating surplus and mixed income, it is a an institutional unit or sector, it is followed by the balancing item that is relevant only to producers, but one allocation of other primary income account in order to that can be calculated only for institutional units and arrive at the balance of primary incomes. In the allocation sectors and not for establishments and industries. of other primary income account, the first item listed under resources is entrepreneurial income, the balancing item 7.23 Entrepreneurial income is calculated by deducting from carried forward from the entrepreneurial income account operating surplus any interest, investment income instead of operating surplus or mixed income, which are the disbursements and rent payable and adding property balancing items carried forward from the generation of incomes receivable. For the non-financial and financial income account. The only item in the account, for non- corporations sectors, the only difference between financial and financial corporations, apart from the entrepreneurial income and the balance of primary incomes balancing items, is the entry for the distributed income of is that entrepreneurial income is measured before the corporations. payment of dividends, the withdrawals of income from quasi-corporations and reinvested earnings. Entrepreneurial 7.26 For general government, households and NPISHs, the income is not calculated for other sectors. Although allocation of other primary income account matches the government and households may contain unincorporated allocation of primary income account. enterprises undertaking market production, the fact that the assets attributed to this activity cannot be distinguished from the entirety of assets of the institution means that 7.27 The entrepreneurial income account and the account for identification of property income relating to the activity is other primary income are shown in table 7.3. Table 7.2 (cont):The allocation of primary income account - concise form - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Compensation of employees 1 154 1 154 2 1 156 Taxes on production and imports 235 235 235 Subsidies - 44 - 44 - 44 Property income 96 149 22 123 7 397 38 435 135 System of National Accounts B. Compensation of employees 1. Identifying employees The employment relationship 7.29 In order to be classified as employed, that is, either as an 7.28 It is not always self-evident whether a person is an employee or self-employed, the person must be engaged in employee or self-employed, for example, some workers an activity that falls within the production boundary of the paid by results may be employees while others may be self- SNA. The relationship of employer to employee exists employed. The boundary also affects the subsectoring of when there is a written or oral agreement, which may be the household sector. The definitions in the SNA are formal or informal, between an enterprise and a person, consistent with resolutions of the International Conference normally entered into voluntarily by both parties, whereby the person works for the enterprise in return for of Labour Statisticians (ICLS) concerning the definitions of remuneration in cash or in kind. The remuneration is the economically active population. For the SNA, though, normally based on either the time spent at work or some the main objective is to clarify the nature of the other objective indicator of the amount of work done. employment relationship in order to fix the boundary between compensation of employees and other kinds of 7.30 The self-employed are persons who work for themselves, receipts. Some persons who in labour statistics may be when the enterprises they own are distinguished neither as included with the self-employed, in particular some owners separate legal entities nor as separate institutional units in the SNA. They may be persons who are the sole owners, or of quasi-corporations and owner-managers of corporations, joint owners, of the unincorporated enterprises in which are treated in the SNA as employees. Further discussion on they work; members of a producers' cooperative or the measurement of the labour force and definitions of the contributing family workers (that is, family members who related terms appear in chapter 19. work in an unincorporated enterprise without pay). Table 7.3:The entrepreneurial income and allocation of other primary income accounts - uses Entrepreneurial account Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Property income 87 153 240 240 Interest 56 106 162 162 Distributed income of corporations Reinvested earnings on foreign direct investment Investment income disbursements 47 47 47 Rent 31 0 31 31 Entrepreneurial income, gross 301 42 343 343 Entrepreneurial income, net 144 30 174 174 Allocation of other primary income account Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 6 6 Taxes on production and imports Subsidies Property income 47 15 42 41 6 151 63 214 Interest 35 14 6 55 13 68 Reinvested earnings on foreign direct investment 0 14 14 Rent 7 27 0 34 34 Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 136 The distribution of income accounts a. Workers engaged in production undertaken entirely for corporations and receive paid remuneration other than their own final consumption or own capital formation, withdrawal of earnings from the quasi-corporation are either individually or collectively, are self-employed. also treated as employees. Although a value may be imputed for the output of own-account production based on costs, including estimated labour costs, no imputation is made for the d. Outworkers may be either employees or self-employed wages of workers engaged in such production, even in depending on their exact status and circumstances. The the case of collective, or communal, projects treatment of outworkers is specified in more detail undertaken by groups of persons working together. The below. surplus of the imputed value of the output over any monetary costs or taxes on production explicitly incurred is treated as gross mixed income. 7.31 The remuneration of the self-employed is treated as mixed income. b. Contributing family workers, including those working without pay in unincorporated enterprises engaged 7.32 Students in their capacity as consumers of educational or wholly or partly in market production, are also treated training services are not employees. However, if students as self-employed. also have a formal commitment whereby they contribute some of their own labour as an input into an enterprise's c. The whole of the equity of a corporation may be owned process of production, for example, as apprentices or by a single shareholder or small group of shareholders. similar kinds of worker trainees, articled clerks, student When those shareholders also work for the corporation nurses, research or teaching assistants, hospital interns, etc., and receive paid remuneration other than dividends, the they are treated as employees, whether or not they receive shareholders are treated as employees. The owners of any remuneration in cash for the work that they do in quasi-corporations who work in those quasi- addition to training received as in-kind payment. Table 7.3 (cont):The entrepreneurial income and allocation of other primary income accounts - resources Entrepreneurial account Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Property income 96 149 245 245 Interest 33 106 139 139 Distributed income of corporations 10 25 35 35 Reinvested earnings on foreign direct investment 4 7 11 11 Investment income disbursements 8 8 16 16 Rent 41 3 44 44 Allocation of other primary income account Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Entrepreneurial income, gross 301 42 343 343 Entrepreneurial income, net 144 30 174 174 Compensation of employees 1 154 1 154 2 1 156 Taxes on production and imports 235 235 235 Subsidies - 44 - 44 - 44 Property income 22 123 7 152 38 190 Interest 14 49 7 70 21 91 Reinvested earnings on foreign direct investment 0 3 0 3 0 3 Rent 0 21 0 21 21 137 System of National Accounts Employers and own-account workers 7.35 Outworkers have some of the characteristics of employees and some of the characteristics of self-employed workers. The way in which they are to be classified is determined 7.33 Self-employed persons may be divided into two groups: primarily by the basis on which they are remunerated. A those who do and those who do not engage paid employees distinction can be drawn between two cases that, in on a continuous basis. Those who do engage employees on principle, are quite different from one another: a continuous basis are described as employers and those without paid employees are described as own-account a. The person is remunerated directly, or indirectly, on the workers. The distinction is used for purposes of basis of the amount of work done, that is, by the subsectoring the household sector. Own-account workers amount of labour that is contributed as an input into may be further subdivided into outworkers who are under some process of production, irrespective of the value of some kind of formal or informal contract to supply goods the output produced or the profitability of the or services to a particular enterprise, and ordinary own- production process. This kind of remuneration implies account workers who may be engaged in either market that the worker is an employee. production or production for own final consumption or own capital formation. b. The income received by the person is a function of the value of the outputs from some process of production Outworkers for which that person is responsible, however much or little work was put in. This kind of remuneration implies that the worker is self-employed. 7.34 An outworker is a person who agrees to work for a particular enterprise or to supply a certain quantity of goods 7.36 In practice it may not always be easy to distinguish or services to a particular enterprise, by prior arrangement between employees and self-employed on the basis of these or contract with that enterprise, but whose place of work is criteria. Outworkers who employ and pay others to work not within any of the establishments that make up that for them must be treated as the self-employed owners of enterprise. The enterprise does not control the time spent at unincorporated enterprises, that is as employers. The issue, work by an outworker and does not assume responsibility therefore, is to distinguish own-account workers from for the conditions in which that work is carried out, employees. although it may carry out checks on the quality of work. Most outworkers work at home but may use other premises 7.37 An outworker is considered an employee when an of their own choice. Some outworkers are provided with employment relationship exists between the enterprise and the equipment or materials, or both, on which they work, by the outworker. This implies the existence of an implicit or an enterprise but other outworkers may purchase their own explicit employment contract or agreement whereby it is equipment or materials, or both. In any case, outworkers agreed that the outworker is remunerated on the basis of the have to meet some production costs themselves: for work done. Conversely, an outworker is considered to be example, the actual or imputed rentals on the buildings in an own-account worker when there is no such implicit or which they work; heating, lighting and power; storage or explicit employment contract or agreement and the income transportation; etc. earned by the outworker depends on the value of the goods Table 7.4:The generation of income account - compensation of employees - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 986 44 98 11 11 1 150 1 150 Wages and salaries 841 29 63 11 6 950 950 Employers' social contributions 145 15 35 0 5 200 200 Employers' actual social contributions 132 14 31 0 4 181 181 Employers' actual pension contributions 122 14 28 0 4 168 168 Employers' actual non-pension contributions 10 0 3 0 0 13 13 Employers' imputed social contributions 13 1 4 0 1 19 19 Employers' imputed pension contributions 12 1 4 0 1 18 18 Employers' imputed non-pension contributions 1 0 0 0 0 1 1 Taxes on production and imports 235 235 Subsidies - 44 - 44 Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Consumption of fixed capital on gross operating surplus 157 12 27 15 3 214 Consumption of fixed capital on gross mixed income 8 8 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 138 The distribution of income accounts or services supplied to the enterprise. This suggests that 7.40 As noted above, compensation of employees is defined as decisions on markets, scale of operations and finance are the total remuneration, in cash or in kind, payable by an likely to be in the hands of self-employed outworkers who enterprise to an employee in return for work done by the are also likely to own, or rent, the machinery or equipment latter during the accounting period. on which they work. 7.41 Compensation of employees is recorded on an accrual 7.38 The status of an outworker has important implications for basis; that is, it is measured by the value of the the accounts. When the outworker is an own-account remuneration in cash or in kind that an employee becomes worker, the payment from the enterprise to the outworker entitled to receive from an employer in respect of work constitutes a purchase of intermediate goods or services. done during the relevant period, whether paid in advance, For the outworker, the payment from the enterprise simultaneously or in arrears of the work itself. No represents the value of output and the excess over direct compensation of employees is payable in respect of unpaid costs to the outworker (treated as intermediate work undertaken voluntarily, including the work done by consumption) is gross mixed income. When the outworker members of a household within an unincorporated is an employee, the payment constitutes compensation of enterprise owned by the same household. Compensation of employees and so is paid out of the value added of the employees does not include any taxes payable by the enterprise. Thus, the outworker's status affects the distribution of value added between enterprises as well as employer on the wage and salary bill, for example, a the distribution of incomes between compensation of payroll tax; such taxes are treated as taxes on production in employees of the employing enterprise and net mixed the same way as taxes on buildings, land or other assets income of the household of the outworker. used in production. 2. The components of compensation of 7.42 Compensation of employees has two main components: employees a. Wages and salaries payable in cash or in kind; 7.39 Compensation of employees is recorded under uses in the generation of income account and under resources in the b. Social insurance contributions payable by employers, allocation of primary income account. The uses side of the which include contributions to social security schemes; generation of income account showing the detailed entries actual social contributions to other employment-related for compensation of employees is given in table 7.4 and the social insurance schemes and imputed social corresponding resources part of the allocation of primary contributions to other employment-related social income account in table 7.5. The only item, apart from the insurance schemes. balancing items, relevant to these accounts that is not shown is the entry for compensation of employees payable by the rest of the world, which appears in the uses part of Social insurance schemes and the nature of benefits they the allocation of primary income account. provide are discussed in section D of chapter 8. Table 7.5:The allocation of primary income account - compensation of employees - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Compensation of employees 1 154 1 154 2 1 156 Wages and salaries 954 954 2 956 Employers' social contributions 200 200 0 200 Employers' actual social contributions 181 181 0 181 Employers' actual pension contributions 168 168 0 168 Employers' actual non-pension contributions 13 13 0 13 Employers' imputed social contributions 19 19 0 19 Employers' imputed pension contributions 18 18 0 18 Employers' imputed non-pension contributions 1 1 0 1 Taxes on production and imports 235 235 235 Subsidies - 44 - 44 - 44 Property income 96 149 22 123 7 397 38 435 139 System of National Accounts Wages and salaries The amounts reimbursed are treated as intermediate consumption by employers. To the extent that employees who are required by their contract of employment to 7.43 Wages and salaries include the values of any social purchase tools, equipment, special clothing, etc., are not contributions, income taxes, etc., payable by the employee fully reimbursed, the remaining expenses they incur should even if they are actually withheld by the employer for be deducted from the amounts they receive in wages and administrative convenience or other reasons and paid salaries and the employers' intermediate consumption directly to social insurance schemes, tax authorities, etc., on increased accordingly. Expenditures on items needed behalf of the employee. Wages and salaries may be paid in exclusively, or primarily, for work do not form part of various ways, including goods or services provided to household final consumption expenditures, whether employees as remuneration in kind instead of, or in reimbursed or not. addition to, remuneration in cash. 7.46 Wages and salaries in cash also do not include social Wages and salaries in cash insurance benefits paid by employers in the form of: 7.44 Wages and salaries in cash include the following kinds of a. Children's, spouse's, family, education or other remuneration: allowances in respect of dependants; a. Wages or salaries payable at regular weekly, monthly b. Payments made at full, or reduced, wage or salary rates or other intervals, including payments by results and to workers absent from work because of illness, piecework payments; enhanced payments or special accidental injury, maternity leave, etc.; allowances for working overtime, at nights, at weekends or other unsocial hours; allowances for c. Severance payments to workers or their survivors who working away from home or in disagreeable or lose their jobs because of redundancy, incapacity, hazardous circumstances; expatriation allowances for accidental death, etc. working abroad; etc.; In practice, it may be difficult to separate payments of b. Supplementary allowances payable regularly, such as wages or salaries during short periods of absence due to housing allowances or allowances to cover the costs of sickness, accidents, etc., from other payments of wages and travel to and from work, but excluding social benefits salaries, in which case they have to be grouped with the (see below); latter. c. Wages or salaries payable to employees away from 7.47 In some instances a benefit such as a car or extra pension work for short periods, for example, on holiday or as a contributions may not be provided free but be "purchased" result of a temporary halt to production, except during from the employer by foregoing some salary. The attraction absences due to sickness, injury, etc. (see below); of such schemes lies in the tax advantages of doing so. A car bought by the employer and sold to the employee may d. Ad hoc bonuses or other exceptional payments linked be taxed at a lower rate than a car purchased by an to the overall performance of the enterprise made under individual; pension contributions may be taxed differently incentive schemes; from other income if deducted at source. In these cases, the full salary should be recorded as payable in cash with the cost to the employee shown as consumption expenditure or e. Commissions, gratuities and tips received by pension contribution etc. as appropriate. employees: these should be treated as payments for services rendered by the enterprise employing the worker, and so should also be included in the output Wages and salaries in kind and gross value added of the employing enterprise when they are paid directly to the employee by a third 7.48 Employers may remunerate their employees in kind for party. various reasons. For example: 7.45 Wages and salaries in cash do not include the a. There may be tax advantages for the employer, the reimbursement by employers of expenditures made by employee, or both by avoiding payments in cash; employees in order to enable them to take up their jobs or to carry out their work. For example: b. The employer may wish to dispose of outputs that are periodically in excess supply. a. The reimbursement of travel, removal or related expenses made by employees when they take up new 7.49 Income in kind may bring less satisfaction than income in jobs or are required by their employers to move their cash because employees are not free to choose how to homes to different parts of the country or to another spend it. Some of the goods or services provided to country; employees may be of a type or quality that the employee would not normally buy. Nevertheless, they must be valued b. The reimbursement of expenditures by employees on consistently with other goods and services. When the goods tools, equipment, special clothing or other items that or services have been purchased by the employer, they are needed exclusively, or primarily, to enable them to should be valued at purchasers' prices. When produced by carry out their work. the employer, they should be valued at producers' prices. 140 The distribution of income accounts When provided free, the value of the wages and salaries in 7.53 A frequent item provided as income in kind is a car. The car kind is given by the full value of the goods and services in may be provided free to the employee but for tax purposes question. When provided at reduced prices, the value of the an imputed cash amount is attached to the benefit. In a wages and salaries in kind is given by the difference country where many cars are provided as a fringe benefit to between the full value of the goods and services and the employees, the purchasing power of the employer may be amount paid by the employees. such as to obtain a significant discount on the purchase price of the car. Thus the employee receives a higher 7.50 Goods or services that employers are obliged to provide to quality car than the cash equivalent would buy for an their employees in order for them to be able to carry out individual. The value of the car to the employee should be their work are treated as intermediate consumption by the estimated at the actual cost to the employer. employer: for example, special protective clothing. A list of such items is given in paragraph 6.222. Remuneration in 7.54 Remuneration in kind may also include the value of the kind, on the other hand, consists of goods and services that interest foregone by employers when they provide loans to are not necessary for work and can be used by employees in employees at reduced, or even zero rates of interest for their own time, and at their own discretion, for the purposes of buying houses, furniture or other goods or satisfaction of their own needs or wants or those of other services. Its value may be estimated as the amount the members of their households. employee would have to pay if average mortgage, or consumer loan, interest rates were charged less the amount of interest actually paid. The sums involved could be large 7.51 5Almost any kind of consumption good or service may be when nominal interest rates are very high because of provided as remuneration in kind. The following includes inflation but otherwise they may be too small and too some of the most common types of goods and services uncertain to be worth estimating. provided without charge, or at reduced prices, by employers to their employees: Stock options a. meals and drinks provided on a regular basis including any subsidy element of an office canteen (for practical 7.55 Another form of income in kind results from the practice of reasons, it is unnecessary to make estimates for meals an employer giving an employee the option to buy stocks and drinks consumed as part of official entertainment (shares) at some future date. The details of valuing and or during business travel); recording of stock options are described in part 6 of chapter 17. b. housing services or accommodation of a type that can be used by all members of the household to which the Employers' social contributions employee belongs; 7.56 Employers' social contributions are social contributions c. the services of vehicles or other durables provided for payable by employers to social security funds or other the personal use of employees; employment-related social insurance schemes to secure social benefits for their employees. Social security schemes are operated by general government; other d. goods and services produced as outputs from the employer-related social insurance schemes may be employer's own processes of production, such as free operated by the employers themselves, by an insurance travel for the employees of railways or airlines, or free corporation or may be an autonomous pension scheme. coal for miners; 7.57 As employers' social contributions are made for the benefit e. sports, recreation or holiday facilities for employees of their employees, their value is recorded as one of the and their families; components of compensation of employees together with wages and salaries in cash and in kind. The social f. transportation to and from work, free or subsidized car contributions are then recorded as being paid by the parking, when it would otherwise have to be paid for; employees as current transfers to the social security schemes or other employment-related social insurance schemes. Although it is administratively more efficient for g. childcare for the children of employees. employers to pay the contributions on behalf of their employees, this must not be allowed to obscure the 7.52 Some of the services provided by employers, such as underlying economic reality. The payment made by the transportation to and from work, car parking and childcare employer to the social security scheme or other have some of the characteristics of intermediate employment-related social insurance schemes is not, in consumption. However, employers are obliged to provide fact, a current transfer to the fund on the part of the these facilities to attract and retain labour, and not because employer. The transfer takes place between the employee of the nature of the production process or the physical and the social security scheme or other employment-related conditions under which employees have to work. On social insurance schemes out of remuneration provided by balance, they are more like other forms of compensation of the employer. The situation is parallel to one in which employees than intermediate consumption. Many workers income taxes payable by employees are deducted by have to pay for transportation to and from work, car employers from the wages or salaries and paid directly to parking and childcare out of their own incomes, the the tax authorities. In this case, it is evident that the taxes relevant expenditures being recorded as final consumption are not current transfers payable by the employers. It is expenditures. customary to describe the employers' social contributions 141 System of National Accounts as being re-routed in the accounts via the employees' 7.64 For a defined contribution pension scheme, there are no primary and secondary distribution of income accounts. imputed contributions unless the employer operates the However, the accounts depict the various payables and scheme himself. In that case, the value of the costs of receivables correctly. The direct payment of social operating the scheme is treated as an imputed contribution contributions, or income taxes, by employers to social payable to the employee as part of compensation of security schemes, other employment-related social employees. This amount is also recorded as final insurance schemes or tax authorities is merely a short cut consumption expenditure by households on financial taken on grounds of administrative convenience and services. efficiency. 7.65 For a defined benefit pension scheme, there is an imputed 7.58 An amount equal in value to employers' social contribution by the employer calculated as a residual. It contributions is first recorded in the generation of income must be such that the sum of the employer's actual account as one of the components of compensation of contribution plus the sum of any contribution by the employees and then recorded either in the secondary employee plus the imputed contribution by the employer is distribution of income account as being transferred by equal to the increase in benefit due to current period households to social security funds or other employment- employment plus the costs of operating the scheme. related social insurance schemes as the case may be, or is recorded in the use of income account as the payment by 7.66 Some defined benefit pension schemes may be so well run households for the financial services associated with that the funds available to the scheme exceed the liabilities running the schemes. The transactions are recorded of the scheme to present and past employees. It is possible simultaneously in all three accounts at the times when the that in this case the employer may take a "contribution work that gives rise to the requirement to pay the holiday" and not make actual contributions for one or more contributions is carried out. The contributions paid to social periods. Nonetheless, an imputed contribution by the security schemes may be fixed amounts per employee or employer should be calculated and recorded as described may vary with the levels of wages or salaries paid. The here. amounts paid under other employment-related social insurance schemes depend on the arrangements agreed 7.67 Some schemes may be expressed as non-contributory between employers and employees. because no actual contributions are ever made by the employee. Nevertheless, an imputed contribution by the 7.59 Social insurance schemes in respect of pensions are of two employer is calculated and imputed as just described. types, described as defined contribution schemes or defined benefit schemes. A defined contribution scheme is one where the benefits are determined by the contributions Employers' imputed non-pension contributions actually made to the scheme. Under a defined benefit scheme, the ultimate benefit is calculated by means of a 7.68 Some employers provide non-pension benefits themselves formula embodied in the terms of the social insurance directly to their employees, former employees or scheme. Similarly, the increase in the employee's dependants without involving an insurance enterprise or entitlement due to the period of employment in the current autonomous pension fund, and without creating a special accounting period can also be determined by the formula. fund or segregated reserve for the purpose. In this situation, existing employees may be considered as being protected 7.60 The contributions made by employers to social insurance against various specified needs or circumstances, even schemes are divided into actual and imputed contributions. though no reserves are built up to provide future entitlement. Remuneration should therefore be imputed for such employees equal in value to the amount of social 7.61 For both actual and imputed contributions, the components contributions that would be needed to secure the de facto relating to pensions and other benefits are shown entitlements to the social benefits they accumulate. These separately. amounts take into account any actual contributions made by the employer or employee and depend not only on the Employers' actual contributions to social insurance levels of the benefits currently payable but also on the ways schemes in which employers' liabilities under such schemes are likely to evolve in the future as a result of factors such as expected changes in the numbers, age distribution and life 7.62 The actual contributions by employers to social insurance expectancies of their present and previous employees. schemes consist of actual contributions made to both social Thus, the values that should be imputed for the security and other employment-related schemes. The contributions ought, in principle, to be based on the same contributions relating to pensions and other benefits are kind of actuarial considerations that determine the levels of shown separately. premiums charged by insurance enterprises. Employers' imputed contribution to social insurance 7.69 In practice, however, it may be difficult to decide how large schemes such imputed contributions should be. The enterprise may make estimates itself, perhaps on the basis of the contributions paid into similar funded schemes, in order to Employers' imputed pension contributions calculate its likely liabilities in the future, and such estimates may be used when available. Otherwise, the only 7.63 There are no imputed contributions to social security practical alternative may be to use the unfunded non- schemes. pension benefits payable by the enterprise during the same 142 The distribution of income accounts accounting period as an estimate of the imputed may nevertheless provide the best available estimates of the remuneration that would be needed to cover the imputed contributions and associated imputed remuneration. contributions. While there are obviously many reasons why the value of the imputed contributions that would be 7.70 The fact that, failing other information, the value of needed may diverge from the unfunded non-pension contributions for a non-contributory scheme may be set benefits actually paid in the same period, such as the equal to the value of benefits does not mean that the changing composition and age structure of the enterprise's benefits themselves are treated as part of compensation of labour force, the benefits actually paid in the current period employees. C. Taxes on production and on imports 1. Recording of taxes on production and on 7.75 In business accounting, taxes on production, except imports invoiced VAT, are usually regarded as costs of production that may be charged against sales or other receipts when calculating profits for tax or other purposes. They 7.71 Taxes are compulsory, unrequited payments, in cash or in correspond to "indirect taxes" as traditionally understood, kind, made by institutional units to government units. indirect taxes being taxes that supposedly can be passed on, They are described as unrequited because the government in whole or in part, to other institutional units by increasing provides nothing in return to the individual unit making the the prices of the goods or services sold. However, it is payment, although governments may use the funds raised extremely difficult, if not impossible, to determine the real in taxes to provide goods or services to other units, either incidence of different kinds of taxes, and the use of the individually or collectively, or to the community as a terms "direct" and "indirect" taxes has fallen out of favour whole. in economics and is not used in the SNA. 7.72 The full classification of taxes on production and on imports consists of: The recording of taxes on production and on imports in the accounts Taxes on products, Value added type taxes (VAT), 7.76 Taxes on production and imports are recorded under uses in Taxes and duties on imports excluding VAT, the generation of income account and under resources in Import duties, the allocation of primary income account. Taxes on imports excluding VAT and duties, Export taxes, 7.77 In the generation of income account, taxes on imports are Taxes on products, excluding VAT, import and recorded only at the level of the total economy as they are export taxes, not payable out of the value added of domestic producers. Other taxes on production. Moreover, at the level of an individual institutional unit or sector, only those taxes on products that have not been 7.73 At the highest level of the classification, taxes on deducted from the value of the output of that unit or sector production and on imports consist of taxes on products and need to be recorded under uses in its generation of income other taxes on production. Taxes on products consist of account. These vary depending upon the way in which taxes on goods and services that become payable as a result output is valued. When output is valued at basic prices, all of the production, sale, transfer, leasing or delivery of those taxes (subsidies) on products payable (receivable) on the goods or services, or as a result of their use for own goods or services produced as outputs are deducted from consumption or own capital formation. The way in which (added to) the value of that output at producers' prices. taxes on products are recorded in the SNA depends on the Therefore they do not have to be recorded under uses in the valuation used for the recording of output as described generation of income account of the units or sectors below. Other taxes on production consist mainly of taxes concerned, being recorded only at the level of the total on the ownership or use of land, buildings or other assets economy, in the same way as taxes on imports. When used in production or on the labour employed, or output is valued at producers' prices, all taxes or subsidies compensation of employees paid. Whatever the valuation on products payable or receivable on outputs have to be of output used, other taxes on production are always recorded under uses in the generation of income accounts recorded as a charge on value added in the generation of of the units or sectors concerned, except invoiced VAT or income account. similar deductible taxes as invoiced VAT is never included in the value of output. Non-deductible VAT and similar 7.74 A full explanation of the content of each of the categories taxes are recorded under uses only at the level of the total of taxes on production and on imports is given below after economy, like taxes on imports. a discussion of the rules of recording taxes. This explanation provides links to the main publications of data 7.78 Other taxes or subsidies on production, that is, taxes on tax yields, the GFSM2001 and Revenue Statistics payable on the land, assets, labour, etc., employed in (Organisation for Economic Co-operation and production are not taxes payable per unit of output and Development (OECD), annual publication). cannot be deducted from the producer's price. They are 143 System of National Accounts recorded as being payable out of the value added of the case of households). The general case of government issued individual producers or sectors concerned. permits is discussed in part 5 of chapter 17. 7.79 In the allocation of primary income account, taxes on Links with the IMF and OECD tax classifications production and imports appear under resources only for the general government sector and the total economy, apart from any such taxes payable to foreign governments. 7.81 The coverage of taxes in the SNA coincides with that of "tax revenue" as defined in the GFSM2001 except for implicit taxes resulting from the central bank imposing a Taxes versus fees higher rate of interest than the market rate. In contrast to "taxes" as defined in Revenue Statistics, the SNA includes imputed taxes or subsidies resulting from the operation of 7.80 One of the regulatory functions of governments is to forbid official multiple exchange rates, imputed taxes and the ownership or use of certain goods or the pursuit of subsidies resulting from a central bank imposing interest certain activities, unless specific permission is granted by rates above or below the market rate but does not classify issuing a licence or other certificate for which a fee is social security contributions under the heading of taxes. demanded. If the issue of such licences involves little or no Chapter 5 of the GFSM2001 contains a detailed listing and work on the part of government, the licences being granted classification of taxes according to the nature of the tax. automatically on payment of the amounts due, it is likely Annex A of Revenue Statistics contains a closely related that they are simply a device to raise revenue, even though classification. the government may provide some kind of certificate, or authorization, in return. However, if the government uses the issue of licences to exercise some proper regulatory 7.82 The categories of taxes distinguished in the SNA depend on function, for example, checking the competence, or the interaction of the following three factors, of which the qualifications, of the person concerned, checking the nature of tax is only one: efficient and safe functioning of the equipment in question, or carrying out some other form of control that it would otherwise not be obliged to do, the payments made should a. The nature of the tax, as specified in the GFSM2001/ be treated as purchases of services from government rather OECD classification; than payments of taxes, unless the payments are clearly out of all proportion to the costs of providing the services. The b. The type of institutional unit paying the tax; borderline between taxes and payments of fees for services rendered is not always clear-cut in practice (see paragraph 8.64(c) below for a further explanation of this matter in the c. The circumstances in which the tax is payable. Table 7.6:The generation of income account - taxes and subsidies on production - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 986 44 98 11 11 1 150 1 150 Taxes on production and imports 235 235 Taxes on products 141 141 Value added type taxes (VAT) 121 121 Taxes and duties on imports excluding VAT 17 17 Import duties 17 17 Taxes on imports excluding VAT and duties 0 0 Export taxes 1 1 Taxes on products except VAT, import and export taxes 2 2 Other taxes on production 88 4 1 0 1 94 94 Subsidies - 44 - 44 Subsidies on products -8 -8 Import subsidies 0 0 Export subsidies 0 0 Other subsidies on products -8 -8 Other subsidies on production - 35 0 0 -1 0 - 36 - 36 Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Consumption of fixed capital on gross operating surplus 157 12 27 15 3 214 Consumption of fixed capital on gross mixed income 8 8 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 144 The distribution of income accounts 7.83 Thus, payments of exactly the same tax may be recorded payment only when evidenced by tax assessments, under two different headings in the SNA. For example, declarations or other instruments, such as sales invoices or payment of an excise duty may appear under "taxes on customs declarations, that create liabilities in the form of imports, except value added taxes (VAT) and duties" or clear obligations to pay on the part of taxpayers. (In under "taxes on products, except VAT, import and export determining the amount of tax accruing, care must be taken taxes" depending upon whether the excise duty is paid on not to include tax unlikely ever to be collected.) an imported or domestically produced good. Similarly, Nevertheless, in accordance with the accrual principle, the payments of an annual tax on automobiles may be recorded times at which the taxes should be recorded are the times at under "other taxes on production" or under "current taxes which the tax liabilities arise. For example, a tax on the on income, wealth, etc." depending upon whether the tax is sale, transfer or use of output should be recorded when that paid by an enterprise or by a household. For this reason, it sale, transfer or use took place, which is not necessarily the is not possible to arrive at the SNA categories simply by same time as when the tax authorities were notified, when a regrouping the GFSM2001/OECD classifications. tax demand was issued, when the tax was due to be paid or However, in order to take advantage of the existence of when the payment was actually made. Some flexibility is these detailed classifications, each category of tax listed permitted, however, as regards the time of recording of below contains a cross-reference to the corresponding income taxes deducted at source. GFSM2001 and OECD classifications. It should be noted, though, that the SNA categories are included within the 7.85 In some countries, and for some taxes, the amounts of taxes GFSM2001 and OECD categories but may not be identical eventually paid may diverge substantially and with them. systematically from the amounts due to be paid to the extent that not all of the latter can be effectively construed The accrual basis of recording as constituting financial liabilities as these are understood within the SNA. In such cases, it may be preferable for analytic and policy purposes to ignore unpaid tax liabilities 7.84 All taxes should be recorded on an accrual basis in the and confine the measurement of taxes within the SNA to SNA, that is, when the activities, transactions or other those actually paid. Nevertheless, the taxes actually paid events occur that create the liabilities to pay taxes. should still be recorded on an accrual basis at the times at However, some economic activities, transactions or events, which the events took place that gave rise to the liabilities. which under tax legislation ought to impose on the units concerned the obligation to pay taxes, permanently escape the attention of the tax authorities. It would be unrealistic to Interest, fines or other penalties assume that such activities, transactions or events give rise to financial assets or liabilities in the form of payables and 7.86 In principle, interest charged on overdue taxes or fines, or receivables. For this reason the amounts of taxes to be penalties imposed for the attempted evasion of taxes, recorded in the SNA are determined by the amounts due for should be recorded separately and not as taxes. However, it Table 7.7:The allocation of primary income account - taxes and subsidies on production - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Compensation of employees 1 154 1 154 2 1 156 Taxes on production and imports 235 235 235 Taxes on products 141 141 141 Value added type taxes (VAT) 121 121 121 Taxes and duties on imports excluding VAT 17 17 17 Import duties 17 17 17 Taxes on imports excluding VAT and duties 0 0 0 Export taxes 1 1 1 Taxes on products except VAT, import and export taxes 2 2 2 Other taxes on production 94 94 94 Subsidies - 44 - 44 - 44 Subsidies on products -8 -8 -8 Import subsidies 0 0 0 Export subsidies 0 0 0 Other subsidies on products -8 -8 -8 Other subsidies on production - 36 - 36 - 36 Property income 96 149 22 123 7 397 38 435 145 System of National Accounts may not be possible to separate payments of interest, fines subsequently become subject to a further tax, or taxes, as or other penalties from the taxes to which they relate, so they circulate within the economy. For example, excise that in practice they are usually grouped with taxes. duties or sales taxes may become due on goods as they pass through the chain of wholesale or retail distribution, such Taxes and subsidies within the primary taxes being levied on all goods at the same point, whether those goods have been produced by resident enterprises or distribution of income accounts imported. Taxes payable subsequently on goods that have been already imported are not recorded as taxes on imports 7.87 Table 7.6 shows the details of taxes and subsidies as uses in but as taxes on products, excluding VAT, import and the generation of income account; table 7.7 shows them as export taxes. resources in the allocation of primary income account. Because of the way that taxes on products and subsidies on 7.92 Exceptionally, some taxes and duties may be payable on products are recorded in the SNA, no details of payables by goods that physically enter the country but where there is sector appear in table 7.6, only the totals. This is consistent no change of ownership so they are not treated as imports. with the presentation in table 6.1. Taxes and subsidies on Nevertheless, any such taxes and duties are still included in products payable by the rest of the world appear in the the heading of taxes and duties on imports. resources part of the allocation of primary income account, not shown here. Import duties 2. Taxes on products 7.93 Import duties consist of customs duties, or other import charges, that are payable on goods of a particular type 7.88 A tax on a product is a tax that is payable per unit of some when they enter the economic territory. The duties are good or service. The tax may be a specific amount of specified under customs tariff schedules. They may be money per unit of quantity of a good or service (the intended as a means of raising revenue or discouraging quantity units being measured either in terms of discrete imports in order to protect resident goods producers units or continuous physical variables such as volume, (GFSM2001, 1151; OECD, 5123). weight, strength, distance, time, etc.), or it may be calculated ad valorem as a specified percentage of the price per unit or value of the goods or services transacted. A tax Taxes on imports, excluding VAT and duties on a product usually becomes payable when it is produced, sold or imported, but it may also become payable in other 7.94 Taxes on imports, excluding VAT and duties consist of all circumstances, such as when a good is exported, leased, taxes (except VAT and import duties) as defined in the transferred, delivered, or used for own consumption or own GFSM/OECD classifications that become payable when capital formation. An enterprise may or may not itemize the goods enter the economic territory or services are amount of a tax on a product separately on the invoice or delivered by non-residents to residents. They include the bill that it charges its customers. following: Value added type taxes a. General sales taxes: these consist of general sales taxes (excluding VAT) that are payable on imports of goods 7.89 A value added type tax (VAT) is a tax on goods or services and services when the goods enter the economic collected in stages by enterprises but that is ultimately territory or the services are delivered to residents charged in full to the final purchasers. Such taxes have (GFSM2001, 11412; OECD, 5110-5113); already been described in paragraphs 6.55 to 6.62. They are described as a "deductible" tax because producers are not b. Excise duties: excise duties are taxes levied on specific usually required to pay to the government the full amount kinds of goods, typically alcoholic beverages, tobacco of the tax they invoice to their customers, being permitted and fuels; they may be payable in addition to import to deduct the amount of tax they have been invoiced on duties when the goods enter the economic territory their own purchases of goods or services intended for (GFSM2001, 1142; OECD, 5121); intermediate consumption or fixed capital formation. VAT is usually calculated on the price of the good or service c. Taxes on specific services: these may be payable when including any other tax on the product. VAT is also payable non-resident enterprises provide services to resident on imports of goods or services in addition to any import units within the economic territory (GFSM2001, 1156; duties or other taxes on the imports (GFSM2001 11411; OECD, 5126); OECD, 5111). d. Profits of import monopolies: these consist of the Taxes and duties on imports, excluding VAT profits transferred to governments of import marketing boards, or other public enterprises exercising a 7.90 Taxes and duties on imports consist of taxes on goods and monopoly over the imports of some good or service. services that become payable at the moment when those The justification for treating these profits as implicit goods cross the national or customs frontiers of the taxes on products is the same as that shown in economic territory or when those services are delivered by paragraph 7.96 (e) for fiscal monopolies (GFSM2001, non-resident producers to resident institutional units. 1153; OECD, 5127); 7.91 Imported goods on which all the required taxes on imports e. Taxes resulting from multiple exchange rates: these have been paid when they enter the economic territory may consist of implicit taxes resulting from the operation of 146 The distribution of income accounts multiple exchange rates by the central bank or other e. Profits of fiscal monopolies: these consist of the profits official agency (GFSM2001, 1154). of fiscal monopolies that are transferred to government. Fiscal monopolies are public corporations, public Export taxes quasi-corporations, or government-owned unincorporated enterprises that have been granted a legal monopoly over the production or distribution of a 7.95 Export taxes consist of taxes on goods or services that particular kind of good or service in order to raise become payable by government when the goods leave the revenue and not in order to further the interests of economic territory or when the services are delivered to public economic or social policy. Such monopolies are non-residents. They include the following: typically engaged in the production of goods or services that may be heavily taxed in other countries, a. Export duties: general or specific taxes or duties on for example, alcoholic beverages, tobacco, matches, exports (GFSM2001, 1152; OECD, 5124); petroleum products, salt, playing cards, etc. The exercise of monopoly powers is simply an alternative b. Profits of export monopolies: these consist of the way for the government to raise revenue instead of the profits transferred to governments of export marketing more overt procedure of taxing the private production boards, or other public enterprises exercising a of such products. In such cases the sales prices of the monopoly over the exports of some good or service. monopolies are deemed to include implicit taxes on the The justification for treating these profits as implicit products sold. While in principle only the excess of the taxes on products is the same as that shown in monopoly profits over some notional "normal" profits paragraph 7.96 (e) for fiscal monopolies (GFSM2001, should be treated as taxes, it is difficult to estimate this 1153; OECD, 5124); amount and, in practice, the value of the taxes should be taken as equal to the amount of the profits actually transferred from fiscal monopolies to government c. Taxes resulting from multiple exchange rates: these (GFSM2001, 1143; OECD, 5122). When a public consist of implicit taxes on exports resulting from the enterprise is granted monopoly powers as a matter of operation of an official system of multiple exchange deliberate economic or social policy because of the rates. (GFSM2001, 1154). special nature of the good or service or the technology of production (for example, public utilities, post offices Taxes on products, excluding VAT, import and and telecommunications, railways, etc.) it should not be export taxes treated as a fiscal monopoly. As a general rule, fiscal monopolies tend to be confined to the production of consumer goods or fuels. As the profits of a fiscal 7.96 Taxes on products, excluding VAT, import and export monopoly are calculated for the enterprise as a whole, it taxes, consist of taxes on goods and services that become is not possible to estimate the average amount of the tax payable as a result of the production, sale, transfer, per unit of good or service sold when the enterprise has leasing or delivery of those goods or services, or as a more than one good or service as output without result of their use for own consumption or own capital introducing an assumption about the rates of tax on the formation. They include the following commonly different products. Unless there is good reason occurring taxes: otherwise, it should be assumed that the same ad valorem rate of tax is applied to all products, this rate a. General sales or turnover taxes: these include being given by the ratio of the total value of the implicit manufacturers', wholesale and retail sales taxes, taxes to the value of total sales less the total value of the purchase taxes, turnover taxes, and so on, but exclude implicit taxes. It is necessary to establish this rate in VAT and other systems of deductible taxes order to be able to calculate the basic prices of the (GFSM2001, 11412-11413; OECD, 5110-5113). products concerned. b. Excise duties: these consist of taxes levied on specific kinds of goods, typically alcoholic beverages, tobacco f. Taxes resulting from the central bank imposing a and fuels (GFSM2001, 1142; OECD, 5121). higher rate of interest than the market rate: These taxes are described in paragraphs 7.122 to 7.126. (These taxes are not mentioned in GFSM2001.) c. Taxes on specific services: these include taxes on transportation, communications, insurance, advertising, hotels or lodging, restaurants, entertainments, gambling 3. Other taxes on production and lotteries, sporting events, etc. (GFSM2001, 1144; OECD, 5126). 7.97 Other taxes on production consist of all taxes except taxes d. Taxes on financial and capital transactions: these on products that enterprises incur as a result of engaging consist of taxes payable on the purchase or sale of non- in production. Such taxes do not include any taxes on the financial and financial assets including foreign profits or other income received by the enterprise and are exchange. They become payable when the ownership payable regardless of the profitability of the production. of land or other assets changes, except as a result of They may be payable on the land, fixed assets or labour capital transfers (mainly inheritances and gifts) employed in the production process or on certain activities (GFSM2001, 1134; OECD, 4400). They are treated as or transactions. Other taxes on production include the taxes on the services of the unit selling the asset. following: 147 System of National Accounts a. Taxes on payroll or work force: these consist of taxes also paragraph 8.64 (c) for the treatment of licences payable by enterprises assessed either as a proportion obtained by households for their own personal use.); of the wages and salaries paid or as a fixed amount per person employed. They do not include compulsory d. Taxes on the use of fixed assets or other activities: these social security contributions paid by employers or any include taxes levied periodically on the use of vehicles, taxes paid by the employees themselves out of their ships, aircraft or other machinery or equipment used by wages or salaries (GFSM2001, 112; OECD, 3000); enterprises for purposes of production, whether such assets are owned or rented. These taxes are often b. Recurrent taxes on land, buildings or other structures: described as licences, and are usually fixed amounts these consist of taxes payable regularly, usually each that do not depend on the actual rate of usage year, in respect of the use or ownership of land, (GFSM2001, 11451-11452 and 5.5.3; OECD, 5200); buildings or other structures utilized by enterprises in production, whether the enterprises own or rent such e. Stamp taxes: these consist of stamp taxes that do not assets (GFSM2001, 1131; OECD, 4100); fall on particular classes of transactions already identified, for example, stamps on legal documents or c. Business and professional licences: these consist of cheques. These are treated as taxes on the production of taxes paid by enterprises in order to obtain a licence to business or financial services. However, stamp taxes on carry on a particular kind of business or profession. the sale of specific products, such as alcoholic Licences such as taxi and casino licences are included. beverages or tobacco, are treated as taxes on products In certain circumstances, licences to use a natural (GFSM2001, 1161; OECD, 6200); resource, however, are treated not as a tax but as the sale of an asset. These circumstances are described in f. Taxes on pollution: these consist of taxes levied on the part 5 of chapter 17. However, if the government emission or discharge into the environment of noxious carries out checks on the suitability, or safety of the gases, liquids or other harmful substances. They do not business premises, on the reliability, or safety, of the include payments made for the collection and disposal equipment employed, on the professional competence of waste or noxious substances by public authorities, of the staff employed, or on the quality or standard of which constitute intermediate consumption of goods or services produced as a condition for granting enterprises (GFSM2001, 11452; OECD, 5200); such a licence, the payments are not unrequited and should be treated as payments for services rendered, g. Taxes on international transactions: these consist of unless the amounts charged for the licences are out of taxes on travel abroad, foreign remittances or similar all proportion to the costs of the checks carried out by transactions with non-residents (GFSM2001, 1156; governments (GFSM2001, 11452; OECD, 5210). (See OECD, 5127). D. Subsidies 7.98 Subsidies are current unrequited payments that 1. Subsidies on products government units, including non-resident government units, make to enterprises on the basis of the levels of 7.100 A subsidy on a product is a subsidy payable per unit of a their production activities or the quantities or values of good or service. The subsidy may be a specific amount of the goods or services that they produce, sell or import. money per unit of quantity of a good or service, or it may be calculated ad valorem as a specified percentage of the They are receivable by resident producers or importers. In price per unit. A subsidy may also be calculated as the the case of resident producers they may be designed to difference between a specified target price and the market influence their levels of production, the prices at which price actually paid by a buyer. A subsidy on a product their outputs are sold or the remuneration of the usually becomes payable when the good or service is institutional units engaged in production. Subsidies have produced, sold or imported, but it may also be payable in the same impact as negative taxes on production in so far as other circumstances such as when a good is transferred, leased, delivered or used for own consumption or own their impact on the operating surplus is in the opposite capital formation. direction to that of taxes on production. Import subsidies 7.99 Subsidies are not payable to final consumers; current transfers that governments make directly to households as 7.101 Import subsidies consist of subsidies on goods and consumers are treated as social benefits. Subsidies also do services that become payable when the goods cross the not include grants that governments may make to frontier of the economic territory or when the services are delivered to resident institutional units. They include enterprises in order to finance their capital formation, or implicit subsidies resulting from the operation of a system compensate them for damage to their capital assets, such of official multiple exchange rates. They may also include grants being treated as capital transfers. losses incurred as a matter of deliberate government policy 148 The distribution of income accounts by government trading organizations whose function is to a. Subsidies on products used domestically: these consist purchase products from non-residents and then sell them at of subsidies payable to resident enterprises in respect of lower prices to residents (see also export subsidies in their outputs that are used or consumed within the paragraph 7.103). economic territory; 7.102 As in the case of taxes on products, subsidies on imported b. Losses of government trading organizations: these goods do not include any subsidies that may become consist of the losses incurred by government trading payable on such goods after they have crossed the frontier organizations whose function is to buy and sell the and entered into free circulation within the economic products of resident enterprises. When such territory of the country. organizations incur losses as a matter of deliberate government economic or social policy by selling at Export subsidies lower prices than those at which they purchased the goods, the difference between the purchase and the selling prices should be treated as a subsidy. Entries to 7.103 Export subsidies consist of all subsidies on goods and the inventories of goods held by such organizations are services that become payable by government when the valued at the purchasers' prices paid by the trading goods leave the economic territory or when the services organizations and the subsidies are recorded at the time are delivered to non-resident units. They include the the goods are sold; following: c. Subsidies to public corporations and quasi- a. Direct subsidies on exports payable directly to resident corporations: these consist of regular transfers paid to producers when the goods leave the economic territory public corporations and quasi-corporations that are or the services are delivered to non-residents; intended to compensate for persistent losses (that is, negative operating surpluses) incurred on their b. Losses of government trading organizations: these productive activities as a result of charging prices that consist of losses incurred as a matter of deliberate are lower than their average costs of production as a government policy by government trading matter of deliberate government economic and social organizations whose function is to buy the products of policy. In order to calculate the basic prices of the resident enterprises and then sell them at lower prices outputs of such enterprises, it will usually be necessary to non-residents. The difference between the buying to assume a uniform ad valorem implicit rate of subsidy and selling prices is an export subsidy (see also on those outputs determined by the size of the subsidy paragraph 7.105(b)); as a percentage of the value of sales plus subsidy. c. Subsidies resulting from multiple exchange rates: these d. Subsidies resulting from the central bank accepting a consist of implicit subsidies resulting from the lower rate of interest than the market rate: These operation of an official system of multiple exchange subsidies are described in paragraphs 7.122 to 7.126. rates. (These subsidies are not mentioned in GFSM2001.) Exclusions from export subsidies 2. Other subsidies on production 7.104 Export subsidies do not include the repayment at the 7.106 Other subsidies on production consist of subsidies except customs frontier of taxes on products previously paid on subsidies on products that resident enterprises may goods or services while they were inside the economic receive as a consequence of engaging in production. territory. They also exclude the waiving of the taxes that would be due if the goods were to be sold or used inside the Examples of such subsidies are the following: economic territory instead of being exported. General taxes on products such as sales or purchase taxes, VAT, excise a. Subsidies on payroll or workforce: these consist of taxes or other taxes on products are usually not payable on subsidies payable on the total wage or salary bill, or exports. total work force, or on the employment of particular types of persons such as physically handicapped Other subsidies on products persons or persons who have been unemployed for long periods. The subsidies may also be intended to cover some or all of the costs of training schemes organized 7.105 Other subsidies on products consist of subsidies on goods or financed by enterprises; or services produced as the outputs of resident enterprises, or on imports, that become payable as a result of the production, sale, transfer, leasing or delivery of b. Subsidies to reduce pollution: these consist of subsidies those goods or services, or as a result of their use for own intended to cover some or all of the costs of additional consumption or own capital formation. The most common processing undertaken to reduce or eliminate the types are the following: discharge of pollutants into the environment. 149 System of National Accounts E. Property incomes 1. Defining property income resource lease, the land is returned to the legal owner in the same state as when the lease started. For resources such as 7.107 Property income accrues when the owners of financial subsoil assets, though the resources potentially have an assets and natural resources put them at the disposal of infinite life, they are not all returned to the legal owner at other institutional units. The income payable for the use of the end of the lease since the purpose of the lease is to financial assets is called investment income while that permit extraction and disposal of the resource. Although payable for the use of a natural resource is called rent. the resource may suffer depletion in excess of any new Property income is the sum of investment income and discoveries or re-evaluations (or natural replenishments for rent. renewable resources) the fact that rent is shown without deduction for any consumption of natural resources means that, in the SNA, the resource is effectively treated as 7.108 Investment income is the income receivable by the owner having an infinite life as far as income generation is of a financial asset in return for providing funds to concerned. another institutional unit. The terms governing the payment of investment income are usually specified in the financial instrument created when the funds are transferred 7.110 The regular payments made by the lessees of natural from the creditor to the debtor. Such arrangements are resources such as subsoil assets are often described as typically made only for a limited period of time, after royalties, but they are treated as rent in the SNA. The term which the funds must be returned. The period of time may "rent" is reserved in this manual for rent on natural be several months or several years, though the resources, payments under operating leases being described arrangements may be renewed. as "rentals". 7.109 Rent is the income receivable by the owner of a natural 7.111 Property incomes are classified in the following way in the resource (the lessor or landlord) for putting the natural SNA: resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in Investment income production. The terms under which rent on a natural Interest resource is payable are expressed in a resource lease. A Distributed income of corporations resource lease is an agreement whereby the legal owner Dividends of a natural resource that the SNA treats as having an infinite life makes it available to a lessee in return for a Withdrawals from income of quasi-corporations regular payment recorded as property income and Reinvested earnings on foreign direct investment described as rent. A resource lease may apply to any Other investment income natural resource recognized as an asset in the SNA. For Investment income attributable to insurance resources such as land it is assumed that, at the end of the policyholders Table 7.8:The allocation of primary income account - property income - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Compensation of employees 6 6 Taxes on production and imports 0 Subsidies 0 Property income 134 168 42 41 6 391 44 435 Interest 56 106 35 14 6 217 13 230 Distributed income of corporations 47 15 62 17 79 Dividends 39 15 54 13 67 Withdrawals from income of quasi-corporations 8 0 8 4 12 Reinvested earnings on foreign direct investment 0 0 0 14 14 Investment income disbursements 47 47 0 47 Investment income attributable to insurance policy holders 25 25 0 25 Investment income payable on pension entitlements 8 8 0 8 Investment income attributable to collective investment funds share holders 14 14 0 14 Rent 31 0 7 27 0 65 65 Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 150 The distribution of income accounts Investment income payable on pension date and sometimes not until the loan, or other financial entitlements instrument matures. Investment income attributable to collective investment fund shareholders The accrual basis of recording Rent 7.115 Interest is recorded on an accrual basis, that is, interest is Each of these items is described in more detail below. recorded as accruing continuously over time to the creditor on the amount of principal outstanding. The interest accruing is the amount receivable by the creditor and 7.112 Table 7.8 shows an expansion of table 7.2 to include the payable by the debtor. It may differ not only from the details of property income payable and receivable. amount of interest actually paid during a given period but also the amount due to be paid within the period. Some 2. Interest financial instruments are drawn up in such a way that the debtor is obliged to make regular interest payments, period by period, as the interest accrues but in other cases there 7.113 Interest is a form of income that is receivable by the may be no such requirement. As explained in part 4 of owners of certain kinds of financial assets, namely: chapter 17, there are many different kinds of financial deposits, debt securities, loans and (possibly) other instruments and new instruments are continually being accounts receivable for putting the financial asset at the developed. Interest may therefore be paid in various disposal of another institutional unit. Income on SDR different ways, not always explicitly described as interest. holdings and allocations is also treated as interest. The However, streams of net settlement payments under a swap financial assets giving rise to interest are all claims of or forward rate agreement contract (possibly described as creditors over debtors. Creditors lend funds to debtors that "interest" in the contract) are not considered as property lead to the creation of one or other of the financial income but are to be recorded as transactions in financial instruments listed above. The amount the debtor owes the derivatives in the financial account (see paragraphs 11.111 creditor is known as the principal. Over time, the amount to 11.115). due to the creditor declines as the debt is repaid and increases as interest accrues. The balance at any time is referred to as the principal outstanding. Interest payable and receivable on loans and deposits 7.114 Interest may be a predetermined sum of money or a fixed or variable percentage of the principal outstanding. If some or 7.116 As explained in chapter 6, the amounts of interest on loans all of the interest accruing to the creditor is not paid during and deposits payable to and receivable from financial the period in question, it may be added to the amount of the corporations include a margin that represents an implicit principal outstanding or it may constitute an additional, payment for the services provided by the financial separate liability incurred by the debtor. However, the corporations in providing loans and accepting deposits. The interest may not necessarily be due for payment until a later actual payments or receipts to or from financial Table 7.8 (cont):The allocation of primary income account - property income - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Transactions and balancing items Total Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Compensation of employees 1 154 1 154 2 1 156 Taxes on production and imports 235 235 235 Subsidies - 44 - 44 - 44 Property income 96 149 22 123 7 397 38 435 Interest 33 106 14 49 7 209 21 230 Distributed income of corporations 10 25 7 20 0 62 17 79 Dividends 10 25 5 13 0 53 14 67 Withdrawals from income of quasi-corporations 2 7 9 3 12 Reinvested earnings on foreign direct investment 4 7 0 3 0 14 0 14 Investment income disbursements 8 8 1 30 0 47 0 47 Investment income attributable to insurance policy holders 5 0 0 20 0 25 0 25 Investment income payable on pension entitlements 8 8 0 8 Investment income attributable to collective investment funds share holders 3 8 1 2 0 14 0 14 Rent 41 3 0 21 0 65 65 151 System of National Accounts corporations, described as bank interest, need to be information needed to calculate real interest is provided partitioned so that SNA interest and the service charges within the SNA as a whole since the real holding losses may be recorded separately. The amounts of SNA interest incurred by creditors are recorded in the revaluation paid by borrowers to financial corporations are less than account. bank interest by the estimated values of the charges payable, while the amounts of SNA interest receivable by The special case of interest rates set by the depositors is higher than bank interest by the amount of the service charge payable. The values of the charges are central bank recorded as sales of services in the production accounts of financial corporations and as uses in the accounts of their 7.122 The central bank's main responsibility is to formulate and customers. carry out part of economic policy. It therefore often acts differently than other financial corporations and generally 7.117 If bank interest is unpaid, it must be the case that both SNA has received the authority from government to enforce its interest and the service charge are unpaid. In other words, views. In cases where the central bank uses its special the amount of principal outstanding increases by both the powers to oblige market participants to pay transfers amount of SNA interest unpaid plus the unpaid service without a direct quid pro quo, it is appropriate to record the charge. proceeds as implicit taxes. Conversely, in cases when the central bank makes payments that are clearly for policy rather than commercial purposes, it may be argued that Interest payable on debt securities implicit subsidies are paid. Three cases are considered: 7.118 Certain financial instruments, for example, bills and zero a. The central bank is able to dictate below market rates coupon bonds, are such that the debtor is under no for reserve deposits; obligation to make any payments to the creditor until the asset matures. In effect, no interest becomes due for b. The central bank pays above market rates in a situation payment until the end of the asset's life at which point the where the external value of the currency is under debtor's liability is discharged by a single payment pressure; covering both the amount of the funds originally provided by the creditor and the interest accumulated over the entire life of the asset. In such cases the amount of interest c. The central bank acts as a development bank offering payable over the life of the security is derived as the loans at below market rates to priority industries. difference between the value at which the instrument is acquired and its value when it matures. 7.123 If central bank interest rates are out of line with those of commercial banks, then the difference between flows Further elaboration calculated using the reference rate and the actual rate set by the central bank should be recorded not as market output, specifically FISIM, but as implicit taxes and subsidies as 7.119 Chapter 17 contains in part 4 a section detailing how all the described immediately below. This procedure is analogous transactions and other flows associated with financial to and consistent with the practice of treating the difference instruments are to be recorded in the accounts. It contains, between the market exchange rate and an alternative in particular, specific recommendations on how interest on exchange rate imposed by the central bank as an implicit each of the relevant financial instruments is to be tax or subsidy. calculated. Below market rates on reserve deposits Nominal and real interest 7.124 Suppose the central bank pays only three per cent to a 7.120 When a debtor discharges the principal by making commercial bank on reserve deposits when the market rate payments equal in money value to the funds borrowed plus is five per cent. The following recording is made in the the interest accruing at the agreed rate over the time the SNA: debt exists, the associated interest payments are described as "nominal". Such interest payments do not represent the "real" return to the creditor when, as a result of inflation, a. Although the commercial bank actually receives only the purchasing power of the funds repaid is less than that of three per cent as "interest", it is recorded as receiving the funds borrowed. In situations of chronic inflation the five per cent as interest and paying two per cent to nominal interest payments demanded by creditors typically government as a tax on production; rise in order to compensate them for the losses of purchasing power that they expect when their funds are b. Government is recorded as receiving two per cent from eventually repaid. the commercial bank as a tax on production and as making a payment of a current transfer of two per cent 7.121 In practice, the interest recorded in the allocation of to the central bank (both these flows are notional); and primary income account is not partitioned in this way. The interest recorded is always the amount of nominal interest c. The central bank actually pays three per cent to the receivable or payable (plus or minus the charges for commercial bank but is recorded as paying five per cent services of financial intermediaries for which no explicit to the commercial bank and receiving two per cent charges are made, when relevant). However, the from government in the form of a current transfer. 152 The distribution of income accounts No financial account transactions are involved with this re- 7.128 Dividends are a form of investment income to which routing. shareholders become entitled as a result of placing funds at the disposal of corporations. Raising equity capital Above market rates for currency support through the issue of shares is an alternative to borrowing as a way of raising funds. In contrast to loan capital, however, equity capital does not give rise to a liability that is fixed in 7.125 Suppose the central bank pays seven per cent to a monetary terms and it does not entitle the holders of shares commercial bank for a limited period when the currency is of a corporation to a fixed or predetermined income. under pressure at a time when the market rate is five per cent. The following recording is made in the SNA: 7.129 Just as corporations are understood in the SNA to cover a set of institutional units engaged in production that may be a. Although the commercial bank actually receives seven described by different names such as private or public per cent as "interest", it is recorded as receiving five per corporations, private or public companies, cooperatives and cent as interest and receiving another two per cent from limited liability partnerships, so dividends must also be government as a subsidy on production; understood to cover all distributions of profits by corporations to their shareholders or owners, by whatever b. Government is recorded as paying two per cent to the name they are called. Dividends may occasionally take the commercial bank as a subsidy on production and as form of an issue of shares, but this excludes issues of bonus receiving a current transfer of two per cent from the shares that simply represent a reclassification between own central bank (both these flows are notional); and funds, reserves and undistributed profits. c. The central bank actually pays seven per cent to the Time of recording commercial bank but is recorded as paying five per cent to the commercial bank and paying two per cent to government in the form of a current transfer. 7.130 Although dividends represent a part of income that has been generated over a substantial period, often six or twelve months, dividends are not recorded in the SNA on a No financial account transactions are involved with this re- strict accrual basis. For a short period after a dividend is routing. declared but before it is actually payable, shares may be sold "ex dividend" meaning that the dividend is still Below market rates to priority industries payable to the owner at the date the dividend was declared and not to the owner on the date payable. A share sold "ex 7.126 Suppose the central bank charges only three per cent to a dividend" is therefore worth less than one sold without this priority industry when the market rate is five per cent. The constraint. The time of recording of dividends in the SNA following recording is made in the SNA: is the point at which the share price starts to be quoted on an ex dividend basis rather than at a price that includes the dividend. a. Although the priority industry actually pays only three per cent as "interest", it is recorded as paying five per cent as interest but receiving two per cent from Super-dividends government as a subsidy on production; 7.131 Although dividends are notionally paid out of the current b. Government is recorded as paying two per cent to the period's operating surplus, corporations often smooth the priority industry as a subsidy on production and as payments of dividends, often paying out rather less than receiving a current transfer of two per cent from the operating surplus but sometimes paying out a little more, central bank (both these flows are notional); and especially when the operating surplus itself is very low. For practical reasons, no attempt is made in the SNA to align c. The central bank actually receives three per cent from dividend payments with earnings except in one the priority industry but is recorded as receiving five circumstance. The exception occurs when the dividends are per cent from the priority industry and paying two per disproportionately large relative to the recent level of cent to government in the form of a current transfer. dividends and earnings. In order to determine whether the dividends are disproportionately large, it is helpful to introduce the concept of distributable income. No financial account transactions are involved with this re- Distributable income of a corporation is equal to routing. entrepreneurial income, plus all current transfers receivable, less all current transfers payable and less the 3. Distributed income of corporations adjustment for the change in pension entitlements relating to the pension scheme of that corporation. From this it is possible to look at the ratio of dividends to Dividends distributable income over the recent past and assess the plausibility that the current level of dividends declared is in 7.127 Corporations obtain funds by issuing shares in their equity line with past practice, accepting some degree of smoothing that entitle the holders to a proportion of both distributed from year to year. If the level of dividends declared is profits and the residual value of the assets of the greatly in excess of this, the excess should be treated as a corporation in the event of its liquidation. Shareholders are financial transaction, specifically the withdrawal of the collective owners of a corporation. owners' equity from the corporation. 153 System of National Accounts 7.132 This treatment applies to all corporations, whether b. A corporation in which at least one foreign investor incorporated or quasi-corporate and whether subject to (which may, or may not, be another corporation) owns public, foreign or domestic private control. There is more sufficient shares to have an effective voice in its discussion on the case of publicly controlled corporations management. in chapter 22. 7.137 Actual distributions may be made out of the distributable Withdrawals of income from quasi-corporations income of foreign direct investment enterprises in the form of dividends or withdrawals of income from quasi- corporations. The payments made in these ways to foreign 7.133 Withdrawal of income from a quasi-corporation consists direct investors are recorded in the accounts of the SNA of that part of distributable income that the owner and in the balance of payments as international flows of withdraws from the quasi-corporation. The income that investment income. However, both systems also require the the owners of quasi-corporations withdraw from them is retained earnings of a foreign direct investment enterprise analogous to the income withdrawn from corporations by to be treated as if they were distributed and remitted to paying out dividends to their shareholders. It is therefore foreign direct investors in proportion to their ownership of treated as property income accruing to the owners of quasi- the equity of the enterprise and then reinvested by them by corporations. The withdrawal of income by the owners of means of additions to equity in the financial account. The quasi-corporations needs to be identified in order to be able imputed remittance of these retained earnings is classified to establish a full set of accounts for the entity and to treat it in the SNA as a form of distributed income that is separate as an institutional unit separate from that of its owner. from, and additional to, any actual payments of dividends or withdrawals of income from quasi-corporations. 7.134 Withdrawals of income from a quasi-corporation do not include withdrawals of funds realized by the sale or 7.138 The rationale behind this treatment is that since a foreign disposal of the quasi-corporation's assets: for example, the direct investment enterprise is, by definition, subject to sale of inventories, fixed assets, land or other non-produced control, or influence, by a foreign direct investor or assets. Such sales would be recorded as disposals in the investors, the decision to retain some of its earnings within capital account of the quasi-corporation and the transfer of the enterprise must represent a deliberate investment the resulting funds would be recorded as a withdrawal from decision on the part of the foreign direct investor(s). In the equity of quasi-corporations in the financial account of practice, the great majority of direct investment enterprises the quasi-corporation and as a receivable by its owner(s). are subsidiaries of foreign corporations or the Similarly, funds withdrawn by liquidating large amounts of unincorporated branches of foreign enterprises, which are accumulated retained savings or other reserves of the quasi- completely controlled by their parent corporations or corporation, including those built up out of provisions for owners. consumption of fixed capital, are treated as withdrawals from equity. This situation corresponds to the treatment of superdividends payable by listed enterprises described 7.139 Retained earnings of a corporation or quasi-corporation immediately above. are equal to the distributable income less the dividends payable or withdrawal of income from the corporation or quasi-corporation respectively. If the foreign direct 7.135 Conversely, any funds provided by the owner(s) of a quasi- investment enterprise is wholly owned by a single foreign corporation for the purpose of acquiring assets or reducing direct investor (for example, a branch of a foreign its liabilities should be treated as additions to its equity. Just enterprise), the whole of the retained earnings is deemed to as there cannot be a negative distribution from the be remitted to that investor and then reinvested, in which distributable income of corporations in the form of negative case the saving of the enterprise must be zero. When a dividends, it is not possible to have a negative distribution foreign direct investor owns only part of the equity of the from the distributable income of quasi-corporations in the direct investment enterprise, the amount that is deemed to form of negative withdrawals. However, if the quasi- be remitted to, and reinvested by, the foreign investor is corporation is owned by government, and if it runs a proportional to the share of the equity owned. persistent operating deficit as a matter of deliberate government economic and social policy, any regular transfers of funds into the enterprise made by government Retained earnings of domestic enterprises to cover its losses should be treated as subsidies, as explained in paragraph 7.105 (c) above. 7.140 A suggestion has been made to extend the treatment of distributing retained earnings to the owners of other Reinvested earnings on foreign direct corporations, in particular of public corporations. Investigation of this suggestion is part of the research investment agenda. 7.136 As explained in chapter 26, a foreign direct investment 4. Investment income disbursements enterprise is a corporate or unincorporated enterprise in which a foreign investor has made a foreign direct investment. A foreign direct investment enterprise may be Investment income attributed to insurance either: policyholders a. The (unincorporated) branch of a non-resident 7.141 Investment income attributable to insurance policyholders corporate or unincorporated enterprise: this is treated as should be divided between holders of non-life and life a quasi-corporation; or policies. 154 The distribution of income accounts 7.142 For non-life policies, the insurance corporation has a Investment income payable on pension liability towards the policyholder of the amount of the entitlements premium deposited with the corporation but not yet earned, the value of any claims due but not yet paid and a reserve for claims not yet notified or notified but not yet settled. Set 7.147 As explained in part 2 of chapter 17, pension entitlements against this liability, the insurance corporation holds arise from one of two different types of pension schemes. technical reserves. The investment income on these These are defined contribution schemes (sometimes reserves is treated as income attributable to the described as money purchase schemes) and defined benefit policyholders, then distributed to the policyholders in the schemes. allocation of primary income account and paid back to the insurance corporation as a premium supplement in the 7.148 A defined contribution scheme is one where contributions secondary distribution of income account. The reserves by both employers and employees are invested on behalf of concerned are those where the insurance corporation the employees as future pensioners. No other source of recognizes a corresponding liability to the policyholders. funding of pensions is available and no other use is made of the funds. The investment income payable on defined 7.143 For an institutional unit operating a standardized guarantee contribution entitlements is equal to the investment income scheme against fees, there may also be investment income on the funds plus any net operating surplus earned by earned on the reserves of the scheme and this should also renting land or buildings owned by the fund. be shown as being distributed to the units paying the fees (who may not be the same units which stand to benefit from 7.149 A defined benefit scheme is one where the benefits payable the guarantees) and treated as supplementary fees in the are defined in terms of a formula. The formula often takes secondary distribution of income account. the form of a link to final salary (hence the alternative terminology final salary schemes) or average salary over 7.144 For life insurance policies and annuities, the insurance some defined period. The formula may be expressed in corporations have liabilities towards the policyholders and many ways including, for example, a variation on a defined annuitants equal to the present value of expected claims. contribution scheme such as the growth in earnings of the Set against these liabilities, the insurance corporations have funds or a minimum percentage growth. funds belonging to the policyholders consisting of bonuses declared for with-profits policies as well as provisions for both policyholders and annuitants of the payment of future 7.150 Because the benefits are calculated according to a formula, bonuses and other claims. These funds are invested in a it is possible to determine the level of entitlements range of financial assets and possibly non-financial assets necessary at any point in time to meet future obligations. such as property and land. The insurance enterprises The value of the entitlements is the present value of all receive investment income from the financial assets and future payments, calculated using actuarial assumptions land, and earn net operating surpluses from the renting or about life lengths and economic assumptions about the leasing of residential and other buildings. In addition they interest or discount rate. The present value of the make holding gains or losses on the financial assets held. entitlements existing at the start of the year increases The bonuses declared to holders of life policies should be because the date when the entitlements become payable has recorded as investment income receivable by the become one year nearer. The amount of the increase is not policyholders (resident and possibly non-resident affected by whether the pension scheme actually has households) and are treated as premium supplements paid sufficient funds to meet all the obligations nor by the type by the policyholders to the insurance corporations. As with of increase in the funds, whether it is investment income or interest and dividends, the source of the investment income holding gains, for example. payable may not be investment income itself, but for the SNA, the decisive criterion for recording this as investment Investment income attributed to investment fund income is that of the recipient who regards these payments shareholders as the rewards for putting financial assets at the disposal of the insurance corporation. 7.151 Investment income attributed to holders of shares or units 7.145 The investment income attributed to life insurance in investment funds (including mutual funds and unit policyholders is recorded as payable by the insurance trusts) is shown as two separate items. The first of these is company and receivable by households in the allocation of the dividends distributed to investment fund shareholders. primary income account. This amount carries through The second is retained earnings attributed to investment automatically to saving without the need of an adjustment fund shareholders. item as is the case for changes in pension entitlements. The investment income is treated as premium supplements and 7.152 The dividend component is recorded in exactly the same so forms part of the net premiums, less claims, recorded in manner as dividends for individual corporations, as the financial account as payable by households and described above. The retained earnings component is receivable by insurance corporations as changes in life recorded using the same principles as those described for insurance and annuities entitlements. foreign direct investment enterprises but is calculated excluding any reinvested earnings on foreign direct 7.146 Unlike the case of non-life insurance or pensions, the investment. That is to say, the remaining retained earnings amount carries through to saving and is then recorded as a are distributed to the shareholders (leaving the investment financial transaction, specifically an increase in the fund with no saving) and are reinjected into the fund by the liabilities of life insurance corporations, in addition to new shareholders in a transaction recorded in the financial premiums less the service charge offset by claims payable. account. 155 System of National Accounts 5. Rent pay to the landowner. Rent reduced in this way by taxes or other expenses for which the landowner is liable is described as "after-tax rent". By adopting the convention Rent distinguished from rentals that the tenant pays only the after-tax rent, the taxes or expenses are recorded in the production or generation of income accounts of the tenant. This treatment does not 7.153 The distinction between rent and the rentals receivable and change the income of the tenant. The convention avoids the payable under operating leases is basic to the SNA as rent necessity to create a notional enterprise for the landowner is a form of property income and rentals are treated as sales or purchases of services. Rentals are payments made under as the lessor. an operating lease to use a fixed asset belonging to another unit where that owner has a productive activity in which the 7.158 Rentals payable on buildings or other structures are treated fixed assets are maintained, replaced as necessary and as purchases of services. In practice, however, a single made available on demand to lessees. Rent is a payment payment may cover both rent and rentals when an made under a resource lease for the use of a natural institutional unit rents land that consists of land resource. Not only is the type of asset leased different as improvements and land in its natural state and may include between rent and rentals, so is the nature of the lease. The distinction between different types of leases is explained in any buildings situated on it in a single contract, or lease, in part 5 of chapter 17. which the two kinds of payments are not differentiated from each other. For example, a farmer may rent a farmhouse, farm buildings, cultivated and grazing farmland Rent on natural resources in a contract in which only a single payment is required to cover all four. If there is no objective basis on which to split the payment between rent on land and rental on the 7.154 Rent is the income receivable by the owner of a natural buildings, it is recommended to treat the whole amount as resource (the lessor or landlord) for putting the natural rent when the value of the grazing land is believed to resource at the disposal of another institutional unit (a exceed the value of the buildings and cultivated land, and lessee or tenant) for use of the natural resource in as a rental otherwise. production. Two particular cases of resource rent are considered, rent on land and rent on subsoil resources. Resource rent on other natural resources follows the pattern Rent on subsoil assets laid out by these two instances. 7.159 The ownership of subsoil assets in the form of deposits of Rent on land minerals or fossil fuels (coal, oil or natural gas) depends upon the way in which property rights are defined by law 7.155 Rent on land is recorded as accruing continuously to the and also on international agreements in the case of deposits landowner throughout the period of the contract agreed below international waters. In some cases the assets may between the landowner and the tenant. The rent recorded belong to the owner of the ground below which the deposits for a particular accounting period is equal to the value of are located but in other cases they may belong to a local or the accumulated rent payable over that period of time, as central government unit. distinct from the amount of rent due to be paid during that period or the rent actually paid. 7.160 The owners of the assets, whether private or government units, may grant leases to other institutional units 7.156 Rent may be paid in cash or in kind. Under share-cropping permitting them to extract such deposits over a specified or similar schemes, the value of the rent payable is not period of time in return for the payment of rent. These fixed in advance in monetary terms and is measured by the payments are often described as royalties, but they are value at basic prices of the crops that the tenants are essentially rent that accrues to owners of the assets in return obliged to provide to the landowner under the contract for putting them at the disposal of other institutional units between them. Rent on land also includes the rent payable for specified periods of time and are treated as such in the to the owners of inland waters and rivers for the right to SNA. The rent may take the form of periodic payments of exploit such waters for recreational or other purposes, fixed amounts, irrespective of the rate of extraction or, including fishing. more commonly, they may be a function of the quantity or volume of the asset extracted. Enterprises engaged in 7.157 A landowner may be liable to pay land taxes or incur exploration may make payments to the owners of surface certain maintenance expenses solely as a consequence of land in exchange for the right to make test drillings or owning the land. By convention, such taxes or expenses are investigate by other means the existence and location of treated as payable by the tenant who is deemed to deduct subsoil resources. Such payments are also to be treated as them from the rent that he would otherwise be obliged to rent even though no extraction is taking place. 156 Chapter 8: The redistribution of income accounts A. Introduction 8.1 This chapter describes two accounts that show how income 8.7 Two main types of social insurance schemes may be is redistributed between institutional units by means of the distinguished: payments and receipts of current transfers. This redistribution represents the second stage in the process of a. The first consists of social security schemes covering income distribution as shown in the accounts of the SNA. the entire community, or large sections of the The two accounts are the secondary distribution of income community, that are imposed, controlled and financed account and the redistribution of income in kind account. by government units. Pensions payable under these schemes may or may not be related to levels of salary 8.2 The secondary distribution of income account shows how of the beneficiary or history of employment. Non- the balance of primary incomes of an institutional unit or pension benefits are less frequently linked to salary sector is transformed into its disposable income by the levels. receipt and payment of current transfers excluding social transfers in kind. b. The second type consists of other employment-related schemes. These schemes derive from an employer- 8.3 The redistribution of income in kind account takes the employee relationship in the provision of pension process of income redistribution one stage further. It shows entitlement that is part of the conditions of employment how the disposable incomes of households, non-profit and where responsibility for the provision of benefits institutions serving households (NPISHs) and government does not devolve to general government under social units are transformed into their adjusted disposable security provisions. incomes by the receipt and payment of social transfers in kind. Non-financial and financial corporations are not 8.8 Social assistance benefits in cash are current transfers involved in this process. payable to households by government units or NPISHs to meet the same needs as social insurance benefits but which 8.4 Much of this chapter is concerned with the detailed are not made under a social insurance scheme requiring definition, description and classification of the various participation usually by means of social contributions. types of current transfers recorded in the secondary distribution of income and redistribution of income in kind 8.9 Social transfers in kind consist of social security benefits accounts. As part of this description, there is discussion of payable in kind and social assistance benefits payable in the composition of social insurance schemes and their role kind. as the recipients of social contributions and dispensers of social benefits. 1. The secondary distribution of income account 8.5 Understanding the difference between four related concepts is crucial to an appreciation of the two accounts described 8.10 Apart from the balance of primary incomes, the balancing in this chapter. These terms are social insurance, social item carried forward from the primary distribution of security, social assistance and social transfers in kind. income accounts, and disposable income, the balancing These are explained very briefly below and in greater detail item on the secondary distribution of income account, all in later parts of the chapter. the entries in the secondary distribution of income account consist of current transfers. A transfer is a transaction in 8.6 Social insurance schemes are schemes in which social which one institutional unit provides a good, service or contributions are paid by employees or others, or by asset to another unit without receiving from the latter any employers on behalf of their employees, in order to secure good, service or asset in return as a direct counterpart. entitlement to social insurance benefits, in the current or Transfers are separated into current transfers and capital subsequent periods, for the employees or other transfers. Capital transfers are unrequited transfers where contributors, their dependants or survivors. The social either the party making the transfer realizes the funds benefits payable by social insurance schemes are of two involved by disposing of an asset (other than cash or kinds, pensions and other benefits such as medical, inventories), relinquishing a financial claim (other than education, housing or unemployment benefits. Pensions are accounts receivable) or the party receiving the transfer is always paid in cash; non-pension benefits may be payable obliged to acquire an asset (other than cash) or both in cash or in kind. conditions are met. Capital transfers are often large and 157 System of National Accounts irregular but neither of these are necessary conditions for a Their general nature and the purposes they serve are transfer to be considered a capital rather than a current summarized in the following paragraphs. transfer. Other transfers are described as current. A current transfer is a transaction in which one institutional unit Current taxes on income, wealth, etc. provides a good or service to another unit without receiving from the latter any good or service directly in return as counterpart and does not oblige one or both 8.15 Current taxes on income, wealth, etc. consist mainly of parties to acquire, or dispose of, an asset. The concept of a taxes on the incomes of households or profits of transfer is explained in more detail in section B below. corporations and of taxes on wealth that are payable regularly every tax period (as distinct from capital taxes levied infrequently). In table 8.1, current taxes on income, 8.11 Table 8.1 shows the concise form of the secondary wealth, etc. receivable appear under resources for the distribution of income account identifying the main kinds general government sector and possibly the rest of the of transfers. Current transfers may take place between world, while taxes payable appear under uses for the resident and non-resident units as well as between resident household and non-financial and financial corporation institutional units. sectors, and possibly for the non-profit institutions serving households (NPISHs) sector and the rest of the world. 8.12 The transfers payable by an institutional unit or sector are recorded on the left-hand side of the account under uses. Social contributions and benefits For example, in table 8.1, taxes on income, wealth etc. payable by the household sector are recorded at the intersection of the row for this item and the uses column for 8.16 Social contributions are actual or imputed payments to the household sector. The transfers receivable by an social insurance schemes to make provision for social institutional unit or sector are recorded on the right-hand insurance benefits to be paid. Social contributions may be side of the account under resources. For example, social made by employers on behalf of their employees. As such benefits other than social transfers in kind receivable by the they form part of compensation of employees and are household sector are recorded at the intersection of the row included in the balance of primary income of households. for this item and the resources column for the household In the secondary distribution of income account, these sector. contributions together with payments made by households themselves in their capacity as employed, self-employed or unemployed persons, are recorded as payable by 8.13 In accordance with the general accounting rules of the households and receivable by the units responsible for the SNA, the entries in the account, apart from the balancing social insurance schemes. Social contributions may be items, refer to amounts payable and receivable. These may receivable by a unit in any sector in their capacity as not necessarily coincide with the amounts actually paid or providing a social insurance scheme to their employees received in the same accounting period. Any amounts (even exceptionally households if in their capacity as payable and not paid or receivable and not received are unincorporated enterprises they run a social insurance recorded in the financial account, under accounts scheme for their employees) or by a third-party unit receivable or payable. designated as the institution responsible for administering the scheme. Most contributions, however, are likely to be 8.14 Three main kinds of current transfers are distinguished in recorded under resources for the general government the secondary distribution of income account: sector, including social security funds, and insurance corporations and pension funds in the financial a. Current taxes on income, wealth, etc.; corporations sector. Social contributions are recorded under uses only for households, either resident or non-resident. b. Social contributions and benefits; 8.17 Social benefits are current transfers received by households intended to provide for the needs that arise c. Other current transfers. from certain events or circumstances, for example, Table 8.1:The secondary distribution of income account - concise form - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Current transfers 98 277 248 582 7 1 212 17 1 229 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 Net social contributions 333 333 0 333 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 Other current transfers 12 62 136 71 2 283 16 299 Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 158 The redistribution of income accounts sickness, unemployment, retirement, housing, education 8.21 Disposable income, like the balance of primary incomes, or family circumstances. Social benefits may be provided may be recorded gross or net of consumption of fixed under social insurance schemes or by social assistance. capital. As elsewhere, the net measure is conceptually preferable but it may be necessary to record the balancing 8.18 Social insurance benefits in kind provided by employers are items gross because of the difficulty of measuring treated as if they were paid in cash and included in the consumption of fixed capital even though consumption of secondary distribution of income account. If this were not fixed capital is a cost of production and not a component of so, the purchase of the goods and services concerned would income. The following discussion refers to the net concept have to be shown as incurred by employers but these of disposable income. products are not intermediate consumption and enterprises cannot have final consumption. However, social insurance 8.22 Disposable income is not all available in cash. The benefits in kind provided under general social security inclusion in the accounts of non-monetary transactions schemes and all social assistance benefits in kind constitute associated with production for own consumption or barter, social transfers in kind and are therefore included only in or with remuneration in kind, means that households have the redistribution of income in kind account. In table 8.1 no choice but to consume certain kinds of goods and social benefits, except social transfers in kind, are recorded services for which the values of the corresponding under resources for the household sector and may, in expenditures out of disposable income are imputed. principle, be recorded under uses for any sector operating a Although social transfers in kind from government units or social insurance scheme in its capacity as an employer. NPISHs to households are recorded separately in the redistribution of income in kind account, other transfers in Other current transfers kind are recorded in the secondary distribution of income account together with transfers in cash. They may include 8.19 Other current transfers consist of all current transfers international transfers of food, clothing, medicines, etc. to between resident institutional units, or between resident relieve the effects of famine or other hardships caused by and non-resident units, other than current taxes on natural disasters or wars. The recipients of transfers in kind, income, wealth, etc., social contributions and benefits, other than social transfers in kind, are, by convention, and social benefits in kind. The group includes net recorded as making imputed consumption expenditures on premiums and claims under non-life insurance policies, the goods or services in question as if the transfers were current transfers between different kinds of government received in cash. units, usually at different levels of government, and also between general government and foreign governments, as 8.23 Households also receive several kinds of imputed property well as current transfers to and from NPISHs and between income flows that are not available to the household to resident and non-resident households. spend as they wish. These include investment income on insurance, annuity and pension entitlements as well as 2. Disposable income income from investment fund shares or units. Income flows related to investment funds and to life insurance and 8.20 Disposable income is the balancing item in the secondary annuities that are not treated as social insurance do carry distribution of income account. It is derived from the through to disposable income even though they balance of primary incomes of an institutional unit or automatically go to increase the assets held by households sector by: in the financial institutions managing these funds and policies and the household therefore has no discretion about spending these amounts. Income flows that are related to a. Adding all current transfers, except social transfers in non-life insurance and social insurance schemes are kind, receivable by that unit or sector; and recorded in the secondary distribution of income account as if repaid to the non-life insurance corporation or social b. Subtracting all current transfers, except social insurance schemes and are not included in disposable transfers in kind, payable by that unit or sector. income except for the part already committed to meet the Table 8.1 (cont):The secondary distribution of income account - concise form - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 Current taxes on income, wealth, etc. 213 213 0 213 Net social contributions 66 213 50 0 4 333 0 333 Social benefits other than social transfers in kind 384 384 0 384 Other current transfers 6 62 104 36 36 244 55 299 159 System of National Accounts service charge associated with the insurance policy or National disposable income social insurance scheme. 8.26 Most current transfers, whether in cash or in kind, can take 8.24 For households, disposable income includes the excess of place between resident and non-resident institutional units as well as between resident units. Gross or net national SNA interest over bank interest on deposits by households disposable income may be derived from gross or net and the excess of bank interest over SNA interest on loans national income by: to households. These differences are also precommitted to meeting the indirect service charges levied by financial a. Adding all current transfers in cash or in kind institutions on loans and deposits (FISIM). (For other receivable by resident institutional units from non- institutional sectors excluding financial intermediaries, resident units; and FISIM is treated as part of intermediate consumption so is excluded from income measures.) b. Subtracting all current transfers in cash or in kind payable by resident institutional units to non-resident units. Links with economic theoretical concepts of income 8.27 Among the more important current transfers taking place between residents and non-residents are the following: 8.25 Disposable income as measured in the SNA can be compared with the concept of income as it is generally a. Social contributions or benefits; understood in economics. From a theoretical point of view, income is often defined as the maximum amount that a b. Current taxes on income or wealth; household, or other unit, can consume without reducing its real net worth. However, the real net worth of a unit may be c. Non-life insurance premiums and claims; changed as a result of the receipt or payment of capital transfers and as a result of real holding gains or losses that d. Current international cooperation; that is, current accrue on its assets or liabilities. It may also be changed by transfers between different governments, such as events such as natural disasters that change the volume of transfers under aid programmes intended to sustain the consumption levels of populations affected by war or assets. Capital transfers, real holding gains or losses and natural disasters such as droughts, floods or other changes in the volume of assets due to the effect of earthquakes; events such as natural disasters are specifically excluded from disposable income as measured here. (Capital e. Remittances between resident and non-resident transfers are recorded in the capital account of the SNA, households. while other changes in the volume of assets and real holding gains or losses are recorded in the other changes in 8.28 The net disposable income of a country is a better measure assets accounts.) Disposable income can be interpreted in a than its net national income (NNI) for purposes of narrow sense as the maximum amount that a household or analysing its consumption possibilities. other unit can afford to spend on consumption goods or services during the accounting period without having to 3. The redistribution of income in kind account finance its expenditures by reducing its cash, by disposing of other financial or non-financial assets or by increasing 8.29 Apart from the balancing items, disposable income and its liabilities. This concept is equivalent to the economic adjusted disposable income, all the entries in the theoretical concept only when the net worth at the redistribution of income in kind account consist of social beginning of the period is not changed by capital transfers, transfers in kind. Social transfers in kind consist only of other changes in the volume of assets or real holding gains social benefits in kind and transfers of individual non- or losses recorded during the period. market goods and services provided to resident households Table 8.2:The redistribution of income account - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Social transfers in kind 184 31 215 215 Social transfers in kind - non-market production 180 31 211 211 Social transfers in kind - purchased market production 4 4 4 Adjusted disposable income, gross 228 25 133 1 434 6 1 826 1 826 Adjusted disposable income, net 71 13 106 1 411 3 1 604 1 604 160 The redistribution of income accounts by government units, including social security funds, and b. Subtracting the value of the social transfers in kind NPISHs. payable by that unit or sector. 8.30 As social transfers in kind only take place between Adjusted disposable income, like disposable income, may government units, NPISHs and households, the be recorded gross or net of consumption of fixed capital. redistribution of income in kind account is not needed for Because social transfers in kind are payable only by the non-financial and financial corporate sectors. government units and NPISHs and only receivable by households, it follows that the adjusted disposable incomes 8.31 The social transfers in kind payable by government units or of the general government and NPISHs sectors are lower NPISHs are recorded on the left-hand side of their than their disposable incomes, while the adjusted redistribution of income in kind accounts under uses. For disposable income of the household sector exceeds its example, in table 8.2, the value of individual non-market disposable income. In both cases, the value of the goods or services provided free, or at prices that are not difference is equal to the total value of social transfers in economically significant, by government units is recorded kind so adjusted disposable income for the total economy is at the intersection of the row for this item and the uses the same as its disposable income. column for the general government sector. Social transfers receivable by the household sector are recorded on the 8.33 The adjusted disposable income of a household can be right-hand side of their account under resources. As only interpreted as measuring the maximum value of the final the household sector receives social transfers in kind, the consumption goods or services that it can afford to resources columns for the other four sectors are empty. consume in the current period without having to reduce its cash, dispose of other assets or increase its liabilities for the 4. Adjusted disposable income purpose. Its consumption possibilities are determined not only by the maximum amount it can afford to spend on consumption goods and services (its disposable income), 8.32 Adjusted disposable income is the balancing item in the but also by the value of the consumption goods and redistribution of income in kind account. It is derived services it receives from government units or NPISHs as from the disposable income of an institutional unit or social transfers in kind. Conversely, the adjusted disposable sector by: income of general government can be interpreted as measuring the maximum value of the collective services a. Adding the value of the social transfers in kind that it can afford to provide to the community without receivable by that unit or sector; and having to dispose of assets or increase its liabilities. B. Current transfers 8.34 As defined above, a transfer is a transaction in which one certain conditions prevail. In addition, all resident institutional unit provides a good, service or asset to households benefit from services provided by government another unit without receiving from the latter any good, units. However, the fact that a transfer has been made does service or asset in return as a direct counterpart. A unit not automatically mean a benefit will be received by the making a transfer receives no specific quantifiable benefit unit making the transfer nor, if it does, that the amount of in return that can be recorded as part of the same the benefit is commensurate with the amount of the transaction. Nevertheless, the payment of a social insurance transfer. It is for this reason that the SNA holds there is no contribution or non-life insurance premium may entitle the direct counterpart to the transfer. unit making the payment to some contingent future benefits. For example, a household may be entitled to 8.35 The process of government collecting taxes and using the receive some social benefits should certain events occur or revenue generated to pay for the provision of government Table 8.2 (cont):The redistribution of income account - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 Social transfers in kind 215 215 215 Social transfers in kind - non-market production 211 211 211 Social transfers in kind - purchased market production 4 4 4 161 System of National Accounts services and the process by which an insurance corporation reduce its final consumption by the whole amount of the accepts premiums for non-life insurance in a year from transfer. Unless institutional units are capable of many policyholders and pays claims to a relatively small distinguishing capital from current transfers and react number of them are essentially distributive in nature. differently to them, it becomes impossible to measure Within a single accounting period, an institutional unit (the income, both in theory and in practice. government or the insurance corporation) receives and disburses funds according to a given set of procedures but the events giving rise to payments to and disbursements by 8.39 Current transfers consist of all transfers that are not these units are not directly related. transfers of capital. They directly affect the level of disposable income and should influence the consumption of goods or services. In practice, capital transfers tend to be 8.36 In contrast, payments of premiums on individual life large, infrequent and irregular, whereas current transfers insurance policies taken out by members of households on tend to be comparatively small and are often made their own initiative outside any social insurance scheme, frequently and regularly. However, while size, frequency and the corresponding benefits, are not transfers. For life and regularity help to distinguish current from capital insurance, the insurance corporation manages funds on transfers they do not provide satisfactory criteria for behalf of named households. There is relatively little defining the two types of transfer. For example, social redistribution among the various households holding security benefits in the form of maternity or death benefits similar policies and each household is able to predict with a are essentially current grants designed to cover the reasonable degree of certainty what they will receive and increased consumption expenditures occasioned by births when. Such policies therefore constitute the acquisition and or deaths, even though the events themselves are obviously disposal of financial assets and are recorded as such in the infrequent. financial accounts of the SNA as components of the change in the life insurance and annuities entitlements. 8.40 It is possible that some cash transfers may be regarded as capital by one party to the transaction and as current by the 8.37 It could be argued that pension schemes function in a other. For example, the payment of an inheritance tax may manner similar to life insurance schemes and that they be regarded as a capital transfer by the household but as a should be treated as savings schemes of individual current transfer by government. Similarly, a large country households. There are three reasons in the SNA why the that regularly makes investment grants to a number of designation of social insurance scheme is used to cover smaller countries may regard the outlays as current, even employment-related pensions, a designation that brings though they may be specifically intended to finance the with it the recording of contributions and benefits as acquisition of assets. In an integrated system of accounts transfers. The first is that social security is essentially a such as the SNA, however, it is not feasible to have the process of redistribution across a wide section of the same transaction classified differently by the two parties. population with many individuals contributing so that those Accordingly, a transfer should be classified as capital for in need may benefit. A second reason is that pensions both parties if it clearly involves a transfer of an asset for provide a regular and stable source of funding post- one of the parties. retirement. In other economic applications, such as surveys of income and expenditure, pensions are regarded as income rather than dis-saving. The third reason for treating 2. The recording of transfers pensions as income rather than dis-saving is that they frequently cease when the pensioner (or survivor) dies. In this respect, pension entitlements are distinct from other 8.41 Although no good, service or asset is received in return as a financial assets that are unaffected by the death of the direct counterpart to a transfer, the recording of a transfer owner. nevertheless must give rise to four entries in the accounts. The ways in which transfers (whether in cash or in kind) and social transfers in kind are recorded are shown below 1. The distinction between current and capital in the following examples. transfers Transfers in cash 8.38 Transfers may be either current or capital. In order to distinguish one from the other, it is preferable to focus on the special characteristics of capital transfers. As noted 8.42 The first example is of a current transfer in cash, such as the above, a capital transfer is one that is linked to the payment of a social security benefit in cash. The transfer is acquisition or disposal of an asset, either financial or non- recorded as payable by the social security fund and financial. Institutional units must be capable of receivable by the household in the secondary distribution of distinguishing capital from current transfers and must be income account. (If the transfer were a capital transfer, it presumed to treat capital transferred during the course of would be recorded in the capital account instead of the the accounting period in the same way as capital held secondary distribution of income account.) The throughout the period. For example, a prudent household consequence of the transfer is a reduction in the financial will not treat a capital transfer that happens to be received assets (or increase in the financial liabilities) of the social during a particular period as being wholly available for security scheme and an increase in the financial assets of final consumption within the same accounting period. the household. The eventual use of the cash by the Conversely, a household making a capital transfer (for household is recorded subsequently as a separate example, the payment of an inheritance tax) will not plan to transaction. 162 The redistribution of income accounts Household Social security fund NPISH Enterprise A Enterprise B Resources/ Resources/ Resources/ Resources/ Resources/ Uses/ Changes Changes in Uses/ Changes Changes in Uses/ Changes in Uses/ Changes in Uses/ Changes in in assets liabilities and net in assets liabilities and net Changes in liabilities Changes in liabilities Changes in liabilities worth worth assets and net assets and net assets and net Secondary worth worth worth Transfer Transfer Distribution of Secondary receivable Payable Transfer Transfer income account Distribution of Increase in Decrease in receivable Payable income account Financial account financial asset financial asset Increase in Decrease in Financial account financial financial asset asset Provisions of goods and services by enterprises Production Output/sale account of medicine Use of income Expenditure 8.43 The next example is of an enterprise producing medicines account on medicine that donates some of its output free of charge to a charity Decrease in Increase in (NPISH). As mentioned above, two transactions should be Financial account financial financial recorded, each with four entries. In this example, the first is asset asset the provision of a transfer by the enterprise to the NPISH, the second is the purchase of the medicine by the NPISH using the funds made available by the transfer. Both Social transfers in kind transactions imply two entries in the financial account and, if both transactions are completed in the same accounting 8.45 In the SNA, final consumption expenditure is incurred only period, these changes in financial assets will cancel each by general government, NPISHs and households. All other for both units involved, leaving only four entries consumption expenditure by households is incurred on their apparent in the accounts. However, if there is a difference own behalf. Consumption expenditure by general in the timing between when the transfer is recorded and government, on the other hand, is either for the benefit of when the delivery of the medicine takes place, it will be the community at large (collective consumption) or for the necessary to include the entries in the financial accounts, benefit of individual households. This distinction between specifically under other accounts receivable or payable. collective and individual consumption expenditure is of considerable importance in the SNA and is discussed in NPISH Enterprise detail in chapter 9. Consumption expenditures by general Resources/ Resources/ government and NPISHs on behalf of households (their Uses/ Changes Changes in Uses/ Changes Changes in individual consumption expenditures) are undertaken for in assets liabilities and net in assets liabilities and net worth worth the purpose of making social transfers in kind. They cover Secondary the non-market output of both general government and Transfer Transfer Distribution of receivable Payable NPISHs delivered to households free, or at prices that are income account not economically significant, as well as goods and services Increase in Decrease in Financial account financial asset financial asset bought from market producers and provided to households Production Output/sale of free or at prices that are not economically significant. account medicine Use of income Expenditure on General government account medicine Resources/ Decrease in Increase in Uses/ Changes Changes in Financial account financial asset financial asset in assets liabilities and net worth Output of 8.44 A more complex variant occurs if enterprise A purchases Production education the medicine from enterprise B and then gives it to an account services NPISH. Although A actually purchases the goods from B, Consumption expenditure of they do not form part of A's intermediate consumption or Use of income education capital formation. Nor can they be recorded as final account services consumption by A, since it is an enterprise. As before, a cash transfer is imputed from enterprise A to the NPISH 8.46 The next example is of an education service provided to a and an imputed purchase by the NPISH. If both household by a non-market producer owned by a transactions occur in the same accounting period, the two government unit. The provision of the service is actually entries of the financial account for the NPISH will cancel, recorded twice in the accounts of the SNA. First, it is leaving only six of the eight entries apparent in the recorded in the traditional way in national accounting as accounts. output by government in the production account and final consumption expenditure of government in the use of income account. As this transaction is recorded as an internal transaction within government, it leads to only two, not four entries, in the accounts, both being recorded under general government. 8.47 This method of recording does not portray the fact that in reality the education service is actually provided to a household as a social transfer in kind paid for by government. 163 System of National Accounts Household General government When explicitly recording social transfers in kind, the entry Resources/ Resources/ for the consumption expenditure by government is replaced Uses/ Changes Changes in Uses/ Changes Changes in by two entries for the social transfers in kind and one for in assets liabilities and net in assets liabilities and net worth worth actual consumption by households. The entries for the Output of financial account remain as under the normal recording of Production education government purchases. account services Redistribution of Social transfers income in kind in kind Social transfer in Household General government Enterprise account receivable kind payable Resources/ Resources/ Resources/ Actual Uses/ Changes in Uses/ Changes in Uses/ Changes in Use of adjusted consumption of Changes in liabilities Changes in liabilities Changes in liabilities disposable education assets and net assets and net assets and net income account services worth worth worth Production Output/sale account of medicine 8.48 For a social transfer in kind, the consumption of the Social Social education service is recorded as actual consumption by Redistribution of transfers in transfer in households in the use of adjusted disposable income income in kind kind kind account receivable payable account. The resources for this are provided via social Use of adjusted Actual transfers in kind from government to households in the disposable consumption redistribution of income in kind account. (The distinction income account of medicine between actual consumption and consumption expenditure Decrease in Increase in for households, general government and NPISHs is further Financial account financial financial asset asset elaborated in chapter 9.) 8.49 The final example is a more complex case involving two 8.51 This example also covers the case in which the household interrelated transactions in which a government unit, or purchases the medicine directly from a pharmacist and is NPISH, purchases a good or service, such as a medicine, then reimbursed by the social security fund, other from a market producer and then provides it free to a government unit or NPISH that ultimately bears the cost. In household. this case, the household is not recorded as actually incurring any expenditure, the expenditure being attributed 8.50 Under the normal recording in the SNA, four entries would to the social security fund or other unit that ultimately bears be required showing the sale of the medicine by the the cost. Any difference between the time when the enterprise and the purchase as final consumption household incurs the expense and the time when it is expenditure of government with consequences for the reimbursed is shown as an other account receivable (by financial accounts for both units. The purchase would be households) and payable (by the unit ultimately bearing the recorded as consumption expenditure by government. cost). C. Current taxes on income, wealth, etc. 1. Taxes in general wealth of the household or its members, for example, poll taxes. 8.52 Taxes are compulsory, unrequited payments, in cash or in 8.53 The general nature of taxes and the accounting rules kind, made by institutional units to government units. governing their recording in the SNA were described in They are transfers because the government provides paragraphs 7.80 to 7.86. For convenience, these paragraphs nothing directly in return to the individual unit paying the are repeated below. tax, although governments do provide goods and services to the community as a whole or to individual units, or groups of units, depending on their general economic and Taxes versus fees social policy. Current taxes on income, wealth, etc. consist mainly of taxes levied on the incomes of households and 8.54 One of the regulatory functions of governments is to forbid corporations. They constitute charges against income and the ownership or use of certain goods or the pursuit of are recorded under uses for the households and certain activities, unless specific permission is granted by corporations sectors in the secondary distribution of income issuing a licence or other certificate for which a fee is account. The taxes may also be payable by non-residents or demanded. If the issue of such licences involves little or no possibly by government units or NPISHs. Current taxes on work on the part of government, the licences being granted income, wealth, etc. were described as "direct taxes" in the automatically on payment of the amounts due, it is likely past, but the terms "direct" and "indirect" are no longer that they are simply a device to raise revenue, even though used in the SNA, as explained in chapter 7. The taxes the government may provide some kind of certificate, or cannot be described simply as "current taxes on income and authorization, in return. However, if the government uses wealth" because they include some periodic taxes on the issue of licences to exercise some proper regulatory households that are assessed neither on the income nor the function, for example, checking the competence, or 164 The redistribution of income accounts qualifications, of the person concerned, checking the However, some economic activities, transactions or events, efficient and safe functioning of the equipment in question, which under tax legislation ought to impose on the units or carrying out some other form of control that it would concerned the obligation to pay taxes, permanently escape otherwise not be obliged to do, the payments made should the attention of the tax authorities. It would be unrealistic to be treated as purchases of services from government rather assume that such activities, transactions or events give rise than payments of taxes, unless the payments are clearly out to financial assets or liabilities in the form of payables and of all proportion to the costs of providing the services. The receivables. For this reason the amounts of taxes to be borderline between taxes and payments of fees for services recorded in the SNA are determined by the amounts due for rendered is not always clear-cut in practice (see paragraph payment only when evidenced by tax assessments, 8.64 (c) for a further explanation of this matter in the case declarations or other instruments, such as sales invoices or of households). customs declarations, that create liabilities in the form of clear obligations to pay on the part of taxpayers. (In Links with the IMF and OECD tax classifications determining the amount of tax accruing, care must be taken not to include tax unlikely ever to be collected.) Nevertheless, in accordance with the accrual principle, the 8.55 The coverage of taxes in the SNA coincides with that of times at which the taxes should be recorded are the times at "tax revenue" as defined in the GFSM2001, and also with which the tax liabilities arise. For example, a tax on the "taxes" as defined in Revenue Statistics. In contrast to the sale, transfer or use of output should be recorded when that latter, the SNA includes imputed taxes or subsidies sale, transfer or use took place, which is not necessarily the resulting from the operation of official multiple exchange same time as that at which the tax authorities were notified, rates, imputed taxes and subsidies resulting from a central at which a tax demand was issued, at which the tax was due bank imposing interest rates above or below the market rate to be paid or the payment was actually made. Some and does not classify social security contributions under the flexibility is permitted, however, as regards the time of heading of taxes. Chapter 5 of the GFSM2001 contains a recording of income taxes deducted at source (see detailed listing and classification of taxes according to the paragraph 8.61). nature of the tax. Annex A of Revenue Statistics contains a closely related classification. 8.59 In some countries, and for some taxes, the amounts of taxes eventually paid may diverge substantially and 8.56 The categories of tax distinguished in the SNA depend on systematically from the amounts due to be paid to the the interaction of the following three factors, of which the extent that not all of the latter can be effectively construed nature of tax is only one: as constituting financial liabilities as these are understood within the SNA. In such cases, it may be preferable for a. The nature of the tax, as specified in the GFSM2001/ analytic and policy purposes to ignore unpaid tax liabilities OECD classification; and confine the measurement of taxes within the SNA to those actually paid. Nevertheless, the taxes actually paid b. The type of institutional unit paying the tax; should still be recorded on an accrual basis at the times at which the events took place that gave rise to the liabilities. c. The circumstances in which the tax is payable. Interest, fines or other penalties 8.57 Thus, payments of exactly the same tax may be recorded under two different headings in the SNA. For example, 8.60 In principle, interest charged on overdue taxes or fines, or payment of an excise duty may appear under "taxes on penalties imposed for the attempted evasion of taxes, imports, except value added taxes (VAT) and duties" or should be recorded separately and not as taxes. However, it under "taxes on products, except VAT, import and export may not be possible to separate payments of interest, fines taxes" depending upon whether the excise duty is paid on or other penalties from the taxes to which they relate, so an imported or domestically produced good. Similarly, that in practice they are usually grouped with taxes. payments of an annual tax on automobiles may be recorded under "other taxes on production" or under "current taxes 2. Taxes on income on income, wealth, etc." depending upon whether the tax is paid by an enterprise or by a household. For this reason, it is not possible to arrive at the SNA categories simply by 8.61 Taxes on income consist of taxes on incomes, profits and regrouping the GFSM2001/OECD classifications. capital gains. They are assessed on the actual or presumed However, in order to take advantage of the existence of incomes of individuals, households, NPISHs or these detailed classifications, each category of tax listed corporations. They include taxes assessed on holdings of below contains a cross-reference to the corresponding property, land or real estate when these holdings are used as GFSM2001 and OECD classifications. It should be noted, a basis for estimating the income of their owners. In some though, that the SNA categories are included within the cases the liability to pay income taxes can only be GFSM2001 and OECD categories but may not be identical determined in a later accounting period than that in which with them. the income accrues. Some flexibility is therefore needed in the time at which such taxes are recorded. Income taxes deducted at source, such as pay-as-you-earn taxes and The accrual basis of recording regular prepayments of income taxes, may be recorded in the periods in which they are paid and any final tax liability 8.58 All taxes should be recorded on an accrual basis in the on income can be recorded in the period in which the SNA, that is, when the activities, transactions or other liability is determined. Taxes on income include the events occur that create the liabilities to pay taxes. following types of taxes: 165 System of National Accounts a. Taxes on individual or household income: These a. Current taxes on land and buildings: These consist of consist of personal income taxes, including those taxes payable periodically, in most cases annually, on deducted by employers (pay-as-you-earn taxes), and the ownership of land or buildings excluding taxes on surtaxes. Such taxes are usually levied on the total land or buildings rented or owned by enterprises and declared or presumed income from all sources of the used by them in production including use for owner- person concerned: compensation of employees, occupied dwelling services (GFSM2001, 1131; OECD, property income, pensions, etc., after deducting certain 4100); agreed allowances. Taxes on the income of owners of unincorporated enterprises are included here (GFSM2001, 1111; OECD, 1110); b. Current taxes on net wealth: These consist of taxes payable periodically, in most cases annually, on the value of land or fixed assets less any debt incurred on b. Taxes on the income of corporations: These consist of those assets, excluding taxes on assets owned by corporate income taxes, corporate profits taxes, enterprises and used by them in production corporate surtaxes, etc. Such taxes are usually assessed (GFSM2001, 1132; OECD, 4200); on the total incomes of corporations from all sources and not simply profits generated by production (GFSM2001, 1112; OECD, 1210); c. Current taxes on other assets: These include taxes payable periodically, usually annually, on assets such as jewellery or other external signs of wealth c. Taxes on capital gains: These consist of taxes on the (GFSM2001, 1136; OECD, 4600). capital gains (described as holding gains in the SNA) of persons or corporations that become due for payment during the current accounting period, irrespective of the Miscellaneous current taxes periods over which the gains have accrued. They are usually payable on nominal, rather than real, capital gains and on realized, rather than unrealized, capital 8.64 Miscellaneous current taxes consist of various different gains (GFSM2001, 1111-1113; OECD, 1120, 1220); kinds of taxes payable periodically, usually annually, of which the most common are the following: d. Taxes on winnings from lotteries or gambling: These are taxes payable on the amounts received by winners a. Poll taxes: These are taxes levied as specific amounts as distinct from taxes on the turnover of producers that of money per adult person, or per household, organize gambling or lotteries, which are treated as independently of actual or presumed income or wealth. taxes on products (GFSM2001, 1111-113; OECD, The amounts levied may vary, however, according to 1120). the circumstances of the person or household (GFSM2001, 1162; OECD, 6000); 8.62 The calculation of taxes due on income frequently exempts some part of income from taxes; such exemptions being b. Expenditure taxes: These are taxes payable on the total described as tax allowances. In addition, or as an expenditures of persons or households instead of on alternative, a government may determine an amount that is their incomes. Expenditure taxes are alternatives to treated as if it is tax already paid; such an amount is called a income taxes and may be levied at progressively higher tax credit. In some cases, if the tax due is less than the tax rates in the same way as personal income taxes, credit, the balance may be payable to the beneficiary; this is depending upon the total level of expenditure. They are called a payable tax credit. There is more discussion on tax uncommon in practice (GFSM2001, 1162; OECD, credits in chapter 22. 6000); 3. Other current taxes c. Payments by households to obtain certain licences: Payments by persons or households for licences to own or use vehicles, boats or aircraft and for licences for Current taxes on capital recreational hunting, shooting or fishing are treated as current taxes. Payments for all other kinds of licences (for example, driving or pilot's licences, television or 8.63 Current taxes on capital consist of taxes that are payable radio licences, firearm licences, etc.) or fees to periodically, usually annually, on the property or net government (for example, payments for passports, wealth of institutional units, excluding taxes on land or airport fees, court fees, etc.) are treated as purchases of other assets owned or rented by enterprises and used by services rendered by governments. The boundary them for production, such taxes being treated as other between taxes and purchases of services is based on the taxes on production. They also exclude taxes on property practices actually followed in the majority of countries or wealth levied infrequently and at irregular intervals, or in in their own accounts (GFSM2001, 11451 and 11452; exceptional circumstances (for example, death duties), such OECD, 5200); taxes being treated as capital taxes. They also exclude income taxes assessed on the basis of the value of the property owned by institutional units when their incomes d. Taxes on international transactions: These consist of cannot be estimated satisfactorily, such taxes being taxes on travel abroad, foreign remittances, foreign recorded under the previous heading, taxes on income. investments, etc. except those payable by producers Current taxes on capital include the following: (GFSM2001, 1155 and 1156; OECD, 5127). 166 The redistribution of income accounts D. Social insurance schemes 8.65 A social insurance scheme is an insurance scheme where the form of treatment or care provided free or at prices the following two conditions are satisfied: that are not economically significant, or by reimbursing expenditures made by households. Social insurance a. the benefits received are conditional on participation benefits in cash may also be payable to beneficiaries in the scheme and constitute social benefits as this needing health care; term is used in the SNA; and b. The beneficiaries have to support dependants of various b. at least one of the three conditions following is met: kinds: spouses, children, elderly relatives, invalids, etc. The social insurance benefits are usually paid in cash in · Participation in the scheme is obligatory either by law the form of regular dependants' or family allowances; or under the terms and conditions of employment of an employee, or group of employees; c. The beneficiaries suffer a reduction in income as a result of not being able to work full-time. The social · The scheme is a collective one operated for the benefit insurance benefits are usually paid regularly in cash for of a designated group of workers, whether employed the duration of the condition. In some instances a lump or non-employed, participation being restricted to sum may be provided additionally or instead of the members of that group; regular payment. People may be prevented from working for various different reasons, including involuntary unemployment, including temporary lay- · An employer makes a contribution (actual or offs and short-time working, and sickness, accidental imputed) to the scheme on behalf of an employee, injury, the birth of a child, etc. that prevents a person whether or not the employee also makes a from working, or from working full-time; contribution. d. The beneficiaries suffer a reduction in income because Social insurance schemes may be organized privately or by of the death of the main income earner. The social government units. Social insurance benefits may be insurance benefits are usually paid in cash in the form provided in cash or in kind. They become payable when of regular allowances or, in some instances, a lump certain events occur, or certain circumstances exist, that sum; may adversely affect the welfare of the households concerned either by imposing additional demands on their resources or reducing their incomes. The contingencies e. The beneficiaries are provided with housing either free covered are liable to vary from scheme to scheme. or at prices that are not economically significant or by However, the identification of certain receivables as social reimbursing expenditure made by households; insurance benefits depends not just on the contingencies covered but also the way in which coverage is provided. f. The beneficiaries are provided with allowances to cover education expenses incurred on behalf of 1. The extent of social benefits themselves or their dependants; education services may occasionally be provided in kind. 8.66 Social benefits may be payable under social insurance schemes or social assistance but similar circumstances may 8.69 The above are typical circumstances in which social be covered under both. benefits are payable. However, the list is illustrative rather than exhaustive. It is possible, for example, that under some 8.67 Social benefits may be divided into two main classes; schemes other benefits may be payable. Conversely, by no pensions and all other social benefits, described in the SNA means do all schemes provide benefits in all the as non-pension benefits. The most important type of circumstances listed above. In practice, the scope of social pension is one paid to an individual when they cease benefits is liable to vary significantly from country to employment on retirement. Pensions may also be payable country, or from scheme to scheme within the same to other individuals, for example a bereaved spouse or country. someone suffering from a permanent disability. Payments made while a person is temporarily unemployed or 8.70 In cases where no qualifying contribution has to have been suffering a medical condition that prevents them from paid in order to receive benefits, these are treated as part of working for a period are treated as non-pension benefits. social assistance. Typically social assistance is provided by government to all persons who are in need without any 8.68 Six kinds of circumstances illustrate when non-pension formal requirement to participate as evidenced by the social benefits may be payable as follows: payment of contributions, for example. The extent of social assistance varies very considerably from country to a. The beneficiaries, or their dependants, require medical, country. In many countries, benefits are only payable to dental or other treatments, or hospital, convalescent or people on low incomes. This is often described as saying long-term care, as a result of sickness, injuries, the benefits are "means-tested", where the term "means" is maternity needs, chronic invalidity, old age, etc. The used in the sense of indicating a maximum qualifying level social insurance benefits are usually provided in kind in of income. 167 System of National Accounts 2. The organization of social insurance 8.73 Many social insurance schemes are organized collectively schemes for groups of workers so that those participating do not have to take out individual insurance policies in their own names. In such cases, there is no difficulty about 8.71 Social insurance schemes are intended to cover distinguishing social insurance from insurance taken out on beneficiaries and their dependants during their working a personal basis. However, some social insurance schemes lives and usually also into retirement, whether they are may permit, or even require, participants to take out employees, employers, own-account workers, or persons policies in their own names. In order for an individual temporarily without employment. Eligibility for social policy to be treated as part of a social insurance scheme the insurance benefits requires social contributions to have eventualities or circumstances against which the been paid by, or on behalf of, the beneficiaries or their participants are insured must be of the kind listed in dependants in the current or previous accounting periods. paragraph 8.65, and in addition, one or more of the As already noted, the social contributions may be payable following conditions must be satisfied: not only by the participants themselves but also by employers on behalf of their employees. a. Participation in the scheme is obligatory either by law for a specified category of worker, whether employer or 8.72 Social insurance schemes must be organized collectively non-employed, or under the terms and conditions of for groups of workers or be available by law to all workers employment of an employee, or group of employees; or designated categories of workers, possibly including non-employed persons as well as employees. They may b. The scheme is a collective one operated for the benefit range from private schemes arranged for selected groups of of a designated group of workers, whether employees workers employed by a single employer to social security or non-employed, participation being restricted to schemes covering the entire labour force of a country. members of that group; Participation in such schemes may be voluntary for the workers concerned, but it is more common for it to be c. An employer makes a contribution (actual or imputed) obligatory. For example, participation in schemes to the scheme on behalf of an employee, whether or not organized by individual employers may be required by the the employee also makes a contribution. terms and conditions of employment collectively agreed between employers and their employees. Participation in nationwide social security schemes organized by The premiums payable, and claims receivable, under government units may be compulsory by law for the entire individual policies taken out under a social insurance labour force, except perhaps for persons who are already scheme are recorded as social contributions and social covered by private schemes. insurance benefits. Table 8.3:The secondary distribution of income account - with details for taxes and social contributions - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Current transfers 98 277 248 582 7 1 212 17 1 229 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 Taxes on income 20 7 0 176 0 203 1 204 Other current taxes 4 3 0 2 0 9 9 Net social contributions 333 333 0 333 Employers' actual social contributions 181 181 0 181 Employers' actual pension contributions 168 168 0 168 Employers' actual non-pension contributions 13 13 0 13 Employers' imputed social contributions 19 19 0 19 Employers' imputed pension contributions 18 18 0 18 Employers' imputed non-pension contributions 1 1 0 1 Households' actual social contributions 129 129 0 129 Households' actual pension contributions 115 115 0 115 Households' actual non-pension contributions 14 14 0 14 Households' social contributions supplements 10 10 0 10 Households' pension contribution supplements 8 8 0 8 Households' non-pension contribution supplements 2 2 0 2 Social insurance scheme service charges 6 6 0 6 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 Other current transfers 12 62 136 71 2 283 16 299 Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 168 The redistribution of income accounts 8.74 Social insurance schemes are essentially schemes in which enterprise owned by a household operates a social workers are obliged, or encouraged, by their employers or insurance scheme for the benefit of its employees. by general government to take out insurance against certain eventualities or circumstances that may adversely affect 8.76 All social insurance schemes are founded on an their welfare or that of their dependants. When individuals employment relationship even if the participants are self- take out insurance policies in their own names, on their employed or currently unemployed. Two main types of own initiative and independently of their employers or social insurance schemes may be distinguished: government, the premiums payable and claims receivable are not treated as social contributions and social insurance benefits, even though the policies may be taken out against a. The first consists of social security schemes covering the same kinds of eventualities or situations as are covered the entire community, or large sections of the by social insurance schemes such as accident, ill health, community, that are imposed, controlled and financed retirement, etc. The premiums payable and claims by government units. Pensions payable under these receivable under such individual insurance policies are schemes may or may not be related to levels of salary recorded as current transfers in the secondary distribution of the beneficiary or history of employment. Non- of income account in the case of non-life insurance, while pension benefits are less frequently linked to salary the premiums payable and claims receivable under levels. individual life insurance policies are recorded as acquisitions and disposals of financial assets in the b. The second type consists of other employment-related financial account. schemes. These schemes derive from an employer- employee relationship in the provision of pension and 8.75 As can be seen from the consideration of individual possibly other entitlements that are part of the insurance policies, the nature of the benefit is by no means conditions of employment and where responsibility for sufficient to identify the social nature of the transactions. the provision of benefits does not devolve to general For example, the receipt of free medical services does not government under social security provisions. always constitute a social benefit. If the medical services received by one household are paid for by another, they are Making this distinction is difficult in some countries where not social benefits but transfers between households. First the ultimate responsibility for administering the scheme aid rendered to employees at work is not a social benefit, and paying benefits is undertaken by government on behalf the costs involved being recorded as intermediate of many employers not working for general government. In consumption of the employer. In general, social benefits countries where there is no such arrangement, social cannot be provided by one household to another except in insurance schemes organized by government units for their the relatively rare case in which an unincorporated own employees, as opposed to the working population at Table 8.3 (cont):The secondary distribution of income account - with details for taxes and social contributions - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 Current taxes on income, wealth, etc. 213 213 0 213 Taxes on income 204 204 0 204 Other current taxes 9 9 9 Net social contributions 66 213 50 0 4 333 0 333 Employers' actual social contributions 31 110 38 0 2 181 0 181 Employers' actual pension contributions 27 104 35 0 2 168 0 168 Employers' actual non-pension contributions 4 6 3 0 0 13 0 13 Employers' imputed social contributions 12 2 4 0 1 19 0 19 Employers' imputed pension contributions 12 1 4 0 1 18 0 18 Employers' imputed non-pension contributions 0 1 0 0 0 1 0 1 Households' actual social contributions 25 94 9 0 1 129 0 129 Households' actual pension contributions 19 90 6 0 0 115 0 115 Households' actual non-pension contributions 6 4 3 0 1 14 0 14 Households' social contributions supplements 10 10 0 10 Households' pension contribution supplements 8 8 0 8 Households' non-pension contribution supplements 2 2 0 2 Social insurance scheme service charges 2 3 1 6 0 6 Social benefits other than social transfers in kind 384 384 0 384 Other current transfers 6 62 104 36 36 244 55 299 169 System of National Accounts large, should, if possible, be included in the group of other may choose to pay voluntarily in order to qualify for the employment-related schemes and not remain within social receipt of social security benefits. security schemes. Other employment-related social insurance Social security schemes schemes 8.77 In many countries, social security schemes are by far the most important category of social insurance schemes and it 8.78 The terms of employment-related social insurance schemes is worth summarizing their main characteristics. Social are determined by employers, possibly in conjunction with security schemes are schemes imposed, controlled and their employees and may be administered by the employers financed by government units for the purpose of providing themselves. Very often, though, the funds may form a social benefits to members of the community as a whole, or separate institutional unit (an autonomous pension fund) or of particular sections of the community. When social may be managed by an insurance corporation on behalf of security funds are established for this purpose and are the employer. organized and managed separately from other government funds, they are treated as separate institutional units. Their 8.79 Not all employment-related social insurance schemes are receipts consist mainly of contributions paid by individuals adequately funded. In the secondary distribution of income and by employers on behalf of their employees, but they account, transactions are recorded as if the schemes are may also include transfers from other government funds. adequately funded and any discrepancies are recorded in The payment of social security contributions by, or on the financial account under other accounts receivable or behalf of, certain specified individuals, such as employees, payable. A complete overview of the recording of pension is generally compulsory by law, but some other individuals schemes is given in part 2 of chapter 17. E. Net social contributions 8.80 In the SNA, all contributions to social insurance schemes employed persons. A third element consists of contribution are shown as made by households. There are, however, supplements, or imputed payments by households, which several elements to the amounts paid. The first is the represent the return to the pension fund of the property amount of contributions made by the employer on behalf of income earned on the start of year pension entitlement and the employee. This amount is part of compensation of on any reserves established for non-pension benefits. These employees and is received by households in the generation are attributed to households in the allocation of primary of income account and thus forms part of the balance of income account and, like the employers' contributions, are primary income of households. The second element included in the balance of primary incomes for households. consists of actual payments made by households in the Set against these is the service fee charged by the unit current period to cover their share of the pension and other administering the pension scheme. This may be an explicit provisions relating to the current period. These payments charge made by a unit separate from the employer or may may be made by employees, self-employed persons or non- be the sum of costs incurred by the employer in Table 8.4:The secondary distribution of income account - with details of social benefits - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Current transfers 98 277 248 582 7 1 212 17 1 229 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 Net social contributions 333 333 0 333 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 Social security benefits in cash 53 53 0 53 Social security pension benefits 45 45 0 45 Social security non-pension benefits in cash 8 8 0 8 Other social insurance benefits 62 205 7 0 5 279 0 279 Other social insurance pension benefits 49 193 5 0 3 250 0 250 Other social insurance non-pension benefits 13 12 2 0 2 29 0 29 Social assistance benefits in cash 52 52 52 Other current transfers 12 62 136 71 2 283 16 299 Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 170 The redistribution of income accounts administering the scheme if it is not a separate unit. 2. Employers' actual social contributions Depending on the nature of the scheme, either the contribution by the employer or the property income 8.83 This item is exactly the same as that recorded in the includes the value of the service charge. allocation of primary income account and described in paragraph 7.62. 8.81 Table 8.3 shows table 8.1 with social contributions 3. Employers' imputed social contributions disaggregated according to these criteria. For practical reasons, the tables show the employers' contributions and 8.84 This item is exactly the same as that recorded in the property income at the same value as recorded in the allocation of primary income account and described in distribution of primary income account with the service paragraphs 7.63 to 7.69. charge shown separately. This charge, though, is not a redistributive transaction but part of output and 4. Households' actual social contributions consumption expenditure. It is included in the table to clarify the way in which social insurance is funded. Each 8.85 Households' actual social contributions are social contributions payable on their own behalf by employees, heading is discussed briefly in turn below. A more self-employed or non-employed persons to social extensive discussion of the transactions to be recorded for insurance schemes. They are recorded on an accrual basis. pension schemes is given in part 2 of chapter 17. For those in work, this is at the times when the work that gives rise to the liability to pay the contributions is carried out. 1. Components of social contributions 5. Households' social contribution 8.82 Net social contributions are the actual or imputed supplements contributions made by households to social insurance schemes to make provision for social benefits to be paid. 8.86 Households' social contribution supplements consist of Fees charged by the administrators of the schemes are the property income earned during the accounting period on the stock of pension and non-pension entitlements. excluded from contributions payable. These fees are This amount is included in property income payable by the treated as consumption expenditure by households in the administrators of pension funds to households in the use of income account. allocation of primary income account. Table 8.4 (cont):The secondary distribution of income account - with details of social benefits - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 Current taxes on income, wealth, etc. 213 213 0 213 Net social contributions 66 213 50 0 4 333 0 333 Social benefits other than social transfers in kind 384 384 0 384 Social security benefits in cash 53 53 0 53 Social security pension benefits 45 45 0 45 Social security non-pension benefits in cash 8 8 0 8 Other social insurance benefits 279 279 0 279 Other social insurance pension benefits 250 250 0 250 Other social insurance non-pension benefits 29 29 0 29 Social assistance benefits in cash 52 52 52 Other current transfers 6 62 104 36 36 244 55 299 171 System of National Accounts F. Social benefits other than social transfers in kind 8.87 Social benefits are current transfers received by households cannot be sustained for ever without intervention to raise intended to provide for the needs that arise from certain contributions, lower benefits or both. events or circumstances. Benefits are divided into two groups, the first consists of pensions and the second of all 8.92 Social assistance is distinguished from social security in other benefits, described as non-pension benefits. These that eligibility to receive social assistance benefits is not cover, for example, payments due in respect of sickness, dependent on having elected to participate as demonstrated unemployment, housing, education or family by the payment of contributions. Usually all members of circumstances. resident households are entitled to apply for social assistance but the conditions under which it is granted are 8.88 The way in which the receipt of social benefits is recorded often restrictive. Frequently there is an assessment of in the accounts depends on a number of intersecting factors. available income in relation to the perceived needs of a As well as the type of social benefit, pension or non- household and only those households falling below a given pension, it is necessary to specify whether the benefits are threshold may be entitled to this type of social assistance. payable under a social insurance scheme or not, whether (This process is often described as "means-testing".) they are paid by government or not and whether they are paid in cash or not. The following sections discuss the 8.93 The extent to which social assistance provides incomes to different institutional arrangements for paying benefits, households varies extensively from country to country. In then the different types of benefits before summarizing how some countries, indeed, there is no social security and all these appear in the accounts. provision by government of income to meet social needs is provided without contribution but this is not the general 1. Institutional arrangements case. Social insurance schemes or social assistance 2. Types of social benefits 8.89 Social benefits may be payable as part of a social insurance 8.94 Social benefits may be paid under three different sorts of scheme or by government as social assistance. Unlike institutional arrangements. They may be paid by social assistance, all social insurance schemes require government as either social assistance or social security or formal participation by the beneficiaries. This participation they may be paid by other employment related social is linked to employment and is usually evidenced by the insurance schemes. Pensions under all three arrangements payment of contributions to the scheme either by the are recorded in a similar way but with a distinction drawn participants, an employer or both. Social security is an between those that are made under social assistance and important kind of social insurance and like social those that are made under social insurance. Non-pension assistance, is provided by government. It is therefore benefits payable in cash are also recorded in a similar way necessary to determine when a social benefit provided by but with a distinction drawn between those that are made government is made as part of social security and when it is under social assistance and those that are made under social part of social assistance. insurance. Non-pension benefits payable in kind are recorded differently for those payable by government, Social security and social assistance whether as social assistance or social security. 8.90 There is a fundamental difference between government Pensions provision of benefits under social security and under social assistance although the proportion of benefits allocated to 8.95 The main social benefit payable in cash is pension one or the other heading varies considerably from country provision for retirees. However, others may be entitled to to country depending on national institutional pensions, for example widows and the permanently arrangements. disabled. Pensions are almost always paid in cash though there may be some circumstances where housing is 8.91 Social security is one form of a social insurance scheme. available free or at a reduced rate to some pensioners in The beneficiary is enrolled in the scheme or participates which case the value of this housing benefit is treated as usually by paying a contribution to the scheme or having part of the cash payment with the same amount showing as one paid to the scheme on his behalf. The payment may be purchase of housing services from the provider. made by the employer or a family member or even in some cases by government itself (perhaps for the duration of 8.96 As noted, pensions payable under social insurance pensions unemployment, for instance). Because it is a contributory are distinguished from those payable as social assistance. scheme, there is some sort of contract between the government and the beneficiaries. In some countries this contract has a strict legal form and cannot be altered Non-pension benefits payable in cash retrospectively; in others the contract is much looser and retroactive adjustments are possible. For all social security 8.97 While the nature of a pension payment is generally schemes, the difference between the contributions unambiguous, other social insurance payments must be receivable and the benefits payable is monitored in the carefully distinguished from other payments made to context of the government budget since persistent deficits households. Once such payments are eliminated, non- 172 The redistribution of income accounts pension benefits in cash are recorded under social insurance scheme is recorded as paid to the employee and the non-pension benefits and social assistance benefits in cash. expenditure on the health service is then recorded as being undertaken by the employee. The rationale for this is that a private social insurance scheme operates simply as a Receivables by households that are not social financial corporation and cannot have final consumption benefits expenditure. Some services provided by an employer are regarded as intermediate consumption by the employer, for example a medical service at the workplace to provide 8.98 Government may make payments to a household in respect assistance to someone falling ill at work or training that it is of the production activities of the household. An example in the interests of the employer that the employee should might be a payment to encourage the production of a undertake. However, general health and education particular agricultural crop. Such payments are treated as provision via a social insurance scheme are part of the subsidies to the household enterprise. Less common, but compensation package of the employee and not part of the conceptually possible, is if government made a payment to intermediate consumption of the employer. permit the household to acquire a fixed asset for use in production, this would be recorded as an investment grant (a capital transfer). Benefits provided in kind by government 8.99 An employer, whether government or not, may provide an employee with equipment that is necessary to carrying out 8.103 Social benefits paid in cash allow households to use this the labour services the employee provides. Examples are cash indistinguishably from income coming from other uniforms or small tools, such as scissors for hairdressers or sources. When social benefits are payable in kind, the bicycles for delivering mail. This equipment is recorded as household has no discretion over the use of the benefit; the intermediate consumption of the employing enterprise and benefits simply relieve the household from having to meet is never recorded as being acquired by the household to these expenses out of income from other sources. However, which the employee belongs. The same convention applies governments all over the world take on responsibility to to services provided to employees carrying out their tasks, provide households with services they can make use of but for example the cost of food and hotel accommodation not trade for other services or exchange them with other when travelling on business is treated as intermediate households. These are the individual services provided by consumption of the employer and not final consumption of government to households either free or at prices that are the employee. not economically significant. These benefits are described as social transfers in kind. They are recorded not in the secondary distribution of income account but in the 8.100 When an employer makes available to the employee a good redistribution of income in kind account as described below or service that the employee does use other than in the in section H. course of his employment, these goods and services are treated as the provision of wages and salaries in kind that are recorded as being in cash with corresponding 8.104 A special case of benefits payable in kind is that of expenditure by the employees on the goods and services. reimbursements, when the household initially makes a cash Examples include the provision of free housing or making a outlay but the government reimburses some or all of the car available to the employee to use for personal purposes expense. For example, when a payment is made by an as well as for business. Typically the value of these goods employee or other member of a resident household for and services will be treated as part of the employee's health or education benefits and these are subsequently income for tax purposes. reimbursed by government, they are not shown as a social insurance benefit and thus as part of compensation of 8.101 Households may receive significant gifts from other employees but as part of the expenditure by government on households, both resident in the same economy and abroad, health services provided to individual household members. or may receive compensation from another unit in respect The expenditure by government on individual services is of an injury sustained or wrongful arrest, for example. Even part of government final consumption expenditure and not though these payments may enable the household to part of household final consumption expenditure nor of improve their standard of living (as might a lottery win compensation of employees. also) they are not treated as social benefits in the SNA. Other current transfers, both those payable and receivable by households and other sectors of the economy also, are 8.105 If a household is reimbursed by government for only a part discussed in more detail in section G. of the health (or other) services provided, the part that is reimbursed is treated as government final consumption expenditure and the part that is not reimbursed by Non-pension benefits payable in kind government as household final consumption expenditure. Only if the employer explicitly agrees to reimburse the part of the expenditure not reimbursed by government is it 8.102 All benefits arising from employment-related social treated as part of compensation of employees. insurance schemes other than social security are recorded as if they are received in cash. Even if the employee does not initially pay for health treatment, for example, but 8.106 All social benefits in kind provided by government are simply sends the bill to his social insurance scheme for treated in the same way with no attempt made to separate payment by them, the amount paid by the social insurance these into social security and social assistance. 173 System of National Accounts 3. Social benefits recorded in the secondary than social security to contributors to the schemes, their distribution of income account dependants or survivors. The benefits are divided between pensions and other benefits. 8.107 Taking the foregoing considerations into account, social benefits recorded in the secondary distribution of income 8.110 Social assistance benefits in cash are current transfers account are structured as follows: payable to households by government units or NPISHs to meet the same needs as social insurance benefits but Social benefits other than social transfers in kind which are not made under a social insurance scheme Social security benefits in cash requiring participation usually by means of social Social security pension benefits contributions. They therefore exclude all benefits paid by Social security non-pension benefits in cash social security funds. The benefits are divided between Other social insurance benefits pensions and other benefits. Other social insurance pension benefits Other social insurance non-pension benefits 8.111 Social assistance benefits do not include current transfers Social assistance benefits in cash. paid in response to events or circumstances that are not normally covered by social insurance schemes. Thus, social 8.108 Social security benefits in cash are social insurance assistance benefits do not cover transfers in cash or in kind benefits payable in cash to households by social security made in response to natural disasters such as drought, funds. The benefits are divided between pensions and non- floods or earthquakes. Such transfers are recorded pension benefits. separately under other current transfers. 8.109 Other employment-related social insurance benefits are 8.112 Table 8.4 shows table 8.1 with the disaggregation of social social benefits payable by social insurance schemes other benefits described here. G. Other current transfers 8.113 Other current transfers consist of all current transfers transfers serving quite different purposes. The four between resident institutional units, or between residents categories are insurance-related transactions, transfers and non-residents, except for current taxes on income, within government, current international cooperation and wealth, etc. and social contributions and benefits. Other miscellaneous current transfers. Each of these is described current transfers include a number of different kinds of in turn below. Table 8.5:The secondary distribution of income account - with details of current transfers - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Current transfers 98 277 248 582 7 1 212 17 1 229 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 Net social contributions 333 333 0 333 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 Other current transfers 12 62 136 71 2 283 16 299 Net non-life insurance premiums 8 13 4 31 0 56 2 58 Net non-life direct insurance premiums 8 0 4 31 0 43 1 44 Net non-life reinsurance premiums 13 13 1 14 Non-life insurance claims 48 48 12 60 Non-life direct insurance claims 45 45 0 45 Non-life reinsurance claims 3 3 12 15 Current transfers within general government 96 96 0 96 Current international cooperation 31 31 1 32 Miscellaneous current transfers 4 1 5 40 2 52 1 53 Current transfers to NPISHs 1 1 5 29 0 36 0 36 Current transfers between resident and non-resident households 7 7 1 8 Other miscellaneous current transfers 3 0 0 4 2 9 0 9 Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 174 The redistribution of income accounts 8.114 Table 8.5 shows table 8.1 with this disaggregation of government and outside any social insurance scheme. Net current transfers. non-life insurance premiums comprise both the actual premiums payable by policyholders to obtain insurance 1. Insurance-related transactions cover during the accounting period (premiums earned) and the premium supplements payable out of the investment income attributed to insurance policyholders 8.115 There are three types of transactions included under the less the service charges payable to the insurance heading of insurance. These are net premiums and claims corporation. The way in which the service charges are related to direct insurance, net premiums and claims related calculated is explained in paragraphs 6.184 to 6.191. After to reinsurance and payments related to standardized deducting the service charges from the sum of non-life guarantees. Each of these is described below. A more insurance premiums and premium supplements, the detailed description of transactions to be recorded for remainder is described as net non-life insurance premiums. insurance appears in part 1 of chapter 17 and for Only the net non-life insurance premiums constitute current standardized guarantees in part 3 of chapter 17. transfers and are recorded in the secondary distribution of income account. The service charges constitute purchases 8.116 It should be noted that in this context "net" as applied to of services by the policyholders and are recorded as premiums implies that the service charge for the insurance intermediate or final consumption, as appropriate. services has been deducted from actual premiums paid plus premium supplements. There is no netting between direct insurance and reinsurance; each is recorded in full and Non-life insurance claims separately from the other. 8.118 Non-life insurance claims are the amounts payable in Net non-life insurance premiums settlement of damages that result from an event covered by a non-life insurance policy during the current 8.117 Non-life insurance policies provide cover against various accounting period. Claims normally become due at the events or accidents resulting in damage to goods or moment when the eventuality occurs that gives rise to a property or harm to persons as a result of natural or human valid claim under the terms of the policy. An exception is causes (for example, fires, floods, crashes, collisions, made in cases where the possibility of making a claim is sinkings, theft, violence, accidents, sickness, etc.) or recognized only long after the event has happened. For against financial losses resulting from events such as example, an important series of claims were recognized sickness, unemployment, accidents, etc. Such policies are only when exposure to asbestos was established as a cause taken out by enterprises, government units, NPISHs or of serious illness. In such cases the claim is recorded at the individual households. The policies taken out by individual time that the insurance company accepts the liability. This households are those taken out on their own initiative and may not be the same time as when the size of the claim is for their own benefit, independently of their employers or agreed on or when the claim is paid. Table 8.5 (cont):The secondary distribution of income account - with details of current transfers - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 Current taxes on income, wealth, etc. 213 213 0 213 Net social contributions 66 213 50 0 4 333 0 333 Social benefits other than social transfers in kind 384 384 0 384 Other current transfers 6 62 104 36 36 244 55 299 Net non-life insurance premiums 47 47 11 58 Net non-life direct insurance premiums 44 44 44 Net non-life reinsurance premiums 3 3 11 14 Non-life insurance claims 6 15 1 35 0 57 3 60 Non-life direct insurance claims 6 1 35 42 3 45 Non-life reinsurance claims 15 15 0 15 Current transfers within general government 96 96 0 96 Current international cooperation 1 1 31 32 Miscellaneous current transfers 0 0 6 1 36 43 10 53 Current transfers to NPISHs 36 36 36 Current transfers between resident and non-resident households 1 1 7 8 Other miscellaneous current transfers 6 6 3 9 175 System of National Accounts 8.119 The settlement of a non-life insurance claim is treated as a 2. Current transfers within general government transfer to the claimant. The claimant is usually but not invariably the policyholder. Claims are usually treated as 8.126 Current transfers within general government consist of current transfers, even when large sums may be involved as current transfers between different government units. a result of the accidental destruction of a fixed asset or They include current transfers between different levels of serious personal injury to an individual. The amounts government, such as frequently occur between central and received by claimants are usually not committed for any state or local government units, and between general particular purpose and goods or assets that have been government and social security funds. They do not include damaged or destroyed need not necessarily be repaired or transfers of funds committed to finance gross fixed capital replaced. formation, such transfers being treated as capital transfers. 8.120 Some claims arise because of damages or injuries that the 8.127 One government unit may act as an agent on behalf of a policyholders cause to the property or persons of third second government unit by, for example, collecting taxes parties, for example, the damages or injuries that insured that are due to the second unit, at the same time as it drivers of vehicles may cause to other vehicles or persons. collects its own taxes. Taxes collected on behalf of the In these cases, valid claims are recorded as being payable second unit in this way are to be recorded as accruing directly by the insurance enterprise to the injured parties directly to the second unit and are not to be treated as a and not indirectly via the policyholder. current transfer from the first to the second unit. Delays in remitting the taxes from the first to the second government unit give rise to entries under "other accounts receivable or 8.121 In exceptional circumstances, some proportion of claims payable" in the financial account. may be recorded not as current transfers but as capital transfers. The description of the functioning of the insurance activity in part 1 of chapter 17 explains when this 3. Current international cooperation is deemed to be appropriate. 8.128 Current international cooperation consists of current transfers in cash or in kind between the governments of Net reinsurance premiums and claims different countries or between governments and international organizations. These include: 8.122 Direct insurers provide a means of redistribution amongst regular policyholders. Instead of a large loss on an irregular a. Transfers between governments that are used by the basis, policyholders face regular smaller costs in the recipients to finance current expenditures, including knowledge that, when and if a large loss happens, it will be emergency aid after natural disasters; they include settled by the insurance company and thus avoid the transfers in kind in the form of food, clothing, blankets, policyholder from bearing a large loss in that year. medicines, etc.; Reinsurance policies work in the same way to allow direct insurers (and other reinsurers) to protect themselves against b. Annual or other regular contributions paid by member particularly heavy claims by taking out a policy with governments to international organizations (excluding another insurance corporation that specializes in taxes payable to supranational organizations); reinsurance. c. Payments by governments or international organizations to other governments to cover the salaries 8.123 Net reinsurance premiums and claims are calculated in of those technical assistance staff who are resident in exactly the same manner as non-life insurance premiums the country in which they are working and are and claims. However, because the reinsurance business is employed by the host government. concentrated in a few countries, globally most reinsurance policies are with non-resident units. Current international cooperation does not cover transfers intended for purposes of capital formation, such transfers Fees and calls under standardized guarantees being recorded as capital transfers. 4. Miscellaneous current transfers 8.124 Some units, especially government units, may provide a guarantee against a creditor defaulting in conditions that have many of the same characteristics as non-life 8.129 Miscellaneous current transfers consist of current insurance. This happens when many guarantees of the same transfers other than insurance-related premiums and sort are issued and it is possible to make a realistic estimate claims, current transfers within general government and of the probable level of defaults overall. In this case, the current international cooperation. Some of the more fees payable (and the property income earned on them) are important examples are described below. treated in the same way as non-life insurance premiums and the calls under the guarantees are treated in the same way Current transfers between the central bank and as non-life insurance claims. Part 3 of chapter 17 discusses general government the topic of standardized guarantees in detail. 8.130 As described in paragraph 6.155, a current transfer 8.125 Standardized guarantees provide cover only for financial representing the value of non-market output of the central instruments and do not extend to product warranties bank is recorded as payable by the central bank to general 176 The redistribution of income accounts government. The non-market output consists of monetary of employees from abroad less expenditure abroad by the policy services, which are regarded as collective employees. Personal remittances thus show the total flows consumption. into a resident household from households abroad or from a member of the household working abroad for part of the 8.131 This item may also include transfers between the central year. Total remittances from abroad are equal to personal bank and government that are recorded when the central remittances plus social benefits (including pensions due bank charges interest at a rate that is out of line with market from abroad in relation to earlier work abroad by a member rates for policy purposes. The recording in such cases is of the household). Payments to abroad are defined described in paragraphs 7.122 to 7.126. correspondingly. For more details, reference should be made to chapter 26 and to BPM6. Current transfers to NPISHs Fines and penalties 8.132 Current transfers to NPISHs consist of transfers received by NPISHs from other resident or non-resident 8.135 Fines and penalties are compulsory payments imposed on institutional units in the form of membership dues, institutional units by courts of law or quasi-judicial subscriptions, voluntary donations, etc. whether made on bodies. However, fines or other penalties imposed by tax a regular or occasional basis. Transfers to NPISHs are authorities for the evasion or late payment of taxes cannot intended to cover the costs of the non-market production of usually be distinguished from the taxes themselves and are, NPISHs or to provide the funds out of which current therefore, grouped with the latter in practice and not transfers may be made to resident or non-resident recorded under this heading; nor are payments of fees to households in the form of social benefits. Transfers in the obtain licences, such payments being either taxes or form of gifts of food, clothing, blankets, medicines, etc. to payments for services rendered by government units (see charities for distribution to resident or non-resident paragraph 8.54). households are included to the extent that they are newly acquired and are treated as transfers in cash used to Lotteries and gambling purchase these commodities. Gifts of unwanted or used articles from households typically do not have a market value and so do not feature in the accounts as transfers. 8.136 The amounts paid for lottery tickets or placed in bets Gifts of valuables are treated as transfers of the value of the consist of two elements: the payment of a service charge to valuable in the balance sheet. Payments of membership the unit organizing the lottery or gambling and a residual dues or subscriptions to market NPIs serving businesses, current transfer that is paid out to the winners. The service such as chambers of commerce or trade associations, are charge may be quite substantial and may have to cover treated as payments for services rendered and are therefore taxes on the production of gambling services. The transfers not transfers (see paragraph 4.88). They are recorded in the are regarded in the SNA as taking place directly between production account as intermediate consumption and not in those participating in the lottery or gambling, that is, the secondary distribution of income account. between households. Current transfers between households 8.137 Some lotteries may be organized with three components, the two as just described and a third element that is donated 8.133 Current transfers between households consist of all to charity. This element shows as a transfer to the charity, current transfers made, or received, by resident usually an NPISH. households to or from other resident or non-resident households. The transfers include all cash transfers and the 8.138 When non-resident households take part there may be value of transfers in kind. In the context of remittances, significant net transfers between the household sector and current transfers between households are often referred to the rest of the world. as personal transfers. They include regular remittances between members of the same family resident in different 8.139 In some cases the winner of a lottery does not receive a parts of the same country or in different countries, usually lump sum immediately but a stream of income over future from a member of a family working in a foreign country for periods. In the SNA this should be recorded as the receipt a period of a year or longer. Earnings remitted by seasonal of the lump sum and the immediate purchase of an annuity. workers to their families are not international transfers as The recording of annuities is described in part 1 of chapter the workers remain resident in their country of origin (that 17. is, they are still members of their original households) when they work abroad for periods of less than a year. Their earnings are recorded as compensation of employees Payments of compensation from abroad if they have the status of an employee in the non-resident country while they are working there or as the 8.140 Payments of compensation consist of current transfers provision of services otherwise. paid by institutional units to other institutional units in compensation for injury to persons or damage to property 8.134 Transfers from non-resident households to resident caused by the former that are not settled as payments of households (and vice versa) are an item of considerable non-life insurance claims. Payments of compensation policy interest. In addition, memorandum items in the could be either compulsory payments awarded by courts of balance of payments are suggested for personal remittances law, or ex gratia payments agreed out of court. This and total remittances. Personal remittances from abroad are heading covers compensation for injuries or damages equal to personal transfers from abroad plus compensation caused by other institutional units and ex gratia payments 177 System of National Accounts made by government units or NPISHs in compensation for injuries or damages caused by natural disasters. H. Social transfers in kind 8.141 As explained in section G, the secondary distribution of saving is unaffected by this different perspective. In order income account is concerned with how income is to accommodate this different view of household income redistributed among sectors by means of transfers in cash and consumption, the SNA introduces two accounts, one of or transfers that are treated as if they are in cash. However, which derives an alternative measure of income (the there remains an important class of transfers that are redistribution of income in kind account, described below. recorded as a transfer of consumption expenditure The second account shows the alternative measure of originally undertaken by general government and NPISHs. consumption (the use of adjusted disposable income These are described as social transfers in kind. Social account) and is described in chapter 9. transfers in kind consist of goods and services provided to households by government and NPISHs either free or at 1. The redistribution of income in kind account prices that are not economically significant. These transfers are sufficiently distinctive that two separate accounts are devoted to recording them. 8.144 The redistribution of income in kind account takes the balancing item of the secondary distribution of income account, disposable income, and adjusts this for the value 8.142 Social transfers in kind consist of final consumption of social transfers in kind to reach a new balancing item expenditure undertaken by government and NPISHs on called adjusted disposable income. For households, behalf of households. For this reason they are described as adjusted disposable income is higher than disposable individual goods and services. This is in distinction from income; for government and NPISHs, it is lower. public goods such as defence and street lighting, which the SNA refers to as collective services. (There is more discussion on the difference between individual and 2. Social transfers in kind paid to non-residents collective expenditure of government in chapter 9.) There are two main reasons why government may choose to 8.145 In principle, social transfers in kind may be paid to non- provide individual services to households. One is that by residents. One simple example is emergency medical care meeting the needs of very large sections, or even all, the provided to a foreign tourist by a hospital within general population centrally there are cost efficiencies to be government. However, just as non-resident households may realized. The other is that the government can ensure that benefit from social transfers in kind from the national these services are available to the population at reasonable government, so resident households may benefit from cost to households, prescribe the standards of the service to social transfers in kind paid by the government of another be observed and can insist that households avail themselves economy. In general these flows to non-residents will be of the services, for example by requiring children to attend small relative to the total level of social transfers in kind school. and, unless there is strong evidence to the contrary, by convention it may be assumed that the flows to non- 8.143 For some analytical purposes, it is instructive to consider a residents are balanced by flows from governments (and measure of household consumption that includes the goods NPISHs) of other economies. Subject to this convention, it and services provided as social transfers in kind. The is therefore the case that total disposable income for the expanded view of consumption, though, must be matched total economy is exactly equal to total adjusted disposable by a similarly extended view of income since household income. 178 Chapter 9: The use of income accounts A. Introduction 9.1 The purpose of the use of income accounts is to show how 9.5 Some of the services provided by NPISHs to the members households, government units and non-profit institutions of the associations that own them have some of the serving households (NPISHs) allocate their disposable characteristics of collective services; for example, some income between final consumption and saving. Throughout research carried out by NPISHs may benefit all members of this chapter, unless otherwise stated, the expression the community. However, most of the services provided by consumption should be taken to mean final consumption. NPISHs are individual in nature and, if it is not practicable There are two use of income accounts that correspond to to identify the outputs of NPISHs that may be considered to two concepts of disposable income and consumption. In the be collective in nature, all the services provided by NPISHs first account, the use of disposable income account, shown may be treated as individual. in table 9.1, attention is focused on disposable income and the expenditure on consumption goods and services that 9.6 As explained in later sections of this chapter, expenditure is can be met out of that income. In the second account, the attributed to the institutional units that bear the costs even if use of adjusted disposable income account, shown in table they are not the units to whom the goods or services are 9.2, attention is focused on the consumption goods and delivered. Thus, expenditures that government units or services acquired and used by institutional units, especially NPISHs make on individual goods and services that they households, whether acquired by expenditure or by social provide to households as social transfers in kind are transfers in kind. To explain the difference between the two recorded as final consumption expenditure incurred by accounts it is necessary to define some key terms. government units or NPISHs. Although they do not physically consume the goods and services provided as social transfers in kind, government units or NPISHs are 9.2 A consumption good or service is defined as a good or the units that pay for them and take the decisions about the service that is used (without further transformation in amounts to be provided. Information about their production as defined in the SNA) by households, expenditure on such goods and services must, therefore, be NPISHs or government units for the direct satisfaction of recorded in the accounts of the SNA in conjunction with individual needs (or wants) or for the collective needs of their disposable income. However, merely to record the members of the community. expenditure is not sufficient when the goods and services are consumed by units different from those that control and finance the expenditure. In order to identify the units that 9.3 An individual consumption good or service is one that is benefit from their consumption it is necessary to recognize acquired by a household and used to satisfy the needs or that the goods and services are in fact transferred to, and wants of members of that household. Individual goods and used by, households. From this stems the distinction services can always be bought and sold on the market, between final consumption expenditure and actual final although they may also be provided free, or at prices that consumption. are not economically significant, as social transfers in kind. In practice, all goods and most services are individual. 9.7 In the use of disposable income account, the main resource is disposable income, which is the balancing item carried 9.4 A collective consumption service is a service provided forward from the secondary distribution of income account. simultaneously to all members of the community or to all The main use is final consumption expenditure. Final members of a particular section of the community, such consumption expenditure is the amount of expenditure on as all households living in a particular region. Collective consumption goods and services. In the use of adjusted services are automatically acquired and consumed by all disposable income account, the main resource is adjusted members of the community, or section of the community, disposable income which is the balancing item carried without any action on their part. Typical examples are forward from the redistribution of income in kind account. public administration and the provision of security, either at The main use is actual final consumption. Actual final a national or local level. Collective services are the "public consumption measures the amount of consumption goods goods" of economic theory. By their nature, collective and services acquired. services cannot be sold to individuals on a market, and they are financed by government units out of taxation or other 9.8 In the redistribution of income in kind account, described in revenues. The differences between individual and chapter 8, the adjusted disposable income of households is collective consumption goods or services are elaborated derived from their disposable income by adding the value further in paragraphs 9.91 to 9.98. of social transfers in kind receivable, while that for 179 System of National Accounts government units and NPISHs is derived by subtracting the entries for final consumption expenditure or actual final value of social transfers in kind payable. Corresponding to consumption. Apart from the adjustment item for pension the redistribution of income in kind account, is the use of entitlements referred to above and explained in more detail adjusted disposable income account in which the actual in paragraphs 9.20 to 9.25, the gross or net saving of final consumption of households is derived from their final corporations must be equal to their gross or net disposable, consumption expenditure by adding the value of social or adjusted disposable, incomes. In other contexts, the transfers in kind receivable, while the actual final saving of corporations is often described as the "retained consumption of government units and NPISHs is derived earnings" or "undistributed incomes" of corporations. by subtracting the value of social transfers in kind payable. Thus there are two accounts describing the derivation of disposable income in the SNA and two use of income 1. The use of disposable income account accounts. 9.12 As shown in Table 9.1, the use of disposable income 9.9 In both the use of disposable income account and the use of account contains only three main entries apart from the adjusted disposable income account, an adjustment item is balancing item, saving. Disposable income, the balancing needed in order to show the change in pension entitlements item carried forward from the secondary distribution of recorded in the financial account. Saving is the balancing income account, is recorded on the right-hand side of the item for both the use of disposable income account and the account under resources, while final consumption use of adjusted disposable income account. It is calculated expenditure is recorded on the left-hand side under uses. As as disposable income adjusted for the change in pension just noted, the account is relevant mainly for the three entitlements less final consumption expenditure, or as sectors that incur final consumption expenditure, namely adjusted disposable income adjusted for the change in the general government, NPISHs and household sectors. pension entitlements less actual final consumption. It follows that saving is the same whether it is calculated in the use of disposable income account or the use of adjusted 9.13 The balancing item for the account is saving. Before the disposable income account. balance is struck, however, an adjustment item showing the adjustment for the change in pension entitlements is entered in order to reallocate a certain amount of saving between 9.10 Saving, like disposable income and adjusted disposable sectors. This item is needed because of the way in which income, may have to be recorded gross of consumption of pension contributions and benefits are recorded in the fixed capital because of the difficulty of measuring the secondary distribution of income accounts. The adjustment latter. As elsewhere, however, the net figures are is shown on the right-hand side under resources for conceptually preferable. households and on the left-hand side under uses for financial corporations or other units responsible for pension liabilities. 9.11 Corporations do not have final consumption expenditure. They may purchase the same kinds of goods or services as households use for final consumption (for example 9.14 Final consumption expenditure is shown in table 9.1, electricity or food) but such goods or services are either disaggregated between individual consumption expenditure used for intermediate consumption or provided to and collective consumption expenditure to bring out the employees as remuneration in kind. It is assumed in the accounting interrelationships described below. However, it SNA that corporations do not make transfers of is usually desirable to break down final consumption consumption goods or services to households. As expenditure using a classification of expenditure by corporations neither make nor receive social transfers in purpose or by type of good or service. Most users will kind, it is also not possible to draw a meaningful distinction expect at least some degree of disaggregation, for example, between their disposable and adjusted disposable incomes. between expenditures on goods or services or between It follows that both the use of disposable income account expenditures on durable and non-durable goods. and the use of adjusted disposable income account for Disaggregation by type of goods and services is needed for corporations are only dummy accounts that contain no the supply and use tables, as explained in chapter 14. Table 9.1:The use of disposable income account - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Final consumption expenditure 352 1 015 32 1 399 1 399 Individual consumption expenditure 184 1 015 31 1 230 1 230 Collective consumption expenditure 168 1 169 169 Adjustment for the change in pension entitlements 0 11 0 0 11 0 11 Saving, gross 228 14 - 35 215 5 427 427 Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 180 The use of income accounts 2. The use of adjusted disposable income their expenditure by a significant margin. For these reasons, account the actual final consumption of households has sometimes been described as their "enlarged" consumption or their "total" consumption, although these terms are not used in 9.15 As shown in Table 9.2, the use of adjusted disposable the SNA. The actual final consumption of the general income account also contains three main entries apart from government sector is correspondingly smaller than the balancing item, saving. Adjusted disposable income, government final consumption expenditure. the balancing item brought forward from the redistribution of income in kind account, is recorded on the right-hand side of the account under resources, while actual final 3. The relationship between the two versions of consumption is recorded on the left-hand side under uses. the use of income account As with the use of disposable income account, before the balancing item, saving, is struck, the adjustment for the 9.18 The two use of income accounts are neither sequential nor change in pension entitlements is entered. The account is hierarchical. They are parallel accounts that serve different relevant mainly for the general government, NPISHs and analytical or policy purposes. One shows which units incur household sectors. expenditure; the other which unit benefits from the expenditure and the extent to which households' 9.16 The actual final consumption of households is obtained by consumption levels are provided by themselves. The values augmenting their final consumption expenditure by the of the goods and services involved in social transfers in value of social transfers in kind receivable, while that for kind are recorded in two different ways in the SNA, both of government units and NPISHs is obtained by subtracting which represent uses of resources by government units or from their final consumption expenditure the value of NPISHs: social transfers in kind payable. Some social transfers in kind may be receivable by non-residents, for example a. As final consumption expenditure, payable by emergency medical treatment in a public hospital for a non- government units or NPISHs; and resident tourist, but the figures involved are likely to be very small compared with total social transfers in kind. b. As social transfers in kind, payable by government Further, residents abroad may also benefit from social units or NPISHs but receivable by households and transfers in kind from a non-resident government (or recorded as part of their actual final consumption. NPISH) in like manner. Unless there is strong reason to believe otherwise, therefore, it is assumed these two figures 9.19 Although the difference between disposable and adjusted offset one another so that all social transfers in kind can be disposable income is attributable to social transfers in kind, shown as payable to resident households. Thus, the value of even disposable income should not be interpreted as if it actual final consumption for the total economy is equal to were a measure of income available in cash. Its several that of total final consumption expenditure. non-cash elements, such as those associated with production for own consumption or remuneration in kind, 9.17 The actual final consumption of households is a measure of were pointed out in paragraphs 8.22 and 8.23. the value of the consumption goods and services acquired by households, whether by purchase or by transfer from 4. Adjustment for the change in pension government units or NPISHs, and used by households for the satisfaction of their needs (or wants). It is therefore a entitlements better indicator of their living standards than their final consumption expenditure. In some countries, the value of 9.20 As individuals accrue pension entitlements in a social the individual non-market goods and services provided to insurance scheme throughout their working lives, the households as social transfers in kind may be quite large, corresponding entitlements become their assets and the depending upon the kinds of economic and social policies liabilities of the units ultimately responsible for paying the pursued by their governments, so that the value of the pensions. Pensions due under social assistance are excluded actual final consumption of households may exceed that of because the amounts due do not necessarily accrue in a Table 9.1 (cont):The use of disposable income account - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 Final consumption expenditure 1 399 1 399 Individual consumption expenditure 1 230 1 230 Collective consumption expenditure 169 169 Adjustment for the change in pension entitlements 11 11 0 11 181 System of National Accounts predictable fashion over time or for predictable reasons. exceed their contributions, saving does not reflect the fact Similar arguments apply to benefits due under social that the negative change in entitlements represents a security. In some countries, government assumes reduction in net worth. However, as is clear in the financial responsibility for paying pensions even for non- account, the change in pension entitlements is part of government employees and these pensions are paid via household net worth. It is therefore necessary to adjust social security funds. There is detailed discussion in part 2 saving for the difference between contributions payable and of chapter 17 about when the liabilities for these schemes benefits receivable shown in the secondary distribution of can be integrated into the sequence of accounts and when income account. they only appear in a supplementary table. In this chapter, the expression "pension scheme" is used to cover those 9.24 An item described as the adjustment for the change in parts of social security schemes where liabilities can be pension entitlements therefore appears in both the use of integrated into the sequence of accounts, including the disposable income account and the use of the adjusted accumulation accounts and balance sheets, together with all disposable income account. It is equal to: other employment-related schemes. the total value of the actual and imputed social 9.21 Pension schemes are treated in the SNA as having contributions payable into pension schemes, liabilities towards the households with claims on the schemes. The payments of pension contributions into the schemes and the receipts of pensions by pensioners plus the total value of contribution supplements payable out constitute the acquisition and disposal of financial assets. of the property income attributed to pension fund However, this may not accord with the perception of the beneficiaries, households concerned, especially pensioners' households, who tend to regard the pensions they receive as income in minus the value of the associated service charges, the form of current transfers. Moreover, at least some pensions received under social security schemes and those minus the total value of the pensions paid out as social received under social assistance are in fact treated as insurance benefits by pension schemes. current transfers in the SNA. 9.25 Opposite adjustments are needed in the use of income 9.22 In order to present income information that may be more accounts of the units responsible for paying pensions. useful for analysing the behaviour of the households These adjustments can affect non-resident institutional concerned, the payments of pension contributions to all units, both households and pension providers. pension schemes and to social security and the receipts of pensions by pensioners' households under both pension schemes and social security are recorded in the secondary 5. Saving distribution of income account as social contributions and social insurance benefits, respectively. They therefore 9.26 Saving is the balancing item in the two use of income affect the level of disposable incomes of households. accounts. Its value is the same whether it is derived as disposable income less final consumption expenditure or as 9.23 The rationale for treating pension contributions and adjusted disposable income less actual final consumption benefits as current transfers is that, when looked at for the (in both cases, after making the adjustment for the change economy as a whole, the effect of pension provision can be in pension entitlements just described). seen as if it were a redistributive process among households. To the extent that contributions and benefits 9.27 As already noted, non-financial and financial corporations are not exactly equal, there is an impact on household have no final consumption expenditure or actual final saving. For example, if households as a whole pay more consumption. Their net saving is equal to their net contributions than they receive as benefits, their saving is disposable, or adjusted disposable, income (apart from the reduced by this difference. Similarly if household benefits adjustment item for pension entitlements). Table 9.2:The use of adjusted disposable income account - uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Actual final consumption 168 1 230 1 1 399 1 399 Actual individual consumption 1 230 1 230 1 230 Actual collective consumption 168 1 169 169 Adjustment for the change in pension entitlements 0 11 0 0 11 0 11 Saving, gross 228 14 - 35 215 5 427 427 Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 182 The use of income accounts 9.28 Saving represents that part of disposable income accounting period without having to reduce its cash, (adjusted for the change in pension entitlements) that is liquidate other assets or increase its liabilities. not spent on final consumption goods and services. It may be positive or negative depending on whether disposable income exceeds final consumption expenditure, or vice 6. Calculating savings ratios versa. Assuming that saving is positive (and in the absence of capital transfers), the unspent income must be used to acquire assets (possibly only an increase in cash) or reduce 9.30 The savings ratio, especially for households, is a key liabilities. If saving is negative, some financial or non- economic variable. It is usually calculated by dividing financial assets must have been liquidated, (including a run saving by disposable income for the sector. However, the down of cash) or some liabilities increased. Thus, saving entry of the change in pension entitlements in both the use provides the link between the current accounts of the SNA of disposable income account and the use of adjusted and the subsequent accumulation accounts. disposable income account complicates this calculation. It is necessary to use not the balancing item from the 9.29 If saving is zero, final consumption expenditure equals secondary distribution of income account (disposable disposable income plus the change in pension entitlements. income) or from the redistribution of income in kind In that case, the institutional unit is not obliged to dispose account (adjusted disposable income) but to add the of any assets or increase any of its liabilities unless capital adjustment for the change in pension entitlements to each transfers are receivable or payable. As already indicated in of these figures to derive a figure for total disposable chapter 8, disposable income can, therefore, be interpreted income or total adjusted disposable income. It is this total as the maximum amount that an institutional unit can afford figure that should be the denominator in the savings ratio to spend on final consumption goods and services in the calculation. B. Expenditures, acquisitions and consumption of goods and services 9.31 The distinction between final consumption expenditure and units or NPISHs to pay for goods or services that the sellers actual final consumption depends on the general distinction provide to households. Moreover, as explained below, the between expenditures on, and acquisitions of, goods and liability incurred by the buyer does not necessarily have to services. The purpose of this section is to explain not only be settled by a payment of cash. how expenditure differs from acquisition but also how both of them differ from the actual or physical use of goods and The timing of expenditures on goods and services. services 1. Expenditures 9.33 Expenditures on goods or services occur at the times when buyers incur liabilities to sellers. These are usually the times when: 9.32 Expenditures on goods and services are defined as the values of the amounts that buyers pay, or agree to pay, to sellers in exchange for goods or services that sellers a. The ownership of the good is transferred from the seller provide to them or to other institutional units designated to the new owner; or by the buyers. The buyer incurring the liability to pay need not be the same unit that takes possession of the good or b. The delivery of a service by the producer is completed service. As already noted, it is common for government to the satisfaction of the consumer. Table 9.2 (cont):The use of adjusted disposable income account - resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Adjusted disposable income, gross 228 25 133 1 434 6 1 826 1 826 Adjusted disposable income, net 71 13 106 1 411 3 1 604 1 604 Actual final consumption 1 399 1 399 Actual individual consumption 1 230 1 230 Actual collective consumption 169 169 Adjustment for the change in pension entitlements 11 11 0 11 183 System of National Accounts 9.34 The times at which sellers are actually paid for the goods or 9.40 In the case of goods, the distinction between acquisition services they deliver are not necessarily the times at which and consumption is clear. Producers acquire goods that the expenditures occur. As explained in chapter 3, they may hold for varying periods of time before physically payments may either precede, or lag behind, the actual using them up in processes of production. Households may deliveries of the goods or services sold. For this reason, the hold consumption goods before using them for the values of expenditures are measured by the values of the satisfaction of their needs or wants. Few goods are so amounts receivable and payable at the times the perishable that they have to be used immediately. For expenditures are incurred. When payments take place example, most foodstuffs need not be eaten until some time before or after the expenditures are incurred, there must be after they have been acquired. consequential changes in the financial assets or liabilities (other than cash) of the two units concerned at the time the change of ownership takes place or the service is delivered. 9.41 In the case of services, however, the distinction between acquisition and use may not be relevant in a practical sense. The situations of units to whom services are delivered are 9.35 The precise moment at which the ownership of a good is automatically affected by those services and no further transferred, or delivery of a service is completed to the action may be needed in order to benefit from them. satisfaction of the consumer, may not be easy to determine in practice in some cases. It may be perceived differently, or even disputed, by the two parties concerned. Durable versus non-durable goods 2. Acquisitions 9.42 In the case of goods, the distinction between acquisition and use is analytically important. It underlies the distinction 9.36 Acquisitions of goods and services by institutional units between durable and non-durable goods that is used occur when they become the new owners of the goods or extensively in economic analysis. In fact, the distinction when the delivery of services to them is completed. between durable and non-durable goods is not based on Acquisitions are valued at the transaction prices paid by the physical durability as such. Instead, the distinction is based units that incur the expenditures. In most cases, the on whether the goods can be used once only for purposes of transaction price is the market price. The value of the goods production or consumption or whether they can be used or services acquired by an institutional unit or sector repeatedly, or continuously. For example, coal is a highly consists of the value the goods or services acquired through durable good in a physical sense, but it can be burnt only its expenditure plus the value of goods or services received once. A durable good is one that may be used repeatedly through social transfers in kind less the value of goods or or continuously over a period of more than a year, services paid to other units as social transfers in kind. assuming a normal or average rate of physical usage. A consumer durable is a good that may be used for purposes 9.37 The difference between final consumption expenditure and of consumption repeatedly or continuously over a period actual final consumption is exactly the difference between of a year or more. expenditure on consumption goods and services and acquisition of consumption goods and services. Since all consumption goods and services must be both the subject Consumption as the using up of goods and of expenditure and also be acquired, this difference services between final consumption expenditure and actual final consumption, sector by sector, explains the redistribution of goods and services by means of social transfers in kind. 9.43 A consumption function that expresses utility as a function of the quantities of goods and services consumed describes the using up of those goods and services rather than 9.38 The distinction between consumption expenditure and expenditures or acquisitions. In order to measure actual consumption and thus between expenditure and consumption as an activity, it would be necessary to adopt acquisitions is made only in respect of final consumption. accounting procedures similar to those used in a production The difference is explained exactly by social transfers in account, where a clear distinction is drawn between kind. purchases of goods to be used in production and their subsequent use as inputs. 3. Consumption of goods and services 9.44 In practice, the SNA measures household consumption by 9.39 Consumption of goods and services is the act of expenditures and acquisitions only. The repeated use of completely using up the goods and services in a process of durables by households could be recognized only by production or for the direct satisfaction of human needs extending the production boundary by postulating that the or wants. The activity of consumption consists of the use durables are gradually used up in hypothetical production of goods and services for the satisfaction of individual or processes whose outputs consist of services. These services collective human needs or wants. The satisfaction of needs could then be recorded as being acquired by households or wants is immediate and direct in the case of final over a succession of time periods. However, durables are consumption; it is indirect and delayed in the case of not treated in this way in the SNA. A possible intermediate consumption where goods and services are supplementary extension to the SNA to allow for such an used to produce other goods and services that ultimately extension of the production boundary could usefully take lead to the satisfaction of human needs or wants. place in a satellite account. 184 The use of income accounts C. Measuring the value of non-monetary transactions indirectly 9.45 By mutual agreement between the buyer and the seller, the transaction involves two parties only and no wholesale or liability incurred by the buyer may be discharged by retail margin. providing a good, service or asset other than cash in exchange. For example, goods or services may be 2. Expenditures on goods and services exchanged for each other in barter transactions, or received as income in kind employees may provide labour in exchange for goods or services received as remuneration in kind. 9.51 Income in kind received by employees is measured by the value of the goods and services provided by employers to 9.46 When the buyers do not pay cash, or expect to pay cash, their employees in remuneration for work done. Workers values have to be imputed for the expenditures using the receiving remuneration in kind are treated as making appropriate prices of similar goods or services sold for cash expenditures equal to the market value of the goods or on the market. services received (at producers' prices if produced by the employer or at purchasers' prices if bought by the 9.47 The value of goods produced and consumed within the employer), the costs of the expenditures being met out of same household as well as for those household services the income they receive as remuneration in kind. Thus, the falling within the production boundary must also be values of the goods and services must be recorded as final measured indirectly. consumption expenditure incurred by households as well as income in kind. 9.48 In the interests of brevity, a transaction for which a value has to be imputed may be described as an "imputed 9.52 A distinction has to be made between goods or services expenditure" and this terminology is used below. Strictly provided to employees as remuneration in kind and goods speaking, however, the imputation refers to the value of or services provided because they are needed at work, the goods or services involved and not to the expenditure itself. latter constituting intermediate consumption by the In other words it is the valuation that is imputed, not the enterprise. In principle, the distinction is clear. Goods or fact that the transaction takes place. It is therefore services that employers are obliged to provide to their preferable to refer to measuring the flows indirectly rather employees to enable them to carry out their work, such as than by imputation. tools, equipment, special clothing, etc., constitute intermediate consumption. On the other hand, goods or services that employees are able to use in their own time for 1. Barter transactions the direct satisfaction of their needs or wants, or those of their families, constitute remuneration in kind. In practice, there are inevitably borderline cases, such as uniforms that 9.49 A barter transaction is one where one basket of goods and must be worn at work but are also worn extensively by services is exchanged for another basket of different employees away from work. A detailed listing of the kinds goods and services without any accompanying monetary of goods and services that are included in remuneration in payment. The values of the goods or services acquired in kind is given in the section on compensation of employees barter transactions constitute imputed expenditures. Values in chapter 7. have to be estimated indirectly for goods or services exchanged in barter transactions equal to their market values. Thus, when the goods or services obtained through 3. Expenditure on goods and services barter are used for household consumption their estimated produced on own account values must be recorded as household final consumption expenditure. When a good offered for barter is an existing 9.53 When institutional units retain goods or services produced good and not newly produced output, negative imputed by themselves for their own final consumption or gross expenditure must be recorded for the unit offering the good, fixed capital formation, they clearly bear the costs in the same way that sales of existing goods are recorded as themselves. They are, therefore, recorded as incurring negative expenditures. expenditures whose values have to be estimated using the basic prices of similar goods or services sold on the market 9.50 In barter, both parties to a transaction must be recorded as or their costs of production in the absence of suitable basic making expenditures. The value of these expenditures prices. should be based on the purchasers' prices of these bartered products. In practice, neither taxes on products or 9.54 Household final consumption expenditure includes transportation costs may apply, in which case the estimates for the values of goods or services produced as purchasers' prices will not differ from the basic prices of outputs of unincorporated enterprises owned by households the products. As the values of the goods or services that are retained for consumption by members of the bartered may not be the same, the values imputed for the household. The production of services for own barter transaction may on pragmatic grounds be taken as a consumption within the same household falls outside the simple average of the estimated values of the goods or production boundary of the SNA, except for housing services exchanged, so that equal expenditures are recorded services produced by owner-occupiers and services for both parties. Goods that have been the subject of a produced by employing paid domestic staff. As the costs of barter transaction may be subsequently bartered with producing goods or services for own consumption are another party at a higher price, earning a margin for the unit borne by the households themselves, it is clear that the conducting both barter transactions. However, each barter expenditures on them are also incurred by households, even 185 System of National Accounts though their values must be estimated indirectly. The main c. Housing services produced for own final consumption types of goods and services produced and consumed within by owner-occupiers (discussed further below); and the same household are as follows: d. Domestic or other services produced for own final a. Food or other agricultural goods produced for own final consumption by households that employ paid staff for consumption by farmers, including subsistence this purpose (domestic staff, cooks, gardeners, farmers, or others for whom agricultural production is chauffeurs, etc.). only a secondary, or even a leisure, activity; 9.55 Values are estimated for these goods or services on the b. Other kinds of goods produced by unincorporated basis of the current basic prices of similar goods or services enterprises owned by households that are consumed by sold on the market, or by costs of production when suitable members of the same households; prices are not available, except for the services of paid staff; by convention, services of paid staff are valued simply by the compensation of employees paid, in cash and in kind. D. Household final consumption expenditure 1. Introduction 2. Expenditures by households owning unincorporated enterprises 9.56 Household final consumption expenditure consists of expenditure incurred by resident households on 9.59 When a household includes one or more persons who own consumption goods or services. As well as purchases of an unincorporated enterprise, all expenditure incurred for consumer goods and services, final consumption business purposes is excluded from household consumption expenditure. It is necessary to ensure that only expenditure expenditure includes the estimated value of barter for the direct satisfaction of human needs and wants is transactions, goods and services received in kind, and included in household final consumption expenditure. This goods and services produced and consumed by the same may not be easy in practice when the same good or service household, valued as explained in section C. (for example, electricity or other fuels) may be used equally well for business purposes or for final consumption. Business expenditures cannot therefore be identified purely 9.57 Final consumption expenditure excludes expenditure on on the basis of the type of good or service purchased. fixed assets in the form of dwellings or on valuables. Particular care needs to be exercised in the case of farms, Dwellings are goods used by their owners to produce including subsistence farms, where goods that have been housing services. Expenditure on dwellings by households, purchased, or produced on own account, may be used either therefore, constitutes gross fixed capital formation. When for household final consumption or for intermediate dwellings are rented by their owners, rentals are recorded consumption; for example, corn or potatoes may be as output of housing services by owners and final consumed by members of the households, fed to animals or consumption expenditure by tenants. When dwellings are used as seeds for future crops. occupied by their owners, the imputed value of the housing services enters into both the output and final consumption 9.60 Care is also needed with purchases of consumer durables expenditure of the owners. Valuables are expensive durable such as vehicles, furniture, or electrical equipment, which goods that do not deteriorate over time, are not used up in are to be classified as gross fixed capital formation by the consumption or production, and are acquired primarily as household enterprise when purchased for business purposes stores of value. They consist mainly of works of art, but as final consumption expenditure when purchased for precious stones and metals and jewellery fashioned out of the personal use of household members. While the nature of the distinction may be clear in principle, it is often such stones and metals. Valuables are held in the blurred in practice, especially when the owner of the expectation that their prices, relative to those of other goods business uses a durable good, such as a vehicle, partly for and services, will tend to increase over time, or at least not business purposes and partly for personal benefit. In such decline. Although the owners of valuables may derive cases, the expenditure on the purchase of the durable satisfaction from possessing them, they are not used up in should be split between gross fixed capital formation by the the way that consumption goods, including consumer enterprise and household final consumption expenditure in durables, are used up over time. proportion to its usage for business and personal purposes. When durables are purchased wholly or partly for business purposes, the decline in their value attributable to their use 9.58 The treatment of expenditure in some specific situations or within the business should be recorded under the on certain specific types of goods and services is outlined consumption of fixed capital of the unincorporated in the following sections. enterprise. 186 The use of income accounts 3. Expenditures on particular types of goods are deemed to be equal in value to the rentals that would be and services paid on the market for accommodation of the same size, quality and type. Care must be taken in respect of any taxes paid on housing. Taxes such as value added tax are rarely Expenditures on financial services paid on housing services, but if they are payable, they should be excluded from the value of owner-occupied 9.61 When appropriate, values must be estimated for the housing if the owner-occupier is exempt from payment. expenditures that households incur on services provided by The imputed values of the housing services are recorded as financial institutions for which no explicit charges are final consumption expenditures of the owners. made. Expenditures on services for which financial institutions do make charges are recorded in the usual way. Decoration, minor repairs and maintenance Financial services, except insurance and pension 9.66 "Do-it-yourself" activities of decoration and undertaking fund services minor repairs, often of a routine nature, of a kind that would normally be seen as the responsibility of a tenant are 9.62 Financial institutions, except insurance corporations and treated as falling outside the production boundary. pension funds, and money lenders charge interest rates Purchases of materials used for such decoration or repairs higher than a reference rate and pay interest at a rate lower should therefore be treated as final consumption than the reference interest rate. As explained in chapters 6 expenditure, as should fees and service charges paid to and 7, SNA interest is recorded in the allocation of primary builders, carpenters, plumbers, etc. Maintenance that is the income account at a reference rate and the difference responsibility of tenants is also treated as final consumption between SNA interest and bank interest is recorded as final expenditure. consumption expenditure of households. (If it is possible to identify interest payments and receipts relating exclusively 9.67 Expenditures that owners, including owner-occupiers, incur to unincorporated household enterprises, the charges would on the decoration, minor repairs and maintenance of the appear as intermediate consumption of those enterprises, dwelling that would normally be seen as the responsibility but this is often not possible.) of a landlord should not be treated as household final consumption expenditure but as intermediate expenditure 9.63 When households acquire or dispose of foreign exchange incurred in the production of housing services. These and some other financial assets, the dealer in the financial expenditures may consist either of payments for services asset will typically quote a buying price and a selling price provided by professional builders or decorators or for the asset. The difference between the price actually purchases of materials for "do-it-yourself" repairs and receivable or payable and the average of the buying and decoration. In the latter case, no cost of the labour involved selling price at the time of the transaction is also treated as in the activity is included. The only value added for the expenditure on the services of financial institutions. imputed rental of owner-occupied housing is operating surplus. Insurance and pension fund services Major improvements 9.64 The way in which the value of the services produced by insurance enterprises and pension schemes is calculated in 9.68 Expenditures on major improvements (that is, the SNA is explained in chapter 6. The values of the reconstructions, renovations or enlargements) to dwellings insurance services consumed by different sectors, are not classed in the same way as decoration, minor repairs subsectors or institutional units are estimated by allocating and maintenance. They are excluded from household the value of the services produced by an insurance consumption expenditure and are treated as gross fixed enterprise in proportion to the actual premiums. When the capital formation on the part of the owners of those value of output is estimated by line of business, which is dwellings, including owner-occupiers. desirable if practicable, the service charge should be allocated across premiums by line of business also. The The repair and maintenance of durables amounts paid by households are recorded as final consumption expenditure (except for the insurance services 9.69 Expenditures on all repair and maintenance of consumer purchased by unincorporated enterprises owned by durables, including vehicles, are treated in the same way as households, which are treated as intermediate minor repairs to dwellings of the type carried out by consumption). The whole of the service charge on pension tenants. Repairs and maintenance constitute final schemes is borne by households (some of which may be consumption expenditure whether they are carried out by non-resident). specialist producers or by members of the household as "do-it-yourself" activities. In the latter case, only the values Services of dwellings, repairs and improvements of the materials purchased should be included in household consumption expenditure. Services of owner-occupied dwellings Licences and fees 9.65 Persons who own the dwellings in which they live are treated as owning unincorporated enterprises that produce 9.70 Households make payments to government units to obtain housing services that are consumed by the household to various kinds of licences, permits, certificates, passports, which the owner belongs. The housing services produced etc., and in some cases it is not clear whether the 187 System of National Accounts government units actually provide services in return, such 9.75 The value of barter and goods received as income in kind is as testing or inspection, or whether the payments are de recorded at the prices paid by the units incurring the facto taxes. As explained in paragraph 8.64 (c), the expenditure initially. Goods produced on own account are treatment of certain borderline cases has been decided by valued at basic prices, consistently with their valuation as the following convention, based on the practices followed production. in the majority of countries: payments by households for licences to own or use vehicles, boats or aircraft and also 9.76 Different households may pay different prices for identical licences for recreational hunting, shooting or fishing are products because of market imperfections. Price treated as taxes. Payments for licences to undertake a differences may persist because households may not be specific activity, for example a taxi licence, are treated as a aware of them, or they may have imperfect information tax on production. Payments for all other kinds of licences, because the costs of searching for the retail outlets selling permits, certificates, passports, etc., are treated as at the lowest prices may be too great. Even when purchases of services and included in household households are aware of the price differences, it may be too consumption expenditure. inconvenient or costly to visit the outlets selling at the lowest prices. Another reason for the persistence of price 4. Classification of household final differences is that many service producers deliberately consumption expenditure practise price discrimination by charging different households different prices for identical services (for example, by charging lower prices or fees to pensioners or 9.71 Household final consumption expenditure is typically a people with low incomes). As services cannot be retraded, large aggregate covering a wide range of goods and price discrimination is extremely common, or even services. It is thus usually desirable to break down the prevalent, among service producers. Household figure. The CPC may be used for a breakdown by type of expenditures are nevertheless recorded at the prices good or service. The Classification of Individual actually paid, as this is the appropriate value of the Consumption by Purpose (COICOP) may be used for a transaction. breakdown by purpose or function, such as food, health and education services. 9.77 Apparent price differences between the same goods or services are often not genuine price differences as they may 5. Timing and valuation of household final be due to differences in quality, including differences in the consumption expenditure terms or conditions of sale. For example, lower prices are often charged for bulk purchases of goods or off-peak Timing purchases of services. Such expenditures are recorded at the prices actually paid; that is, after deducting from the standard or list prices or charges any discounts for bulk or 9.72 In accordance with the general principles adopted in the off-peak purchases. SNA, expenditures should be recorded when the payables are created, that is, when the purchaser incurs a liability to the seller. This implies that expenditure on a good is to be Valuation of purchases on credit recorded at the time its ownership changes while expenditure on a service is recorded when the delivery of 9.78 The purchaser's price does not include any interest or the service is completed. Non-monetary transactions are service charges that may be added when the seller arranges recorded when the goods involved are made available to the for credit to be provided to the purchaser. Similarly, the household. purchaser's price does not include any extra charges that may be incurred as a result of failing to pay within the 9.73 When a good is acquired under a hire purchase agreement, period stated at the time the purchases were made, such financial lease or similar method of financing, the charges being effectively interest payments on the credit purchaser accepts the risks and rewards of ownership on the extended by the seller. If the credit is arranged by a good from the time the good is delivered. A change of financial institution, the total charge may need to be ownership is therefore imputed at the time of delivery. allocated between a financial service charge and interest, as Even though there is no legal change of ownership at this explained in paragraph 9.62. If the credit is provided by a point, it is assumed that there is a change of economic non-financial institution, no financial service charge is ownership. The purchaser must also be shown in the provided. Note, however, that many large retailers have financial accounts as incurring a liability to the hire subsidiaries handling credit facilities, which are classed as purchase or finance corporation. financial institutions in their own right. Valuation 6. Expenditures by resident and non-resident households 9.74 Household expenditure is recorded at the purchasers' prices paid by households including any taxes on products that 9.79 Resident households make expenditures while travelling may be payable at the time of purchase. As defined in abroad, and non-resident households may make paragraphs 6.64 to 6.68, the purchaser's price of a good is expenditures inside the economic territory of a country. the amount payable to take delivery of a unit of the good at Household final consumption expenditure in the SNA the time and place required by the purchaser. It includes refers to the expenditure incurred by resident households, any transport charges incurred by the purchaser not already whether that expenditure is incurred within the economic included in the seller's invoice price. territory or abroad. 188 The use of income accounts 9.80 In order to calculate total household final consumption territory. Expenditures by residents abroad constitute expenditure it may be convenient to calculate the total imports, while expenditures by non-residents are exports. expenditure made by all households, whether resident or However, while the total expenditures by all households not, within the economic territory and to adjust this figure within the economic territory may be used for calculation by adding expenditures by residents abroad and subtracting in this way, it is not an aggregate recognized within the expenditures by non-residents within the economy SNA. E. Household actual final consumption 9.81 Household actual final consumption consists of the 9.82 The values of social transfers in kind provided by consumption goods and services acquired by individual government units or NPISHs are equal to the values of the households. The value of household actual final goods or services supplied to households less the amounts consumption is given by the sum of three components: of any expenditures incurred by households when the prices charged are not economically significant. a. The value of households' expenditures on consumption goods or services including expenditures on non- market goods or services sold at prices that are not 9.83 As described in sections F and H, the consumption economically significant; expenditure on individual goods and services by both general government and NPISHs is broken down between b. The value of the expenditures incurred by government those that are produced by the units themselves as non- units on individual consumption goods or services provided to households as social transfers in kind; and market producers and those that are purchased from market producers for onward transmission to households free or at c. The value of the expenditures incurred by NPISHs on prices that are not economically significant. This means individual consumption goods or services provided to that total household actual final consumption can also be households as social transfers in kind. split into these two components. F. Consumption expenditures incurred by general government 9.84 Expenditures on a wide range of consumption goods and account for most of the final consumption expenditure by services are incurred by general government, either on general government. It is therefore appropriate to take them collective services or on selected individual goods or first. services. Expenditures on the outputs of non-market 9.85 The final consumption expenditures of general government producers can be classified in several ways. In particular, they may be classified: 9.87 Government may produce output for own final use and some market output but most production by units of general a. According to whether the goods or services have been government is non-market in nature. As explained in produced by market or non-market producers; chapter 6 the value of the non-market output is estimated by the sum of the costs involved in production. Although b. According to whether the expenditures are on government delivers goods and services to the population collective services or individual goods or services; individually and collectively, the costs of so doing are shown as final consumption expenditure by government. c. By function or purpose according to the classification of the functions of government (COFOG); or 9.88 The value of government final consumption expenditure on non-market goods and services is not necessarily exactly d. By type of good or service according to the CPC. equal to the value of government output of these goods and services. The values of these expenditures are equal to the 1. Expenditures on the outputs of market and estimated values of all types of output less the value of production for own capital formation and less the values of non-market producers any receipts from sales. These receipts may be derived from sales of some goods or services at prices that are not 9.86 Expenditures on the outputs of non-market producers that economically significant or from sales of a few goods or are provided free, or at prices that are not economically services at prices that are economically significant (sales of significant, to individual households or the community secondary market output). 189 System of National Accounts Expenditures on consumption goods and c. The good or service must be such that its acquisition by services produced by market producers one household or person, or possibly by a small, restricted group of persons, precludes its acquisition by other households or persons. 9.89 Government units also purchase consumption goods and services produced by market producers that are supplied directly to households. The role of the government unit is 9.93 The reference to a small, restricted group of persons is confined to paying for the goods or services and ensuring needed because certain services are provided to small that they are distributed to households as social transfers in groups of people simultaneously; for example, several kind. The government unit does not engage in any further persons may travel in the same bus, train, ship or plane or processing of such goods or services and the expenditures attend the same class, lecture, concert or live theatre are treated as final consumption expenditure and not performance. However, these are still essentially individual intermediate consumption of the government unit. The services if there is a restriction on the number of values of the goods or services distributed in this way form individuals who can consume them. Other members of the part of social transfers in kind. In this way, expenditure by community are excluded and derive no benefit from them. government on market goods and services on behalf of households is recorded as both final consumption 9.94 From a welfare point of view, the important characteristic expenditure of government and actual final consumption of of an individual good or service is that its acquisition by households. one household, person or group of persons brings no (or very little) benefit to the rest of the community. While the Government output and final consumption provision of certain individual health or education services (for example, vaccination or immunization) may bring expenditure some external benefits to the rest of the community, in general the individuals concerned derive the main benefit. 9.90 Final consumption expenditure of government can be Thus, when a government unit incurs expenditures on the derived as follows: provision of individual goods or services, it must decide not only how much to spend in total but how to allocate, or The value of all types of output of general government, distribute, the goods or services among individual members of the community. From the point of view of economic and social policy, the way in which they are distributed may be less the value of output for own account capital formation, as important as the total amount spent. less the value of sales of goods and services at both Individual consumption by type of producer economically insignificant prices and at economically significant prices, 9.95 The whole of individual consumption of general government is treated as social transfers in kind in the plus the value of goods and services purchased from market redistribution of income in kind account and in the use of producers for delivery to households free or at adjusted disposable income account. It is analytically economically insignificant prices. interesting to split individual consumption into those goods and services produced by general government as a non- 2. Expenditures on individual and collective market producer and those that are purchased by general goods and services government from market producers for onward transmission to households either free or at prices that are not economically significant. 9.91 The consumption expenditures incurred by government units have to be divided into those incurred for the benefit of individual households and those incurred for the benefit Collective services of the community as a whole, or large sections of the community. 9.96 Most goods can be privately owned and are individual in the sense used here. On the other hand, certain kinds of Individual goods and services services can be provided collectively to the community as a whole. The characteristics of these collective services may be summarized as follows: 9.92 Individual goods and services are essentially "private", as distinct from "public", goods and services. They have the following characteristics: a. Collective services are delivered simultaneously to every member of the community or to particular a. It must be possible to observe and record the sections of the community, such as those in a particular acquisition of the good or service by an individual region of a locality; household or member thereof and also the time at which it took place; b. The use of such services is usually passive and does not require the explicit agreement or active participation of b. The household must have agreed to accept the all the individuals concerned; and provision of the good or service and to take whatever action is necessary to make it possible, for example, by c. The provision of a collective service to one individual attending a school or clinic; and does not reduce the amount available to others in the 190 The use of income accounts same community or section of the community. There is 02 Defence; no rivalry in acquisition. 03 Public order and safety; 9.97 The collective services provided by government consist mostly of the provision of security and defence, the 04 Economic affairs; maintenance of law and order, legislation and regulation, the maintenance of public health, the protection of the environment, etc. All members of the community can 05 Environmental protection; benefit from such services. As the individual usage of collective services cannot be recorded, individuals cannot 06 Housing and community amenities; be charged according to their usage. 07 Health; The borderline between individual and collective services 08 Recreation, culture and religion; 9.98 Expenditures incurred by governments in connection with 09 Education; individual services such as health and education are to be treated as collective when they are concerned with the 10 Social protection. formulation and administration of government policy, the setting and enforcement of public standards, the regulation, licensing or supervision of producers, etc. For example, the 9.100 All of classes 01 to 06 are collective services, as are section expenditures incurred by Ministries of Health or Education 07.5 and 07.6 of health, sections 08.3 to 08.6 of recreation, at a national level are to be included in collective culture and religion, sections 09.7 and 09.8 of education, consumption expenditures as they are concerned with and sections 10.8 and 10.9 of social protection. These general matters of policy, standards and regulation. On the sections cover expenditures on general administration, other hand, any overhead expenses connected with the regulation, research that is not recorded as capital administration or functioning of a group of hospitals, formation and so on. The remaining sections of health, schools, colleges or similar institutions are to be included in recreation, culture and religion, education and social individual expenditures. For example, if a group of private protection (which dominate each of the classes) are hospitals has a central unit that provides certain common individual services. services such as purchasing, laboratories, ambulances, or other facilities, the costs of these common services would Non-market services to enterprises be taken into account in the prices charged to patients. The same principle must be followed when the hospitals are non-market producers: all the costs that are associated with 9.101 Many government expenditures benefit enterprises as much the provision of services to particular individuals, including as households; expenditures on the cleaning, maintenance those of any central units providing common services, and repair of public roads, bridges, tunnels, etc. including should be included in the value of expenditures on the provision of street lighting, are examples. These are individual services. services whose consumption can be monitored and for this reason they are frequently provided on a market basis by charging tolls on road usage. When they are provided free, The classification of individual and collective however, it would be difficult to separate the services government expenditures provided free to enterprises from those provided free to households and, by convention, all these expenditures are 9.99 The classification of the functions of government treated as collective final expenditure. (COFOG) is a classification of transactions designed to apply to general government and its subsectors. There are 9.102 Collective services such as the provision of security by the ten classes in the classification as follows: police, fire services, etc. that are provided free to the community at large also benefit individual enterprises as 01 General public services; well as households. G. Actual final consumption of general government 9.103 The value of the actual final consumption of general sections of the community, rather than the government, the government is equal to the value of its total final actual consumption of these services cannot be distributed consumption expenditure less its expenditure on individual among individual households, or even among groups of goods or services provided as social transfers in kind to households such as subsectors of the household sector, or to households. The value of the actual final consumption of government units is thus equal to the value of the enterprises, as just noted. It is therefore attributed to the expenditures they incur on collective services. Although government units that incur the corresponding collective services benefit the community, or certain expenditures. 191 System of National Accounts 9.104 The identification and measurement of government actual economic, rather than political, rationale for final consumption serves two main analytical or policy government involvement; purposes: b. Collective services do not provide a mechanism for redistributing resources among individual households. a. Collective services can be identified with "public As redistribution may be one of the main economic goods" as defined in public finance and economic objectives of government policy, it is useful to separate theory. While it may be technically possible to charge the collective services that do not serve this purpose individual consumers of certain collective services from the individual goods and services that are according to their usage, the transactions costs of so ultimately channelled to individual households, even doing would be prohibitively high. This provides an though paid for by government. H. Consumption expenditures incurred by NPISHs 9.105 The treatment of consumption expenditures incurred by a. According to whether the goods or services have been NPISHs is very similar to that for general government. This produced by market or non-market producers; section itemizes only those aspects that differ. Whereas government expenditures are financed in large part out of b. According to whether the expenditures are on taxation, those of NPISHs are financed principally out of collective services or individual goods and services; subscriptions, contributions or donations or property income. c. By function or purpose according to the classification of the purposes of non-profit institutions serving 9.106 The services provided by NPISHs are often confined to the households (COPNI); and members of the associations that own them, although they may also provide individual goods or services to third d. By type of good or service according to the CPC. parties. Many NPISHs are only concerned with protecting the interests or welfare of their members or providing 9.109 For NPISHs as for government, it is possible that they recreational, sporting or cultural facilities that households purchase goods from market producers for distribution to or persons cannot otherwise easily obtain for themselves households. It is also possible that they may have some acting individually. Although NPISHs may provide receipts from sales either of non-market output at prices services to their members in groups, the services are that are not economically significant or from sales of essentially individual rather than collective. In general, secondary market production at economically significant persons other than their members are excluded and derive prices. However for many NPISHs, the value of their no benefit from the services provided. consumption expenditure will exactly match the value of their non-market output. 9.107 It is possible for NPISHs to produce collective services. For Individual consumption by type of producer example a privately funded non-profit institution may undertake medical research and make its results freely available. However, unless such activities are evident and 9.110 The whole of individual consumption of NPISHs is treated quantifiable, the assumption can be made that the as social transfers in kind in the redistribution of income in expenditure of NPISHs is on individual goods and services kind account and in the use of adjusted disposable income only. account. It is analytically interesting to split individual consumption into those goods and services produced by NPISHs as non-market producers and those that are 9.108 The final consumption expenditures of NPISHs can be purchased by NPISHs from market producers for onward classified in several ways. In particular, they may be transmission to households either free or at prices that are classified: not economically significant. I. Actual final consumption of NPISHs 9.111 The value of the actual final consumption of NPISHs is equal to the value of the expenditures they incur on equal to the value of its total final consumption expenditure collective services. If it is not possible to identify and less its expenditure on individual goods or services measure collective services provided by NPISHs, there provided as social transfers in kind to households. The may be no actual final consumption of NPISHs shown in value of the actual final consumption of NPISHs is thus the accounts. 192 The use of income accounts J. Final consumption expenditure and actual final consumption: summary 9.112 The purpose of this section is to summarize the conceptual 9.117 Actual final consumption of general government is interrelationship between the main consumption aggregates measured by the value of the collective consumption for the three sectors in which final consumption takes services provided to the community, or large sections of place, namely, the household sector, the NPISH sector and the community, by general government. the general government sector. 9.118 Actual final consumption of NPISHs is measured by the 1. Final consumption expenditure value of the collective consumption services provided to the community, or large sections of the community, by NPISHs. 9.113 Household final consumption expenditure consists of the expenditure, including expenditure whose value must be estimated indirectly, incurred by resident households on 3. Total final consumption in the economy individual consumption goods and services, including those sold at prices that are not economically significant and including consumption goods and services acquired 9.119 Total final consumption in the economy may be viewed abroad. from two angles. It may be defined from the expenditure side as the total value of all expenditures on individual and collective consumption goods and services incurred by 9.114 General government final consumption expenditure consists of expenditure, including expenditure whose resident households, resident NPISHs and general value must be estimated indirectly, incurred by general government units. Or, it may be defined in terms of actual government on both individual consumption goods and final consumption as the value of all the individual goods services and collective consumption services. and services acquired by resident households plus the value of the collective services provided by general government and NPISHs to the community or large sections of the 9.115 Final consumption expenditure of NPISHs consists of the community. expenditure, including expenditure whose value must be estimated indirectly, incurred by resident NPISHs on individual consumption goods and services and possibly 9.120 As noted in paragraph 8.145, social transfers in kind may on collective consumption services. be paid to non-residents. One simple example is emergency medical care provided to a foreign tourist by a hospital within general government. However, just as non-resident 2. Actual final consumption households may benefit from social transfers in kind from the national government, so resident households may 9.116 Actual final consumption of households is measured by benefit from social transfers in kind paid by the the value of all the individual consumption goods and government of another economy. In general these flows to services acquired by resident households. There are three non-residents will be small relative to the total level of sets of goods and services entering into household actual social transfers in kind and, unless there is strong evidence final consumption: to the contrary, by convention it may be assumed that the flows to non-residents are balanced by flows from governments (and NPISHs) of other economies. Subject to a. Those acquired through expenditure by households this convention, it is therefore the case that consumption themselves; expenditure for the total economy is exactly equal to total actual consumption. b. Those acquired as social transfers in kind from general government and NPISHs that are the output of these 9.121 In order to ensure that the values of the two aggregates are institutions as non-market producers; the same, the goods and services acquired by resident households through social transfers in kind must always be c. Those acquired as social transfers in kind from general valued at the same prices at which they are valued in the government and NPISHs that have been purchased by expenditure aggregates and the time of recording the goods these institutions from market producers for onward and services acquired by social transfers in kind must be transmission to households free or at prices that are not the same as the time of recording in the expenditure economically significant. aggregates. 193 System of National Accounts 194 Chapter 10: The capital account A. Introduction 10.1 The capital account is the first of four accounts dealing as goods and services, natural resources, financial assets with changes in the values of assets held by institutional and liabilities is the institutional unit entitled in law and units. It records transactions in non-financial assets. The sustainable under the law to claim the benefits associated financial account records transactions in financial assets with the entities. By contrast, the economic owner of and liabilities. The other changes in the volume of assets entities such as goods and services, natural resources, account records changes in the value of both non-financial financial assets and liabilities is the institutional unit and financial assets that result from neither transactions nor entitled to claim the benefits associated with the use of the price changes. The effects of price changes are recorded in entity in question in the course of an economic activity by the revaluation account. These four accounts enable the virtue of accepting the associated risks. change in the net worth of an institutional unit or sector between the beginning and end of the accounting period to 10.6 Every entity has both a legal owner and an economic be decomposed into its constituent elements by recording owner, though in many cases the economic owner and the all changes in the prices and volumes of assets, whether legal owner of an entity are the same. Where they are not, resulting from transactions or not. The impact of all four the legal owner has handed responsibility for the risk accounts is brought together in the balance sheets. The involved in using the entity in an economic activity to the immediately following chapters describe the other accounts economic owner along with associated benefits. In return just mentioned. the legal owner accepts another package of risks and benefits from the economic owner. 10.2 The purpose of the capital account, shown in table 10.1, is to record the values of the non-financial assets that are 10.7 When government claims legal ownership of an entity on acquired, or disposed of, by resident institutional units by behalf of the community at large, the benefits also accrue to engaging in transactions and to show the change in net the government on behalf of the community at large. Thus worth due to saving and capital transfers. The transactions government is regarded as both the legal and economic may be either with other institutional units, both resident owner of these entities. and non-resident, or internal transactions in which units retain products that they have produced themselves for use 10.8 An asset is a store of value representing a benefit or series as capital formation. of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of 10.3 When compiling balance sheets, it is customary to record carrying forward value from one accounting period to assets on the left-hand side and liabilities and net worth on another. All assets in the SNA are economic assets. the right-hand side. The same convention is followed in the accumulation accounts, where changes in assets are 2. Non-financial assets recorded on the left-hand side and other items on the right- hand side. As in the current accounts, the balancing item of the capital account, net lending or net borrowing, is 10.9 Two different categories of non-financial assets are recorded on the left-hand side. Consumption of fixed distinguished from each other: produced assets and non- capital is also recorded on the left-hand side of the capital produced assets. account. a. Produced assets are non-financial assets that have come 10.4 The right-hand side of the capital account records the into existence as outputs from production processes resources available for the accumulation of assets. These that fall within the production boundary of the SNA. consist of net saving, the balancing item carried forward from the use of income account, and capital transfers. b. Non-produced assets are non-financial assets that have Capital transfers payable are recorded with a negative sign. come into existence in ways other than through processes of production. 1. The definitions of ownership and assets Produced assets 10.5 Ownership and assets are defined in chapter 3 but it is helpful to recall some of the key features of the definitions 10.10 There are three main types of produced assets: fixed assets, here. It is important to distinguish between legal ownership inventories and valuables. Both fixed assets and inventories and economic ownership. The legal owner of entities such are assets that are held only by producers for purposes of 195 System of National Accounts production. Valuables may be held by any institutional unit decline in real value, nor to deteriorate over time under and are primarily held as stores of value. normal conditions. They consist of precious metals and stones, jewellery, works of art, etc. Valuables may be held by all sectors of the economy. 10.11 Fixed assets are produced assets that are used repeatedly or continuously in production processes for more than one year. The distinguishing feature of a fixed asset is not Non-produced assets that it is durable in some physical sense, but that it may be used repeatedly or continuously in production over a long period of time, which is taken to be more than one year. 10.14 Non-produced assets consist of three categories: natural resources; contracts, leases and licences; and purchased Some goods, such as coal, may be highly durable goodwill and marketing assets. physically but cannot be fixed assets because they can be used once only. Fixed assets include not only structures, machinery and equipment but also cultivated assets such as 10.15 Natural resources consist of naturally occurring trees or animals that are used repeatedly or continuously to resources such as land, water resources, uncultivated produce other products such as fruit or dairy products. They forests and deposits of minerals that have an economic also include intellectual property products such as software value. or artistic originals used in production. 10.16 Contracts, leases and licences are treated as assets only 10.12 Inventories are produced assets that consist of goods and when two conditions are both satisfied. services, which came into existence in the current period or in an earlier period, and that are held for sale, use in a. The terms of the contract, lease or licence specify a production or other use at a later date. Inventories consist price for the use of an asset or provision of a service of stocks of outputs that are still held by the units that that differs from the price that would prevail in the produced them prior to their being further processed, sold, absence of the contract, lease or licence. delivered to other units or used in other ways and stocks of products acquired from other units that are intended to be used for intermediate consumption or for resale without b. One party to the contract must be able legally and further processing. Inventories of services consist of work- practically to realize this price difference. in-progress or finished products, for example architectural drawings, which are in the process of completion or are The second condition presupposes that a market for the completed and waiting for the building to which they relate contract exists. It is recommended that in practice contracts, to be started. Inventories held by government include, but leases and licences should only be recorded in the accounts are not limited to, inventories of strategic materials, and when the holder does actually exercise his right to realize grain and other commodities of special importance to the the price difference. nation. 10.17 Purchased goodwill and marketing assets represent the 10.13 Valuables are produced goods of considerable value that whole or part of the net worth of an institutional unit. are not used primarily for purposes of production or They are recorded only when a unit is purchased in its consumption but are held as stores of value over time. entirety or an identifiable marketing asset is sold to another Valuables are expected to appreciate or at least not to unit. Table 10.1: The capital account - concise form - changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Gross capital formation 308 8 38 55 5 414 414 Net capital formation 151 -4 11 32 2 192 192 Gross fixed capital formation 280 8 35 48 5 376 376 Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 26 0 0 2 0 28 28 Acquisitions less disposals of valuables 2 0 3 5 0 10 10 Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 Capital transfers, receivable Capital transfers, payable Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 196 The capital account 3. The structure of the capital account Changes in net worth due to saving and capital transfers Saving 10.21 The total of the entries on the right-hand side of the account is explicitly shown and described as changes in net worth 10.18 The right-hand side of the capital account represents due to saving and capital transfers. It is not a balancing item. Changes in net worth due to saving and capital changes in liabilities and net worth. The first item recorded transfers represent the positive or negative amount on the right-hand side is the balancing item carried down available to the unit or sector for the acquisition of non- from the use of disposable income account, net saving. financial and financial assets. When positive, net saving represents that part of disposable income that is not spent on consumption goods and services Acquisitions less disposals of non-financial and must, therefore, be used to acquire non-financial or financial assets of one kind or another, including cash, or to assets repay liabilities. When negative, net saving measures the amount by which final consumption expenditure exceeds 10.22 The left-hand side of the capital account records how much disposable income: the excess must be financed by of the change in net worth due to saving and capital transfers is used to acquire non-financial assets and how disposing of assets or incurring new liabilities. much is left to be explained by the acquisition of financial assets or liabilities in the financial account. Resources Capital transfers coming from the disposal of existing assets appear as negative entries on the left-hand side of the account also. As well as purchases and sales of assets, non-financial 10.19 Capital transfers are unrequited transfers where either assets acquired (or disposed of) via barter or by means of the party making the transfer realizes the funds involved production for own use are included. by disposing of an asset (other than cash or inventories), relinquishing a financial claim (other than accounts 10.23 Three headings for the net change in the value of non- receivable) or the party receiving the transfer is obliged to financial assets are shown in the capital account: acquire an asset (other than cash) or both conditions are met. Capital transfers are often large and irregular but a. Gross capital formation; neither of these are necessary conditions for a transfer to be considered a capital rather than a current transfer. If there is b. Consumption of fixed capital; doubt about whether a transfer should be treated as current or capital, it should be treated as current. c. Acquisitions less disposals of non-produced non- financial assets. 10.20 Capital transfers receivable represent an increase in net The treatment given to each of these categories of changes worth and so are shown on the right-hand side of the in assets is described in later sections of this chapter. account for the recipient. By convention, the matching amounts payable are also shown on the right-hand side of 10.24 Gross capital formation shows the acquisition less the account but as a negative entry (that is, a decrease in net disposal of produced assets for purposes of fixed capital worth) for the payer. formation, inventories or valuables. It is possible (if Table 10.1 (cont): The capital account - concise form - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 Gross capital formation 414 414 Net capital formation 192 192 Gross fixed capital formation 376 376 Consumption of fixed capital - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 28 28 Acquisitions less disposals of valuables 10 10 Acquisitions less disposals of non-produced assets 0 0 Capital transfers, receivable 33 0 6 23 0 62 4 66 Capital transfers, payable - 16 -7 - 34 -5 -3 - 65 -1 - 66 Changes in net worth due to saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 197 System of National Accounts uncommon) for the gross capital formation of an individual are either actually or notionally resident, this part will institutional unit or sector to be negative if it sells off generally be zero for the economy as a whole. (An enough of its existing assets to other units or sectors. exception exists for land purchased by a foreign government for an embassy or military base.) However, 10.25 Consumption of fixed capital is the decline, during the there may be transactions in contracts, leases and licences course of the accounting period, in the current value of or marketing assets with non-resident units. the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or Net lending normal accidental damage. When, as recommended in the SNA, the balancing item carried down from the use of income account is net saving, it already reflects the fact that 10.28 The balancing item of the capital account, net lending, is net worth has been reduced by the amount of consumption defined as the difference between changes in net worth of fixed capital, the amount by which fixed assets are due to saving and capital transfers and net acquisitions of reduced in the period. Since the capital account is designed non-financial assets (acquisitions less disposals of non- to show the way in which net worth is augmented by the financial assets, less consumption of fixed capital). If the acquisition of non-financial assets, this amount has to be amount is negative it represents net borrowing. It shows offset from the value of new acquisitions of fixed assets so the amount of the resources remaining for purposes of the addition to the capital stock of fixed assets is a net lending or that need to be borrowed. Even if funds are not amount. For this reason, consumption of fixed capital is actively lent but are retained in cash, or in a bank deposit, recorded as a negative change in assets on the left-hand the holder of the counterpart obligations represented by side of the capital account. these financial assets has in effect borrowed from the unit holding the cash or bank deposit. 10.26 If it is not feasible to measure consumption of fixed capital because of lack of data, the saving figure carried forward from the use of income account has to be gross. In this case, 10.29 The identity between the balancing items of the capital there is no entry for consumption of fixed capital in the account and the financial account is an important feature of capital account. If consumption of fixed capital has to be the set of the accounts as a whole. What is borrowed by one omitted from both sides of the account, the balancing item unit must be lent by another and vice versa. The conceptual of the account is not affected; net lending or borrowing can identity between the balancing items provides a check on be derived residually whether or not consumption of fixed the numerical consistency of the set of accounts as a whole, capital can be estimated. However, if consumption of fixed although the two balancing items are likely to diverge in capital is not estimated, the accumulation accounts do not practice because of errors of measurement. record all changes between two successive balance sheets. 10.30 In general in the SNA, and especially in balancing items, 10.27 The remaining item on the left-hand side of the capital the prefix net means excluding the consumption of fixed account refers to non-produced non-financial assets. The capital. For net lending this is not the case; it represents the total value of the acquisitions less disposals of non- difference between those assets giving rise to making funds produced non-financial assets may also be positive or available to other units and those drawing funds from other negative. Since natural resources are owned by units that units. B. Gross capital formation 10.31 Gross capital formation is measured by the total value of constitute a fixed asset and what activities are treated as the gross fixed capital formation, changes in inventories adding to the value of non-produced assets. and acquisitions less disposals of valuables. Before discussing in detail the entries to be recorded under each of The asset boundary these items, it is necessary to clarify the coverage of the item and the application of accounting rules such as valuation, time of recording and the identification of 10.33 All goods and services supplied to the economy by means ownership. of production, imports or the disposal of produced assets must be used for exports, consumption (intermediate or final) or as part of capital formation. The boundary line 1. Gross fixed capital formation between those products that are retained in the economy and are used for consumption and those products that are used for capital formation is known as the asset boundary. 10.32 Gross fixed capital formation is measured by the total The asset boundary for fixed assets consists of goods and value of a producer's acquisitions, less disposals, of fixed services that are used in production for more than one assets during the accounting period plus certain specified year. expenditure on services that adds to the value of non- produced assets. In order to ensure that the coverage of 10.34 Two exclusions from the asset boundary should be noted at gross fixed capital formation is precisely defined, it is the outset. The first is that consumer durables are not necessary first to define what does and what does not treated as fixed assets. The services these durables produce 198 The capital account are household services outside the production boundary of production by their current owners, but an existing capital the SNA. If, for example, a washing machine were to be good might be sold by its owner before it has actually been treated as a fixed asset, the production boundary would used. have to be extended to include all laundry services, whether undertaken by machine or by hand. As it stands, the 10.39 In general, sales or other disposals of existing goods, production boundary restricts laundry services to those whether fixed assets or not, are recorded as negative services provided to other units but includes services expenditures or negative acquisitions. Thus, when the provided by both machine and by hand. However, owner- ownership of an existing fixed asset is transferred from one occupied dwellings are not treated as consumer durables resident producer to another, the value of the asset sold, but are included within the asset boundary. The owner- bartered or transferred is recorded as negative gross fixed occupiers are treated as owners of unincorporated capital formation by the former and as positive gross fixed enterprises producing housing services for their own capital formation by the latter. The value of the positive consumption. gross fixed capital formation recorded for the purchaser exceeds the value of the negative gross fixed capital 10.35 The second exclusion is pragmatic rather than conceptual formation recorded for the seller by the value of the costs of and concerns small tools. Some goods may be used ownership transfer incurred by the purchaser. The repeatedly, or continuously, in production over many years treatment of these costs is explained in more detail in a later but may nevertheless be small, inexpensive and used to section. perform relatively simple operations. Hand tools such as saws, spades, knives, axes, hammers, screwdrivers and 10.40 When the sale takes place between two resident producers, spanners or wrenches are examples. If expenditures on such the positive and negative values recorded for gross fixed tools take place at a fairly steady rate and if their value is capital formation cancel out for the economy as a whole small compared with expenditures on more complex except for the costs of ownership transfer. Similarly, if an machinery and equipment, it may be appropriate to treat the existing immovable fixed asset, such as a building, is sold tools as materials or supplies used for intermediate to a non-resident, by convention the latter is treated as consumption. Some flexibility is needed, however, purchasing a financial asset that is the equity of a notional depending on the relative importance of such tools. In resident unit while the notional resident unit is deemed to countries in which they account for a significant part of the purchase the asset, so that the sale and purchase of the asset value of the total stock of an industry's durable producers' takes place between resident units. However, if an existing goods, they may be treated as fixed assets and their movable fixed asset, such as a ship or aircraft, is exported, acquisition and disposal by producers recorded under gross no positive gross fixed capital formation is recorded fixed capital formation. elsewhere in the economy to offset the seller's negative gross fixed capital formation. 10.36 Not all goods included within the asset boundary must be newly produced. Since assets have a long life, they may 10.41 Some durable goods, such as vehicles, may be classified as change hands but continue to function as fixed assets for fixed assets or as consumer durables depending upon the their new owners. Thus it is important to define what owner and the purpose for which they are used. If, existing fixed assets are and how they are treated in therefore, the ownership of such a good were transferred measuring gross fixed capital formation. from an enterprise to a household to be used for final consumption, negative gross fixed capital formation is 10.37 Nor are all services included within the asset boundary recorded for the enterprise and positive consumption immediately recognizable. Important classes of services are expenditure by the household. If a vehicle owned by a included in the asset boundary because of the impact they household were to be acquired by an enterprise, it would be have on the value of new or existing assets. These are recorded as an acquisition of a "new" fixed asset by the improvements to existing assets and the cost of ownership enterprise, even though it is an existing good, and as transfer of assets. These are described below after defining negative consumption expenditure by the household. A existing fixed assets. similar treatment is applied to imports of used products acquired by resident producers as assets. Existing fixed assets 10.42 Thus, it is perfectly possible for gross fixed capital formation to be negative as a result of the sale or disposal 10.38 Because assets have service lives that may range up to 50 of existing fixed assets, although aggregate gross fixed years or more for dwellings or other structures, their capital formation is unlikely to be negative for large groups ownership may change several times before they are of units such as subsectors, sectors or the economy as a eventually scrapped, demolished or abandoned. An existing whole. fixed asset is one whose value was included in the stock of fixed capital of at least one producer unit in the domestic economy at some earlier point in time either in the Improvements to existing assets current period or in the immediately previous accounting period. In many countries, well-organized markets exist to 10.43 Gross fixed capital formation may take the form of facilitate the buying and selling of many kinds of existing improvements to existing fixed assets, such as buildings or fixed assets, notably automobiles, ships, aircraft, dwellings computer software, that increase their productive capacity, and other structures. Indeed, the number of existing extend their service lives, or both. By definition, such gross dwellings bought and sold within a given time period may fixed capital formation does not lead to the creation of new considerably exceed the number of new dwellings. In assets that can be separately identified and valued, but to an practice, most existing fixed assets will have been used in increase in the value of the asset that has been improved. 199 System of National Accounts Accordingly, it is the improved asset that is henceforth as size, shape, performance, capacity, or expected service relevant to the SNA and on which consumption of fixed lives, or by the fact that improvements are not the kinds of capital must be calculated subsequently. changes that are observed to take place routinely in other fixed assets of the same kind, as part of ordinary 10.44 A different treatment is applied to improvements to land in maintenance and repair programmes. its natural state. In this case the improvements are treated as the creation of a new fixed asset and are not regarded as Costs incurred on acquisition and disposal of assets giving rise to an increase in the value of the natural resource. If land, once improved, is further improved, then the normal treatment of improvements to existing fixed 10.48 Purchasing a fixed asset is often a complicated procedure assets applies. that may involve using lawyers to establish legal title to the asset, engineers to certify that it is in satisfactory working order and so on. There may also be taxes to be paid 10.45 The distinction between ordinary maintenance and repairs occasioned by the change of ownership of the item. that constitute intermediate consumption and those that are Further, in the case of highly complex machinery there may treated as capital formation is not clear cut. As explained in be significant costs associated with delivery and installation paragraphs 6.226 to 6.229, ordinary maintenance and that were not included in the purchase price. repairs are distinguished by two features: 10.49 The benefits to be derived from the use of the asset in a. They are activities that must be undertaken regularly in production have to cover these costs as well as the initial order to maintain a fixed asset in working order over its price of the asset. Costs incurred on acquisition of an asset expected service life. The owner or user of the asset has are treated as an integral part of the value of that unit's no choice about whether or not to undertake ordinary gross fixed capital formation. The value at which the asset maintenance and repairs if the asset in question is to enters the balance sheet of its new owner therefore includes continue to be used in production; these costs. This applies to both new and existing assets. b. Ordinary maintenance and repairs do not change the fixed asset's performance, productive capacity or 10.50 Just as there may be costs incurred on the acquisition of an expected service life. They simply maintain it in good asset, there may also be costs incurred on the disposal of an working order, if necessary by replacing defective parts asset. Some of these may be parallel to those costs incurred by new parts of the same kind. on acquisition, for example legal fees and disinstallation costs. However, in the case of some significantly large and important assets, such as oil rigs and nuclear power 10.46 On the other hand, improvements to existing fixed assets stations, there may also be major costs associated with the that constitute gross fixed formation must go well beyond decommissioning of the asset at the end of its productive the requirements of ordinary maintenance and repairs. They life. For some land sites, such as those used for landfill, must bring about significant changes in some of the there may be large costs associated with rehabilitation of characteristics of existing fixed assets. They may be the site. These are referred to collectively as terminal costs. distinguished by the following features: 10.51 All these costs associated with acquiring and disposing of a. The decision to renovate, reconstruct or enlarge a fixed assets may be described as costs of ownership transfer. The asset is a deliberate investment decision that may be costs of ownership transfer consist of the following kinds taken any time, even when the good in question is in of items: good working order and not in need of repair. Major renovations of ships, buildings or other structures are frequently undertaken well before the end of their a. All professional charges or commissions incurred by normal service lives; both units acquiring or disposing of an asset such as fees paid to lawyers, architects, surveyors, engineers b. Major renovations, reconstructions or enlargements and valuers, and commissions paid to estate agents increase the performance or productive capacity of and auctioneers; existing fixed assets or significantly extend their previously expected service lives, or both. Enlarging or b. Any trade and transport costs separately invoiced to extending an existing building or structure constitutes a the purchaser; major change in this sense, as does the refitting or restructuring of the interior of a building or ship or a c. All taxes payable by the unit acquiring the asset on major extension to or enhancement of an existing the transfer of ownership of the asset; software system. d. Any tax payable on the disposal of an asset; 10.47 It is difficult to provide simple objective criteria that enable improvements to be distinguished from repairs because any repair may be said to improve the performance or extend e. Any delivery and installation or disinstallation costs the working life of the unrepaired asset. For example, not included in the price of the asset being acquired or machines may cease to function at all because of the failure disposed of; and of one small part. The replacement of such a part does not, however, constitute gross fixed capital formation. Thus, f. Any terminal costs incurred at the end of an asset's improvements have to be identified either by the magnitude life such as those required to render the structure safe of the changes in the characteristics of the fixed assets such or to restore the environment in which it is situated. 200 The capital account 10.52 All these costs of ownership transfer are treated as gross acquired by the lessee in return for a loan extended by the fixed capital formation. They are attributed to the purchaser lessor to the lessee. The asset is then recorded on the or seller of the asset according to which unit bears the balance sheet of the lessee and not the lessor. The payments responsibility of meeting the costs. The time of recording due under the lease arrangement are treated as forming a of these costs is discussed below. The costs are written off repayment of the principal of the loan and a payment of via consumption of fixed capital over the period the new interest and possibly a service charge. More details of these owner expects to hold the asset, as discussed in the section arrangements are given in chapter 17. on consumption of fixed capital except for the terminal costs that should be written off over the whole life of the 10.58 Certain structures may be produced for own communal use asset. by groups of households: for example, buildings, roads, bridges, etc. After they are finished, the ownership of such Time of recording structures may then be transferred to some government unit that assumes responsibility for their maintenance. When the 10.53 The general principle for the time of recording of transfer occurs, the gross fixed capital formation on own acquisitions less disposals of fixed assets is when the account originally attributed to the group of households is ownership of the fixed assets is transferred to the cancelled by their negative gross fixed capital formation institutional unit that intends to use them in production. resulting from the capital transfer in kind made to the Except in two special cases, this time is not generally the government unit. The final gross fixed capital formation same as the time at which the fixed assets are produced. remaining is that of the government unit resulting from its Nor is it necessarily the time at which they are put to use in acquisition of the asset through the capital transfer in kind. the production of other goods or services. If no such transfer exists and the structure remains the communal property of the group of households responsible for its construction, an NPISH providing collective services 10.54 The two exceptions cover assets that take some time to should be created. produce such as construction projects and some cultivated biological resources. In general, incomplete construction projects and immature animals and plantations are treated 10.59 A further consideration to be taken into account in as work-in-progress. They are reclassified from inventories determining ownership concerns assets built under a private to fixed capital when complete and delivered to the unit finance initiative (PFI), sometimes also described as a intending to use them as fixed assets. However, when the public-private partnership (PPP) or a build, own, operate, assets are being produced on own account, the partially transfer (BOOT) scheme or some other similar shorthand. complete products are recorded as fixed capital formation Such schemes are under accounting scrutiny at the time of as work takes place. writing. Provisional guidance on how to ascribe the ownership of such schemes is given in chapter 22. 10.55 When assets are developed under a contract of sale, the producer records work-in-progress as normal but when 10.60 All buildings and other structures within the economic stage payments are made, these are regarded as purchase of territory are deemed, by convention, to be owned by [part of] a fixed asset or as a trade advance if the value of resident units. If the economic owner (or lessee under a the stage payment exceeds the value of the work put in financial lease) would not otherwise qualify as a resident place. In the latter case, work is recorded as fixed capital unit, a notional resident unit is created for this purpose. The delivered to the final owner as work proceeds until the notional resident unit is assumed to purchase (or lease) the trade credit is exhausted. When there is no contract of sale building or structure. The legal owner (or lessor) is deemed agreed in advance, the output produced by the enterprise to hold equivalent equity in the notional resident unit. If a must be recorded as work-in-progress or as additions to the building or structure is owned in part by a resident unit and producers' inventories of finished goods, depending on in part by one or several non-residents, there is one notional whether the product is completed. For example, finished resident unit established with each of the owners having a dwellings built speculatively remain as additions to the proportionate share of the equity of the notional resident producers' inventories of finished goods until they are sold unit. or otherwise acquired by users. Valuation Ownership of assets 10.61 The various components of acquisitions and disposals of 10.56 In most cases, the ownership of fixed assets is fixed assets are listed below: straightforward; it is the unit that acquires the asset for use in production. There are however, three exceptions to be a. Value of fixed assets purchased; noted. One concerns assets subject to a financial lease; the second concerns assets produced by communal effort; the third concerns immovable assets owned by non-residents. b. Value of fixed assets acquired through barter; 10.57 A financial lease is a contract between a lessor and a lessee c. Value of fixed assets received as capital transfers in whereby the lessor legally owns the good but the terms of kind; the lease are such that the lessee takes over both the economic risks and rewards of using the asset in d. Value of fixed assets retained by their producers for production. In effect, therefore, the lessee becomes the their own use, including the value of any fixed assets economic owner of the asset even if the lessor remains the being produced on own account that are not yet legal owner. In these cases, the asset is recorded as being completed or fully mature; 201 System of National Accounts less 10.65 Table 10.2 shows the changes in assets side of table 10.1 expanded to show the entries for transactions in fixed assets. It will be noted that the SNA recommends showing e. Value of existing fixed assets sold; acquisitions of certain categories of assets separately from disposals of those assets when this provides analytically f. Value of existing fixed assets surrendered in barter; useful data. g. Value of existing fixed assets surrendered as capital 10.66 In presentations of the capital account, gross fixed capital transfers in kind. formation is usually shown by type of asset, where the accounting principles of the last paragraph are applied to Items (a) to (d) include new assets, existing assets, the each category of fixed asset in turn. Table 10.2 also value of improvements to assets and the cost of ownership incorporates the classification of fixed assets used in the transfers in respect of these assets. Items (e), (f) and (g) SNA. Each of the main categories of fixed assets is defined include disposals of assets that may cease to be used as and described in turn below. fixed assets by their new owners: for example, vehicles sold by enterprises to households for their personal use, 10.67 The SNA does not formally include a division between assets that are scrapped or demolished by their new owners tangible and intangible assets in the classification. and assets that are exported. However, the categories of dwellings, other buildings and structures, machinery and equipment, weapons systems and 10.62 Fixed assets acquired through barter are valued at their cultivated biological resources can be taken to correspond estimated purchasers' prices plus any costs of ownership to tangible assets and the other categories to intangible transfer. In practice, neither taxes on products nor assets. transportation costs may apply, in which case the purchasers' prices will not differ from the basic prices of Dwellings the product. Fixed assets produced for own gross fixed capital or assets transferred in kind are valued at their estimated basic prices, or by their costs of production when 10.68 Dwellings are buildings, or designated parts of buildings, satisfactory estimates of their basic prices cannot be made. that are used entirely or primarily as residences, including any associated structures, such as garages, and all permanent fixtures customarily installed in residences. 10.63 Special considerations apply to fixed assets produced by Houseboats, barges, mobile homes and caravans used as communal construction by households. If the value of the principal residences of households are also included, as are asset must be estimated on the basis of costs, and some or public monuments identified primarily as dwellings. all of the labour is provided free, as may happen, an estimate of what the cost of paid labour would be must be included in the estimated total production costs using wage 10.69 Examples include products included in CPC 2 class 5311, rates for similar kinds of labour in the vicinity or region. residential buildings and part of CPC 2.group 387. The Otherwise, the value of the finished structure will be former class includes single and multiple dwelling seriously underestimated. However, this estimate is not buildings as well as residential buildings for communities, treated as compensation of employees but as gross mixed retirement homes, hostels, orphans etc. The latter class income. This income accrues to the households concerned includes prefabricated buildings, including those intended who are then assumed to use it to "purchase" the final for housing or for buildings associated with housing such construction. If the construction is then handed over to as garages. government, there is negative gross fixed capital formation recorded by the community offsetting their previously 10.70 The costs of clearing and preparing the site for construction recorded acquisition of the asset and positive gross fixed are part of the costs of new dwellings (and other buildings capital formation recorded by government, along with a and structures) and are therefore included in the value of capital transfer of the value of the construction from the the buildings. community to government. 10.71 Incomplete dwellings are included to the extent that the Transactions in fixed assets ultimate user is deemed to have taken ownership, either because the construction is on own-account or as evidenced by the existence of a contract of sale or purchase. 10.64 Gross fixed capital formation in a particular category of fixed asset consists of the value of producers' acquisitions of new and existing products of this type less the value of 10.72 Dwellings acquired for military personnel are included their disposals of fixed assets of the same type. Gross fixed because they are used for the production of housing capital formation is not recorded until the ownership of the services, in the same way as dwellings acquired by civilian fixed assets is transferred to the unit that intends to use units. them in production unless it is being constructed to order under a contract agreed in advance. Thus, new assets that Other buildings and structures have not yet been sold form part of additions to inventories of finished goods held by the producers of the assets. Similarly, an imported product is not recorded as gross 10.73 Other buildings and structures comprise non-residential fixed capital formation until it is acquired by the unit that buildings, other structures and land improvements. These intends to use it. are described in turn below. 202 The capital account Buildings other than dwellings Other structures 10.74 Buildings other than dwellings include whole buildings or 10.76 Other structures include structures other than buildings, parts of buildings not designated as dwellings. Fixtures, including the cost of the streets, sewer, etc. The costs of site clearance and preparation are also included. Public facilities and equipment that are integral parts of the monuments for which identification as dwellings or non- structures are included. For new buildings, costs of site residential buildings is not possible are included as are clearance and preparation are included. Public monuments shafts, tunnels and other structures associated with mining identified primarily as non-residential buildings are also mineral and energy resources, and the construction of sea included. walls, dykes, flood barriers etc. intended to improve the quality and quantity of land adjacent to them. The infrastructure necessary for aquaculture such as fish farms 10.75 Examples include products included in CPC 2.0 class 5312, and shellfish beds is also included. non-residential buildings, such as warehouses and industrial buildings, commercial buildings, buildings for 10.77 Examples include products included in CPC 2.0 group 532, public entertainment, hotels, restaurants, schools, hospitals, civil engineering works, such as highways, streets, roads, prisons etc. Prisons, schools and hospitals are regarded as railways and airfield runways; bridges, elevated highways, buildings other than dwellings despite the fact that they tunnels and subways; waterways, harbours, dams and other may shelter institutional households. waterworks; long-distance pipelines, communication and Table 10.2:The capital account - the classification of fixed assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Gross capital formation 308 8 38 55 5 414 414 Net capital formation 151 -4 11 32 2 192 192 Gross fixed capital formation 280 8 35 48 5 376 376 Acquisitions less disposals of fixed assets 263 8 35 48 5 359 359 Acquisitions of new fixed assets 262 8 38 45 5 358 358 Acquisitions of existing fixed assets 5 0 0 3 1 9 9 Disposals of existing fixed assets -4 -3 0 -1 -8 -8 Costs of ownership transfer on non-produced assets 17 17 17 Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 Gross fixed capital formation by type of asset Dwellings Other buildings and structures Buildings other than dwellings Other structures Land improvements Machinery and equipment Transport equipment ICT equipment Other machinery and equipment Weapons systems Cultivated biological resources Animal resources yielding repeat products Tree, crop and plant resources yielding repeat products Costs of ownership transfer on non-produced assets Intellectual property products Research and development Mineral exploration and evaluation Computer software and databases Computer software Databases Entertainment, literary or artistic originals Other intellectual property products Changes in inventories 26 0 0 2 0 28 28 Acquisitions less disposals of valuables 2 0 3 5 0 10 10 Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 Capital transfers, receivable Capital transfers, payable Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 203 System of National Accounts power lines; local pipelines and cables, ancillary works; integral to buildings that are included in dwellings and non- constructions for mining and manufacture; and residential buildings. Machinery and equipment other than constructions for sport and recreation. weapons systems acquired for military purposes are included; weapons systems form another category. 10.78 The construction of new public monuments constitutes gross fixed capital formation and similarly, major 10.83 Machinery and equipment such as vehicles, furniture, improvements to existing public monuments are also kitchen equipment, computers, communications included in gross fixed capital formation. Public equipment, etc. that are acquired by households for monuments are identifiable because of particular purposes of final consumption are not fixed assets and their historical, national, regional, local, religious or symbolic acquisition is not treated as gross fixed capital formation. significance. They are accessible to the general public, and However, houseboats, barges, mobile homes and caravans visitors are often charged for admission to the monuments that are used as the principal residences of households are or their vicinity. Their owners, who may be government treated as dwellings, so that their acquisition by households units, non-profit institutions (NPIs), corporations or is included in gross fixed capital formation. households, typically use public monuments to produce cultural or entertainment-type services. In principle, the gross fixed capital formation in public monuments should Transport equipment be included in dwellings, non-residential buildings, and other structures as appropriate; in practice, it may be 10.84 Transport equipment consists of equipment for moving desirable to classify them with other structures. people and objects. Examples include products other than Consumption of fixed capital on new monuments, or on parts included in CPC 2.0 division 49, transport equipment, major improvements to existing monuments, should be such as motor vehicles, trailers and semi-trailers; ships; calculated on the assumption of appropriately long service railway and tramway locomotives and rolling stock; aircraft lives. and spacecraft; and motorcycles, bicycles, etc. Land improvements ICT equipment 10.79 Land improvements are the result of actions that lead to 10.85 Information, computer and telecommunications (ICT) major improvements in the quantity, quality or equipment consists of devices using electronic controls productivity of land, or prevent its deterioration. Activities and also the electronic components forming part of these such as land clearance, land contouring, creation of wells devices. Examples are products within CPC 2.0 categories and watering holes that are integral to the land in question 452 and 472. In practice, this narrows the coverage of ICT are to be treated as resulting in land improvements. equipment mostly to computer hardware and Activities such as the creation of seawalls, dykes, dams and telecommunications equipment. major irrigation systems which are in the vicinity of the land but not integral to it, which often affect land belonging to several owners and which are often carried out by Other machinery and equipment government, result in assets that are to be classified as structures. 10.86 Other machinery and equipment consists of machinery and equipment not elsewhere classified. Examples include 10.80 Land improvements represent a category of fixed assets products other than parts and items identified in other distinct from the non-produced land asset as it existed categories of fixed capital formation included in CPC 2.0 before improvement. Land before improvements are divisions 43, general purpose machinery; 44, special effected remains a non-produced asset and as such is purpose machinery; 45, office, accounting and computing subject to holding gains and losses separately from price equipment; 46, electrical machinery and apparatus; 47, changes affecting the improvements. In cases where it is radio, television and communication equipment and not possible to separate the value of the land before apparatus; and 48, medical appliances, precision and improvement and the value of those improvements, the optical instruments, watches and clocks. Other examples land should be allocated to the category that represents the are products other than parts included in CPC 2.0 groups greater part of the value. 337, fuel elements (cartridges) for nuclear reactors; 381, furniture; 383, musical instruments; 384, sports goods; and 10.81 The costs of ownership transfer on all land are to be 423, steam generators except central heating boilers. included with land improvements. Weapons systems Machinery and equipment 10.87 Weapons systems include vehicles and other equipment 10.82 Machinery and equipment cover transport equipment, such as warships, submarines, military aircraft, tanks, machinery for information, communication and missile carriers and launchers, etc. Most single-use telecommunications (ICT) equipment, and other weapons they deliver, such as ammunition, missiles, machinery and equipment. As explained above, machinery rockets, bombs, etc., are treated as military inventories. and equipment under a financial lease are treated as However, some single-use items, such as certain types of acquired by the user (lessee) rather than as acquired by the ballistic missile with a highly destructive capability, may lessor. Tools that are relatively inexpensive and purchased provide an ongoing service of deterrence against aggressors at a relatively steady rate, such as hand tools, may be and therefore meet the general criteria for classification as excluded. Also excluded are machinery and equipment fixed assets. 204 The capital account Cultivated biological resources acquired by users of the livestock less the value of their disposals. Disposals consist of animals sold or otherwise disposed of, including those sold for slaughter, plus those 10.88 Cultivated biological resources cover animal resources animals slaughtered by their owners. Exceptional losses of yielding repeat products and tree, crop and plant animals due to major outbreaks of disease, contamination, resources yielding repeat products whose natural growth drought, famine, or other natural disasters are recorded in and regeneration are under the direct control, the other changes in the volume of assets account and not responsibility and management of institutional units. as disposals. Incidental losses of animals due to occasional deaths from natural causes form part of consumption of 10.89 In general, when the production of fixed assets takes a long fixed capital. Consumption of fixed capital of an individual time to complete, those assets whose production is not yet animal is measured by the decline in its value as it gets completed at the end of the accounting period are recorded older. as work-in-progress. However, when the assets are produced on own account they are treated as being acquired by their users at the same time as they are produced and not Tree, crop and plant resources yielding repeat as work-in-progress. These general principles also apply to products the production of cultivated assets such as animals or trees that may take a long time to reach maturity. Two cases need 10.95 Tree, crop and plant resources yielding repeat products to be distinguished from each other: the production of cover plants whose natural growth and regeneration are cultivated products by specialized producers, such as under the direct control, responsibility and management breeders or tree nurseries, and the own-account production of institutional units. They include trees (including vines of cultivated assets by their users. and shrubs) cultivated for fruits and nuts, for sap and resin and for bark and leaf products. Trees grown for timber that 10.90 In the case of the specialist producers, animals or trees yield a finished product once only when they are ultimately whose production is not yet complete and are not ready for felled are not fixed assets, just as cereals or vegetables that sale or delivery are recorded as work-in-progress. produce only a single crop when they are harvested cannot Examples are one-year-old horses bred for sale as two- be fixed assets. year-old race horses, or young fruit trees that need further growth before being marketable. Such work-in-progress is 10.96 Gross fixed capital formation in plantations, orchards, etc., recorded and valued in exactly the same way as that consists of the value of the acquisitions less disposals of originating in any other kind of production. mature trees, shrubs, etc., including acquisitions of immature trees, shrubs, etc., produced on own account. As 10.91 However, when animals or trees intended to be used as explained above, the value of the latter may be fixed assets are produced on own account by farmers or approximated, if necessary, by the value of costs incurred others, incomplete assets in the form of immature animals, in their production during the period: for example, the costs trees, etc. that are not ready to be used in production are of preparing the ground, planting, staking, protection from treated not as work-in-progress but as gross fixed capital weather or disease, pruning, training, etc., until the tree formation by the producing unit in its capacity as eventual reaches maturity and starts to yield a product. Disposals user. consist of trees, shrubs, etc., sold or otherwise transferred to other units plus those cut down before the end of their service lives. All agricultural output is at the mercy of the Animal resources yielding repeat products weather. Expected output must take account of normal variations in climatic conditions and exceptional losses 10.92 Animal resources yielding repeat products cover animals should be confined to those outside recent past experience. whose natural growth and regeneration are under the Disposals do not include exceptional losses of trees due to direct control, responsibility and management of drought or other natural disasters such as gales or institutional units. They include breeding stocks, dairy hurricanes, these being recorded in the other changes in the cattle, draft animals, sheep or other animals used for wool volume of assets account. production and animals used for transportation, racing or entertainment. Animals raised for slaughter, including Costs of ownership transfer on non-produced assets poultry, are not fixed assets but inventories. Immature cultivated assets are excluded unless produced for own use. 10.97 The costs of ownership transfer on non-produced assets represent produced assets but their value cannot be 10.93 This heading includes aquatic resources yielding repeat integrated with the value of another produced asset. They products, consisting of aquatic resources maintained for must therefore be shown as a separate category of gross controlled reproduction. In all but exceptional cases, fixed capital formation. An exception is made in the case of though, these will be small and may be ignored unless of land where costs of ownership transfer are treated by significant importance. convention as land improvements. Costs of ownership transfer are defined in paragraphs 10.48 to 10.52. 10.94 Gross fixed capital formation in livestock that are cultivated for the products they yield year after year (dairy cattle, draught animals, etc.) is measured by the value of Intellectual property products acquisitions less disposals, taking account of the treatment just described of immature livestock reared on own 10.98 Examples of intellectual property products are the results of account. It is therefore equal to the total value of all mature research and development, mineral exploration and animals and immature animals produced on own account evaluation, computer software and databases, and 205 System of National Accounts entertainment, literary or artistic originals. They are on the basis of the benefits to its own production and may characterized by the fact that most of their value is make copies available for marketing purposes, generating attributable to intellectual endeavour. They can be goodwill or in cases it considers deserving. described in general terms in the following way. Intellectual property products are the result of research, 10.102 It is often the case for some intellectual property products development, investigation or innovation leading to that some of the benefits accrue to units other than the knowledge that the developers can market or use to their owner to the extent they stimulate the production of other own benefit in production because use of the knowledge is intellectual property products by other units. Examples of restricted by means of legal or other protection. The such spillovers include a breakthrough in the development knowledge may be embodied in a free-standing product or of a new class of drug leading other enterprises to develop may be embodied in another. When the latter is the case, competing drugs of the same type, and the success or the product embodying the knowledge has an increased failure of mineral exploration in a particular zone informing price relative to a similar product without this embodied other units with exploration rights in a neighbouring zone. knowledge. The knowledge remains an asset as long as its These are treated in the same way as other externalities in use can create some form of monopoly profits for its owner. the SNA. Unless there is a quantifiable monetary impact for When it is no longer protected or becomes outdated by later one or both parties, nothing is recorded in the SNA. A developments, it ceases to be an asset. Handbook on Deriving Capital Measures of Intellectual Property Products (Organisation for Economic Co- 10.99 Some intellectual property products are used solely by the operation and Development, forthcoming) is under unit responsible for their development or by a single unit to preparation. whom the product is transferred. Mineral exploration and evaluation is an example. Other products, such as computer Research and development software and artistic originals, are used in two forms. The first is the original or "master copy". This is frequently 10.103 Intellectual property products include the results of controlled by a single unit but exceptions exist as explained research and development (R&D). Research and below. The original is used to make copies that are in turn [experimental] development consists of the value of supplied to other units. The copies may be sold outright or expenditures on creative work undertaken on a systematic made available under a licence. basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use 10.100 A copy sold outright may be treated as a fixed asset if it of this stock of knowledge to devise new applications. This satisfies the necessary conditions, that is, it will be used in does not extend to including human capital as assets production for a period in excess of one year. A copy made within the SNA. The value of research and development available under a licence to use may also be treated as a (R&D) should be determined in terms of the economic fixed asset if it meets the necessary conditions, that is, it is benefits it is expected to provide in the future. This includes expected to be used in production for more than one year the provision of public services in the case of R&D and the licensee assumes all the risks and rewards of acquired by government. In principle, R&D that does not ownership. A good, but not necessary, indication is if the provide an economic benefit to its owner does not licence to use is purchased with a single payment for use constitute a fixed asset and should be treated as over a multiyear period. If the acquisition of a copy with a intermediate consumption. Unless the market value of the licence to use is purchased with regular payments over a R&D is observed directly, it may, by convention, be valued multiyear contract and the licensee is judged to have at the sum of costs, including the cost of unsuccessful acquired economic ownership of the copy, then it should be R&D, as described in chapter 6. regarded as the acquisition of an asset. If regular payments are made for a licence to use without a long-term contract, 10.104 R&D should be recognized as part of capital formation. In then the payments are treated as payments for a service. If order to achieve this, several issues have to be addressed. there is a large initial payment followed by a series of These include deriving measures of research and smaller payments in succeeding years, the initial payment development, price indices and service lives. Specific is recorded as gross fixed capital formation and the guidelines, together with handbooks on methodology and succeeding payments are treated as payments for a service. practice, will provide a useful way of working towards If the licence allows the licensee to reproduce the original solutions that give the appropriate level of confidence in and subsequently assume responsibility for the distribution, the resulting measures. support and maintenance of these copies, then this is described as a licence to reproduce and should be regarded as the sale of part or whole of the original to the unit 10.105 With the inclusion of R&D expenditure as capital holding the licence to reproduce. formation, patented entities no longer feature as assets in the SNA. The patent agreement is to be seen instead as the legal agreement concerning the terms on which access to 10.101 When copies are distributed by the owner free of charge, the R&D is granted. The patent agreement is a form of then no flows between the owner and recipients are licence to use which is treated as giving rise to payments recorded in the SNA. If, despite making copies freely for services or the acquisition of an asset. available, the owner still expects to obtain benefits, then the present value of those benefits should be recorded in its balance sheet. It may be that when the information was Mineral exploration and evaluation distributed freely it was incomplete and the owner intends to make more detailed information available at a price later. 10.106 Mineral exploration and evaluation consists of the value Software distributed freely at the beta test stage is one of expenditures on exploration for petroleum and natural example. Alternatively, the owner justifies the expenditure gas and for non-petroleum deposits and subsequent 206 The capital account evaluation of the discoveries made. These expenditures valued at purchasers' prices, while software developed in- include prelicence costs, licence and acquisition costs, house is valued at its estimated basic price, or at its costs of appraisal costs and the costs of actual test drilling and production if it is not possible to estimate the basic price. boring, as well as the costs of aerial and other surveys, transportation costs, etc., incurred to make it possible to carry out the tests. Re-evaluations may take place after Databases commercial exploitation of the reserve has started and the cost of these re-evaluations is also included in gross fixed 10.112 Databases consist of files of data organized in such a way capital formation. as to permit resource-effective access and use of the data. Databases may be developed exclusively for own use or for sale as an entity or for sale by means of a licence to access 10.107 Mineral exploration is undertaken in order to discover new the information contained. The standard conditions apply deposits of minerals or fuels that may be exploited for when an own-use database, a purchased database or the commercially. Such exploration may be undertaken on own licence to access a database constitutes an asset. account by enterprises engaged in mining or the extraction of fuels. Alternatively, specialized enterprises may carry out exploration either for their own purposes or for fees. 10.113 The creation of a database will generally have to be The information obtained from exploration influences the estimated by a sum-of-costs approach. The cost of the data production activities of those who obtain it over a number base management system (DBMS) used should not be of years. The expenditures incurred on exploration within a included in the costs but be treated as a computer software given accounting period, whether undertaken on own asset unless it is used under an operating lease. The cost of account or not, are therefore treated as expenditures on the preparing data in the appropriate format is included in the acquisition of an intellectual property product and included cost of the database but not the cost of acquiring or in the enterprise's gross fixed capital formation. producing the data. Other costs will include staff time estimated on the basis of the amount of time spent in developing the database, an estimate of the capital services 10.108 The expenditures included in gross fixed capital formation of the assets used in developing the database and costs of include not only the costs of actual test drillings and items used as intermediate consumption. borings, but also the costs incurred to make it possible to carry out tests, for example, the costs of aerial or other surveys, transportation costs, etc. The value of the resulting 10.114 Databases for sale should be valued at their market price, asset is not measured by the value of new deposits which includes the value of the information content. If the discovered by the exploration but by the value of the value of a software component is available separately, it resources allocated to exploration during the accounting should be recorded as the sale of software. period. When the activities are carried out by contractors, the prices charged by these contractors, including their Entertainment, literary and artistic originals operating surplus, become part of the value of the expenditures incurred. Consumption of fixed capital may 10.115 Entertainment, literary and artistic originals consist of be calculated for such assets by using average service lives the original films, sound recordings, manuscripts, tapes, similar to those used by mining or oil corporations in their models, etc., on which drama performances, radio and own accounts. television programming, musical performances, sporting events, literary and artistic output, etc., are recorded or Computer software and databases embodied. Such works are frequently developed on own account. Subsequently they may be sold outright or by 10.109 Computer software and databases are grouped together means of licences. The standard conditions on when the because a computerized database cannot be developed originals and copies are recognized as fixed assets apply. If independently of a database management system (DBMS), an original is acquired as a valuable, its production does not which is itself computer software. count as own account production of a fixed asset but it may have been classified as work-in-progress. Computer software 10.116 An original purchased on the market is valued at the purchaser's price. One developed in-house is valued at its 10.110 Computer software consists of computer programs, estimated basic price or at its costs of production if it is not program descriptions and supporting materials for both possible to estimate the basic price. systems and applications software. Gross fixed capital formation in computer software includes both the initial Other intellectual property products development and subsequent extensions of software as well as acquisition of copies that are classified as assets. 10.117 Other intellectual property products include any such products that constitute fixed assets but are not captured 10.111 The development of computer software represents the in one of the specific items above. development of an intellectual property product. It is treated as an asset if it is to be used in production by its owner for more than one year. The software may be 2. Changes in inventories intended only for own use or may be intended for sale by means of copies. If copies of the software are sold on the 10.118 Changes in inventories are measured by the value of the market, their treatment follows the principles described in entries into inventories less the value of withdrawals and paragraph 10.100. Software purchased on the market is less the value of any recurrent losses of goods held in 207 System of National Accounts inventories during the accounting period. Some of these valuable than the current year's vintage by a predictable acquisitions and disposals are attributable to actual factor. purchases or sales, but others reflect transactions that are internal to the enterprise. 10.122 The activity of storage may be undertaken by any institutional unit, not just the original producer of the 10.119 It is useful to distinguish between two functions performed product or may be undertaken by several units in by an enterprise: its function as a producer of goods and succession if the ownership of the goods changes during services and its function as an owner of assets. When a storage. good is entered into inventories it is acquired as an asset by the enterprise in its capacity as owner either by purchase 10.123 The goods in storage are classified as work-in-progress and (or barter) or by an internal transaction with itself as the not finished goods. The increase in value during the producer. Conversely, a good leaving inventories accounting period up to the expected level at that time is represents the disposal of an asset by the owner either by treated as production of storage; any difference from this sale or other use, by an internal transfer to the producer or level is treated as a holding gain or loss. The method of possibly as a result of recurrent losses (recurrent wastage, valuing storage is described in the annex to chapter 6. The accidental damage or pilfering). expected level of price increase for items being stored for more than one year, though, needs to be calculated in Storage and stocks of inventories accordance with the principles of valuing work-in-progress described below. 10.120 Most goods going into inventories simply remain there until they are withdrawn in the same state as when they Valuation entered. Not infrequently, the price of the goods will have increased while they are in inventories, but these increases 10.124 The enterprise in its capacity as a producer may obtain are not due to production but are simply holding gains. goods or services for intermediate consumption either by There are some goods, though, where the passage of time in purchasing them on the market for immediate use or by store changes the character of the goods. In such cases, the internal transfers out of inventories. In order to ensure that increase in value due to storage is to be treated as all the goods and services used for intermediate production and not as holding gains, though holding gains consumption are consistently valued at current prices, the (or losses) may occur as well. goods transferred out of inventories are valued at purchasers' prices current at the time of the withdrawal 10.121 The indication that storage is being undertaken as a from inventories. production activity is that the price of the good stored, relative to the general level of prices, is expected to 10.125 Similarly, the output produced by the producer may either increase by a certain amount over a predetermined time. be sold or otherwise disposed of or be transferred to For example, winter wheat may be expected, on the basis of inventories as finished products or work-in-progress. In past experience, to fetch a given multiple of its price at order to ensure that output is consistently valued, finished harvest. Similarly, wine that is several years old is more goods transferred into inventories are valued as if they were Table 10.3:The capital account - changes in inventories and valuables Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Gross capital formation 308 8 38 55 5 414 414 Net capital formation 151 -4 11 32 2 192 192 Gross fixed capital formation 280 8 35 48 5 376 376 Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 26 0 0 2 0 28 28 Materials and supplies Work-in-progress Work-in-progress on cultivated biological assets Other work-in-progress Finished goods Military inventories Goods for resale Acquisitions less disposals of valuables 2 0 3 5 0 10 10 Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 Capital transfers, receivable Capital transfers, payable Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 208 The capital account sold at that time, while additions to work-in-progress are withdrawals and less regular losses from inventories. Table given the value they have at the time they are added to 10.3 shows the expansion of table 10.1 to incorporate inventories. changes in inventories. Each of the categories is described and defined below. Valuation of work-in-progress Materials and supplies 10.126 Much work-in-progress is of short duration and occurs only because production is a continuous process and some goods 10.131 Materials and supplies consist of all products that an will be incomplete at the end of one accounting period but enterprise holds in inventory with the intention of using will be completed long before the end of the next. For them as intermediate inputs into production. Not all output with a production period of a year or less, and necessarily get used in this way, however, as some may be assuming that prices and costs remain stable during the lost as a result of physical deterioration, or recurrent period of production, the value of the additions to work-in- accidental damage or pilfering. Such losses of materials progress for non-agricultural products within a given and supplies are recorded and valued in the same way as accounting period can be approximated by calculating the materials and supplies actually withdrawn to be used up in proportion of the total production costs incurred in that production. period and applying that ratio to the basic price realized by the finished product. Thus, the value of the output of the 10.132 Enterprises may hold a variety of quite different kinds of finished product is distributed over the accounting periods goods under the heading of materials and supplies, the most in which it was produced in proportion to the costs incurred common types being fuels, industrial raw materials, in each period. If the average levels of prices and costs agricultural materials, semi-processed goods, components change from period to period, the output should be for assembly, packaging materials, foodstuffs, office allocated initially using the prices and costs at the time the supplies, etc. Every enterprise, including non-market production is finished, and then the values of the work-in- producers owned by government units, may be expected to progress thus calculated for earlier periods should be hold some inventories of materials and supplies, if only recalculated in proportion to the change in average cost inventories of office supplies. levels from period to period. 10.133 Materials and supplies do not include works of art or stocks 10.127 For agricultural products, this method of allocating output of precious metals or stones acquired by enterprises as over multiple periods may not be satisfactory. A valuables. However, there are some producers that do use disproportionate share of the costs may be incurred in gold, diamonds, etc. as intermediate inputs into the sowing a crop with little if any costs being incurred until production of other goods or services, for example, harvest. Prorating the output to the physical growth of the manufacturers of jewellery or dentists. Stocks of gold, crop may be considered a possibility but in cases where diamonds, etc., intended for use in production are recorded there is serious risk of climatic damage just before the crop under materials and supplies. is harvested, this may give over-optimistic indications of probable output. Pragmatic distributions over quarters Work-in-progress based on past experience may have to be used, or where multicropping is the norm, to allow the whole output of each crop to be counted in the period when it is harvested. 10.134 Work-in-progress consists of output produced by an enterprise that is not yet sufficiently processed to be in a 10.128 There are important activities, such as construction of state in which it is normally supplied to other institutional buildings, structures and complex machinery, where the units. Work-in-progress occurs in all industries, but is production process may take several years. In these cases, especially important in those in which some time is needed the valuation of the partially complete product requires to produce a unit of finished output, for example, in careful consideration especially since such large projects agriculture, or in industries producing complex fixed assets are by their nature very costly. such as ships, dwellings, software or films. Work-in- progress can therefore take a wide variety of different forms ranging from growing crops to partially completed 10.129 Even if one fifth of the work involved is put in place film productions or computer programs. Although work-in- annually over a period of five years, it does not follow that progress is output that has not reached the state in which it one fifth of the value (assuming zero inflation for is normally supplied to others, its ownership is nevertheless simplicity) should be recorded in each year. The work put transferable, if necessary. For example, it may be sold in place in the first year cannot be used for four more years under exceptional circumstances such as the liquidation of and so the value of it must be discounted to allow for this the enterprise. delay. In the second year, the value of the work put in place in the first year will increase by one discount factor and this should be added to the value of the work put in place in the 10.135 Work-in-progress must be recorded for any output that is second year and so on. This case is discussed in more detail not complete at the end of the accounting period. This is a in chapter 20. particular problem for output taking a long time to complete, such as construction. The shorter the accounting period, the more important work-in-progress is likely to be Transactions in inventories relatively to finished output. In particular, it is likely to be more significant for quarterly accounts than annual 10.130 The transactions in the capital account relating to accounts, if only because the production of many inventories show the change in the level of inventories of agricultural crops is completed within a year but not each type. The changes comprise the additions less necessarily within a quarter. The only exceptions to 209 System of National Accounts recording incomplete work as work-in-progress are for production. Thus, inventories of coal produced by a mining partially completed projects for which the ultimate owner is enterprise are classified as finished products, although deemed to have taken ownership, either because the inventories of coal held by a power station are classified production is for own use or as evidenced by the existence under materials and supplies. Inventories of batteries of a contract of sale or purchase. produced by a manufacturer of batteries are finished goods, although inventories of the same batteries held by 10.136 Reductions in work-in-progress take place when the manufacturers of vehicles and aircraft are classified under production process is completed. At that point, all work-in- materials and supplies. progress is reclassified as a finished product. This reclassification appears in the other changes in the volume 10.143 Inventories of finished goods may be held only by the of assets account. enterprises that produce them. Finished goods entering inventories are valued at the basic prices of those goods at 10.137 If prices and costs have risen, work-in-progress carried the times the entries take place; finished goods withdrawn forward from previous periods must be revalued using the from inventories are valued at the basic prices at the time prices and costs of the period in which the production is when their withdrawals take place. Current losses of finished. finished goods resulting from physical deterioration or recurrent accidental damage or pilfering should be valued 10.138 Current losses from work-in-progress resulting from at the prices at the time when the losses occur. physical deterioration or recurrent accidental damage or pilfering should be deducted from the additions to work-in- Military inventories progress accruing as a result of the production carried out in the same period. 10.144 Military inventories consist of single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by 10.139 Work-in-progress is subdivided between work-in-progress weapons or weapons systems. As noted above in the on cultivated assets and other work-in-progress, as defined discussion of weapons systems as fixed capital, most below. single-use items are treated as inventories but some types of missiles with highly destructive capability may be Work-in-progress on cultivated biological resources treated as fixed capital because of their ability to provide an ongoing deterrence service against aggressors. 10.140 Work-in-progress on cultivated biological resources consists of output that is not yet sufficiently mature to be Goods for resale in a state in which it is normally supplied to other institutional units. In the present context it is necessary to 10.145 Goods for resale are goods acquired by enterprises, such distinguish single-use plants, trees and livestock that as wholesalers or retailers, for the purpose of reselling produce an output once only (when the plants or trees are them to their customers. Goods for resale are not processed cut down or uprooted or the livestock slaughtered) from further by the enterprises that purchase them, except for trees (including vines and shrubs) and livestock that are presenting them for resale in ways that are attractive to used repeatedly or continuously for more than one year to their customers. Thus, goods for resale may be transported, produce outputs such as fruit, nuts, rubber, milk, wool, stored, graded, sorted, washed, packaged, etc. by their power, transportation and entertainment. Work-in-progress owners but are not otherwise transformed. should be recorded for single use resources. For repeat yield resources, being cultivated on own account, or under an agreed contract with another unit, the growth is counted 10.146 Goods for resale entering the inventories of the enterprises as fixed capital formation and so excluded from are valued at their actual or estimated purchasers' prices. inventories. Any remaining cultivation of resources with These prices include any additional transportation charges repeat yields should be included in work-in-progress. This paid to enterprises other than the suppliers of the goods, but may be the case for nurseries and breeders of race horses or not the costs of any transport services produced on own other special animals, for example. account by the enterprise taking delivery. In principle, goods acquired by barter are valued at their estimated purchasers' prices at the time of acquisition. However, Other work-in-progress because there are no taxes or margins on bartered goods, the purchaser's price is the same as the basic price. 10.141 Other work-in-progress consists of output (other than on cultivated biological resources) that is not yet sufficiently 10.147 Goods for resale withdrawn from inventories are valued at processed to be in a state in which it is normally supplied the purchasers' prices at which they can be replaced at the to other institutional units. time they are withdrawn as distinct from the purchasers' prices that may have been paid for them when they were Finished goods acquired. Reductions in inventories are valued in this way whether the goods withdrawn are sold at a profit or at a 10.142 Finished goods consist of goods produced as outputs that loss, or even not sold at all as a result of physical their producer does not intend to process further before deterioration or recurrent accidental damage or pilfering. supplying them to other institutional units. A good is finished when its producer has completed his intended 10.148 By convention, goods acquired by government for production process, even though it may subsequently be distribution as social transfers in kind but that have not yet used as an intermediate input into other processes of been so delivered are also included in goods for resale. 210 The capital account 3. Acquisitions less disposals of valuables valuables. This list should be regarded as indicative and supplementary rather than a standard breakdown. The context of each category is described to assist in identifying The asset boundary and valuing valuables. 10.149 Valuables include precious metals and stones, antiques and other art objects and other valuables. However, not all Precious metals and stones items that may be described by one of these titles should necessarily be included as a valuable in the balance sheet of the owner. The intent of the heading is to capture those 10.152 Precious metals and stones are treated as valuables when items that are often regarded as alternative forms of they are not held by enterprises for sale or use as inputs into investment. At various times, investors may choose to buy processes of production nor are held as monetary gold and gold rather than a financial asset and pension funds have are not held as a financial asset in the form of unallocated been known to buy "old master" paintings when the prices metal accounts. of financial assets were behaving in a volatile manner. Individuals (households in SNA terminology) may also choose to acquire some of these items knowing that they Antiques and other art objects may be sold if there is a need to raise funds. 10.153 Paintings, sculptures, etc., recognized as works of art and Valuation antiques are treated as valuables when they are not held by enterprises for sale. In principle, museum exhibits are 10.150 Costs of ownership transfer, such as valuers' and included under valuables. auctioneers' margins, are often incurred when valuables are exchanged. As with other non-financial assets, these costs are treated as gross capital formation and included in the Other valuables value of the items when recorded in the balance sheet. 10.154 Other valuables not elsewhere classified include such items Transactions in valuables as collections of stamps, coins, china, books etc. that have a recognized market value and fine jewellery, fashioned out 10.151 A possible categorization of valuables is: precious metals of precious stones, and metals of significant and realizable and stones; antiques and other art objects; and other value. C. Consumption of fixed capital 10.155 The concept of consumption of fixed capital is first costs of ownership transfer are treated as fixed assets, described and defined in chapter 6 in connection with the including terminal costs, they are also subject to difference between gross and net value added and then consumption of fixed capital. All buildings and other carries through all subsequent balancing items that may structures are assumed to have finite service lives, even also be shown gross or net of consumption of fixed capital. when properly maintained, so that consumption of fixed The capital account is where the counterpart entry to the capital is calculated for all such fixed assets, including entry in the production account appears though unusually it railways, roads, bridges, tunnels, airports, harbours, appears on the same side as in the production account but pipelines, dams, etc. Service lives are not determined with a negative sign rather than on the opposite side of the purely by physical durability, and many pieces of account. equipment as well as buildings and structures are eventually scrapped because they have become obsolete. 10.156 Consumption of fixed capital constitutes a negative change However, the service lives for some structures such as in the value of the fixed assets used in production. certain roads, bridges, dams, etc., may be as long as a Consumption of fixed capital must be measured with century or more. reference to a given set of prices, that is, the average prices of the type of asset of constant quality over the period. It 1. Costs of ownership transfer may then be defined as the decline, between the beginning and the end of the accounting period, in the value of the fixed assets owned by an enterprise, as a result of their 10.158 The costs of ownership transfer on the acquisition and physical deterioration and normal rates of obsolescence and disposal of a fixed asset are treated as gross fixed capital accidental damage. Consumption of fixed capital may be formation and included in the value of the asset on deducted from gross fixed capital formation to obtain net acquisition and disposal as recorded in the capital account fixed capital formation to match the balancing item of net and in the value of the asset in the balance sheet. However, saving carried down from the use of income account. although consumption of fixed capital is calculated on the value of the asset excluding the costs of ownership transfer 10.157 Consumption of fixed capital applies to all fixed assets and over the whole of its life, the consumption of fixed capital for every year the asset is in use in production. Because in respect of the costs of ownership transfer is calculated 211 System of National Accounts only over the period that the owner expects to hold the taken into account, should be equal to the difference asset. In this way there are no remaining costs of ownership between the acquisition and disposal values. In the case of transfer included in the value of the asset when it is sold to assets with actual costs at the time of disposal, this means a new owner, so the amount the old owner receives is equal that consumption of fixed capital should cover anticipated to the amount the new owner pays except for any costs of terminal costs. Terminal costs should therefore be written ownership transfer incurred by the new owner. off over the whole life of the asset, regardless of the number of owners during the life of the asset. Immediately 10.159 In the case of natural resources other than land, the costs of before the disposal, the value of the asset will have a ownership transfer are shown as transactions in gross fixed negative value which is reduced to zero when the terminal capital formation in the capital account separately from the costs incurred are treated as gross fixed capital formation. acquisition and disposal of natural resources, but the value The apparent oddity of an asset with negative value reflects of the natural resources in the balance sheet includes the the fact that the owner not only could not sell it but would value of the costs of ownership transfer. The costs of have to pay another unit to take over responsibility for the ownership transfer are still written off according to the asset. expected length of time the owner will hold the asset and treated as consumption of fixed capital in the relevant 10.162 In practice, it may be difficult to predict terminal costs production account. accurately. In that case, cumulated consumption of fixed capital may not cover all the terminal costs. However, the 10.160 In the case of land, costs of ownership transfer are treated full costs are still treated as gross fixed capital formation as a part of land improvement, which is itself treated as a and any amount not already covered by consumption of produced asset. The value of land improvements other than fixed capital during the life of the asset is written off at the the costs of ownership transfer is written off over a suitably time the costs are incurred as consumption of fixed capital. long period but the costs of ownership transfer are written This is a pragmatic recommendation and will lead to NDP off over the period the owner expects to own the land. being overstated over the time the asset is in use and understated in the year when the remaining costs are 2. Terminal costs incurred. 10.161 In principle, the value of consumption of fixed capital 10.163 There is further discussion on the treatment of costs of cumulated over the life of an asset, once price changes are ownership transfer and terminal costs in chapter 20. D. Acquisitions less disposals of non-produced non-financial assets 10.164 There are three distinct types of non-produced non- by individual units, and may be owned collectively by financial assets in the SNA: natural resources, contracts, groups of units or by governments on behalf of entire leases and licences, and goodwill and marketing assets. communities. Certain naturally occurring resources, These three types of assets have little in common except however, may be such that it is not feasible to establish that they are all non-produced and non-financial. A ownership over them: for example, air, or the oceans. In separate section discusses each of the three. addition, there may be others that cannot be treated as economic assets because they do not actually belong to any 10.165 Table 10.4 shows table 10.1 expanded to show the standard particular units. These include not only those whose detail of non-produced non-financial assets. Each of the existence is unknown but also those, including uncultivated categories is discussed under the appropriate section. forests, that may be known to exist but remain so remote or inaccessible that, in practice, they are not under the effective control of any units. 1. Natural resources 10.168 Secondly, in order to comply with the general definition of The asset boundary an economic asset, natural assets must not only be owned but must also be capable of bringing economic benefits to 10.166 Not all environmental resources qualify as economic assets. their owners, given the technology, scientific knowledge, It is useful, therefore, to delineate those naturally occurring economic infrastructure, available resources and set of resources that fall within the asset boundary of the SNA relative prices prevailing on the dates to which the balance from those that do not. sheet relates or expected to do so in the near future. Thus, known deposits of minerals that are not commercially 10.167 In the first place, it must be noted that the accounts and exploitable in the foreseeable future are not included in the balance sheets of the SNA are compiled for institutional balance sheets of the SNA, even though they may possibly units or groups of units and can only refer to the values of become commercially exploitable at a later date as a result assets that belong to the units in question. Only those of major, unforeseen advances in technology or major naturally occurring resources over which ownership rights changes in relative prices. have been established and are effectively enforced can therefore qualify as economic assets and be recorded in 10.169 Naturally occurring assets in the form of biota (trees, balance sheets. They do not necessarily have to be owned vegetation, animals, birds, fish, etc.) are renewable. The 212 The capital account growth and regeneration of trees, crops or other vegetation notional resident unit is deemed to purchase the land while or the rearing of animals, birds, fish, etc., may take place the non-resident is deemed to purchase the equity of the under the direct control, responsibility and management of notional unit and thus acquires a financial instead of a non- institutional units. In this situation, the assets are cultivated, financial asset. Thus, all purchases and sales of land and the activity is treated as falling within the production normally take place between resident units. The one boundary of the SNA. The growth of animals, birds, fish, exception is when the boundaries of the economic territory etc., living in the wild, or growth of uncultivated vegetation itself are changed, for example, when a foreign in forests, is not an economic process of production so that government, or international organization, purchases or the resulting assets cannot be classed as produced assets. sells land that is added to, or taken away from, the enclave Nevertheless, when the forests or the animals, birds, fish, in which its embassy or offices are located. etc. are actually owned by institutional units and are a source of benefit to their owners, they constitute economic 10.171 Moreover, as purchases and sales of land and natural assets. When wild animals, birds, fish, etc. live in locations resources are recorded excluding costs of ownership such that no institutional unit is able to exercise effective transfer for both buyers and sellers, the total value of the ownership rights over them they fall outside the asset purchases and sales of land and natural resources must be boundary. Similarly, the forests or other vegetation equal to each other at the level of the total economy, growing in such regions are not counted as economic although not at the level of individual sectors or subsectors. assets. On the other hand, fish stocks in the high seas which are subject to international agreement on how much may be caught by individual countries may be counted as falling 10.172 Similarly, it is assumed that extraction of subsoil resources within the asset boundary. can only be undertaken by resident institutional units. As soon as an enterprise starts to prepare to establish for extraction, for example by obtaining the requisite licences, Ownership it is assumed to become resident at that point. 10.170 All owners and purchasers of land and immovable natural resources within the economic territory are deemed to have Valuation a centre of economic interest in the economy. If an owner or purchaser would not otherwise qualify as a resident unit, 10.173 Since natural resources are non-produced, the costs of a notional resident unit is created for this purpose. The ownership transfer, which are part of fixed capital Table 10.4:The capital account - non-produced non-financial assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Gross capital formation 308 8 38 55 5 414 414 Net capital formation 151 -4 11 32 2 192 192 Gross fixed capital formation 280 8 35 48 5 376 376 Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 26 0 0 2 0 28 28 Acquisitions less disposals of valuables 2 0 3 5 0 10 10 Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 Acquisitions less disposals of natural resources -6 0 2 3 1 0 0 Natural resources Land Mineral and energy reserves Non-cultivated biological resources Water resources Other natural resources Radio spectra Other Acquisitions less disposals of contracts, leases and licences -1 0 0 1 0 0 0 0 Contracts, leases and licences Marketable operating leases Permits to use natural resources Permits to undertake specific activities Entitlement to future goods and services on an exclusive basis Purchases less sales of goodwill and marketing assets 0 0 0 0 0 Capital transfers, receivable Capital transfers, payable Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 213 System of National Accounts formation, must be shown separately in the capital account Mineral and energy resources and not as part of the value of the transaction in the non- produced asset. For land, the costs of ownership transfer are treated, by convention, as being included with land 10.179 Mineral and energy resources consist of mineral and improvements. energy reserves located on or below the earth's surface that are economically exploitable, given current technology and relative prices. Ownership rights to the Transactions in natural resources mineral and energy resources are usually separable from those to the land itself. Mineral and energy resources 10.174 Transactions in natural resources are shown as acquisitions consist of known reserves of coal, oil, gas or other fuels and less disposals of the asset in question, according to the metallic ores, and non-metallic minerals, etc., that are classification given in table 10.4. located below or on the earth's surface, including reserves under the sea. The transactions recorded in the capital account refer only to those mineral and energy resources Land over which ownership rights have been established. In most cases, mineral and energy resources may be owned 10.175 Land consists of the ground, including the soil covering separately from land below which they are located, but in and any associated surface waters, over which ownership other cases the law may stipulate that the ownership of the rights are enforced and from which economic benefits mineral and energy resources is inseparably linked to that can be derived by their owners by holding or using them. of the land. The value of land excludes any buildings or other structures situated on it or running through it; cultivated crops, trees and animals; mineral and energy resources; non-cultivated 10.180 The transactions in mineral and energy resources recorded biological resources and water resources below the ground. in the capital account refer to acquisitions or disposals of The associated surface water includes any inland waters deposits of mineral and energy resources in which the (reservoirs, lakes, rivers, etc.) over which ownership rights ownership of such assets passes from one institutional unit can be exercised and that can, therefore, be the subject of to another. Reductions in the value of known reserves of transactions between institutional units. However, water mineral and energy resources resulting from their depletion bodies from which water is regularly extracted, against as a result of extracting the assets for purposes of payment, for use in production (including for irrigation) are production are not recorded in the capital account but in the included not in water associated with land but in water other changes in the volume of assets account. resources. 10.181 Again if a disaggregation is required, it is recommended to 10.176 As explained above, land improvements and the costs of follow that in the SEEA. ownership transfer on land are treated as fixed assets and shown separately. In consequence, acquisitions and disposals of natural land are recorded at the same value for Non-cultivated biological resources both the purchaser and the seller. Since both parties to the transaction must be residents, it follows that, for the 10.182 Non-cultivated biological resources consist of animals, economy as a whole, the aggregate value of total purchases birds, fish and plants that yield both once-only and repeat of land must equal the aggregate value of total sales, products over which ownership rights are enforced but although this is not generally true at lower levels of for which natural growth or regeneration is not under the aggregation, such as individual sectors or subsectors. The direct control, responsibility and management of value of acquisitions less disposals of land is thus zero for institutional units. Examples are virgin forests and the economy as a whole (excluding transactions that change fisheries within the territory of the country. Only those the boundary of the economic territory itself, as noted in resources that are currently, or are likely soon to be, paragraph 10.170. exploitable for economic purposes should be included. 10.177 Buildings, or other structures, and plantations are often purchased or sold together with the land on which they are 10.183 In the SEEA, this category is further split into aquatic situated, without separate valuations being placed on the resources, animal resources other than aquatic resources, structures and the land. Even if it is not feasible to obtain tree, crop and plant resources. Aquatic resources are further separate valuations, as may be the case for existing split into aquatic resources in national waters including the structures, it may be possible to determine which out of the exclusive economic zone (EEZ) and those in the high seas. land or the structure accounts for most of their combined value and to classify the transaction as the purchase of land Water resources or of a structure depending upon which has the greater value. If it is not possible to determine whether the land or the structure is the more valuable, by convention, the 10.184 Water resources consist of surface and groundwater transaction should be classified as the purchase of a resources used for extraction to the extent that their structure, that is, as gross fixed capital formation. A similar scarcity leads to the enforcement of ownership or use convention holds for plantations. rights, market valuation and some measure of economic control. If it is not possible to separate the value of surface 10.178 The SNA does not specify a disaggregation of land but it is water from the associated land, the whole should be recommended that if a disaggregation is required, it should allocated to the category representing the greater part of the be according to that used in the SEEA. total value. 214 The capital account Other natural resources Permits to use natural resources 10.185 The category other natural resources currently includes 10.191 Permits to use natural resources are third-party property radio spectra. Given the increasing move to carry out rights relating to natural resources. An example is where environmental policy by means of market instruments, it a person holds a fishing quota and he is able, again both may be that other natural resources will come to be legally and practically, to sell this to another person. recognized as economic assets. If so, this is the category to which they should be allocated. Permits to undertake specific activities 2. Contracts, leases and licences 10.192 A permit to undertake a specific activity is one where: The asset boundary a. the permits are limited in number and so allow the holders to earn monopoly profits, 10.186 Contracts, leases and licences are treated as assets only when both the following conditions are satisfied. b. the monopoly profits do not come from the use of an asset belonging to the permit-issuer, a. The terms of the contract, lease or licence specify a price for the use of an asset or provision of a service that differs from the price that would prevail in the c. a permit holder is able both legally and practically to absence of the contract, lease or licence. sell the permit to a third party. b. One party to the contract must be able legally and Such permits are issued mainly by government but may practically to realize this price difference. also be issued by other units. The second condition presupposes that a market for the 10.193 When governments restrict the number of cars entitled to contract exists. It is recommended that in practice contracts, operate as taxis or limit the number of casinos permitted by leases and licences should only be recorded in the accounts issuing licences, they are in effect creating monopoly when the holder does actually exercise his right to realize profits for the approved operators and recovering some of the price difference. the profits as the fee. The incentive to acquire such a licence is that the licensee believes that he will thereby acquire the right to make monopoly profits at least equal to 10.187 Part 5 of chapter 17 discusses the whole question of the the amount he paid for the licence. This stream of future treatment of leases within the SNA and should be consulted income is treated as an asset if the licensee can realize this if there is doubt about whether a contract, lease or licence by on-selling the asset. The type of asset is described as a should be treated as an asset. permit to undertake a specific activity. The value of the asset is determined by the future stream of monopoly 10.188 As with natural resources, the costs of ownership transfer profits. on the acquisition and disposal of contracts, leases and licences should be shown separately as gross capital 10.194 It is less common for units other than government to be formation. able to limit the participation in a given activity. One instance may be where the owner of property limits the Types of assets included in contracts, leases numbers of units allowed to operate on his property, for example a hotel with a policy of only allowing one taxi and licences firm to pick up guests. In this sort of case, the permits are treated as giving rise to payments for services. There is no 10.189 There are four classes of contracts, leases and licences reason in principle why such permits could not be treated as considered to be assets in the SNA: marketable operating assets if they were marketable though this may not be a leases, permits to use natural resources, permits to common situation. undertake specific activities and entitlement to future goods and services on an exclusive basis. Entitlement to future goods and services on an exclusive basis Marketable operating leases 10.195 Entitlement to future goods and services on an exclusive 10.190 Marketable operating leases are third-party property basis relates to the case where one party which has rights relating to fixed assets. An example is where a contracted to purchase goods or services at a fixed price tenant of a building has a fixed rental but the building could at a time in the future is able to transfer the obligation of fetch a higher rental in the absence of the lease. If, in these the second party to the contract to a third party. Examples circumstances, the tenant is able both legally and are footballers' contracts, a publisher's exclusive right to practically to sublet the building, then he has an asset of the publish new works by a named author or issue recordings type of a marketable operating lease. by named musicians. 215 System of National Accounts 3. Goodwill and marketing assets 10.198 As well as residual errors, the value of goodwill may include the value to the corporation of items known as marketing assets. Marketing assets consist of items such 10.196 Potential purchasers of an enterprise are often prepared to as brand names, mastheads, trademarks, logos and pay a premium above the net value of its individually domain names. A brand can be interpreted as far more than identified and valued assets and liabilities. This excess is just a corporate name or logo. It is the overall impression a described as "goodwill" and reflects the value of corporate customer or potential customer gains from their experience structures and the value to the business of an assembled with the company and its products. Interpreted in that wider workforce and management, corporate culture, distribution sense it can also be seen to encompass some of the networks and customer base. It may not have value in characteristics of goodwill such as customer loyalty. isolation from other assets, but it enhances the value of those other assets. Looked at another way, it is the addition 10.199 The value of goodwill and marketing assets is defined as to the value of individual assets because they are used in the difference between the value paid for an enterprise as combination with each other. a going concern and the sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued. Although goodwill is likely to be 10.197 Goodwill cannot be separately identified and sold to present in most corporations, for reasons of reliability of another party. The value has to be derived by deducting measurement it is only recorded in the SNA when its value from the sale value of the corporation the value of assets is evidenced by a market transaction, usually the sale of the and liabilities classified elsewhere within the asset whole corporation. Exceptionally, identified marketing boundary of the SNA. (In practice, since it is estimated as a assets may be sold individually and separately from the residual, an estimate of goodwill will also reflect errors and whole corporation in which case their sale should also be omissions in the valuation of other assets and liabilities.) recorded under this item. E. Capital transfers 1. Capital versus current transfers receivable) or the party receiving the transfer is obliged to acquire an asset (other than cash or inventories) or both 10.200 Capital transfers are unrequited transfers where either the conditions are met. Capital transfers are often large and party making the transfer realizes the funds involved by irregular but neither of these are necessary conditions for a disposing of an asset (other than cash or inventories), by transfer to be considered a capital rather than a current relinquishing a financial claim (other than accounts transfer. Table 10.5:The capital account - capital transfers - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 Gross capital formation 414 414 Net capital formation 192 192 Gross fixed capital formation 376 376 Consumption of fixed capital - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 28 28 Acquisitions less disposals of valuables 10 10 Acquisitions less disposals of non-produced assets 0 0 Capital transfers, receivable 33 0 6 23 0 62 4 66 Capital taxes, receivable 2 2 2 Investment grants, receivable 23 0 0 0 0 23 4 27 Other capital transfers, receivable 10 0 4 23 0 37 37 Capital transfers, payable - 16 -7 - 34 -5 -3 - 65 -1 - 66 Capital taxes, payable 0 0 0 -2 0 -2 0 -2 Investment grants, payable - 27 - 27 - 27 Other capital transfers, payable - 16 -7 -7 -3 -3 - 36 -1 - 37 Changes in net worth due to saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 216 The capital account 10.201 A current transfer reduces the income and consumption Valuation possibilities of the first party and increases the income and consumption possibilities of the second party. Current 10.206 The value of a non-financial asset being transferred is the transfers are therefore not linked to, or conditional on, the estimated price at which the asset, whether new or used, acquisition or disposal of assets by one or both parties to could be sold on the market plus any transport, installation the transaction. or other costs of ownership transfer incurred by the donor but excluding any such charges incurred by the recipient. 10.202 Some cash transfers may be regarded as capital by one Transfers of financial assets, including the cancellation of party to the transfer but as current by the other. For debts, are valued in the same way as other acquisitions or example, the payment of an inheritance tax may be disposals of financial assets or liabilities. regarded as the transfer of capital by the taxpayer but be regarded as a current receipt by government because it 3. Capital taxes receives many such transfers. Similarly, a large country that makes investment grants to a number of smaller countries may regard the grants as current transfers even though they 10.207 Capital taxes consist of taxes levied at irregular and are specifically intended to finance the acquisition of infrequent intervals on the values of the assets or net capital assets. In an integrated system of accounts, such as worth owned by institutional units or on the values of the SNA, it is not feasible, however, to classify the same assets transferred between institutional units as a result of transaction differently in different places. Accordingly, a legacies, gifts inter vivos or other transfers. They include transfer should be classified as capital for both parties even capital levies and taxes on capital transfers: if it involves the acquisition or disposal of an asset, or assets, by only one of the parties. By convention, social a. Capital levies consist of taxes on the values of the transfers are always treated as current transfers. assets or net worth owned by institutional units levied at irregular, and very infrequent, intervals of time. Capital levies are treated as exceptional both by units 10.203 There may be cases in which it is difficult to decide on the concerned and by the government. They may be evidence available whether to classify a cash transfer as payable by households or enterprises. They include current or capital. When there is serious doubt, the transfer betterment levies: that is, taxes on the increase in the should be classified as current rather than capital. It should value of agricultural land due to planning permission be noted, however, that the decision as to which way to being given by government units to develop the land classify a transfer has important consequences for the for commercial or residential purposes (GFSM2001 tax allocation of saving between sectors and subsectors, and code 1133; OECD 4500)); possibly between the economy as a whole and the rest of the world. Other things being equal, a current transfer increases the saving of the recipient and reduces that of the b. Taxes on capital transfers consist of taxes on the values donor, whereas a capital transfer does not affect the saving of assets transferred between institutional units. They of either party. If, therefore, cash transfers are incorrectly consist mainly of inheritance taxes, or death duties, and classified between current and capital, the saving behaviour gift taxes, including gifts inter vivos made between recorded for the units or subsectors involved may be members of the same family to avoid, or minimize, the misleading for purposes of economic analysis and payment of inheritance taxes. They do not include taxes policymaking. on sales of assets as these are not transfers (GFSM2001 tax code 1134; OECD 4300). 2. Transfers in cash and in kind 4. Investment grants 10.204 As explained in chapter 9, transfers may take place in cash 10.208 Investment grants consist of capital transfers made by or in kind. A capital transfer in kind necessarily concerns governments to other resident or non-resident the change of ownership of a product previously recorded institutional units to finance all or part of the costs of as a non-financial asset in the accounts of the donor. In this their acquiring fixed assets. The recipients are obliged to case, the four entries relating to the transaction are all use investment grants for purposes of gross fixed capital recorded in the capital account. Two relate to the transfer of formation, and the grants are often tied to specific wealth implied by a capital transfer; the other two are investment projects, such as large construction projects. If shown as disposal of the asset being transferred by the the investment project continues over a long period of time, donor and its acquisition by the recipient. The treatment of an investment grant in cash may be paid in instalments. fixed assets produced by communal construction and then Payments of instalments continue to be classified as capital transferred to government to maintain is discussed in transfers even though they may be recorded in a succession paragraph 10.58. of different accounting periods. 10.205 All other capital transfers have two entries in the capital 10.209 Investment grants in kind consist of transfers of transport account and two in the financial account. In the case of debt equipment, machinery and other equipment by forgiveness, the two entries in the financial account show governments to other resident or non-resident units and also the reduction in the debt liability of the recipient towards the direct provision of buildings or other structures for the donor and the claim of the donor on the recipient. Other resident or non-resident units. These may be constructed by capital transfers are recorded as a transfer in cash and show enterprises owned by the donor government or by other a decrease in cash or deposits of the donor and an increase enterprises that are paid directly by the donor government. by the recipient. In such cases, a capital transfer in cash is usually recorded 217 System of National Accounts followed by purchase of the items actually transferred in a. Major payments in compensation for extensive kind. Exceptionally, if the transfer is of an existing asset, damages or serious injuries not covered by insurance and the recipient is resident, the transfer of ownership of policies. The payments may be awarded by courts of the asset may be recorded as negative capital formation by law or settled out of court. They may be made to government and positive capital formation by the recipient, resident or non-resident units. They include payments but a capital transfer is still also recorded so that the of compensation for damages caused by major balance sheet of both parties correctly reflects the change in explosions, oil spillages, the side effects of drugs, etc.; net worth that has taken place. b. Exceptionally large insurance settlements in the wake 5. Other capital transfers of a disaster. For more details on when this is the appropriate form of recording see chapter 17; 10.210 Other capital transfers consist of all capital transfers except capital taxes and investment grants. One notable c. Transfers from government units to publicly or category included here is the cancellation of debt by mutual privately owned enterprises to cover large operating agreement between the creditor and the debtor. Such a deficits accumulated over two or more years; cancellation is treated as a capital transfer from the creditor to the debtor equal to the value of the outstanding debt at d. Transfers from central government to units at lower the time of cancellation. It includes, but is not confined to, levels of government to cover some, or all, of the costs the cancellation of debt owed by non-residents to residents, of gross fixed capital formation or large expenditure and vice versa. deficits accumulated over two or more years; 10.211 However, the unilateral writing off of debt is not a e. Legacies or large gifts inter vivos, including legacies to transaction between institutional units and therefore does NPIs; not appear either in the capital account or the financial account of the SNA. If the creditor accepts such a write off f. Exceptionally large donations by households or or default, it should be recorded in the other changes in the enterprises to NPIs to finance gross fixed capital volume of assets account of the creditor and the debtor. formation: for example, gifts to universities to cover the Provisions for bad debt are treated as bookkeeping entries costs of building new residential colleges, libraries, that are internal to the enterprise and do not appear in the laboratories, etc.; SNA except in the case of expected losses on non- performing loans, which appear as memorandum items in g. Transfers of responsibility for pension entitlements, for the balance sheets. The unilateral repudiation of debt by a example when general government assumes debtor is also not a transaction and is not recognized in the responsibility for pensions provision from an employer; SNA. h. Community built assets where responsibility for 10.212 Capital transfers may take various other forms, of which maintenance is then assumed by government or by an some examples are given below: NPISH. 218 Chapter 11: The financial account A. Introduction 11.1 The financial account is the final account in the full made and payment according to the contract is sequence of accounts that records transactions between unconditional. institutional units. Net saving is the balancing item of the use of income accounts, and net saving plus net capital 11.6 In addition, a liability may be established not by contract transfers receivable or payable can be used to accumulate but by long and well-recognized custom that is not easily non-financial assets. If they are not exhausted in this way, refuted. Some payments by government to individuals fall the resulting surplus is called net lending. Alternatively, if under this category. In these cases, the creditor has a valid net saving and capital transfers are not sufficient to cover expectation of payment, despite the lack of a legally the net accumulation of non-financial assets, the resulting binding contract. Such liabilities are called constructive deficit is called net borrowing. This surplus or deficit, net liabilities. lending or net borrowing, is the balancing item that is carried forward from the capital account into the financial 11.7 Whenever either of these types of liability exists, there is a account. The financial account does not have a balancing corresponding financial claim that the creditor has against item that is carried forward to another account, as has been the debtor. A financial claim is the payment or series of the case with all the accounts discussed in previous payments due to the creditor by the debtor under the terms chapters. It simply explains how net lending or net of a liability. Like the liabilities, the claims are borrowing is effected by means of changes in holdings of unconditional. In addition, a financial claim may exist that financial assets and liabilities. The sum of these changes is entitles the creditor to demand payment from the debtor but conceptually equal in magnitude, but on the opposite side whereas the payment by the debtor is unconditional if of the account, to the balancing item of the capital account. demanded, the demand itself is discretionary on the part of the creditor. 11.2 The financial account records transactions that involve financial assets and liabilities and that take place between 11.8 Financial assets consist of all financial claims, shares or resident institutional units and between resident other equity in corporations plus gold bullion held by institutional units and the rest of the world. The left-hand monetary authorities as a reserve asset. Gold bullion held side of the account (table 11.1) records acquisitions of by monetary authorities as a reserve asset is treated as a financial assets less disposals, while the right-hand side financial asset even though the holders do not have a claim records incurrence of liabilities less their repayment. on other designated units. Shares are treated as financial assets even though the financial claim their holders have on 1. Financial assets and liabilities the corporation is not a fixed or predetermined monetary amount. 11.3 As described in chapter 3, an asset is defined as follows. An 2. Quadruple-entry accounting asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of 11.9 The accounting rules of the SNA, explained in chapter 3, carrying forward value from one accounting period to describe how the quadruple principle of accounting is another. implemented. When a good, service, asset or liability is sold by one institutional unit to another, two pairs of entries are recorded. The first pair records the supply of the item 11.4 Benefits are exchanged by means of payments. From this a by one unit and the acquisition by the other. The second financial claim, and hence a liability, can be defined. There pair of entries records the second party supplying the are no non-financial liabilities recognized in the SNA, thus means of payment for the item, and the first party receiving the term liability necessarily refers to a liability that is this. Similar quadruple entries are required in respect of financial in nature. transactions involving property income and transfers. The second pair of entries usually appears in the financial 11.5 A liability is established when one unit (the debtor) is account though in a few cases of transfers in kind, the obliged, under specific circumstances, to provide a second pair of entries may appear as negative and positive payment or series of payments to another unit (the final consumption expenditure or disposal and acquisition creditor). The most common circumstance in which a of a non-financial asset. In all cases except the acquisition liability is established is a legally binding contract that of a financial asset or settlement of a liability, the first pair specifies the terms and conditions of the payment(s) to be of entries appears in one or more of the non-financial 219 System of National Accounts accounts. In the case of the exchange of a financial a. the creditor reduces its holdings of trade credits and instrument, all four entries appear in the financial account. increases its means of payment (currency or transferable deposits); and 11.10 There are thus two reasons for entries in the financial account. The first reason is as counterpart to entries in other b. the debtor reduces its liabilities (in the form of trade accounts; the second is to record transactions involving the credits) and reduces its financial assets (in the form of exchange of financial assets and liabilities only, so both the means of payment). original and the counterpart entries are recorded in the financial account. 11.14 When existing financial assets are exchanged for other 3. Counterparts of non-financial transactions financial assets, all entries take place in the financial account and only affect assets. For example, if a debt security such as an existing bond is sold by one institutional 11.11 Transactions involving the transfer of ownership of a good unit to another on the secondary market, the seller reduces or non-financial asset, or the provision of a service or his holdings of securities and increases his holdings of labour almost always entail a counterpart entry in the means of payment by an equal amount. The purchaser financial account for means of payment or claims on future increases his holdings of securities and decreases his means of payment. Even many transactions in kind, such as holdings of means of payment. barter sales and remuneration in kind, conceptually lead to entries in the financial account. If unit A provides a product of value x to unit B, expecting another product of the same 11.15 When a new financial asset is created through the value in return, A has a financial claim of x on B. This incurrence of a liability by an institutional unit, all related financial claim is settled and thus no longer needs to be entries are also made in the financial account. For example, recorded when B fulfils delivery of the product promised. a corporation may issue short-term securities in exchange Entries in the financial account are needed when all for means of payment. The financial account of the elements of the in-kind transaction are not completed corporate sector accordingly shows an increase in liabilities simultaneously. in the form of securities and an increase in financial assets in the form of means of payment; the financial account of 11.12 The sale of a good, service, or asset may have as its the purchasing sector shows a reduction in assets in the counterpart a change in currency or transferable deposit. form of means of payment and an increase in assets in the Alternatively, the counterpart may be reflected in the form of securities. financial account in a trade credit or other category of accounts receivable or payable. 5. Net lending 4. Exchanges of financial assets and liabilities 11.16 Some sectors or subsectors are net lenders while others are 11.13 Whenever one financial asset is exchanged for another or net borrowers. When institutional units engage in financial when a liability is repaid with a financial asset, transactions transactions with each other, the surplus resources of one are recorded only in the financial account. These sector can be made available by the units concerned for use transactions change the distribution of the portfolio of by other sectors. The financial account indicates how financial assets and liabilities and may change the totals of deficit, or net borrowing, sectors obtain the necessary both financial assets and liabilities, but they do not change financial resources by incurring liabilities or reducing the difference between total financial assets and liabilities. assets and how the net lending sectors allocate their For example, trade credits are extinguished by payments. surpluses by acquiring financial assets or reducing The claim represented by the trade credit no longer exists liabilities. The account also shows the relative when the debtor provides means of payment to the creditor. contributions of various categories of financial assets to The resulting four entries in the financial account are: these transactions. Table 11.1:The financial account - concise form - changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net acquisition of financial assets 83 172 - 10 189 2 436 47 483 Monetary gold and SDRs -1 -1 1 0 Currency and deposits 39 10 - 26 64 2 89 11 100 Debt securities 7 66 4 10 -1 86 9 95 Loans 19 53 3 3 0 78 4 82 Equity and investment fund shares 10 28 3 66 0 107 12 119 Insurance, pension and standardized guarantee schemes 1 7 1 39 0 48 0 48 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 Other accounts receivable/payable 4 1 5 4 1 15 10 25 220 The financial account 11.17 The evolution of net lending can be seen clearly in table 11.21 In the hypothetical case of a closed economy in which 11.1. Non-financial corporations are shown to have a net resident institutional units do not engage in transactions borrowing requirement of 72. This requirement is financed with non-residents, the total net lending and total net by incurring liabilities of 135 and acquiring financial assets borrowing of the various sectors would have to be equal of 63; the difference between the two equals net borrowing. since the net borrowing requirements of deficit sectors Similarly, the household sector, which has a net lending would be met by net lending of surplus sectors. For the balance of 206, achieves this result by acquiring financial economy as a whole, net lending or borrowing would have assets of 220 and incurring liabilities of 14. to be zero. This equality reflects the symmetric nature of financial assets and liabilities. When residents engage in transactions with non-residents, the sum of the net lending 11.18 Although much borrowing and lending is routed through and net borrowing of each of the sectors making up the financial intermediaries, some borrowers can transact total economy must equal the economy's net lending to, or directly with non-financial lenders. For example, borrowing from, the rest of the world. In table 11.1 the total governments can issue securities in the market; these economy has acquired financial assets of 436 and incurred securities can be purchased by households, non-financial liabilities of 426. Net lending for the total economy to the corporations and the rest of the world as well as by rest of the world is therefore 10. financial institutions. In many other cases, financial intermediaries have as their special function the creation of 6. Contingencies a financial market that links lenders and borrowers indirectly. The financial institution incurs liabilities to net 11.22 Many types of contractual financial arrangements between lenders through taking deposits or issuing securities and institutional units do not give rise to unconditional providing the financial resources thus mobilized to requirements either to make payments or to provide other borrowers, for example in the form of loans, holding of objects of value; often the arrangements themselves do not debt securities and holdings of equity securities. Thus, their have transferable economic value. These arrangements, transactions in financial assets and liabilities will be which are often referred to as contingencies, are not actual comparatively large relative to other sectors and to the size current financial assets and are not recorded in the SNA. of their own net lending or borrowing. In table 11.1, the The principal characteristic of contingencies is that one or financial corporations sector has a net borrowing of 15, more conditions must be fulfilled before a financial which is financed by net incurrence of liabilities of 182 and transaction takes place. One-off guarantees of payment by net acquisition of financial assets of 167. third parties are contingencies since payment is only required if the principal debtor defaults. Until the default is evident, the value of the one-off guarantee should be shown 11.19 An examination of the financial transactions of the as a memorandum item. Loan commitments provide a subsectors of the financial corporations sector, in addition guarantee that funds will be made available but no financial to those of the consolidated financial sector, is often useful. asset exists until funds are actually advanced. Letters of credit constitute promises to make a payment conditional upon the presentation of certain documents specified by 11.20 It is important to note that, for each institutional sector, the contract. Underwritten note issuance facilities (NIFs) financial account indicates the types of financial provide a guarantee that a potential debtor will be able to instruments utilized by that sector to incur liabilities and sell short-term securities (notes) that he issues and that the acquire financial assets. The financial account does not, bank or banks issuing the facility will take up any notes not however, indicate to which sectors the liabilities are sold in the market or will provide equivalent advances. The incurred and on which sectors the assets indicate financial facility itself is contingent, and the creation of the facility claims. A more detailed and complex analysis of financial gives rise to no entry in the financial account. Only if the flows between sectors is discussed in chapter 27. The underwriting institution is requested to make funds analysis there illustrates debtor or creditor relationships by available will it acquire an actual asset, which is recorded type of financial asset. in the financial account. Table 11.1 (cont):The financial account - concise form - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 Net acquisition of liabilities 139 173 93 15 6 426 57 483 Monetary gold and SDRs Currency and deposits 65 37 102 -2 100 Debt securities 6 30 38 0 0 74 21 95 Loans 21 0 9 11 6 47 35 82 Equity and investment fund shares 83 22 105 14 119 Insurance, pension and standardized guarantee schemes 48 0 48 0 48 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 Other accounts receivable/payable 26 0 9 4 39 - 14 25 221 System of National Accounts 11.23 Certain financial derivatives are not treated as contingent eventually be due for contingent liabilities, the existence of financial assets but as actual assets. These are described in a high level of them may indicate an undesirable level of section C below. Standardized guarantees are also treated risk on the part of those units offering them. An example is as giving rise to actual and not contingent liabilities. A an overdraft facility on a bank account, which is contingent standardized guarantee is one where many guarantees of until exercised. similar characteristics are issued. Even though the probability of any one guarantee being called is uncertain, the fact that there are many similar guarantees means that a 11.25 Country practices vary in determining which instruments reliable estimate of the number of calls under the guarantee are considered contingent and which are considered actual can be made. Liabilities of this sort where the size of the assets to be recorded in the balance sheet. Flexibility in the liability may be determined probabilistically are often application of this recommendation is required to take described as provisions. The term liability is used when the national practices and variations in the nature of these fact that payment will be required and the amount of the instruments into account. An example, which is payment or the way in which the amount will be calculated quantitatively important in trade financing, is the bankers' are agreed. The term provision is used when the fact that a acceptance. A banker's acceptance involves the acceptance payment will be required is regarded as certain but there is by financial institutions of drafts or bills of exchange and no agreement on how the amount payable will be the unconditional promise to pay a specific amount at a determined. A contingent liability is one where the size of specified date. The banker's acceptance represents an payment may or may not be known with certainty but there unconditional claim on the part of the holder and an is uncertainty about whether there will be a payment unconditional liability on the part of the accepting bank; the required or not. bank's counterpart asset is a claim on its customer. For this reason, the banker's acceptance is treated as an actual 11.24 For the purposes of the SNA, the treatment of financial asset in the SNA even though no funds may have contingencies is simple. Any payments of fees related to been exchanged. the establishment of contingent arrangements are treated as payments for services. Transactions are recorded in the financial account only when an actual financial asset is 11.26 There are other circumstances where future payments are created or changes ownership. However, by conferring not treated as assets, even though both the size of the certain rights or obligations that may affect future payment and the fact that it will be paid are known with a decisions, contingent arrangements obviously produce an high degree of certainty. One example is that although a economic impact on the parties involved. Collectively, such bank loan may be granted to an individual using the fact contingencies may be important for financial programming, that he is in permanent employment with a regular wage as policy, and analysis. Therefore, where contingent positions security, the promise of future earnings is not recognized as are important for policy and analysis, it is recommended a financial asset; nor are future receipts from sales for an that information be collected and presented as enterprise nor a stream of future tax revenue for supplementary data. Even though no payments may government. B. Transactions in financial assets and liabilities 1. The classification of financial assets and matching liability for gold bullion. The second class is liabilities shares, other corporate equity securities and financial participations. These do not have fixed redemption values, as is the case for many other financial assets, but represent 11.27 Because of the symmetry of financial claims and liabilities, claims by the share holders on the net worth of the the same classification can be used to portray both assets corporation. and liabilities. Further, the same classification is used in all accumulation accounts for financial transactions. Within the SNA, the term "instrument" may be used to relate to the 11.29 Table 11.2 shows an elaboration of table 11.1 incorporating asset or liability aspect of an item on the financial balance the classification of financial instruments. The exact sheet. In monetary statistics, some off-balance sheet items coverage and the definition of each of the items are may also be described as instruments. The use of the same described in section C along with an explanation of the term in the SNA is for convenience only and does not types of transactions appearing in the financial account that imply an extension of the coverage of assets and liabilities apply to each instrument. The remainder of this section to include these off-balance-sheet items. deals with general matters of classification and the application of the accounting rules of the SNA as they 11.28 Two classes of financial assets that cannot properly be apply to transactions in financial instruments. equated with identified claims over other designated institutional units are included in the classification of 11.30 The detail in which the classification is employed depends financial instruments. The first class is gold bullion owned on the institutional sector to be analysed. The types of by monetary authorities and others subject to the monetary financial assets in which households transact are more authorities' effective control and held as a financial asset limited than those for other sectors, and sources of and as a component of foreign reserves. There is no information are generally more limited than those for other 222 The financial account sectors. Financial corporations, on the other hand, transact institutions, involve both interest as recorded in the SNA in the full range of instruments, and information on their and a service fee, which is the service payment to the operations is often the most detailed and timely of any financial institution for making the loan available or safe- institutional units. Consequently, a detailed breakdown guarding the deposit. The buying and selling prices for may be developed for financial corporations. Blanks, rather foreign currency and shares are usually different; the than zeros in table 11.2 show where entries are difference between the buying price and mid-price conceptually impossible; zeros show that entries are represents a service provided to and charged to the buyer possible but expected to be small. and the difference between the mid-price and selling price a service provided to and charged to the seller. The mid-price 11.31 The standard items in the classification of financial assets is the mid-point of the buying and selling price at the time a and liabilities provide a useful basis for international transaction takes place; if the purchase and sale of a share, comparison of national data. Presentation of data for for instance, do not take place simultaneously, the mid- individual countries, however, must be tailored to meet point for the sale and purchase price at the time of sale and their analytical needs and to reflect national practices. Thus of purchase will not necessarily be equal. For some the particular form of presentation chosen may reflect financial instruments, for example bonds, the increase in differing institutional arrangements, the extent and nature value over time is taken to represent interest, not simply a of national financial markets, the complexity of financial price increase in the value of the asset. In some cases more assets available, and the degree of regulation and other than one adjustment may be needed to the apparent financial control exercised. For this reason, a number of transaction value to identify and re-route both the service supplementary items are suggested for use in addition to charge and interest associated with the asset. the standard components of the SNA. These are described together with the standard items in section C. 11.35 It is essential that the value of the transactions in financial instruments recorded in the financial account carefully 11.32 The classification of financial transactions has become excludes these service charges and interest payments. Part more difficult because of financial innovation that has led 4 of chapter 17 describes the adjustments necessary to to the development and increased use of new and often make these exclusions on an instrument-by-instrument complex financial assets and other financial instruments to basis. meet the needs of investors with respect to maturity, yield, avoidance of risk, and other factors. The identification issue is further complicated by variations in characteristics of 11.36 Financial transactions with respect to proprietors' net financial instruments across countries and variations in additions to the accumulation of equity in quasi- national practices on accounting and classification of corporations and changes in households' claims on instruments. These factors tend to limit the scope for firm insurance companies and pension funds raise complex recommendations with respect to the treatment of certain issues of valuation that are referred to in the relevant item transactions within the SNA. Thus, a substantial amount of under classification of these categories below and more flexibility, particularly with regard to further breakdowns, extensively in chapter 17. is required to match the classification scheme to national capabilities, resources and needs. In particular, further 4. Time of recording breakdowns of the standard items are desirable for many countries to distinguish important types of assets within categories (such as short-term securities included in 11.37 In principle, the two parties to a financial transaction measures of money). should record the transaction at the same point in time. When the counterpart to an entry in the financial account is in another account, the time of recording of financial claims 2. Negotiability is to be aligned with the time of recording in the other accounts of the transactions that gave rise to the financial 11.33 Financial claims can be distinguished as to whether they claim. For example, when sales of goods or services give are negotiable or not. A claim is negotiable if its legal rise to a trade credit, the entries in the financial accounts ownership is readily capable of being transferred from one should take place when ownership of the goods is unit to another unit by delivery or endorsement. While any transferred or when the service is provided. Similarly, when financial instrument can potentially be traded, negotiable accounts receivable or payable arise from transactions instruments are designed to be traded on organized and related to taxes, compensation of employees and other other markets. Negotiability is a matter of the legal form of distributive transactions, the entries in the financial account the instrument. Those financial claims that are negotiable should take place when the entries are made in the relevant are referred to as securities. Some securities may be legally non-financial account. negotiable, but there is not, in fact, a liquid market where they can be readily bought or sold. Securities include shares and debt securities; listed financial derivatives, such as 11.38 When all entries relating to a transaction pertain only to the warrants, are sometimes considered to be securities. financial account, they should be recorded when the ownership of the asset is transferred. This point in time is usually clear when the transaction involves the sale of 3. Valuation of transactions existing financial assets. When the transaction involves the incurrence or redemption of a liability, both parties should 11.34 The payments required under a contract relating to financial record the transaction when the liability is incurred or assets and liabilities almost always represent more than one redeemed. In most cases, this will occur when cash or some transaction in the sense used in the SNA. Payments of other financial asset is paid by the creditor to the debtor or interest on loans and deposits, as specified by financial repaid by the debtor to the creditor. 223 System of National Accounts 11.39 In practice, the two parties to a financial transaction may b. netting within a given specific asset, such as subtracting perceive the transaction as being completed at different sales of bonds from acquisition of bonds and points in time. This is especially true when trade credits or redemption of bonds from new incurrences of liabilities other accounts payable or receivable are extinguished by in the form of bonds; final payments and there is a lag between the point in time when payments are made and received, creating a "float". c. netting within a given category of assets, such as There are several stages at which creditors and debtors subtracting all disposals of debt securities from all could record a transaction. The debtor could record the acquisitions of such assets; liability as being extinguished when the cheque or other means of payment is issued to the creditor. A substantial period of time may elapse before the creditor receives the d. netting transactions in liabilities against transactions in means of payment and records the payment in his accounts. assets in the same asset category; and There may then be further time-lags between presentation of a cheque to a bank, cheque clearance, and final settlement of the transaction. Asymmetries in time of e. netting transactions in groups of liability categories recording of this transaction are, therefore, likely to emerge against transactions in assets in the same groups. unless the debtor records his transaction on a "cheques cleared" basis, a fairly uncommon accounting procedure. A 11.42 Transactions recorded in the financial account represent net financial claim exists up to the point that the payment is acquisition of assets and net incurrence of liabilities. cleared and the creditor has control of the funds; this would However, it is clear that, when data are collected on as be the optimal point in time for recording the transaction. gross a basis as possible, they can be netted to whatever The float, in practice, may be very large and may affect, in degree is necessary for a particular use; when data are particular, transferable deposits, trade credits, and other collected net, they cannot be grossed up. In general, netting accounts receivable. This effect is especially pronounced in beyond the level described in (c) above is discouraged as it countries where the postal system and bank clearing hinders the usefulness of the financial accounts for tracing procedures are weak. When the float is significant and how the economy mobilizes resources from institutional accounts for large discrepancies in reporting, it is necessary units with positive net lending and transmits them to net to develop estimates of the size of the float in order to borrowers. For detailed flow of funds analysis, gross adjust the accounts. reporting or netting at level (b) above is desirable, particularly for analysis of securities, but netting at level (c) 5. Netting and consolidation above still provides useful information on financial flows. Netting Consolidation 11.40 As described in chapter 3, netting is a process whereby 11.43 Consolidation in the financial account refers to the process entries on alternate sides of the account for the same of offsetting transactions in assets for a given group of transaction item and same institutional unit are offset institutional units against the counterpart transactions in against one another. In general the preference of the SNA is liabilities for the same group of institutional units. to avoid netting where possible but this may not always be Consolidation can be performed at the level of the total possible and for some particular analyses, not always economy, institutional sectors, and subsectors. Different desirable. levels of consolidation are appropriate for different types of analysis. For example, consolidation of the financial accounts for the total economy emphasizes the economy's 11.41 The degree of netting at which transactions in financial financial position with the rest of the world since all assets and liabilities should be recorded depends to a great domestic financial positions are netted on consolidation. extent on the analysis for which the data are to be used. In Consolidation for sectors permits the tracing of overall practice, the degree of netting will depend on how data can financial movements between sectors with positive net be reported, and reporting may vary substantially for lending and those with net borrowing and the identification different classes of institutional units. If detailed of financial intermediation. Consolidation only at the information on financial transactions is maintained and subsector level for financial corporations can provide much reported, gross presentations are possible; if transactions more detail on intermediation and allow, for example, the must be inferred from balance sheet data, a certain level of identification of the central bank's operations with other netting is inevitable. A number of degrees of netting can be financial intermediaries. Another area where consolidation identified: can be instructive is within the general government sector when transactions between the various levels of a. no netting or fully gross reporting in which purchases government are consolidated. Chapter 22 makes a specific and sales of assets are separately recorded, as are the recommendation in this regard. Within the main sequence incurrence and repayment of liabilities; of accounts, however, the SNA discourages consolidation. 224 The financial account C. Recording of individual financial instruments 1. Monetary gold and SDRs recorded in the financial accounts of the monetary authority of the individual participant on the one part and the rest of the world representing the participants collectively on the 11.44 Monetary gold and Special Drawing Rights (SDRs) issued other. by the International Monetary Fund (IMF) are assets that are normally held only by monetary authorities. 11.49 SDRs are held exclusively by official holders, which are central banks and certain other international agencies, and Monetary gold are transferable among participants and other official holders. SDR holdings represent each holder's assured and 11.45 Monetary gold is gold to which the monetary authorities unconditional right to obtain other reserve assets, especially (or others who are subject to the effective control of the foreign exchange, from other IMF members. SDRs are monetary authorities) have title and is held as a reserve assets with matching liabilities but the assets represent asset. It comprises gold bullion (including gold held in claims on the participants collectively and not on the IMF. allocated gold accounts) and unallocated gold accounts A participant may sell some or all of its SDR holdings to with non-residents that give title to claim the delivery of another participant and receive other reserve assets, gold. All monetary gold is included in reserve assets or is particularly foreign exchange, in return. held by international financial organizations. Only gold that is held as a financial asset and as a component of foreign 2. Currency and deposits reserves is classified as monetary gold. Therefore, except in limited institutional circumstances, gold bullion can be a financial asset only for the central bank or central 11.50 Financial transactions in currency and deposits consist of government. Transactions in monetary gold consist of sales additions to, or disposals of, currency and establishing or and purchases of gold among monetary authorities. incrementing a deposit or making a withdrawal from it. In Purchases (sales) of monetary gold are recorded in the the case of a deposit, an apparent increase in the value may financial account of the domestic monetary authority as be due to the payment of interest on an existing stock level. increases (decreases) in assets, and the counterparts are Payments of bank interest are always separated into SNA recorded as decreases (increases) in assets of the rest of the interest and a charge for financial intermediation services world. Transactions in non-monetary gold (including non- indirectly measured (FISIM). SNA interest is first recorded reserve gold held by the monetary authorities and all gold in the distribution of primary income account and then may held by financial institutions other than the monetary be recorded in the financial account as a new deposit. An authorities) are treated as acquisitions less disposals of increase in deposits may correspond to a rundown of valuables (if the sole purpose is to provide a store of currency or vice versa. wealth) and otherwise as final or intermediate consumption, change in inventories, exports or imports. 11.51 The aggregate of currency, transferable deposits (including Deposits, loans, and securities denominated in gold are inter-bank deposits) and other deposits should always be treated as financial assets (not as gold) and are classified calculated. A distinction should always be made between along with similar assets denominated in foreign currencies currency and deposits in domestic currency and in foreign in the appropriate category. A discussion on the treatment currency. If it is considered useful to have data for of allocated and unallocated gold accounts appears under individual foreign currencies, a distinction should be made currency and deposits. between currency and deposits in each currency. 11.46 Gold bullion takes the form of coins, ingots, or bars with a Currency purity of at least 995 parts per thousand; it is usually traded on organized markets or through bilateral arrangements between central banks. Therefore, valuation of transactions 11.52 Currency consists of notes and coins that are of fixed is not a problem. Gold bullion held as a reserve asset is the nominal values and are issued or authorized by the only financial asset with no corresponding liability. central bank or government. (Commemorative coins that are not actually in circulation should be excluded as should unissued or demonetized currency.) A distinction should be SDRs drawn between domestic currency (that is, currency that is the liability of resident units, such as the central bank, other 11.47 Special Drawing Rights (SDRs) are international reserve banks and central government) and foreign currencies that assets created by the International Monetary Fund (IMF) are liabilities of non-resident units (such as foreign central and allocated to its members to supplement existing banks, other banks and governments). All sectors may hold reserve assets. The Special Drawing Rights Department of currency as assets, but normally only central banks and the IMF manages reserve assets by allocating SDRs among government may issue currency. In some countries, member countries of the IMF and certain international commercial banks are able to issue currency under the agencies (collectively known as the participants). authorization of the central bank or government. 11.48 The mechanism by which SDRs are created (referred to as 11.53 Notes and coins are treated as liabilities at full face value. allocations of SDRs) and extinguished (cancellations of The cost of producing the physical notes and coins is SDRs) gives rise to transactions. These transactions are recorded as government expenditure and not netted against recorded at the gross amount of the allocation and are the receipts from issuing the currency. 225 System of National Accounts Transferable deposits it is overdrawn, the withdrawal of funds to zero is treated as the withdrawal of a deposit and the amount of the overdraft is treated as the granting of a loan. 11.54 Transferable deposits comprise all deposits that: 11.55 Transferable deposits should be cross-classified according a. are exchangeable for bank notes and coins on to: demand at par and without penalty or restriction; and a. whether they are denominated in domestic currency or b. are directly usable for making payments by cheque, in foreign currencies; and draft, giro order, direct debit/credit, or other direct payment facility. b. whether they are liabilities of resident institutions or the rest of the world. Some types of deposit accounts embody only limited features of transferability; these are excluded from the category of transferable deposits and treated as other Inter-bank positions deposits. For example, some deposits have restrictions such as on the number of third-party payments that can be made 11.56 Though not strictly accurate, the term bank is frequently per period or on the minimum size of the individual third- used as a synonym for the central bank and other deposit- party payments. A transferable deposit cannot have a taking corporations. Banks take deposits from and make negative value. A bank current or checking account, for loans to all other sectors. There may also be substantial example, is normally treated as a transferable deposit but if borrowing and lending within the banking subsector, but Table 11.2:The financial account - full detail - changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net acquisition of financial assets 83 172 - 10 189 2 436 47 483 Monetary gold and SDRs -1 -1 1 0 Monetary gold 0 0 0 0 SDRs -1 -1 1 0 Currency and deposits 39 10 - 26 64 2 89 11 100 Currency 5 15 2 10 1 33 3 36 Transferable deposits 30 -5 - 27 27 1 26 2 28 Interbank positions -5 -5 -5 Other transferable deposits 30 0 - 27 27 1 31 2 33 Other deposits 4 0 -1 27 0 30 6 36 Debt securities 7 66 4 10 -1 86 9 95 Short-term 10 13 1 3 0 27 2 29 Long-term -3 53 3 7 -1 59 7 66 Loans 19 53 3 3 0 78 4 82 Short-term 14 4 1 3 0 22 3 25 Long-term 5 49 2 0 0 56 1 57 Equity and investment fund shares 10 28 3 66 0 107 12 119 Equity 10 25 3 53 0 91 12 103 Listed shares 5 23 1 48 0 77 10 87 Unlisted shares 3 1 1 2 0 7 2 9 Other equity 2 1 1 3 0 7 0 7 Investment fund shares/units 0 3 0 13 0 16 0 16 Money market fund shares/units 0 2 0 5 0 7 0 7 Non MMF investment fund shares/units 0 1 0 8 0 9 0 9 Insurance, pension and standardized guarantee schemes 1 7 1 39 0 48 0 48 Non-life insurance technical reserves 1 2 0 4 0 7 0 7 Life insurance and annuity entitlements 0 0 0 22 0 22 0 22 Pension entitlements 11 11 0 11 Claim of pension fund on pension managers 3 3 0 3 Entitlements to non-pension benefits 2 2 0 2 Provisions for calls under standardized guarantees 0 2 1 0 0 3 0 3 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 Financial derivatives 3 8 0 1 0 12 0 12 Options 1 3 0 1 0 5 0 5 Forwards 2 5 0 0 0 7 0 7 Employee stock options 0 2 2 2 Other accounts receivable/payable 4 1 5 4 1 15 10 25 Trade credits and advances 3 1 3 7 8 15 Other accounts receivable/payable 1 1 4 1 1 8 2 10 226 The financial account this is of different economic significance from their inter-bank loans and deposits should be separated from intermediation activities involving other sectors. Chapter other loans and deposits. 27 describes how a full analysis of the debtor and creditor sector for each instrument can be portrayed. Such an analysis is known as a detailed flow of funds table. 11.57 There may be cases where the instrument classification of However, not all countries are able to provide these tables inter-bank positions is unclear, for example because the on a timely basis. Inter-bank positions can usually be parties are uncertain, or one party considers it as a loan and identified and are usefully recorded as a separate the other a deposit. Therefore, as a convention to assure instrument category. This is one reason to consider symmetry, all inter-bank positions other than securities and separating inter-bank loans and deposits from other loans accounts receivable or payable and changes in the positions and deposits. A second reason concerns the calculation of are classified under deposits. Chapter 27 describes the the charge for financial intermediation services indirectly detailed flow of funds table which removes the need for measured (FISIM). This calculation depends on knowing identifying inter-bank deposits as a separate category. the level of loans and deposits extended by banks to non- bank customers and calculating the difference between the Other transferable deposits interest the banks receive or pay and the interest when a reference rate is applied to the same levels of loans and deposits. However, there is normally little if any FISIM 11.58 Other transferable deposits are those where one party or payable between banks as banks usually borrow from and both parties to the transaction, or either the creditor or lend to each other at a risk-free rate. For both these reasons, debtor or both of the positions, is not a bank. Table 11.2 (cont):The financial account - full detail - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 Net acquisition of liabilities 139 173 93 15 6 426 57 483 Monetary gold and SDRs Monetary gold SDRs 0 Currency and deposits 65 37 102 -2 100 Currency 35 35 1 36 Transferable deposits 26 2 28 0 28 Interbank positions -5 -5 -5 Other transferable deposits 31 2 33 33 Other deposits 39 39 -3 36 Debt securities 6 30 38 0 0 74 21 95 Short-term 2 18 4 0 0 24 5 29 Long-term 4 12 34 0 0 50 16 66 Loans 21 0 9 11 6 47 35 82 Short-term 4 0 3 2 2 11 14 25 Long-term 17 0 6 9 4 36 21 57 Equity and investment fund shares 83 22 105 14 119 Equity 83 11 94 9 103 Listed shares 77 7 84 3 87 Unlisted shares 3 4 7 2 9 Other equity 3 3 4 7 Investment fund shares/units 11 11 5 16 Money market fund shares/units 5 5 2 7 Non MMF investment fund shares/units 6 6 3 9 Insurance, pension and standardized guarantee schemes 48 0 48 0 48 Non-life insurance technical reserves 7 7 0 7 Life insurance and annuity entitlements 22 22 0 22 Pension entitlements 11 11 0 11 Claim of pension fund on pension managers 3 3 0 3 Entitlements to non-pension benefits 2 2 0 2 Provisions for calls under standardized guarantees 3 0 3 0 3 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 Financial derivatives 2 7 0 0 0 9 3 12 Options 2 2 0 0 0 4 1 5 Forwards 0 5 0 0 0 5 2 7 Employee stock options 1 1 2 2 Other accounts receivable/payable 26 0 9 4 39 - 14 25 Trade credits and advances 6 0 6 4 0 16 -1 15 Other accounts receivable/payable 20 0 3 0 0 23 - 13 10 227 System of National Accounts Other deposits certificates of deposit, commercial paper, debentures, asset- backed securities, and similar instruments normally traded in the financial markets. Bills are defined as securities that 11.59 Other deposits comprise all claims, other than give the holders the unconditional rights to receive stated transferable deposits, that are represented by evidence of fixed sums on a specified date. Bills are issued and usually deposit. Typical forms of deposits that should be included traded in organized markets at discounts to face value that under this classification are savings deposits (which are depend on the rate of interest and the time to maturity. always non-transferable), fixed-term deposits and non- Examples of short-term securities are Treasury bills, negotiable certificates of deposit. The category also covers negotiable certificates of deposit, bankers' acceptances and shares or similar evidence of deposit issued by savings and commercial paper. Bonds and debentures are securities loan associations, building societies, credit unions and the that give the holders the unconditional right to fixed like. Deposits of limited transferability that are excluded payments or contractually determined variable payments, from the category of transferable deposits are included that is, the earning of interest is not dependent on here. Claims on the IMF that are components of earnings of the debtors. Bonds and debentures also give international reserves and are not evidenced by loans holders the unconditional rights to fixed sums as payments should be recorded in other deposits. (Claims on the IMF to the creditor on a specified date or dates. evidenced by loans should be included in loans.) Repayable margin payments in cash related to financial derivative contracts (described below) are included in other deposits, 11.65 Loans that have become negotiable from one holder to as are overnight and very short-term repurchase agreements another are to be reclassified from loans to debt securities if they are considered part of the national definition of under certain circumstances. For such reclassification, there broad money. Other repurchase agreements should be needs to be evidence of secondary market trading, classified under loans. including the existence of market makers, and frequent quotations of the instrument, such as provided by bid-offer spreads. 11.60 It is possible to hold accounts for both "allocated gold" and "unallocated gold". The distinction is precise, practical and recognized in the balance sheets of units holding these 11.66 Non-participating preferred stocks or shares are those that accounts. An allocated gold account gives full outright pay a fixed income but do not provide for participation in ownership of the gold and is equivalent to a custody record the distribution of the residual value of an incorporated of title. The unallocated gold account does not give the enterprise on dissolution. These shares are classified as holder the title to physical gold but provides a claim against debt securities. Bonds that are convertible into equity the account provider denominated in gold. In effect, should also be classified in this category prior to the time therefore, it is a deposit denominated in gold. They are thus that they are converted. treated as deposits in foreign currency. Accounts that are held for allocated gold, on the other hand, are treated as 11.67 Asset-backed securities and collateralized debt obligations holdings of valuables unless they are held by monetary are arrangements under which payments of interest and authorities, or other units authorized by them, as reserves. principal are backed by payments on specified assets or income streams. Securitization may also be used as a term 11.61 Similar accounts, distinguishing between unallocated and to describe this process. Asset-backed securities may be allocated accounts for different precious metals, are also issued by a specific holding unit or vehicle, which issues possible and should be treated in a similar way; those for securities that are sold to raise funds to pay the originator unallocated metals are deposits in foreign currency, those for the underlying assets. Asset-backed securities are for allocated accounts are holdings of valuables. If the classified as debt securities because the security issuers practice of using commodities in this way extends beyond have a requirement to make payments, while the holders do metals, it will be for consideration whether to extend this not have a residual claim on the underlying assets; if they practice. did, the instrument would be equity or investment funds shares. Asset-backed securities are backed by various types of financial assets, for example, mortgages and credit card 11.62 Transferable and other deposits may be held as assets by all loans, non-financial assets, or by future income streams sectors. Deposits are most often accepted as liabilities by (such as the earnings of a musician or a government's financial corporations but institutional arrangements in future revenue) that are not recognized in themselves as an some countries permit non-financial corporations, general economic asset in macroeconomic statistics. government and households to accept deposits as liabilities. 11.68 A banker's acceptance involves the acceptance by a 11.63 Other deposits should be cross-classified according to: financial corporation, in return for a fee, of a draft or bill of exchange and the unconditional promise to pay a a. whether the deposits are denominated in domestic specific amount at a specified date. In contrast to currency or in foreign currencies, and acceptances more generally, a banker's acceptance must be tradable. Much international trade is financed this way. b. whether they are liabilities of resident institutions or the Bankers' acceptances are classified under the category of rest of the world. debt securities. The banker's acceptance represents an unconditional claim on the part of the holder and an unconditional liability on the part of the accepting financial 3. Debt securities corporation; the financial corporation's counterpart asset is a claim on its customer. Bankers' acceptances are treated as 11.64 Debt securities are negotiable instruments serving as financial assets from the time of acceptance, even though evidence of a debt. They include bills, bonds, negotiable funds may not be exchanged until a later stage. 228 The financial account 11.69 Stripped securities are securities that have been 4. Loans transformed from a principal amount with coupon payments into a series of zero-coupon bonds, with a range 11.72 Loans are financial assets that: of maturities matching the coupon payment date(s) and the redemption date of the principal amount(s). The function of stripping is that investor preferences for a. are created when a creditor lends funds directly to a particular cash flows can be met in ways different from the debtor, and mix of cash flows of the original security. Stripped securities may have an issuer different from the original b. are evidenced by documents that are not negotiable. issuer; in which instance, new liabilities are created. There are two cases of stripped securities: 11.73 The category of loans includes overdrafts, instalment loans, hire-purchase credit and loans to finance trade credit. a. When a third party acquires the original securities and Claims on or liabilities to the IMF that are in the form of uses them to back the issue of the stripped securities. loans are also included. An overdraft arising from the Then new funds have been raised and there is a new overdraft facility of a transferable deposit account is financial instrument. classified as a loan. However, undrawn lines of credit are not recognized as a liability as they are contingent. Securities, repurchase agreements, gold swaps and b. When no new funds are raised and the payments on the financing by means of a financial lease may also be original securities are stripped and marketed separately classified as loans. However, accounts receivable/payable, by the issuer or through agents (such as strip dealers) which are treated as a separate category of financial assets, acting with the issuer's consent. and loans that have become debt securities are also excluded from loans. 11.70 Index-linked securities are instruments for which either the coupon payments (interest) or the principal or both 11.74 A securities repurchase agreement is an arrangement are linked to an index such as a price index or the price of involving the provision of securities in exchange for cash a commodity. The objective is to conserve purchasing with a commitment to repurchase the same or similar power or wealth during a period of inflation in addition to securities at a fixed price either on a specified future date earning interest income. When the coupon payments are (often one or a few days hence, but also further in the index-linked they are treated entirely as interest, as is the future) or with an "open" maturity. Securities lending case with any variable interest rate financial asset. When with cash collateral and sale/buy-backs are economically the value of the principal is indexed to an indicator that the same as a repurchase agreement; all involve the moves in line with a broad-based measure of inflation, the provision of securities as collateral for a loan or deposit. A issue price of the security is recorded as the principal and repo is a securities repurchase agreement where securities the index payment paid periodically and at maturity is are provided for cash with a commitment to repurchase treated as interest. The payment owing to indexation should the same or similar securities for cash at a fixed price on be recorded as interest (property income) over the life of a specified future date. (It is called a repo from the the security and the counterpart should be recorded under perspective of the security provider and a reverse repo from debt securities in the financial account. When a security is the perspective of the security taker.) indexed to a commodity and thus may be subject to large price fluctuations, a variation on this procedure is 11.75 The supply and receipt of funds under a securities recommended. It is explained in detail in part 4 of chapter repurchase agreement may be treated as a loan or deposit. It 17. is generally a loan, but is classified as a deposit if it involves liabilities of a deposit-taking corporation and is Supplementary classifications of debt securities included in national measures of broad money. If a securities repurchase agreement does not involve the 11.71 A supplementary subclassification of debt securities by supply of cash (that is, there is an exchange of one security maturity into short-term and long-term should be based on for another, or one party supplies a security without the following criteria. collateral), there is no loan or deposit. However, margin calls in cash under a repo are classified as loans. a. Short-term debt securities include those securities that 11.76 The securities provided as collateral under securities have an original maturity of one year or less. Securities lending, including a securities repurchase agreement, are with a maturity of one year or less should be classified treated as not having changed economic ownership. This as short-term even if they are issued under long-term treatment is adopted because the cash receiver is still facilities such as note issuing facilities. subject to the risks or benefits of any change in the price of the security. b. Long-term debt securities include those securities that have an original maturity of more than one year. Claims 11.77 A gold swap involves an exchange of gold for foreign with optional maturity dates, the latest of which is more exchange deposits with an agreement that the transaction be than one year away, and claims with indefinite maturity reversed at an agreed future date at an agreed gold price. dates should be classified as long-term. The gold taker (cash provider) will not usually record the gold on its balance sheet, while the gold provider (cash In addition, it may sometimes be useful to distinguish listed taker) will not usually remove the gold from its balance debt securities from unlisted ones and to record them sheet. In this manner, the transaction is analogous to a according to whether they are short- or long-term. repurchase agreement and should be recorded as a 229 System of National Accounts collateralized loan or deposit. Gold swaps are similar to creditors have been met. Equity is treated as a liability of securities repurchase agreements except that the collateral the issuing institutional unit. is gold. 11.84 Ownership of equity in legal entities is usually evidenced 11.78 When goods are acquired under a financial lease, a change by shares, stocks, depository receipts, participations, or of economic ownership of the goods from the lessor to the similar documents. Shares and stocks have the same lessee is deemed to take place. The change of economic meaning, while depository receipts are securities that ownership may be distinguished by the fact that all the risks facilitate ownership of securities listed in other economies; and rewards of ownership are transferred from the legal a depository issues receipts listed on one exchange that owner of the good, the lessor, to the user of the good, the represent ownership of securities listed on another lessee. The lessee contracts to make payments that enable exchange. Participating preferred shares are those that the lessor, over the period of the contract, to recover all, or provide for participation in the residual value on the virtually all, of his costs including interest. This de facto dissolution of an incorporated enterprise. Such shares are change in ownership is recorded by assuming a loan is also equity securities, whether or not the income is fixed or made by the lessor to the lessee, the lessee uses this loan to determined according to a formula. (Non-participating acquire the asset and the payments by the lessee to the preferred shares are treated as debt securities as explained lessor represent not rentals on the asset but payments of above.) interest, possibly a service charge and repayments of principal on the imputed loan. Interest is recorded as 11.85 Equities are subdivided into: property income payable or receivable and debt repayment is recorded in the financial account as reducing the value of a. listed shares; the asset (loan) of the lessor and the liability of the lessee. There is more extensive discussion of financial leases in part 5 of chapter 17. b. unlisted shares; and Supplementary classifications of loans c. other equity. Both listed and unlisted shares are negotiable and are 11.79 Loans may be divided, on a supplementary basis, between therefore equity securities. short- and long-term loans. 11.86 Listed shares are equity securities listed on an exchange. a. Short-term loans comprise loans that have an original They are also referred to as quoted shares. The existence of maturity of one year or less. Loans repayable on the quoted prices of shares listed on an exchange means that demand of the creditor should be classified as short- current market prices are usually readily available. term even when these loans are expected to be outstanding for more than one year. 11.87 Unlisted shares are equity securities not listed on an exchange. Unlisted shares can also be called private equity; b. Long-term loans comprise loans that have an original venture capital usually takes this form. Unlisted shares tend maturity of more than one year. to be issued by subsidiaries and smaller scale enterprises and typically have different regulatory requirements but 11.80 It may also be useful to distinguish loans that, though taken neither qualification is necessarily the case. out for a period longer than a year, have less than one year to maturity in the accounting period considered, as well as 11.88 Other equity is equity that is not in the form of securities. loans secured by mortgages. It can include equity in quasi-corporations (such as branches, trusts, limited liability and other partnerships), 5. Equity and investment fund shares unincorporated funds and notional units for ownership of real estate and other natural resources. The ownership of 11.81 Equity and investment fund shares have the distinguishing some international organizations is not in the form of feature that the holders own a residual claim on the assets shares and so is classified as other equity (although equity of the institutional unit that issued the instrument. Equity in the Bank for International Settlements (BIS) is in the represents the owner's funds in the institutional unit. In form of unlisted shares). contrast to debt, equity does not generally provide the owner with a right to a predetermined amount or an amount 11.89 Transactions in equity in the financial account cover three determined according to a fixed formula. different types of transactions. The first is the recording of the value of shares bought and sold on an exchange. From time to time corporations restructure their shares and may 11.82 Investment fund shares have a specialized role in financial offer shareholders a new number of shares for each share intermediation as a kind of collective investment in other previously held. These bonus shares are not however assets, so they are identified separately. treated as transactions but as a form of redenomination since the value of the new number of shares times the new Equity price represents the same proportion of the value of the corporation as the old number of shares times the old price. 11.83 Equity comprises all instruments and records acknowledging claims on the residual value of a 11.90 The second type of transaction concerning equity is capital corporation or quasi-corporation after the claims of all injections by the owners or, on occasion, withdrawals of 230 The financial account equity by the owners. Dividends are recorded in the However, the entire income from a holiday home is treated distribution of primary income account as if they were as a withdrawal by the owner of the notional resident unit always paid out of operating surplus earned in the current so there are no earnings left to be reinvested. This ensures period. An enterprise, though, usually aims to have a that the entire net worth of the notional resident unit is the smooth track record of dividend payments and will value of the property in question. therefore sometimes pay out more than the current operating surplus and sometimes rather less, the balance carrying through to the accumulation accounts by way of Investment fund shares or units saving (which might be negative). However, if the dividends paid out are significantly in excess of recent 11.94 Investment funds are collective investment undertakings average earnings, then the excess should no longer all be through which investors pool funds for investment in recorded in the allocation of primary income account but financial or non-financial assets. Those units acquiring should be regarded as a withdrawal of equity by the owners shares in the funds thus spread their risk across all the and be reflected under this item. Such payments are instruments in the fund. sometimes referred to as "superdividends". Withdrawals may take the form of proceeds from sales of fixed or other assets, transfers of fixed and other assets from the quasi- 11.95 In a detailed flow-of-funds table, the acquisition of corporation to the owner and funds taken from accumulated instruments by the investment funds is shown separately retained earnings and reserves for the consumption of fixed from the acquisition of shares in the funds and a full capital. (The particular case of payments between analysis of the from-whom-to-whom transactions captures government and public enterprises is discussed in chapter the holdings of instruments via investment funds without 22.) Equally, liquidating dividends paid to shareholders needing to have a separate category for it. However, as when an enterprise becomes bankrupt should be recorded noted in connection with the category of inter-bank as withdrawal of equity. positions, timely flow-of-funds tables are not always available. Therefore, in order to distinguish when non- financial units acquire instruments such as securities and 11.91 Conversely, owners may inject extra finance into an equities directly and when they are acquired via investment enterprise. If the enterprise is publicly controlled and runs a funds, the latter are shown separately. regular deficit each year as a matter of government economic or social policy that is covered by a receipt from 11.96 Investment funds include mutual funds and unit trusts. government to match this deficit, the payment is regarded Investment funds issue shares when a corporate structure is as a subsidy. If the payment from government is irregular used and units when a trust structure is used. Investment but clearly designed to cover accumulated losses, it is fund shares refer to the shares issued by mutual funds, treated as a capital transfer. If government makes an rather than the shares the mutual fund may hold. investment grant to a public corporation this also is recorded as a capital transfer. However, there may be cases where the owners (public or private) agree to make new 11.97 Investment funds are divided into money market funds finance available to permit expansion, say, and represent (MMF) and non-MMF investment funds. The fundamental not just a reduction of debt but a positive addition to the difference between them is that MMFs typically invest in enterprise's own funds. The finance consists of funds for money market instruments with a residual maturity of less use by the enterprise in purchasing fixed assets, than one year, are often transferable and are often regarded accumulating inventories, acquiring financial assets or as close substitutes for deposits. Non-MMF investment redeeming liabilities. Transfers by owners of fixed and funds typically invest in longer-term financial assets and other assets to the quasi-corporation are also included as possibly real estate. They are not transferable and are addition to equity. Such payments are to be included in this typically not regarded as substitutes for deposits. item as an acquisition of equity, even if no new shares are issued in response to the financial contribution. 11.98 The increase in value of investment fund shares or units other than from holding gains and losses and after any 11.92 The third type of transaction concerning equity is the reinvested earnings are deducted is shown in the SNA as special case of equity addition and withdrawal that happens distributed to the share or unit holders and reinvested by in respect of the reinvestment of earnings of foreign direct them in the financial account. investment enterprises. In the distribution of primary income account, the share of operating surplus Money market fund shares or units proportionate to the foreign direct investor's share of equity is shown as being withdrawn and distributed to him as reinvested earnings. Because it is not actually withdrawn, it 11.99 Money market funds are investment funds that invest only adds to the value of the equity of the enterprise by a or primarily in short-term money market securities such recording as reinvestment of earnings in the financial as Treasury bills, certificates of deposit and commercial account. paper. Money market funds sometimes are functionally close to transferable deposits, for example, accounts with unrestricted cheque-writing privileges. If these fund shares 11.93 Notional resident units are treated in the same manner as are included in broad money in the reporting economy, they quasi-corporations. For example, an extension to a holiday should be recorded as a separate item to allow home of a non-resident is recorded as an increase in the reconciliation with monetary statistics. Money market fund value of an asset owned by a resident notional unit with a shares or units represent a claim on a proportion of the matching increase in the equity of the non-resident owner. value of an established money market fund. 231 System of National Accounts Other investment fund shares or units for non-life insurance technical reserves recorded in the financial account are accrual adjustments. 11.100 Other investment fund shares or units represent a claim on a proportion of the value of an established investment Life insurance and annuities entitlements fund other than a money market fund. 11.106 Life insurance and annuities entitlements show the extent Supplementary classifications of investment of financial claims policyholders have against an fund shares enterprise offering life insurance or providing annuities. The only transaction for life insurance and annuity entitlements recorded in the financial account is the 11.101 It may be useful to distinguish listed from unlisted difference between net premiums receivable and claims investment fund shares. payable. 11.102 Investment funds invest in a range of assets including debt Pension entitlements securities, equity, commodity-linked investments, real estate, shares in other investment funds and structured assets. Data on the composition of their assets could be 11.107 Pension entitlements show the extent of financial claims useful in economies where investment funds are both existing and future pensioners hold against either significant. their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee. The only transaction 6. Insurance, pension and standardized for pension entitlements recorded in the financial account is guarantee schemes the difference between net contributions receivable and benefits payable. The increase in pension entitlements 11.103 Insurance, pension and standardized guarantee schemes all shown in the financial account is equal to the entry in the function as a form of redistribution of income or wealth use of income accounts for the change in pension mediated by financial institutions. The redistribution may entitlements plus any transfer of entitlements from a be between individual institutional units in the same period previous pension manager. or for the same institutional unit over different periods or a combination of the two. Units participating in the schemes Claims of pension funds on pension manager contribute to them and may receive benefits (or have claims settled) in the same or later periods. While they hold the funds, insurance corporations invest them on behalf of the 11.108 An employer may contract with a third party to administer participants. The part of the investment income that is the pension funds for his employees. If the employer distributed to the participants as property income is continues to determine the terms of the pension schemes returned as extra contributions. In all cases, net and retains the responsibility for any deficit in funding as contributions or premiums are defined as actual well as the right to retain any excess funding, the employer contributions or premiums plus distributed property income is described as the pension manager and the unit working less the service charge retained by the financial institution under the direction of the pension manger is described as concerned. Entries in the financial account, therefore, the pension administrator. If the agreement between the reflect the difference between net contributions or net employer and the third party is such that the employer premiums paid to the schemes less benefits and claims paid passes the risks and responsibilities for any deficit in out. Significant other additions to the reserves of the funding to the third part in return for the right of the third schemes come via other changes in the volume of assets part to retain any excess, the third party becomes the and especially holding gains. There is more extensive pension manger as well as the administrator. discussion on the recording of all these schemes in parts 1, 2 and 3 of chapter 17. 11.109 When the pension manger is a unit different from the administrator, with the consequences that responsibility for 11.104 There are five sorts of reserves applicable to insurance, any deficit, or claims on any excess, rest with the pension pension and standardized guarantee schemes. These are manager, the claim of the pension fund on the pension non-life insurance technical reserves, life insurance and manager is shown under this heading. (The entry is annuities entitlements, pension entitlements, claims of negative if the pension fund makes more investment pension funds on the pension manager and provisions for income from the pension entitlements it holds than is calls under standardized guarantees. necessary to cover the increase in entitlements and the difference is payable to the pension manager of the scheme.) Non-life insurance technical reserves Provisions for calls under standardized 11.105 Non-life insurance technical reserves consist of prepayments of net non-life insurance premiums and guarantees reserves to meet outstanding non-life insurance claims. They consist of premiums paid but not yet earned (called 11.110 Provisions for calls under standardized guarantees unearned premiums) and claims due but not yet settled, consist of prepayments of net fees and provisions to meet including cases where the amount is in dispute or the event outstanding calls under standardized guarantees. The leading to the claim has occurred but has not yet been transactions for provisions for calls under standardized reported (called claims outstanding). The only transactions guarantee schemes recorded in the financial account are 232 The financial account similar to the reserves for non-life insurance; they include services in the appropriate accounts. Financial derivatives unearned fees and calls not yet settled. transactions may take place between two parties directly, or through an intermediary. In the latter case, implicit or 7. Financial derivatives and employee stock explicit service charges may be involved. However, it is usually not possible to distinguish the implicit service options element. Net settlement payments under derivative contracts are therefore recorded as financial transactions. Financial derivatives However, where possible, the service charge component should be separately recorded. Financial derivatives 11.111 Financial derivatives are financial instruments that are contracts are usually settled by net payments of cash. This linked to a specific financial instrument or indicator or often occurs before maturity for exchange-traded contracts commodity, through which specific financial risks can be such as commodity futures. Cash settlement is a logical traded in financial markets in their own right. The value consequence of the use of financial derivatives to trade risk of a financial derivative derives from the price of the independently of ownership of an underlying item. underlying item: the reference price. The reference price However, some financial derivative contracts, particularly may relate to a commodity, a financial asset, an interest involving foreign currency, are associated with transactions rate, an exchange rate, another derivative or a spread in the underlying item. A transaction in an asset underlying between two prices. The derivative contract may also refer a financial derivative contract that goes to delivery should to an index or a basket of prices. be recorded at the prevailing market price for the asset with the difference between the prevailing price and the price 11.112 An observable market price or an index for the underlying actually paid (times the quantity of the asset) recorded as a item is essential for calculating the value of any financial transaction in financial derivatives. derivative. If a financial derivative cannot be valued because a prevailing market price or index for the 11.115 There are two broad classes of financial derivatives: option underlying item is not available, it cannot be regarded as a contracts (options) and forward-type contracts (forwards). financial asset. Unlike debt instruments, no principal Within each class, a further distinction could be made by amount is advanced to be repaid and no investment income market risk categories; foreign exchange, single-currency accrues. Financial derivatives are used for a number of interest rate, equity, commodity, credit and other. purposes including risk management, hedging, arbitrage between markets and speculation. Financial derivatives 11.116 A major difference between forward and option contracts is enable parties to trade specific financial risks (interest rate that, whereas either party to a forward contract is a risk, currency, equity and commodity price risk and credit potential debtor, the buyer of an option contract acquires an risk, etc.) to other entities who are more willing, or better asset and the option writer incurs a liability. However, suited, to take or manage these risks, typically, but not option contracts frequently expire without worth; options always, without trading in a primary asset or commodity. are exercised only if settling a contract is advantageous for The risk embodied in a derivatives contract can be "traded" the option holder. either by trading the contract itself, such as is possible with options, or by creating a new contract that embodies risk characteristics that match, in a countervailing manner, Options those of the existing contract owned. The latter is termed offsetability and is particularly common in forward markets 11.117 Options are contracts that give the purchaser of the or where there are no formal exchanges through which to option the right, but not the obligation, to buy (a "call" trade derivatives. option) or to sell (a "put" option) a particular financial instrument or commodity at a predetermined price (the 11.113 Financial derivative instruments that can be valued "strike" price) within a given time span (American separately from the underlying item to which they are option) or on a given date (European option). Many linked should be treated as financial assets, regardless of options contracts, if exercised, are settled by a cash whether "trading" occurs on- or off-exchange. Transactions payment rather than by delivery of the underlying assets or in financial derivatives should be treated as separate commodities to which the contract relates. Options are sold transactions, rather than as integral parts of the value of or "written" on many types of underlying bases such as underlying transactions to which they may be linked. The equities, interest rates, foreign currencies, commodities and two parties to the derivatives may have different motives specified indices. The buyer of the option pays a premium for entering into the transaction. One may be hedging, (the option price) to the seller for the latter's commitment while the other may be dealing in derivative instruments or to sell or purchase the specified amount of the underlying acquiring the derivative as an investment. Even if both instrument or commodity on demand of the buyer. While parties are hedging, they may be hedging transactions or the premium paid to the seller of the option can risks that involve different financial assets or even conceptually be considered to include a service charge, in transactions in different accounts. Therefore, if derivative practice, it is usually not possible to distinguish the service transactions were treated as integral parts of other element. The full price should be recorded as acquisition of transactions, such treatment would lead to asymmetries of a financial asset by the buyer and as incurrence of a liability measurement in different parts of the accounts or to by the seller. However, where possible, the service charge asymmetries of measurement between institutional sectors. component should be separately recorded. 11.114 Any commissions paid to or received from brokers or other 11.118 The timing of premium payments on options varies. intermediaries for arranging options, futures, swaps and Depending on the type of contract, premiums are paid when other derivatives contracts are treated as payments for the contracts begin, when the options are exercised, or 233 System of National Accounts when the options expire. The value of an option at b. A forward rate agreement (FRA) is an arrangement inception should be recorded at the full price of the in which two parties, in order to protect themselves premium. If the premiums are paid after the purchase of an against interest rate changes, agree on an interest rate option, the value of the premium payable is recorded as an to be paid, at a specified settlement date, on a notional asset at the time the derivative is purchased, financed by an amount of principal that is never exchanged. FRAs account receivable from the writer. Subsequent purchases are settled by net cash payments. The only payment that and sales of options are also to be recorded in the financial takes place is related to the difference between the account. If an option based on a financial asset is exercised agreed forward rate agreement rate and the prevailing or if a commodity based option proceeds to delivery, the market rate at the time of settlement. The buyer of the acquisition or sale of the underlying asset should be forward rate agreement receives payment from the recorded at the prevailing market price in the appropriate seller if the prevailing rate exceeds the agreed rate; the accounts with the difference between this amount and the seller receives payment if the prevailing rate is lower amount actually paid recorded as transactions in financial than the agreed rate. derivatives. c. A foreign exchange swap is a spot sale/purchase of 11.119 Warrants are a form of options that are treated in the currencies and a simultaneous forward purchase/sale financial account in the same way as other options. of the same currencies. Warrants are tradable instruments giving the holder the right to buy, under specified terms for a specified period d. A forward foreign exchange contract involves two of time, from the issuer of the warrant (usually a counterparties who agree to transact in foreign corporation) a certain number of shares or bonds. There currencies at an agreed exchange rate in a specified are also currency warrants based on the amount of one amount at some agreed future date. currency required to buy another and cross-currency warrants tied to third currencies. They can be traded apart e. A cross-currency interest rate swap, sometimes known from the underlying securities to which they are linked and as a currency swap, involves an exchange of cash therefore have a market value. The issuer of the warrant flows related to interest payments and an exchange of incurs a liability, which is the counterpart of the asset held principal amounts at an agreed exchange rate at the by the purchaser. end of the contract. Forwards 11.122 There might also be an exchange of principal at the beginning of the contract and, in these circumstances, there may be subsequent repayments, which include both interest 11.120 Under a forward contract, the two counterparties agree to and principal, over time according to the predetermined exchange a specified quantity of an underlying item (a rules. Streams of net settlement payments resulting from particular product or financial asset) at an agreed contract swap arrangements are to be recorded as transactions in price (the "strike" price) on a specified date. Futures financial derivatives and repayments of principal are to be contracts are forward contracts traded on organized recorded under the relevant instrument item in the financial exchanges. A forward contract is an unconditional account. financial contract that represents an obligation for settlement on a specified date. Futures and other forward Credit derivatives contracts are typically, but not always, settled by the payment of cash or the provision of some other financial instrument rather than the actual delivery of the 11.123 The financial derivatives described in the previous underlying item and therefore are valued and traded paragraphs are related to market risk, which pertains to separately from the underlying item. At the inception of changes in the market prices of securities, commodities, the contract, risk exposures of equal market value are interest and exchange rates. Credit derivatives are exchanged and hence the contract has zero value. Some financial derivatives whose primary purpose is to trade time must elapse for the market value of each party's risk to credit risk. They are designed for trading in loan and differ so that an asset (creditor) position is created for one security default risk. Credit derivatives take the form of party and a liability (debtor) position for the other. The both forward-type and option-type contracts and like other debtor/creditor relationship may change both in magnitude financial derivatives, they are frequently drawn up under and direction during the life of the forward contract. standard master legal agreements and involve collateral and margining procedures, which allow for a means to make a market valuation. 11.121 Common forward-type contracts include interest rate swaps, forward rate agreements (FRA), foreign exchange Margins swaps, forward foreign exchange contracts and cross- currency interest rate swaps. 11.124 Margins are payments of cash or collateral that cover actual or potential obligations under financial derivatives, a. An interest rate swap contract involves an exchange especially futures or exchange-traded options. Repayable of cash flows related to interest payments, or receipts, margins consist of deposits or other collateral deposited to on a notional amount of principal, which is never protect a counterparty against default risk, but that remain exchanged, in one currency over a period of time. under the ownership of the unit that placed the margins. Settlements are often made through net cash payments Although its use may be restricted, a deposit is classified as by one counterparty to the other. repayable if the depositor retains the risks and rewards of 234 The financial account ownership. Repayable margin payments in cash are households and the rest of the world, and advances for transactions in deposits, not transactions in a financial work that is in progress (if classified as such under derivative. The depositor has a claim on the exchange or inventories) or is to be undertaken. Trade credits and other institution holding the deposit. Some compilers may advances do not include loans to finance trade credit, which prefer to classify these margins within other accounts are classified as loans. It may be valuable to separate short- receivable or payable in order to reserve the term deposits term trade credits and advances from long-term trade credit for monetary aggregates. When repayable margin payments and advances by employing the same criteria used to are made in non-cash assets, such as securities, no entries distinguish between other short- and long-term financial are required because the entity on whom the depositor has a assets. claim (the issuer of the security) is unchanged. Non- repayable margins reduce a financial liability created under Other a financial derivative contract. The entity that pays a non- repayable margin no longer retains ownership of the margin nor has the right to the risks and rewards of ownership, 11.127 This category includes accounts receivable and payable, such as the receipt of income or exposure to holding gains other than those described previously, that is the amounts and losses. A payment of a non-repayable margin is are not related to the provision of goods and services. It normally recorded as a decline in currency and deposits covers amounts related to taxes, dividends, purchases and with a counter entry in the reduction in financial derivative sales of securities, rent, wages and salaries, and social liabilities and the receipt of a non-repayable margin is contributions. Interest that accrues but is not paid is recorded as an increase of holdings of currency and included in this item only if the accrued interest is not deposits with the counter entry in the reduction in financial added to the value of the asset on which the interest is derivative assets. payable (as is usually the case). Employee stock options (ESOs) 11.128 This category does not include statistical discrepancies. 11.125 An employee stock option is an agreement made on a 9. Memorandum items given date (the "grant" date) under which an employee may purchase a given number of shares of the employer's Foreign direct investment stock at a stated price (the "strike" price) either at a stated time (the "vesting" date) or within a period of time (the 11.129 Transactions in financial assets and liabilities arising from "exercise" period) immediately following the vesting date. the provision of, or receipt of, foreign direct investment are The exercise date is the time at which the option is to be recorded under the appropriate categories: debt exercised. It cannot be earlier than the vesting date or later securities, loans, equity, trade credit or other. However, the than the end of the exercise period. Transactions in amounts of foreign direct investment included within each employee stock options are recorded in the financial of those categories should also be recorded separately as account as the counterpart to the element of compensation memorandum items. Foreign direct investment is discussed of employees represented by the value of the stock option. further in chapters 17 and 24. The means of valuing and time of recording ESOs is discussed in part 6 of chapter 17. Non-performing loans 8. Other accounts receivable or payable 11.130 It is useful to identify transactions relating to non- performing loans as memorandum items. There is a Trade credit and advances discussion of the definition of and recording for non- performing loans in chapter 13. In addition, when they are 11.126 This category comprises trade credit for goods and services important it may be useful to group all arrears of interest extended to corporations, government, NPISHs, and repayment under a memorandum item. 235 System of National Accounts 236 Chapter 12: The other changes in assets accounts A. Introduction 12.1 This chapter is concerned with the recording of changes in 12.3 The entries in the other changes in assets accounts cover the values of assets and liabilities, and thus of the changes many different kinds of changes in assets, liabilities and net in net worth, between opening and closing balance sheets worth. Some of these are particular to the type of asset that result from flows that are not transactions, referred to concerned, some may apply to all types of assets. All as other flows. Transactions in assets and liabilities and the changes relating to holding gains and losses are included in the revaluation account. Holding gains and losses arise immediate consequences of transactions on net worth are from changes over time in the level and structure of prices. recorded in the capital account and financial account. The All other changes in the value of assets are treated as being change in the value of produced assets resulting from due to a change in volume due to quality change rather than consumption of fixed capital and from recurrent losses due to changes in prices and are recorded in the other from inventories are treated as transactions and so do not changes in the volume of assets account. This includes appear in the other changes in assets accounts. changes in value that result instantaneously, for example, from a reclassification of an asset or from other one-off events. 12.2 Although the entries relate to flows that are not transactions, they are not "residual" entries. Rather they 12.4 The chapter discusses the two accounts in turn, beginning serve to demonstrate significant changes in the value and with the other changes in the volume of assets account and composition of items between the opening and closing proceeding to the revaluation account. Under each account, balance sheets due to other events. the entries for each type of asset are discussed separately. B. The other changes in the volume of assets account 12.5 The other changes in the volume of assets account records from and recurrent losses from inventories. In the financial the changes in assets, liabilities, and net worth between account, most financial assets enter the SNA when the opening and closing balance sheets that are due neither to debtor acquires something of value and accepts the transactions between institutional units, as recorded in the obligation to make payment, or payments, to the creditor. capital and financial accounts, nor to holding gains and Financial assets are extinguished when the debtor has losses as recorded in the revaluation account. The format of fulfilled the financial obligation under the terms of the the other changes in the volume of assets account, shown in agreement. table 12.1, is similar to that of the other accumulation accounts. The entries for changes in assets are on the left- 12.7 Both the capital and financial accounts also record hand side and the entries for changes in liabilities are on the transactions in existing assets among the institutional right-hand side. Non-financial assets, both produced and sectors. However, these acquisitions and disposals merely non-produced, and financial assets are shown separately. change the ownership of the assets without changing the The balancing item in the account, the change in net worth total net worth for the economy as a whole except where due to other changes in volume of assets, is the excess of the transactions are between residents and the rest of the the sum of the changes in assets over the sum of the world. changes in liabilities recorded in the account and is shown on the right-hand side of the account. 12.8 One important function of the other changes in the volume of assets account is to allow certain assets to enter and 1. Functions of the other changes in the leave the SNA other than by transactions. The acts of volume of assets account entering and exiting from the balance sheet are referred to as economic appearances and disappearances. Some entrances and exits happen when naturally occurring assets, 12.6 In the capital account, produced assets enter and leave the such as subsoil assets, gain economic value or become SNA through acquisition less disposal of fixed assets, worthless. Such entrances and exits come about as consumption of fixed capital and additions to, withdrawals interactions between institutional units and nature, thus 237 System of National Accounts contrasting with entrances and exits that come about as a e. entries relating to financial assets. result of transactions, which typically are interactions by mutual agreement between institutional units. Yet other Table 12.2 shows a disaggregation of table 12.1 including entrances and exits may also relate to assets created by the various entries for economic appearance and human activity, such as valuables, purchased goodwill or disappearance of assets. gold. Economic recognition of produced assets 12.9 A second function of the account is to record the effects of exceptional, unanticipated events that affect the economic benefits derivable from assets (and corresponding 12.13 Two types of assets can appear under this item: public liabilities). These occurrences are referred to as the effect monuments and valuables. As was described in chapter 10, of external events. They include one institutional unit's public monuments are objects, structures or sites of effectively removing an asset from its owner without the significant or special value. Valuables are items held as owner's agreement, an action that is not considered a stores of value because their value is expected to transaction because the element of mutual agreement is appreciate, or at least not depreciate, over time. The capital absent. These events also include those that destroy assets, account records the acquisition of valuables and public such as natural disaster or war. monuments when these are newly produced goods or imported and it records transactions in existing goods already classified as valuables and public monuments. 12.10 A third function of the account is to record changes in classifications of institutional units and assets and in the structure of institutional units. 12.14 However, existing goods, valuables and public monuments may not already have been recorded in the balance sheets for any of several reasons; they may date from a time 12.11 The three sections that follow discuss first the recording of before the time period covered by the accounts, they were the economic appearance and disappearance of assets, then originally recorded as consumption goods or, if structures, the effects of external events on the value of assets and they have already been written off. finally changes in the classification and structure of assets. Public monuments 2. Appearance and disappearance of assets other than by transactions 12.15 Public monuments are included with dwellings and with other buildings and structures in the classification of fixed 12.12 Entries relating to the appearance and disappearance of assets. When the special archaeological, historical or assets can be grouped according to the main type of asset cultural significance of a structure or site not already under consideration as follows: recorded in the balance sheet is first recognized, it is classified as an economic appearance and recorded in the other changes in the volume of assets account. For a. entries relating to recognition of produced assets; example, such recognition might be accorded to an existing structure or site that is fully written off and thus no longer b. entries relating to entry and exit from the asset recorded in the balance sheet. Alternatively, a structure or boundary of natural resources; site that is already within the asset boundary but is new or only partially written off, may be assessed as having the status of a public monument. If the monument was c. entries relating to contracts, leases and licences; previously written off, then its recognition as a public monument is recorded as an economic appearance of an d. changes in goodwill and marketing assets; and asset. If it was previously classified as another type of Table 12.1:The other changes in the volume of assets account - concise form - transactions in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets 26 0 7 0 0 33 33 Economic disappearance of non-produced non-financial assets -9 0 -2 0 0 - 11 - 11 Catastrophic losses -5 0 -6 0 0 - 11 - 11 Uncompensated seizures -5 0 5 0 0 0 0 Other changes in volume n.e.c. 1 1 0 0 0 2 2 Changes in classification 6 -2 -4 0 0 0 0 Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Non-produced non-financial assets 14 0 3 0 0 17 17 Financial assets 2 1 0 0 0 3 3 238 The other changes in assets accounts asset, it is recorded as a reclassification of an asset 12.18 One way in which the resources may increase is by the (discussed below) and if at the same time a new valuation is discovery of new exploitable deposits, whether as a result placed on the monument, this increase in value is recorded of systematic scientific explorations or surveys or by under economic appearance. If the reclassification occurs at chance. Economic appearance may also occur because the time of a sale of the asset, for example the acquisition of resources may be increased by the inclusion of deposits for an asset by general government, this acquisition is recorded which exploitation was previously uneconomic but in the capital account as normal. becomes economic as a result of technological progress or relative price changes. Valuables Natural growth of uncultivated biological resources 12.16 For valuables, such as precious stones, antiques and other 12.19 The natural growth of uncultivated biological resources, art objects, when the high value or artistic significance of such as natural forests and fish stocks, may take various an object not already recorded in the balance sheet is first forms: a stand of natural timber may grow taller, or fish in recognized, it is classified as an economic appearance. the estuaries may become more numerous. Although these Hitherto, the object may have been of little value and not resources are economic assets, growth of this kind is not considered an asset. For example, the item might have been under the direct control, responsibility and management of considered an ordinary good whose purchase had been an institutional unit and thus is not treated as production. included in household final consumption expenditure or The increment in the asset must then be regarded as an been regarded as a consumer durable. Recognition of its economic appearance, and it is recorded in the other worth as a store of value leads to its entrance into the changes in the volume of assets account. balance sheet as a valuable. The recognition of the value of a previously unvalued item is often associated with a sale (for example at auction). The sale is recorded in the capital 12.20 In principle, natural growth should be recorded gross, and account as the sale and purchase of a valuable, it having the depletion of these resources should be recorded as been entered first into the balance sheet of the seller. economic disappearance, as described below. This recording would be consistent with the separate recording of acquisitions and disposals described in the capital Entry of natural resources into the asset account. In practice, however, many countries will record boundary natural growth net because the physical measures that are likely to be the only basis available for the recording are, in effect, net measures. These measures may be used in Discoveries and upwards reappraisals of subsoil conjunction with a market price for a unit of the asset to resources estimate the value of the volume change to be recorded. Transfers of other natural resources to economic 12.17 In the SNA, subsoil assets are defined as those proven subsoil resources of coal, oil and natural gas, of metallic activity minerals or of non-metallic minerals that are economically exploitable, given current technology and relative prices. 12.21 Not all land included in the geographic surface area of a The capital account records acquisitions and disposals country is necessarily within the asset boundary of the among sectors of the resources that exist under those SNA. Land may make its economic appearance when it is conditions. The other changes in the volume of assets transferred from a wild or waste state to one in which account, in contrast, records increases and decreases that ownership may be established and the land can be put to change the total volume for the economy as a whole. economic use. It may also acquire value because of activity Table 12.1 (cont):The other changes in the volume of assets account - concise form - transactions in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets Economic disappearance of non-produced non-financial assets Catastrophic losses Uncompensated seizures Other changes in volume n.e.c. 0 0 0 1 0 1 1 Changes in classification 0 0 2 0 0 2 2 Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 1 0 3 3 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 239 System of National Accounts in the vicinity, for example, land that becomes more economic use that are shown as changes in classification, as desirable and thus more valuable because a new described below. For example, the reclassification of development is established nearby or the creation of an cultivated land to land underlying buildings may result in a access road. The cost of land improvements, affecting the change of value as well as a change in classification. In this parcel of land being considered directly, is treated as gross case, the asset is already within the asset boundary, and it is fixed capital formation, recorded as land improvements and the change in quality of the asset due to changes in its subsequently subject to consumption of fixed capital. Any economic use that is regarded as the appearance of excess in the increase in value of the land over the value of additional amounts of the asset. Another example is that of land improvements or any increase due to adjacent capital livestock treated as capital formation, for example, dairy activity is recorded as economic appearance. cattle, if they are sent to slaughter earlier than expected. 12.22 For other natural resources, the first substantial market Exit of natural resources from the asset appearance, generally involving commercial exploitation, boundary is the reference point for recording in this account. For virgin forests, gathering firewood is not commercial exploitation, but large-scale harvesting of a virgin forest for 12.24 Exits of natural resources from the balance sheets are timber is and brings the forest into the asset boundary. shown as negative entries on the left-hand side of the Similarly, drawing water from a natural spring does not account. Many of the possible entries are simply the bring an aquifer into the asset boundary of the SNA, but a negative alternative to the positive entries just discussed. significant diversion of groundwater does. A move to charge for regular extraction from a body of surface water Extractions and downwards reappraisals of subsoil may also bring a water resource into the balance sheet. resources Quality changes in natural resources due to changes 12.25 The changes recorded here are the negative analogues of in economic uses gross additions to the level of exploitable subsoil resources that result from reassessments of exploitability because of 12.23 The SNA, in general, treats differences in quality as changes in technology or relative prices. In practice, only differences in volume. As explained with respect to goods net additions may be available, and these will be recorded and services in chapter 15, different qualities reflect under discoveries and upwards reappraisals of subsoil different use values (and in the case of goods and services, resources. different resource costs). Different qualities are, therefore, economically different from each other. The same principle 12.26 The depletion of natural resources covers the reduction in applies to assets. The quality changes recorded here occur the value of deposits of subsoil assets as a result of the as the simultaneous counterparts of the changes in physical removal and using up of the assets. Table 12.2:The other changes in the volume of assets accounts - changes in assets due to economic appearance and disappearance Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets 26 0 7 0 0 33 33 Produced non-financial assets 3 3 3 Non-produced non-financial assets 26 0 4 0 0 30 30 Natural resources 22 4 26 26 Contracts, leases and licences 4 4 4 Goodwill and marketing assets 0 0 Economic disappearance of non-produced non-financial assets -9 0 -2 0 0 - 11 - 11 Depletion of natural resources -6 0 -2 0 0 -8 -8 Natural resources -6 -2 -8 -8 Other economic disappearance of non-produced non-financial assets -3 0 0 0 0 -3 -3 Natural resources 0 0 Contracts, leases and licences -1 -1 -1 Goodwill and marketing assets -2 -2 -2 Catastrophic losses -5 0 -6 0 0 - 11 - 11 Uncompensated seizures -5 0 5 0 0 0 0 Other changes in volume n.e.c. 1 1 0 0 0 2 2 Changes in classification 6 -2 -4 0 0 0 0 Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Non-produced non-financial assets 14 0 3 0 0 17 17 Financial assets 2 1 0 0 0 3 3 240 The other changes in assets accounts Harvesting of uncultivated biological resources Initiation and cancellation of contracts, leases and licences 12.27 The depletion of natural forests, fish stocks in the open seas and other uncultivated biological resources included in the 12.31 The contracts, leases and licences that can be treated as asset boundary as a result of harvesting, forest clearance, or assets in their own right are all some form of transferable other use beyond sustainable levels of extraction should be lease, contract or permit. They may relate to the use of a included here. fixed asset under an operating lease, the use of a natural resource under a resource lease, a permit to undertake some Transfers of other natural resources out of economic specific economic activity or a service contract relating to activity future services to be provided by a named individual. Holding the operating lease, the resource lease, the permit or the service contract represents an asset for the holder 12.28 It is possible that some natural resources cease to be only when two conditions hold: deployed in economic activity because of changing technology, or reduced demand for the resulting product or for legislative reasons, for example the suspension of a. the current prevailing price for the use of the asset, fishing to ensure the survival of fish stocks. permit or provision of the service differs from the price specified in the contract or lease or paid for the permit, Quality changes in natural resources due to changes and in economic uses b. the holder of the lease, contract or permit can legally and practically realize this difference by subcontracting 12.29 The changes recorded here are the negative equivalent of the lease or contract or on-selling the permit. the upward changes in volume associated with the changes in classification. For example, if a change in land use leads to reclassifying some land from cultivated land to In practice, it is recommended to try to record such assets communal grazing land, there well may be a resulting only when they are sold. In this case they are first recorded change in the value of the land. in the other changes in the volume of assets account and subsequently form the basis of a transaction (or series of 12.30 All degradation of land, water resources and other natural transactions) in the capital account. assets caused by economic activity is recorded in the other changes in the volume of assets account. The degradation 12.32 The value of the contract, lease or licence treated as an may be an anticipated result from regular economic activity asset is equal to the net present value of the excess of the or less predictable erosion and other damage to land from prevailing price over the contract price. It will decline as deforestation or improper agricultural practices. the period of the agreement declines and the difference in Table 12.2 (cont):The other changes in the volume of assets accounts - changes in liabilities and net worth due to economic appearance and disappearance Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets Produced non-financial assets Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Economic disappearance of non-produced non-financial assets Depletion of natural resources Natural resources Other economic disappearance of non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Catastrophic losses Uncompensated seizures Other changes in volume n.e.c. 0 0 0 1 0 1 1 Changes in classification 0 0 2 0 0 2 2 Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 1 0 3 3 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 241 System of National Accounts price is no longer evident. Changes in the value of the accountant can satisfy himself that the remaining value is contract, lease or licence due to changes in the prevailing likely to be realizable in case of a further sale of the price are recorded as revaluation; changes due to the enterprise. expiration of the advantage given by the asset as the time over which it is valid are recorded as other changes in 12.35 Goodwill that is not evidenced by a sale or purchase is not volume. There is more extensive discussion of the considered an economic asset in the SNA. Exceptionally, a treatment of contracts, leases and licences in part 5 of marketing asset may be subject to sale. When this is so, chapter 17. entries should be made for the buyer and the seller along the lines of those made for purchased goodwill and Changes in the value of goodwill and marketing marketing assets when the entire enterprise is sold. assets Appearance and disappearance of financial 12.33 When an enterprise, whether a corporation, quasi- assets and liabilities corporation or unincorporated enterprise, is sold, the price paid may not equal the sum of all the assets less the 12.36 Financial assets that are claims on other institutional units liabilities of the enterprise. The difference between the are created when the debtor accepts the obligation to make price paid and the sum of all the assets less liabilities is a payment, or payments, to the creditor in the future; they called the purchased goodwill and marketing assets of the are extinguished when the debtor has fulfilled the enterprise. The value may be positive or negative (or zero). obligation under the terms of the agreement. Monetary gold By its calculation and designation as an asset of the held in the form of gold bullion, however, cannot be enterprise, the net worth of the enterprise at the moment it created and extinguished in this way; hence when it is bought is exactly zero, whatever the legal status of the becomes a reserve asset it enters the financial part of the enterprise. balance sheet as a reclassification in the other changes in the volume of assets account from valuables to monetary 12.34 The value of purchased goodwill and marketing assets is gold. (At the time it is acquired by a monetary authority it is calculated at the time of the sale, entered in the books of the first classified as a valuable.) The same recording is seller in the other changes in the volume of assets account followed for allocated gold accounts that become part of and then exchanged as a transaction with the purchaser in monetary gold. When allocated gold accounts become the capital account. Thereafter the value of the purchased reserve assets they are reclassified from currency and goodwill and marketing asset must be written down in the deposits to monetary gold, also in the other changes in the books of the purchaser via entries in the other changes in volume of assets accounts. Monetary gold may be sold to the volume of assets account. The rate at which it is written another monetary authority but otherwise any reduction in down should be in accordance with commercial accounting holdings follows a similar declassification path; the standards. These are typically conservative in the amount monetary gold is reclassified to be either a valuable (in the that may appear on the balance sheet of an enterprise and case of gold bullion) or currency and deposits (in the case should be subject to an "impairment test" whereby an of allocated gold accounts). Subsequent transactions, if and Table 12.3:The other changes in the volume of assets account - changes in assets due to external events Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets 26 0 7 0 0 33 33 Economic disappearance of non-produced non-financial assets -9 0 -2 0 0 - 11 - 11 Catastrophic losses -5 0 -6 0 0 - 11 - 11 Produced non-financial assets -5 -4 -9 -9 Non-produced non-financial assets -2 -2 -2 Financial assets/liabilities 0 0 Uncompensated seizures -5 0 5 0 0 0 0 Produced non-financial assets -1 1 0 0 Non-produced non-financial assets -4 4 0 0 Financial assets/liabilities 0 0 Other changes in volume n.e.c. 1 1 0 0 0 2 2 Produced non-financial assets 1 1 1 Non-produced non-financial assets 0 0 Financial assets/liabilities 1 1 1 Changes in classification 6 -2 -4 0 0 0 0 Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Non-produced non-financial assets 14 0 3 0 0 17 17 Financial assets 2 1 0 0 0 3 3 242 The other changes in assets accounts when they occur, are recorded in terms of valuables or recognize that a financial claim can no longer be collected currency and deposits and not in terms of monetary gold. because of bankruptcy, liquidation or other factors and he may remove the claim from his balance sheet. This 12.37 Also recorded here are the effects of events not anticipated recognition (by the creditor) should be accounted for in the when the terms of financial claims were set. other changes in volume of assets account. (The corresponding liability must also be removed from the balance sheet of the debtor to maintain balance in the Debt operations accounts of the total economy.) 12.38 There are a number of circumstances that may lead to 12.41 Most commercial situations where the impossibility of debt reduction or cancellation of debt by other than normal collection is recognized are treated as unilateral repayment of liabilities. The most common instances are cancellation of debt. Unilateral cancellation of a financial described below. claim by a debtor (debt repudiation) is not recognized in the SNA. Write-downs that reflect the actual market values of 12.39 A debtor and creditor may become parties to a bilateral financial assets should be accounted for in the revaluation agreement (often referred to as "debt forgiveness") that a account. However, changes in value that are imposed solely financial claim no longer exists. Such an agreement gives to meet regulatory, supervisory or accounting requirements rise in the SNA to the recording of a capital transfer do not reflect the actual market values of those financial payable or receivable (recorded in the capital account at the assets and should not be recorded in the SNA. time the debt forgiveness occurs) and the simultaneous extinction of the claim (recorded in the financial account). 12.42 Another debt-related operation that raises questions as to Debt forgiveness usually concerns government debt. Some how it should be recorded in the SNA relates to debt taxes and social security contributions that government defeasance. Debt defeasance allows a debtor (whose debts recognizes as unlikely to be collected from the outset are are generally in the form of debt securities and loans) to excluded from tax and social security contribution receipts remove certain liabilities from the balance sheet by pairing and so do not appear in the other changes in the volume of irrevocably assets of equal value to the liabilities. assets account. Subsequent to the defeasance, neither the assets nor the liabilities are included in the balance sheet of the debtor, 12.40 Changes in claims resulting from debt assumption or nor, frequently, need they be reported for statistical rescheduling should be reflected in the financial account purposes. Defeasance may be carried out either by placing when the terms of the debt contract (maturity, interest rate, the paired assets and liabilities in a trust account within the etc.) change, or when the institutional sector of the creditor institutional unit concerned, or by transferring them to or debtor changes, as these are considered new contractual another institutional unit. In the former case, no entry is arrangements. However, all other changes in claims recorded for defeasance and the assets and liabilities will resulting from write-offs and write-downs are excluded not be excluded from the balance sheet of the unit. In the from the financial account because there is no mutual latter case, the transactions by which the assets and agreement between the parties. Specifically, a creditor may liabilities are moved to the second institutional unit are Table 12.3 (cont):The other changes in the volume of assets account - changes in liabilities due to external events Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets Economic disappearance of non-produced non-financial assets Catastrophic losses Produced non-financial assets Non-produced non-financial assets Financial assets/liabilities Uncompensated seizures Produced non-financial assets Non-produced non-financial assets Financial assets/liabilities Other changes in volume n.e.c. 0 0 0 1 0 1 1 Produced non-financial assets Non-produced non-financial assets Financial assets/liabilities 0 0 0 1 0 1 1 Changes in classification 0 0 2 0 0 2 2 Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 1 0 3 3 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 243 System of National Accounts recorded in the financial account of the units concerned and discussed below. Table 12.3 shows an expansion of table reported in the balance sheet of the unit that holds the assets 12.1 to include entries for these events. and liabilities. Therefore, debt defeasance as such never results in liabilities being removed from the SNA, although Catastrophic losses it sometimes leads to a change in the institutional unit that reports those liabilities. 12.46 The volume changes recorded as catastrophic losses in the other changes in the volume of assets account are the result Creation and exhaustion of financial derivatives of large scale, discrete and recognizable events that may destroy a significantly large number of assets within any of 12.43 Typically there are no entries in the other change in the the asset categories. Such events will generally be easy to volume of assets accounts for financial derivatives. identify. They include major earthquakes, volcanic Financial derivatives appear in the financial account when eruptions, tidal waves, exceptionally severe hurricanes, an agreement is reached between the two parties concerned. drought and other natural disasters; acts of war, riots and Employee stock options are similarly recorded in the same other political events; and technological accidents such as account at the grant date. They then may be subject to major toxic spills or release of radioactive particles into the transactions in the financial account. When the agreement air. Included here are such major losses as deterioration in described in the derivative is activated, or it lapses because the quality of land caused by abnormal flooding or wind the time period is exhausted, the value of the derivative damage; destruction of cultivated assets by drought or becomes zero and the change in value is shown in the outbreaks of disease; destruction of buildings, equipment or revaluation account. valuables in forest fires or earthquakes. 12.47 Catastrophic losses of financial assets are less common but 12.44 If the amount payable under a derivative remains due for where evidence of ownership depends on written records payment after the derivative matures, the amount due no and these records are destroyed, it may not be possible to longer represents a derivative as there is no longer any risk re-establish ownership. Accidental destruction of currency associated with it. It is therefore reclassified as an other or bearer securities may result from a natural catastrophe or account receivable or payable. political events. 3. The effect of external events on the value of Uncompensated seizures assets 12.48 Governments or other institutional units may take 12.45 There are three principal causes of the reduction in value of possession of the assets of other institutional units, an asset, or even its total disappearance, that are not related including non-resident units, without full compensation for to the nature of the asset but to conditions prevailing in the reasons other than the payment of taxes, fines, or similar economy that impact either the value or ownership of levies. If the compensation falls substantially short of the assets. These are catastrophic losses, uncompensated values of the assets as shown in the balance sheet, the seizures and other volume changes of assets. Each is difference should be recorded as an increase in assets for Table 12.4:The other changes in the volume of assets account - changes in assets due to changes in classifications Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets 26 0 7 0 0 33 33 Economic disappearance of non-produced non-financial assets -9 0 -2 0 0 - 11 - 11 Catastrophic losses -5 0 -6 0 0 - 11 - 11 Uncompensated seizures -5 0 5 0 0 0 0 Other changes in volume n.e.c. 1 1 0 0 0 2 2 Changes in classification 6 -2 -4 0 0 0 0 Changes in sector classification and structure 6 0 -4 0 0 2 2 Produced non-financial assets 3 -3 0 0 Non-produced non-financial assets 1 -1 0 0 Financial assets 2 2 2 Changes in classification of assets and liabilities 0 -2 0 0 0 -2 -2 Produced non-financial assets -2 -2 -2 Non-produced non-financial assets 0 0 0 0 0 Financial assets 0 0 0 0 0 Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Non-produced non-financial assets 14 0 3 0 0 17 17 Financial assets 2 1 0 0 0 3 3 244 The other changes in assets accounts the institutional unit doing the seizing and a decrease in reflecting the new circumstances, should then be used to assets for the institutional unit losing the asset under the calculate consumption of fixed capital for the remainder of entry for uncompensated seizures of assets. the asset's useful life. If this is not done, continual adjustment in the other changes in the volume of assets 12.49 It should be noted that foreclosures and repossessions of account is necessary and the measure of net value added in goods by creditors are not treated as uncompensated subsequent years is overstated. seizures. They are treated as transactions, specifically as disposals by debtors and acquisitions by creditors, because, 12.52 Physical deterioration may include the effect of unforeseen explicitly or by general understanding, the agreement environmental degradation on fixed assets. Entries must, between debtor and creditor provided this avenue of therefore, be made in the other changes in the volume of recourse. assets account for the decline in the value of the fixed assets from, for example, the effects of acidity in the air and Other changes in volume n.e.c. acid rain on building surfaces or vehicle bodies. 12.50 The value of a fixed asset is continually reduced by the 12.53 The introduction of improved technology such as improved consumption of fixed capital until the asset is disposed of models of the asset or of a new production process that no or has no remaining value. It is possible, though, for the longer requires the asset may lead to unforeseen assumptions underlying the calculation of consumption of obsolescence. In consequence, the amount included for fixed capital to be mistaken and when this is so, corrections their previously expected obsolescence may fall short of the need to be made in the other changes in the volume of actual obsolescence. assets account. Similarly, if the assumption about the rate of shrinkage of inventories is mistaken, this should also be corrected in the other changes in the volume of assets 12.54 The amount included for normally expected damage may account. The financial assets and liabilities that can be fall short of the actual damage. For the economy as a affected by volume change are some of the reserves for whole, this difference should normally be small; for insurance, pension and standardized guarantee schemes. individual units this difference may be significant and may There is further discussion of this in parts 1, 2 and 3 of fluctuate in sign. Adjustments must therefore be made in chapter 17. the other changes in the volume of assets account for the decline in the value of the fixed assets due to these events. Fixed assets These losses are larger than normal, but are not on a scale sufficiently large to be considered catastrophic. 12.51 The calculation of the consumption of fixed capital reflects an assumption about normal rates of physical deterioration, 12.55 As explained in chapter 10, costs of ownership transfer obsolescence and accidental damage. Each of these should be written off over the expected time the asset will assumptions may prove to be faulty. In that case, an be in the possession of the purchaser. If the asset is adjustment in the other changes in the volume of assets disposed of before the costs of ownership transfer are account must be made. In principle, revised assumptions, completely written off, the remainder should also be Table 12.4 (cont):The other changes in the volume of assets account - changes in liabilities and net worth due to changes in classifications Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Economic appearance of assets Economic disappearance of non-produced non-financial assets Catastrophic losses Uncompensated seizures Other changes in volume n.e.c. 0 0 0 1 0 1 1 Changes in classification 0 0 2 0 0 2 2 Changes in sector classification and structure 0 0 2 0 0 2 2 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 0 0 2 2 Changes in classification of assets and liabilities 0 0 0 0 0 0 0 Produced non-financial assets 0 Non-produced non-financial assets 0 Financial assets 0 0 0 0 0 0 0 Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 1 0 3 3 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 245 System of National Accounts recorded in the other changes in the volume of assets annuity provider towards the beneficiary and the account. consequences are recorded here. 12.56 It is possible that the initial assumptions on any or all of Pension entitlements these conditions were overcautious. If that proves to be so, then an upward revision to the value of the asset should be made rather than a downward one. 12.60 The changes in the volume of reserves for pension entitlements apply to defined benefit schemes, those where 12.57 Production facilities with long construction periods may the pension to be provided is determined wholly or in part cease to have an economic rationale before they are by a formula. No such adjustments are needed for defined complete or are put into service. For example, a nuclear contribution schemes where the benefits are determined power plant or industrial site may never be put into service. solely in terms of the investment earnings on contributions When the decision to abandon is made, the value of the fed into the scheme. fixed asset (or in some case, work-in-progress inventories, as explained in chapter 10), as recorded in the balance sheet 12.61 The exact delineation between which changes in pension should be written off in the other changes in the volume of entitlements are treated as transactions and which as other assets account. changes in the volume of assets is still being researched. Part 2 of chapter 17 describes the present situation. Exceptional losses in inventories Provisions for calls under standardized guarantee 12.58 Exceptional losses from fire damage, from robberies, from schemes insect infestation of grain stores, from an unusually high level of disease in livestock, etc., should be recorded here. In this context, exceptional losses indicate that the losses 12.62 If standardized guarantees are provided on a purely are not only large in value but also irregular in occurrence. commercial basis, the provisions for calls will be covered Even very large losses, if they occur regularly, should be by the fees paid and investment earnings on them and taken into account when calculating the change in possible recoveries from the debtor in default. However, inventories calculated for entry in the capital account as government often underwrites such schemes. When it does explained in chapter 10. so, a provision should be entered in the government accounts for the expected excess of calls under the scheme over any fees received, investment income or recoveries Life insurance and annuities entitlements made. If the guarantees cover a long period and there is provision for government to claim assets in the case of 12.59 For an annuity, the relationship between premiums and default, this expected excess should be calculated on the benefits is usually determined when the contract is entered basis of the net present value of calls to be made under the into, taking account of mortality data available at that time. scheme. An entry is required whenever a new scheme is Any subsequent changes will affect the liability of the introduced or a significant change to the expected level of Table 12.5:The other changes in the volume of assets account - changes in asset by type of asset Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Fixed assets 1 -3 -2 -2 Inventories -3 -3 -3 Valuables -2 -2 -2 Non-produced non-financial assets 14 0 3 0 0 17 17 Natural resources 10 0 1 0 0 11 11 Contracts, leases and licences 4 2 6 6 Goodwill and marketing assets 0 0 0 Financial assets 2 1 0 0 0 3 3 Monetary gold and SDRs 0 0 Currency and deposits 0 0 Debt securities 0 0 Loans 0 0 Equity and investment fund shares/units 2 2 2 Insurance, pension and standardized guarantee schemes 1 1 1 Financial derivatives and employee stock options 0 0 Other accounts receivable/payable 0 0 246 The other changes in assets accounts calls is recognized, beyond what will be recovered by fees resulting financial consequences are recorded as or other means. transactions but some may be recorded as other volume changes. Chapter 21 also discusses the implications of 4. Changes in classifications nationalization and privatization, describing when the consequences are treated as transactions and when as other volume changes including reclassification by sector. 12.63 The other changes in the volume of assets account records changes in assets and liabilities that reflect nothing more 12.67 Reclassification is needed as a result of trading in than changes in the classification of institutional units securities. When unit A sells a security to unit B, A has a among sectors, changes in the structure of institutional liability and B an asset. If B now sells the same asset to unit units and changes in the classification of assets and C, the transaction between B and C is recorded in the liabilities. Table 12.4 shows an expansion of table 12.1 to financial account as the sale of a security. Although A is include the entries for changes in classification. not involved in the sale and purchase of the security between B and C, A's balance sheet is affected as the Changes in sector classification and structure liability originally owed to B is now owed to C. This reclassification is shown in the other changes in the volume 12.64 Reclassifying an institutional unit from one sector to of assets account. another transfers its entire balance sheet. For example, if an unincorporated enterprise becomes more financially Changes in classification of assets and liabilities distinct from its owner and takes on the characteristics of a quasi-corporation, it and its balance sheet move from the household sector to the non-financial corporations sector; 12.68 An asset may appear under one heading in the opening or if a financial corporation is newly authorized to take balance sheet and under another in the closing balance deposits, it may be reclassified from "other financial sheet. Since transactions in assets must be registered as an intermediaries" to "deposit-taking corporations except the increase in holding by one party and a decrease in the central bank". holding of the same asset by another, the process of change of classification must be recorded in the other changes in the volume of assets account. The asset may be first 12.65 If a household moves from one economy to another, taking recorded as a transaction under the original classification its possessions (including financial assets) with it, they are and then recorded as changing its classification in the also recorded under changes in classifications and balance sheet of the new owner. Alternatively, it may be structures. As there is no change in ownership of the shown first as a reclassification by the first owner and then possessions, there can be no transaction in them. as a transaction under its new classification. If the change in classification leads to a change in value, it is treated as a 12.66 Chapter 21 discusses the flows to be recorded when there is quality change, and thus a change in volume, as described corporate restructuring, either when two corporations earlier under the discussion on economic appearance and merge, when one is taken over by another group or when disappearance. The choice between whether to reclassify one corporation is split into two or more units. Most of the and then record transactions or vice versa depends on the Table 12.5 (cont):The other changes in the volume of assets account - changes in liabilities and net worth by type of liability Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets 0 0 2 1 0 3 3 Monetary gold and SDRs Currency and deposits Debt securities Loans 0 0 Equity and investment fund shares/units 2 2 2 Insurance, pension and standardized guarantee schemes 1 1 1 Financial derivatives and employee stock options Other accounts receivable/payable Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 247 System of National Accounts nature of the transactors and the question of whether the capital because they are kept as dairy stock or for their original or new owner benefits from the change in price. fleece may be slaughtered for meat at the end of their Some examples of reclassifications are described below. productive lives. In this case, they should in principle be reclassified from fixed capital to inventories when they Sale and reclassification of land and buildings cease to yield repeat products. If this is not practicable, or deemed too fastidious, then some of the source of meat should be accounted for by a reduction in fixed capital 12.69 Unit A sells farm land to unit B, which uses it to build rather than a withdrawal from inventories. In principle, houses on. If A acquires planning permission before selling reclassification from one type of inventory to another or the land it should be registered as a change in classification from fixed capital to inventories, should not involve a in A's accounts (with a probable gain in value to be change in value. If at the time of conversion the previous recorded as an other volume change also in A's accounts), valuation is different from the appropriate new valuation, and then a sale of building land to B. If B acquires planning an entry in the other changes in the volume of assets permission after the sale is complete, then it is farm land account is recorded under economic appearance or that is sold and B records a change of classification (and disappearance as appropriate. If this is found to be possibly an other volume change) in its books. happening systematically, the valuation techniques for inventories should be re-examined. 12.70 Similar considerations apply to buildings if they are converted from a dwelling to commercial premises or vice versa in response to official designation about the allowed 5. Summarizing other volume changes purpose of a building in that location. A conversion resulting solely from new investment in a previous building is not an other change in the volume of the asset but the 12.72 Tables 12.2 to 12.4 show details of other volume changes result of gross fixed capital formation. for each type of change with details for each asset as a second level of classification. The information there can be aggregated by type of assets, regardless of the cause for the Changes of classification involving inventories volume change, as shown in table 12.5. This is the form in which information from the other change in the volume of 12.71 In all instances, work-in-progress needs to be reclassified to assets account feeds into the reconciliation between finished goods prior to sale. Some animals treated as fixed opening and closing balance sheets. C. The revaluation account 1. Different holding gains and losses concepts 12.75 As well as the absolute change in value of an asset, it is interesting to know how the change in value compares with a general measure of inflation. When the value of an asset 12.73 The revaluation account, shown in table 12.6, records the rises over a given period of time by more than the general holding gains or losses accruing during the accounting price level, the asset can be exchanged for a greater volume period to the owners of financial and non-financial assets of the goods, services and assets covered by the general and liabilities. The first entries relate to nominal holding price index at the end of the period than at the beginning. gains and losses which are then decomposed into neutral The increase that preserves exactly the same volume of holding gains and real holding gains. Holding gains or goods and services is called a neutral holding gain. A losses on assets are recorded on the left-hand side of the neutral holding gain (loss) over a period is the increase account and those on liabilities on the right-hand side. (decrease) in the value of an asset that would be required, in the absence of transactions and other changes in the 12.74 The nominal holding gain on a non-financial asset is the volume of assets, to maintain command over the same value of the benefit accruing to the owner of that asset as amount of goods and services as at the beginning of the a result of a change in its price over a period of time. The period. nominal holding gain on a financial asset is the increase in value of the asset, other than transactions in the assets (including the accrual of interest over a period of time) 12.76 The difference between the nominal holding gain or loss and other changes in the volume of assets. The nominal and the neutral holding gain or loss for the same asset over holding gain on a liability is the decrease in value of the the same time period is called the real holding gain or loss. liability, other than by transactions or by other volume If the value of the asset increases faster than the neutral changes. A nominal holding gain that is negative is holding gain, then there is a real holding gain. If the value referred to as a holding loss. A positive holding gain, of the asset does not increase as fast as the overall increase whether due to an increase in the value of a given asset or a in prices, or does not increase at all, the owner of the asset reduction in the value of a given liability, increases the net registers a real holding loss. A real holding gain (loss) is worth of the unit in question. Conversely, a holding loss the amount by which the value of an asset increases reduces the net worth of the unit in question, whether due to (decreases) over the neutral holding gain for the period, a reduction in the value of a given asset or an increase in in the absence of transactions and other changes in the the value of a given liability. volume of assets. Nominal, neutral and real holding gains, 248 The other changes in assets accounts and the interrelationships between them are explained more assumed for the moment that there are neither transactions fully in the following sections. nor other changes in volume intervening between the two dates mentioned. 12.77 The balancing item in the revaluation account is described as changes in net worth due to nominal holding gains or a. An asset held throughout the accounting period: the losses. It is defined as the algebraic sum of the positive or nominal holding gain accruing during the accounting negative nominal holding gains on all the assets and period is equal to the closing balance sheet value minus liabilities of an institutional unit. Just as nominal holding the opening balance sheet value. These values are the gains are decomposed into neutral and real holding gains, estimated values of the assets if they were acquired at so changes in net worth due to nominal holding gains may the times the balance sheets are drawn up. The nominal be decomposed into changes in net worth due to neutral gain is unrealized. holding gains or losses and changes in net worth due to real holding gains or losses. The latter is an item of considerable b. An asset held at the beginning of the period that is sold analytic interest. during the period: the nominal holding gain accruing is equal to the actual or estimated disposal value minus 12.78 In order to simplify the terminology and exposition, the opening balance sheet value. The nominal gain is holding losses will not usually be referred to explicitly realized. unless the context requires it. The term "holding gains" is used to cover both holding gains and losses on the clear c. An asset acquired during the period and still held at the understanding that holding gains may be negative as well end of the period: the nominal holding gain accruing is as positive. Similarly, the term "assets" is used collectively equal to the closing balance sheet value minus the to cover both assets and liabilities, unless the context actual, or estimated, acquisition value of the asset. The requires liabilities to be referred to specifically. nominal gain is unrealized. 12.79 Holding gains are sometimes described as "capital gains". d. An asset acquired and disposed of during the The term "holding gain" is widely used in business accounting period: the nominal holding gain accruing is accounting and is preferred here because it emphasizes the equal to the actual, or estimated, disposal value minus fact that holding gains accrue purely as a result of holding the actual, or estimated, acquisition value. The nominal assets over time without transforming them in any way. gain is realized. Holding gains include not only gains on "capital" such as fixed assets, land and financial assets but also gains on 12.82 The basic identity linking balance sheets, transactions, inventories of all kinds of goods held by producers, other volume changes and nominal holding gains may be including work-in-progress, often described as "stock expressed as follows: appreciation". For most financial assets, a holding gain experienced by one unit is matched, in whole or in part, by a holding loss for the unit holding the counterpart liability. the value of the stock of the asset in the opening balance This is not so for non-financial assets as there are no non- sheet valued at the date of the opening balance sheet, financial liabilities. plus the value of the asset acquired, or disposed of, in 12.80 When an asset whose value has increased because of a transactions valued at the dates the transactions took place, nominal holding gain is sold or otherwise disposed of, the holding gain is said to be realized. If the asset is retained by plus the value of other changes in the volume of the asset the existing owner, the holding gain is unrealized. In valued at the dates the other volume changes are recorded common usage, a realized gain is usually understood as the as taking place, gain realized over the entire period over which the asset is owned or liability is outstanding whether this period plus the value of the nominal holding gains on the asset, coincides with the accounting period or not. Within the SNA, however, all holding gains and losses are measured equals the value of the stock of the asset in the closing only from the start of the accounting period. A holding balance sheet, valued at the date of the closing balance gain (loss) is realized when an asset that has increased sheet. (decreased) in value due to holding gains (losses) since the beginning of the accounting period is sold, redeemed, The values of the assets and liabilities in the closing used or otherwise disposed of, or a liability incorporating balance sheet incorporate the unrealized holding gains or a holding gain or loss is repaid. An unrealized holding losses. The value of transactions includes the value of gain is one accruing on an asset that is still owned or a realized holding gains or losses. It therefore follows that the liability that is still outstanding at the end of the correct value of the revaluation item must cover both accounting period. It follows that the nominal holding gain realized and unrealized holding gains, in other words to be or loss on an asset is the sum of the realized and unrealized the full value of the nominal holding gains or losses. holding gain or loss for the period in question. 12.83 Because the total nominal holding gains accruing on a Nominal holding gains particular category of asset over a given period of time include those accruing on assets acquired or disposed of 12.81 It is useful to distinguish four different situations giving during the accounting period as well as on assets that figure rise to nominal gains and the methods of valuation to be in the opening or closing balance sheets, it is not possible to employed in each case. For clarity of exposition, it is calculate total holding gains from balance sheet data on 249 System of National Accounts their own. This can be demonstrated by means of a simple 12.88 The neutral holding gain on an asset over a given period of example. time is equal to the value of the asset at the beginning of the period multiplied by the proportionate change in some comprehensive price index selected to measure the change 12.84 Suppose a corporation owns 100 units of a stock in the general price level. Neutral holding gains can, (inventories or shares, for instance) at the beginning of the therefore, easily be calculated for assets held throughout period and these are worth 20 each or 2 000 in total. At the accounting period that appear in both the opening and some point in the period, when the price per unit has risen closing balance sheets. It is more difficult, however, to to 22, another 15 units are bought; a cost of 330. At the end keep track of the neutral holding gains on assets that are of the period, when the price has risen to 25, some 15 units acquired or disposed of during the accounting period unless are sold for a value of 375. The value of the stock in the the times at which the various acquisitions and disposals closing balance sheet represents 100 units valued at 25 each took place are known. or 2 500. The increase in the balance sheet of 500 represents unrealized holding gain on the stock of 100. The value of the transactions represents a decrease in the Real holding gains balance sheet since the value of the stock added to the balance sheet (330) is less than the value of stock sold 12.89 The real holding gain on an asset is defined as the (375). The difference, -45, is a reduction in net worth difference between the nominal and the neutral holding brought about by realizing some holding gains. The total gain on that asset. The values of the real holding gains on nominal holding gain is thus 545 which satisfies the assets thus depend on the movements of their prices over identity that the opening stock (2 000) plus the transactions the period in question, relative to movements of other (-45) plus the nominal holding gains (545) plus the other prices, on average, as measured by the general price index. changes in the volume of assets (0) equals the value in the An increase in the relative price of an asset leads to a closing balance sheet (2 500). positive real holding gain and a decrease in the relative price of an asset leads to a negative real gain, whether the general price level is rising, falling or stationary. 12.85 In order to calculate total holding gains directly, therefore, it is necessary to keep records of all the assets acquired and disposed during the accounting period and the prices at 12.90 The nominal holding gains on domestic currency, deposits which they were acquired and disposed of, as well as the and loans denominated in domestic currency are always prices and quantities of assets held at the beginning and end zero. During inflation, the neutral gains on such assets and of the period. This sort of recording is more common for liabilities must be positive and hence the real holding gains financial assets and liabilities than for non-financial assets. must be negative and equal in absolute value to the neutral gains. In other words, the real value of these assets declines both for the creditor and the debtor as a result of inflation. 12.86 Each of the five elements that make up the identity in From the point of view of the debtor a reduction in the real paragraph 12.82 explaining the changes in the balance value of a liability represents an increase in net worth sheet can be calculated directly and independently of the expressed in real terms. In effect, there is an implicit other four elements. Thus, each element has the same transfer of real purchasing power from the creditor to the status, none of them being defined residually as a balancing debtor equal in value to the negative real holding gain on item. Nevertheless, it follows that if any four out of the five the asset or liability. When such transfers are anticipated by elements are calculated directly, the fifth can be estimated creditors, correspondingly higher nominal rates of interest residually. For this reason, the identity can be exploited to may be demanded on loans and offered on deposits to estimate nominal holding gains from the other four compensate for the expected transfers, or loans with fixed elements, but without this implying that nominal holding monetary values may be replaced by indexed loans. gains are a balancing item in the SNA. 12.91 As changes in relative prices may be either positive or negative, the owners of some assets benefit from real Neutral holding gains holding gains while the owners of other assets experience real holding losses. Real holding gains may lead to a 12.87 In order to calculate the neutral holding gain on an asset, it significant redistribution of real net worth among is desirable to select a comprehensive price index covering institutional units, sectors and even countries, the extent of as wide a range of goods, services and assets as possible. In which depends on the amount of variation in the relative practice, the price index for final expenditures is an price changes taking place. While such variations may acceptable choice for most countries, although other occur even when there is no general inflation, there are comprehensive indices could be used depending upon the systematic effects that are associated with the general rate availability of data. A comprehensive index of this kind, of inflation as a result of the decline in the real values of however, may be available only once a year, or at best monetary assets and liabilities when the general price level quarterly, and after a significant lapse of time. As holding is rising. gains may accrue on assets held for only short periods of time, it may also be necessary to make use of an index that 12.92 As real holding gains increase or decrease the purchasing measures changes in prices monthly and that becomes power of the owners of assets, they exert an influence on available without too much delay. The consumer price their economic behaviour. Real holding gains are important index (CPI) usually meets these requirements and an economic variables in their own right as well as for acceptable procedure would be to use the CPI to interpolate purposes of analysing consumption or capital formation. It and extrapolate movements in a more broadly based index can be argued that real holding gains ought to be in order to calculate neutral holding gains. assimilated with income as defined in the SNA to obtain a 250 The other changes in assets accounts more comprehensive measure of income, but there is no Inventories consensus on this. Apart from the practical difficulty of estimating real holding gains and losses, it is likely that 12.97 The estimation of nominal holding gains on inventories their impact on economic behaviour is not the same as that may be difficult because of lack of data on transactions or of income received in cash or in kind. Nevertheless, it is other volume changes in inventories. As explained in clear that information on real holding gains needs to be chapter 6, transactions in inventories of work-in-progress made available to users, analysts and policymakers. and finished goods may not be adequately recorded because they are internal transactions. Goods entering inventories 12.93 As real holding gains may be obtained residually by can be regarded as being acquired by the owner of an subtracting neutral from nominal holding gains, the enterprise from itself as producer, while goods leaving feasibility of calculating real holding gains depends on the inventories can be regarded as being disposed of by the feasibility of calculating nominal and neutral gains. owner to the producer for use in production or for sale. These internal transactions should be valued at the prices prevailing at the times they take place. The value of 2. Holding gains and losses on specific assets withdrawals thus includes any holding gains on the inventories when stored and this ensures that the value of the holding gain is not included in output. However, as Fixed assets explained in paragraphs 6.142 to 6.145 when the storage of goods is essentially an extension of the process of production, the increase in the value of the goods that is due 12.94 Nominal holding gains are calculated with reference to to this production is not to be counted as a nominal holding assets or liabilities that themselves remain qualitatively and gain. In the case of goods for resale, the value of the goods quantitatively unchanged during the period over which the when withdrawn from inventory should include the value holding gain is measured. Thus, changes in the value of of any holding gain or loss that has occurred while they physical assets such as structures, equipment or inventories were in store but not the value of any margin to be realized held by producers that are attributable to some physical or by the wholesaler or retailer. That is to say, goods economic transformation of those assets over time, whether withdrawn from inventories are valued at the prices improvement or deterioration, are not counted as holding prevailing at the time of withdrawal for goods in the same gains. In particular, the decline in the value of the fixed state as when the goods entered inventories (except for the assets owned by producers due to their physical storage case). deterioration or normal rates of obsolescence or accidental damage is recorded as consumption of fixed capital and not 12.98 Other volume changes are likely to consist of inventories of as a negative holding gain. goods destroyed as a result of exceptional events such as natural disasters (floods, earthquakes, etc.) or major fires. Recurrent losses of goods from inventories, such as losses 12.95 Consumption of fixed capital should be calculated by due to regular wastage or pilfering, are treated in the same valuing the opening and closing stock at the average price way as deliberate withdrawals. Nominal holding gains on of the period precisely in order to ensure it excludes any inventories thus relate only to the level of inventories once holding gains. Often the price at the mid-point of the period both exceptional and recurrent losses on inventories have is taken as the average price of the period. Under moderate been taken into account. rates of inflation this may be an acceptable approximation but is less so the higher the rate of inflation and under severe inflation is very misleading. 12.99 Unless records are kept of the quantities of goods entering and leaving inventories and their prices at those times, it is not possible to measure the value of changes in inventories 12.96 Nominal holding gains may occur on existing fixed assets directly. As such records may not be available, it becomes either because of general inflation or because the price of necessary to try to deduce the value of changes in the asset itself changes over time. When assets of the same inventories from the value and quantities of the opening kind are still being produced and sold on the market, an and closing inventories using methods that attempt to existing asset should be valued in the opening or closing partition the difference between the values of the opening balance sheet at the current purchaser's price of a newly and closing stocks of assets into transactions and nominal produced asset less the accumulated consumption of fixed holding gains. Such methods are only as good as the capital up to that time also calculated on the basis of the assumptions on which they are based. Estimating holding prices prevailing at the time the balance sheet is drawn up. gains and losses based only on period end data involves When new assets of the same type are no longer being two problematical assumptions. The first is that prices produced, the valuation of existing assets may pose increase linearly throughout the period; the second is that difficult conceptual and practical problems. If broadly the changes in volume of inventories increase or decrease similar kinds of assets are still being produced, even though linearly between opening and closing balance sheets. Both their characteristics may differ significantly from those of assumptions are improbable, especially in the case of existing assets (for example, new models of vehicles or seasonal products. It should also be noted that this is not aircraft), it may be reasonable to assume that, if the existing only a problem for the accumulation accounts as the values assets were still being produced, their prices would have of changes in inventories of inputs and outputs are needed moved in the same way as those of new assets. However, in order to measure intermediate consumption, output and such an assumption becomes questionable when the value added and hence all the balancing items of the SNA. characteristics of new assets are much improved by In general, if these sorts of assumptions need to be made in technical progress. There is further discussion on this topic order to derive holding gains and losses, they should be in Measuring Capital. made over as short a period as possible. In particular, the 251 System of National Accounts aggregation of quarterly estimates of this type will be Debt securities preferable to an annual estimate of the same type. 12.107 Debt securities typically have market values and these Valuables market values change over time. However, not all of the changes in value are treated as holding gains and losses. 12.100 The nature of valuables is that they are held as a store of value in the expectation that their value will increase over 12.108 A bond is a security that gives the holder the unconditional time. Any increase in value of an individual valuable is right to a fixed money income or contractually determined treated as a nominal holding gain. This may be partitioned variable money income over a specified period of time and into a neutral and a real holding gain in the standard way. (except in the case of perpetual bonds) the right also to a fixed sum as repayment of principal on a specified date or dates. Bonds are usually traded on markets and the holder Financial assets and liabilities of a bond may change several times during the life of the bond. The issuer of such a bond may sometimes be able to 12.101 Because it is not always appropriate to describe financial repay the principal outstanding at any time by purchasing it assets and liabilities as having a price, holding gains and back in advance of the date on which it matures. losses appear to be treated differently for different categories though the same basic principles apply to all 12.109 As explained in part 4 of chapter 17, when a bond is issued categories. Other changes in the volume of financial assets at a discount, including deep discounted and zero coupon and liabilities are possible, as described in section B, but bonds, the difference between its issue price and its face or are generally ignored in what follows. redemption value when it matures measures interest that the issuer is obliged to pay over the life of the bond. Such 12.102 Except for monetary gold and SDRs, the discussion is first interest is recorded as property income payable by the in terms of assets denomination in domestic currency and issuer of the bond and receivable by the holder of the bond then of the effects when they are denominated in foreign in addition to any coupon interest actually paid by the currency. issuer at specified intervals over the life of the bond. In principle, the interest accruing is treated as being simultaneously reinvested in the bond by the holder of the Monetary gold and SDRs bond. It is, therefore, recorded in the financial account as the acquisition of additional value of the existing asset. 12.103 Because the price of gold is usually quoted in dollars, Thus the gradual increase in the market price of a bond that monetary gold is subject to nominal and real holding gains is attributable to the accumulation of accrued, reinvested and losses because of changes in the exchange rate as well interest reflects a growth in the principal outstanding. It is as in the price of gold itself. essentially a quantum or volume increase and not a price increase. It does not generate any holding gain for the holder of the bond or holding loss for the issuer of the bond. 12.104 Since the value of the SDR is based on a basket of four key The increases in value due to the accrual of interest are currencies, the value of SDRs is always subject to nominal recorded in the distribution of primary income account and and real holding gains and losses. From time to time, new the financial account and not in the revaluation account allocations of SDRs may be made; when this occurs the (nor in the other changes in the volume of assets account). allocation is recorded as a transaction. 12.110 The prices of fixed-rate marketable bonds also change, Currency however, when the market rates of interest change, the prices varying inversely with the interest rate movements. 12.105 Domestic currency is not subject to any nominal holding The impact of a given interest rate change on the price of an gains or losses. It can be thought of as a fixed "quantity" of individual bond is less, the closer the bond is to maturity. currency units (for example, one dollar) with a price that is Changes in bond prices that are attributable to changes in always unity. However, although the nominal holding gains market rates of interest constitute price and not quantum are zero, the neutral holding gains on currency are not. changes. They therefore generate nominal holding gains or Under inflation, neutral holding gains are positive and so losses for both the issuers and the holders of the bonds. An the associated real holding gains are negative and of an increase in interest rates generates a nominal holding gain equal size. for the issuer of the bond and an equal nominal holding loss for the holder of the bond, and vice versa in the case of a fall in interest rates. Whenever the interest rate changes, the Deposits and loans market value of the bond changes; this change in value is recorded as a revaluation. Within the SNA, the interest 12.106 Deposits and loans denominated in domestic currency also recorded due to the fact that the redemption date is nearer is do not register nominal holding gains and losses for the calculated on the basis of the interest rate at the issue date. same reasons as currency. There may be increases in the Over the whole of the life of the bond, therefore, the values of a loan or a deposit during an accounting period holding gains and losses are offsetting and total interest but this must be due to transactions including the addition recorded is the difference between issue price and of interest to the previous level of principal. As with redemption price. currency, deposits and loans denominated in domestic currency register real holding losses of the same magnitude 12.111 Prices of bonds may also change because of a change in the as their neutral holding gains. creditworthiness (up as well as down) of the issuer or 252 The other changes in assets accounts guarantor. Such changes give rise to the same sorts of 12.117 The assets the financial institutions use to meet their entries as changes in the interest rate. This is because the commitments under these schemes do indeed benefit from market price of the bond changes to reflect the market's holding gains, for example investments in equity and view of the creditworthiness of the issuer. It does not imply investment funds, but the liabilities towards the that impairments to loans and deposits should be treated as policyholders and beneficiaries change only as a result of revaluations. The appropriate treatment for impaired loans transactions and other changes in the volume of assets. is discussed in paragraphs 13.66 to 13.68. Financial derivatives and employee stock options 12.112 Nominal holding gains or losses may accrue on bills in the same way as for bonds. However, as bills are short-term 12.118 Financial derivatives have quoted prices and thus register securities with much shorter times to maturity, the holding nominal holding gains and losses as for listed shares and gains generated by interest rate changes are generally much investment fund shares and units. As explained in part 6 of smaller than on bonds with the same face values. chapter 17, employee stock options may also register nominal holding gains and losses. Equity and investment fund shares Other accounts receivable or payable 12.113 For corporations that are foreign direct investment enterprises and investment funds, any undistributed 12.119 Other accounts receivable or payable denominated in earnings are shown as reinvested earnings in the domestic currency do not register nominal holding gains distribution of primary income account and as reinvestment and losses. All changes in value between the start and end of earnings in the financial account. Reinvestment of of the accounting period are due to transactions, possibly earnings increases the value of equity and investment fund including accrued interest. As with currency, there may be shares. For listed shares and investment fund shares and real holding gains equal in magnitude to the neutral holding units, market prices exist and changes in the value other losses under inflation. than via reinvested earnings are treated as holding gains and losses exactly as for inventories with no storage component or valuables. Assets denominated in foreign currency 12.114 For other forms of equity, holding gains are calculated in a 12.120 Residents may hold assets denominated in foreign currency manner similar to the way in which the value of the equity just as non-residents may hold assets denominated in is calculated. For example, for a quasi-corporation where domestic currency. For balance sheet purposes, the value of the value of other equity is derived as the balance of assets an asset denominated in foreign currency is measured by its less liabilities, holding gains are calculated as the sum of current value in foreign currency converted into the holding gains on assets less the holding gains on liabilities. currency of the country in which its owner is resident at the mid-point of the bid and offer rate of the exchange rate on the balance sheet date. Nominal holding gains may Insurance, pension and standardized guarantee therefore occur not only because the price of the asset in schemes local currency changes but also because the exchange rate changes. 12.115 When the reserves for insurance and standardized guarantee schemes are denominated in domestic currency, 12.121 Neutral holding gains are calculated in the same way as for there are generally no nominal holding gains and losses just any other type of asset by calculating what the holding as there are none for currency or deposits and loans. gains would have been if the prices of the assets, expressed Exceptionally, if a figure for a claim outstanding has been in the domestic currency, had moved in the same way as the agreed and it has been agreed to be indexed pending general internal price level. Real holding gains, again payment, then there may be a nominal holding gain or loss expressed in the domestic currency, can then be derived recorded for it. residually by subtracting the neutral from the nominal gains. If, in addition to the asset being denominated in foreign currency, either the creditor or debtor is non- 12.116 As far as pension entitlements are concerned, increases in resident, the real holding gains (losses) of the creditor need the value of entitlements due to indexation are recorded via not be equal to the real holding losses (gains) of the debtor reinvestment of investment income payable to the when the general rates of inflation are different in the two beneficiaries and not in the revaluation account. countries. 253 System of National Accounts Table 12.6:The revaluation account - changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Non-financial assets 144 4 44 80 8 280 280 Produced non-financial assets 63 2 21 35 5 126 126 Fixed assets 58 2 18 28 5 111 111 Inventories 4 1 2 7 7 Nominal holding gains and losses Valuables 1 2 5 8 8 Non-produced non-financial assets 81 2 23 45 3 154 154 Natural resources 80 1 23 45 3 152 152 Contracts, leases and licences 1 1 2 2 Goodwill and marketing assets Financial assets/liabilities 8 57 1 16 2 84 7 91 Monetary gold and SDRs 11 1 12 12 Currency and deposits 0 0 Debt securities 3 30 6 1 40 4 44 Loans 0 0 Equity and investment fund shares/units 5 16 10 1 32 3 35 Insurance, pension and standardized guarantee schemes 0 0 Financial derivatives and employee stock options 0 0 Other accounts receivable/payable 0 0 Non-financial assets 101 3 32 56 6 198 198 Produced non-financial assets 60 2 20 34 5 121 121 Fixed assets 58 2 18 28 5 111 111 Inventories 1 1 2 4 4 Valuables 1 1 4 6 6 Non-produced non-financial assets 41 1 12 22 1 77 77 Neutral holding gains Natural resources 40 1 12 22 1 76 76 Contracts, leases and licences 1 1 1 Goodwill and marketing assets Financial assets/liabilities 18 71 8 36 3 136 12 148 Monetary gold and SDRs 14 2 16 16 Currency and deposits 8 3 17 2 30 2 32 Debt securities 2 18 4 1 25 3 28 Loans 1 24 3 28 1 29 Equity and investment fund shares/units 3 14 9 26 2 28 Insurance, pension and standardized guarantee schemes 1 1 5 7 1 8 Financial derivatives and employee stock options 0 0 Other accounts receivable/payable 3 1 4 3 7 Non-financial assets 43 1 12 24 2 82 82 Produced non-financial assets 3 0 1 1 0 5 5 Fixed assets 0 0 0 0 0 Inventories 3 0 0 0 0 3 3 Real holding gains and losses Valuables 0 0 1 1 0 2 2 Non-produced non-financial assets 40 1 11 23 2 77 77 Natural resources 40 0 11 23 2 76 76 Contracts, leases and licences 0 1 0 0 0 1 1 Goodwill and marketing assets Financial assets/liabilities - 10 - 14 -7 - 20 -1 - 52 -5 - 57 Monetary gold and SDRs 0 -3 -1 0 0 -4 0 -4 Currency and deposits -8 0 -3 - 17 -2 - 30 -2 - 32 Debt securities 1 12 0 2 0 15 1 16 Loans -1 - 24 -3 0 0 - 28 -1 - 29 Equity and investment fund shares/units 2 2 0 1 1 6 1 7 Insurance, pension and standardized guarantee schemes -1 -1 0 -5 0 -7 -1 -8 Financial derivatives and employee stock options 0 0 0 0 0 Other accounts receivable/payable -3 0 0 -1 0 -4 -3 -7 254 The other changes in assets accounts Table 12.6 (cont):The revaluation account - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Other flows Non-financial assets Produced non-financial assets Fixed assets Inventories Nominal holding gains and losses Valuables Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities 18 51 7 0 0 76 15 91 Monetary gold and SDRs 12 12 Currency and deposits Debt securities 1 34 7 42 2 44 Loans Equity and investment fund shares/units 17 17 34 1 35 Insurance, pension and standardized guarantee schemes Financial derivatives and employee stock options Other accounts receivable/payable Changes in net worth due to nominal holding gains/losses 134 10 38 96 10 288 -8 280 Non-financial assets Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Neutral holding gains Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities 37 68 13 5 3 126 22 148 Monetary gold and SDRs 16 16 Currency and deposits 1 26 2 1 30 2 32 Debt securities 1 21 4 26 2 28 Loans 18 7 3 1 29 29 Equity and investment fund shares/units 14 14 28 28 Insurance, pension and standardized guarantee schemes 7 7 1 8 Financial derivatives and employee stock options Other accounts receivable/payable 3 2 1 6 1 7 Changes in net worth due to neutral holding gains/losses 82 6 27 87 6 208 - 10 214 Non-financial assets Produced non-financial assets Fixed assets Inventories Real holding gains and losses Valuables Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities - 19 - 17 -6 -5 -3 - 50 -7 - 57 Monetary gold and SDRs 0 0 0 0 0 0 -4 -4 Currency and deposits -1 - 26 -2 0 -1 - 30 -2 - 32 Debt securities 0 13 3 0 0 16 0 16 Loans - 18 0 -7 -3 -1 - 29 0 - 29 Equity and investment fund shares/units 3 3 0 0 0 6 1 7 Insurance, pension and standardized guarantee schemes 0 -7 0 0 0 -7 -1 -8 Financial derivatives and employee stock options 0 0 0 0 0 0 0 0 Other accounts receivable/payable -3 0 0 -2 -1 -6 -1 -7 Changes in net worth due to real holding gains/losses 52 4 11 9 4 80 2 66 255 System of National Accounts 256 Chapter 13: The balance sheet A. Introduction 13.1 This chapter is concerned with measuring the stocks of provide an indicator of economic status. These resources assets, both non-financial and financial, and liabilities. are summarized in the balancing item, net worth. Net worth Assets and liabilities can be aggregated across all types so is defined as the value of all the assets owned by an as to show the total value of assets less liabilities, or net institutional unit or sector less the value of all its worth, of an institutional unit. Alternatively, the total value outstanding liabilities. For the economy as a whole, the of a given type of asset across all units in the economy can balance sheet shows the sum of non-financial assets and net be derived. Tables depicting the first sort of aggregation are claims on the rest of the world. This sum is often referred to called balance sheets; those depicting the second sort are as national wealth. called asset accounts. For both balance sheets and asset accounts, it is also important to show how the transactions 13.5 The balance sheet completes the sequence of accounts, and other flows recorded during the course of an showing the ultimate result of the entries in the production, accounting period explain the changes in value of the stock distribution and use of income, and accumulation accounts. in question between the start and end of the period. The value of the stock at the start of the period is referred to as 13.6 The existence of a set of balance sheets integrated with the the opening stock and the value at the end of the period is flow accounts encourages analysts to look more broadly referred to as the closing stock. Sometimes a stock level is when monitoring and assessing economic and financial referred to as a position, especially in the balance of conditions and behaviour. Balance sheets provide payments context. information necessary for analysing a number of topics. For example, in studies of the factors determining household 1. Balance sheets behaviour, consumption and saving functions often include wealth variables to capture the effects of such factors as 13.2 A balance sheet is a statement, drawn up in respect of a price fluctuations in corporate securities or the deterioration particular point in time, of the values of assets owned and and obsolescence of stocks of durable consumer goods on of the liabilities owed by an institutional unit or group of households' purchasing patterns. Further, balance sheets units. A balance sheet may be drawn up for institutional for groups of households are needed in order to assess the units, institutional sectors and the total economy. A similar distribution of wealth and liquidity. account is drawn up showing the stock levels of assets and liabilities originating in the total economy held by non- 13.7 Balance sheets allow economists to assess the financial residents and of foreign assets and liabilities held by status of a sector and permit risk analyses by a central bank, residents. In BPM6 this account is called the international for example. For corporations, balance sheets permit the investment position (IIP) but is drawn up from the point of computation of widely used ratios that involve data on the view of residents whereas in the SNA it is drawn up from level of the different items on the balance sheet. Banks and the point of view of the rest of the world with the rest of the other financial institutions, for example, are required to world being treated in the same way as domestic sectors. maintain specific reserve ratios that can be monitored via a balance sheet. Non-financial corporations check certain 13.3 Assets appear in the balance sheet of the unit that is the ratios such as current assets in relation to current liabilities economic owner of the asset. In many cases this unit will and the market value of corporate shares in relation to the also be the legal owner but in the case of a financial lease, adjusted book value. Data on the stocks of fixed assets the leased asset appears on the balance sheet of the lessee, owned by corporations, as well as by other institutional while the lessor has a financial asset of similar amount and units, are useful in studies of their investment behaviour a corresponding claim against the lessee. On the other and needs for financing. Balance sheet information on hand, when a natural resource is the subject of a resource financial assets held by, and liabilities owed to, non- lease, the asset continues to appear in the balance sheet of residents are of considerable interest as indicators of the the lessor even though most of the economic risks and economic resources of a nation and for assessing the rewards of using the asset in production are assumed by the external debtor or creditor position of a country. lessee. A fuller description of the treatment of leases is given in part 5 of chapter 17 and of the distinction between 2. Asset accounts legal and economic owner is given in chapter 3. 13.8 As well as drawing up a balance sheet showing the values 13.4 The financial and non-financial resources at the disposal of of all assets held by an institutional unit, it is possible to an institutional unit or sector shown in the balance sheet draw up a similar account for the value of a single type of 257 System of National Accounts Table 13.1:Opening and closing balance sheets with changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Stocks and changes in assets Non-financial assets 2 151 93 789 1 429 159 4 621 4 621 Produced non-financial assets 1 274 67 497 856 124 2 818 2 818 Fixed assets 1 226 52 467 713 121 2 579 2 579 Inventories 43 22 48 1 114 114 Valuables 5 15 8 95 2 125 125 Non-produced non-financial assets 877 26 292 573 35 1 803 1 803 Opening balance sheet Natural resources 864 23 286 573 35 1 781 1 781 Contracts, leases and licences 13 3 6 22 22 Goodwill and marketing assets Financial assets/liabilities 982 3 421 396 3 260 172 8 231 805 9 036 Monetary gold and SDRs 690 80 770 770 Currency and deposits 382 150 840 110 1 482 105 1 587 Debt securities 90 950 198 25 1 263 125 1 388 Loans 50 1 187 115 24 8 1 384 70 1 454 Equity and investment fund shares/units 280 551 12 1 749 22 2 614 345 2 959 Insurance, pension and standardized guarantee schemes 25 30 20 391 4 470 26 496 Financial derivatives and employee stock options 5 13 0 3 0 21 0 21 Other accounts receivable/payable 150 19 55 3 227 134 361 Non-financial assets 300 -2 57 116 11 482 482 Produced non-financial assets 195 -4 29 67 7 294 294 Fixed assets 165 -2 23 53 7 246 246 Inventories 27 0 1 4 0 32 32 Valuables 3 -2 5 10 0 16 16 Total changes in assets Non-produced non-financial assets 105 2 28 49 4 188 188 Natural resources 101 1 26 48 4 180 180 Contracts, leases and licences 4 1 2 1 0 8 8 Goodwill and marketing assets 0 0 0 0 0 0 0 Financial assets/liabilities 93 230 -9 205 4 523 54 577 Monetary gold and SDRs 0 10 1 0 0 11 1 12 Currency and deposits 39 10 - 26 64 2 89 11 100 Debt securities 10 96 4 16 0 126 13 139 Loans 19 53 3 3 0 78 4 82 Equity and investment fund shares/units 17 44 3 76 1 141 15 156 Insurance, pension and standardized guarantee schemes 1 8 1 39 0 49 0 49 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 Other accounts receivable/payable 4 1 5 4 1 15 10 25 Non-financial assets 2 451 91 846 1 545 170 5 103 5 103 Produced non-financial assets 1 469 63 526 923 131 3 112 3 112 Fixed assets 1 391 50 490 766 128 2 825 2 825 Inventories 70 0 23 52 1 146 146 Valuables 8 13 13 105 2 141 141 Non-produced non-financial assets 982 28 320 622 39 1 991 1 991 Closing balance sheet Natural resources 965 24 312 621 39 1 961 1 961 Contracts, leases and licences 17 4 8 1 0 30 30 Goodwill and marketing assets 0 0 0 0 0 0 0 Financial assets/liabilities 1 075 3 651 387 3 465 176 8 754 859 9 613 Monetary gold and SDRs 0 700 81 0 0 781 1 782 Currency and deposits 421 10 124 904 112 1 571 116 1 687 Debt securities 100 1 046 4 214 25 1 389 138 1 527 Loans 69 1 240 118 27 8 1 462 74 1 536 Equity and investment fund shares/units 297 595 15 1 825 23 2 755 360 3 115 Insurance, pension and standardized guarantee schemes 26 38 21 430 4 519 26 545 Financial derivatives and employee stock options 8 21 0 6 0 35 0 35 Other accounts receivable/payable 154 1 24 59 4 242 144 386 258 The balance sheet Table 13.1 (cont):Opening and closing balance sheets with changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Stocks and changes in liabilities Non-financial assets Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Opening balance sheet Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities 3 221 3 544 687 189 121 7 762 1 274 9 036 Monetary gold and SDRs 0 770 770 Currency and deposits 40 1 281 102 10 38 1 471 116 1 587 Debt securities 44 1 053 212 2 1 311 77 1 388 Loans 897 328 169 43 1 437 17 1 454 Equity and investment fund shares/units 1 987 765 4 2 756 203 2 959 Insurance, pension and standardized guarantee schemes 12 435 19 5 471 25 496 Financial derivatives and employee stock options 4 10 14 7 21 Other accounts receivable/payable 237 22 8 35 302 59 361 Net worth - 88 - 30 498 4 500 210 5 090 - 469 4 621 Non-financial assets Produced non-financial assets Fixed assets Total changes in liabilities and net worth Inventories Valuables Non-produced non-financial assets Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities 157 224 102 16 6 505 72 577 Monetary gold and SDRs 12 12 Currency and deposits 0 65 37 0 0 102 -2 100 Debt securities 7 64 45 0 0 116 23 139 Loans 21 0 9 11 6 47 35 82 Equity and investment fund shares/units 100 39 2 0 0 141 15 156 Insurance, pension and standardized guarantee schemes 0 48 0 1 0 49 0 49 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 Other accounts receivable/payable 26 0 9 4 0 39 - 14 25 Changes in net worth, total 236 4 - 54 305 9 500 - 18 482 Saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 Other changes in volume of assets 14 -1 -2 -1 0 10 10 Nominal holding gains/losses 134 10 38 96 10 288 -8 280 Neutral holding gains/losses 82 6 27 87 6 208 - 10 198 Real holding gains/losses 52 4 11 9 4 80 2 82 Non-financial assets Produced non-financial assets Fixed assets Inventories Valuables Non-produced non-financial assets Closing balance sheet Natural resources Contracts, leases and licences Goodwill and marketing assets Financial assets/liabilities 3 378 3 768 789 205 127 8 267 1 346 9 613 Monetary gold and SDRs 782 782 Currency and deposits 40 1 346 139 10 38 1 573 114 1 687 Debt securities 51 1 117 257 2 0 1 427 100 1 527 Loans 918 0 337 180 49 1 484 52 1 536 Equity and investment fund shares/units 2 087 804 6 0 0 2 897 218 3 115 Insurance, pension and standardized guarantee schemes 12 483 19 1 5 520 25 545 Financial derivatives and employee stock options 7 18 0 0 0 25 10 35 Other accounts receivable/payable 263 0 31 12 35 341 45 386 Net worth 148 - 26 444 4 805 219 5 590 - 487 5 103 259 System of National Accounts asset (or liability) held by all institutional units in the plus the value of other positive or negative changes in the economy. This is called an asset account. A basic volume of these assets held, for example, as a result of the accounting identity links the opening balance sheet and the discovery of a subsoil asset or the destruction of an asset closing balance sheet for a given asset: (as a result of war or a natural disaster): these changes are recorded in the other changes in the volume of assets The value of the stock of a specific type of asset in the account; opening balance sheet; plus the value of the positive or negative nominal holding plus the total value of the same type of asset acquired, less gains accruing during the period resulting from a change in the total value of the same type of asset disposed of, in the price of the asset: these changes are shown in the transactions that take place within the accounting period: revaluation account; transactions in non-financial assets are recorded in the capital account (including consumption of fixed capital) and transactions in financial assets are recorded in the equals the value of the stock of the asset in the closing financial account; balance sheet. Table 13.2:Asset accounts for the total economy Revaluation account Opening balance sheet Real holding gains and Nominal holding gains Closing balance sheet Neutral holding gains Other changes in the Capital and financial volume of assets and losses and losses account account losses Non-financial assets 4 621 192 10 280 198 82 5 103 Produced assets 2 818 175 -7 126 121 5 3 112 Fixed assets 2 579 137 -2 111 111 0 2 825 Dwellings Other buildings and structures Machinery and equipment Weapons systems Cultivated biological resources Intellectual property products Inventories 114 28 -3 7 4 3 146 Valuables 125 10 -2 8 6 2 141 Non-produced assets 1 803 17 17 154 77 77 1 991 Natural resources 1 781 17 11 152 76 76 1 961 Land Mineral and energy reserves Non-cultivated biological resources Water resources Other natural resources Contracts, leases and licences 22 0 6 2 1 1 30 Goodwill and marketing assets 0 0 0 0 0 0 0 Financial assets 8 231 436 3 84 136 - 52 8 754 Monetary gold and SDRs 770 -1 0 12 16 -4 781 Currency and deposits 1 482 89 0 0 30 - 30 1 571 Debt securities 1 263 86 0 40 25 15 1 389 Loans 1 384 78 0 0 28 - 28 1 462 Equity and investment fund shares/units 2 614 107 2 32 26 6 2 755 Insurance, pension and standardised guarantee schemes 470 48 1 0 7 -7 519 Financial derivatives and employee stock options 21 14 0 0 0 0 35 Other accounts receivable/payable 227 15 0 0 4 -4 242 Financial liabilities 7 762 426 3 76 126 - 50 8 267 Monetary gold and SDRs 0 0 0 0 0 0 0 Currency and deposits 1 471 102 0 0 30 - 30 1 573 Debt securities 1 311 74 0 42 26 16 1 427 Loans 1 437 47 0 0 29 - 29 1 484 Equity and investment fund shares/units 2 756 105 2 34 28 6 2 897 Insurance, pension and standardised guarantee schemes 471 48 1 0 7 -7 520 Financial derivatives and employee stock options 14 11 0 0 0 0 25 Other accounts receivable/payable 302 39 0 0 6 -6 341 Net worth 5 090 202 10 288 208 80 5 590 260 The balance sheet 13.9 Although balance sheets are more familiar to those used to 13.12 The second part of table 13.1 consists of a summary of the working with commercial accounts, asset accounts are entries in the capital, financial, other changes in volume of particularly useful for some types of analyses. One example assets and revaluation accounts grouped by type of asset. is in connection with environmental accounting where the The entries for fixed assets, for example, show the totals of asset account provides a particularly revealing picture of the entries for fixed assets in each of the capital account, whether an asset is being used sustainably or not. Another the other changes in volume of assets account and the example is in connection with the development of capital revaluation account. Under these entries there is a stock series for fixed assets. Many financial statistics breakdown showing how much of the change in net worth describe the evolution of an individual financial asset, for is due to saving and capital transfers, other changes in the example showing how the level of lending has changed volume of assets and holding gains. There is no entry over the period. carried forward from the financial account because the changes in net worth due to saving and capital transfers are completely exhausted by changes in transactions in 3. Structure of the balance sheet financial and non-financial assets. 13.13 The third section of table 13.1 shows the closing balance 13.10 The balance sheet records assets on the left-hand side and sheet which is numerically equal, cell by cell, to the sum of liabilities and net worth on the right-hand side, as do the the corresponding cells in the first two parts of the table. In accumulation accounts for changes in these items. In table practice, though, these figures will be determined 13.1, only a limited number of classes of assets are shown, independently and a reconciliation exercise needed to though in principle the table can include all the detailed ensure the identities inherent in the table are satisfied. non-financial assets described and defined in chapter 10 and the full set of financial assets and liabilities described 4. Structure of asset accounts and defined in chapter 11. A balance sheet relates to the values of assets and liabilities at a particular point in time. The SNA provides for balance sheets to be compiled at the 13.14 An example of a set of asset accounts is given in table 13.2. beginning of the accounting period (with the same values The same data for the stock levels in the opening and as at the end of the preceding period) and at its end. The closing balance sheets are given for the same range of SNA then provides for a complete recording of the changes assets, but instead of the breakdown by sectors, the in the values of the various items in the balance sheet columns show the entries for each type of asset coming between the beginning and end of the accounting period to from the capital and financial account, the other changes in which the flow accounts of the SNA relate. The balancing the volume of assets account and the revaluation account. item in the balance sheet is net worth, which, as noted earlier, is defined as the value of all the assets owned by an 13.15 Unlike table 13.1, table 13.2 does not include any entries institutional unit or sector less the value of all its for assets held by or due to the rest of the world because it outstanding liabilities. Changes in net worth can thus be focuses on the holding by resident units of particular assets explained fully only by examining the changes in all the and liabilities. However, by comparing the figures for other items that make up the balance sheet. financial assets and liabilities of the same instrument, it is possible to derive the balance with the rest of the world. For example, in the opening balance sheet figures, the value of 13.11 Table 13.1 consists of three sections. The first shows the financial assets for currency and deposits is 1 482 and of opening balance sheet and net worth for each institutional liabilities is 1 471. This implies that the rest of the world sector and the total economy. For the rest of the world, the has a net liability with the national economy of 11. Table only relevant entries are for contracts, leases and licences, 13.1 shows that the asset position of the rest of the world is financial assets and liabilities, and net worth. 105 and the liability position 116. B. General principles of valuation 13.16 For the balance sheets to be consistent with the 13.17 The prices at which assets may be bought or sold on accumulation accounts of the SNA, every item in the markets are the basis of decisions by investors, producers, balance sheet should be valued as if it were being acquired consumers and other economic agents. For example, on the date to which the balance sheet relates. This implies investors in financial assets (such as securities) and natural that when they are exchanged on a market, assets and resources (such as land) make decisions in respect of liabilities are to be valued using a set of prices that are acquisitions and disposals of these assets in the light of their values in the market. Producers make decisions about current on the date to which the balance sheet relates and how much of a particular commodity to produce and about that refer to specific assets. In the case of non-financial where to sell their output by reference to prices on markets. assets, other than land, the value includes any associated For a given asset, there is a clear relationship between the costs of ownership transfer. Financial claims that are not price paid by the purchaser and the price received by the traded on organized financial markets are valued at the seller. For non-financial assets other than land, the price amount the debtor must pay to the creditor to extinguish the paid by the purchaser exceeds that received by the seller by claim. the costs of ownership transfer. In the case of financial 261 System of National Accounts assets, the value is the same for creditor and debtor because type. In some countries, another example of a market in the costs of transferring financial assets and liabilities are which assets may be traded in sufficient numbers to treated as consumption rather than accumulation. provide useful price information is the market for existing dwellings. 13.18 Ideally, observable market prices should be used to value all assets and liabilities in a balance sheet. However, in 13.22 In addition to providing direct observations on the prices of estimating the current market price for balance sheet assets actually traded there, information from such markets valuation, a price averaged over all transactions in a market may also be used to price similar assets that are not traded. can be used if the market is one on which the items in For example, information from the stock exchange also question are regularly, actively and freely traded. When may be used to price unlisted shares by analogy with there are no observable prices because the items in question similar, listed shares, making some allowance for the have not been purchased or sold on the market in the recent inferior marketability of the unlisted shares. Similarly, past, an attempt has to be made to estimate what the prices appraisals of assets for insurance or other purposes would be were the assets to be acquired on the market on generally are based on observed prices for items that are the date to which the balance sheet relates. close substitutes, although not identical, and this approach can be used for balance sheet valuation. For a discussion of 13.19 In addition to values observed in markets or estimated from the special valuation problems associated with direct observed prices, values may be approximated for balance investment enterprises, see chapters 21 and 26. sheet valuation in two other ways. In some cases, values may be approximated by accumulating and revaluing 2. Values obtained by accumulating and acquisitions less disposals of the type of asset in question over its lifetime and adjusted for changes such as revaluing transactions consumption of fixed capital; this generally is the most practical and also the preferred method for fixed assets, but 13.23 Most non-financial assets change in value year by year it can be applied to other assets as well. In other cases, reflecting changes in market prices. At the same time, values may be approximated by the present, or discounted, initial acquisition costs are reduced by consumption of value of future economic benefits expected from a given fixed capital (in the case of fixed assets) or other forms of asset; this is the case for a number of financial assets, depreciation over the asset's expected life. The value of natural resources and even for fixed assets. With good such an asset at a given point in its life is given by the information and efficient markets, the values of the assets current acquisition price of an equivalent new asset less the obtained by accumulating and revaluing transactions accumulated depreciation. This valuation is sometimes should equal, or at least approximate, both the present, or referred to as the "written-down replacement cost". When discounted, value of the remaining future benefits to be reliable, directly observed prices for used assets are not derived from them and their market values when active available, this procedure gives a reasonable approximation second-hand markets exist. These three price bases are of what the market price would be were the asset to be discussed below in general terms. offered for sale. 1. Value observed in markets 3. Present value of future returns 13.20 The ideal source of price observations for valuing balance 13.24 In the case of assets for which the returns either are delayed sheet items is a market, like the stock exchange, in which (as with forests) or are spread over a lengthy period (as each asset traded is completely homogeneous, is often with subsoil assets), although market prices are used to traded in considerable volume and has its market price value the ultimate output, a rate of discount must, in listed at regular intervals. Such markets yield data on prices addition, be used to compute the present value of the that can be multiplied by indicators of quantity in order to expected future returns. compute the total market value of different classes of assets held by sectors and of different classes of their liabilities. These prices are available for nearly all financial claims, 4. Assets denominated in foreign currencies existing transportation equipment, crops, and livestock as well as for newly produced fixed assets and inventories. 13.25 Assets and liabilities denominated in foreign currencies should be converted into the domestic currency at the 13.21 For securities quoted on a stock exchange, for example, it is market exchange rate prevailing on the date to which the feasible to gather the prices of individual assets and of balance sheet relates. This rate should be the mid-point broad classes of assets and, in addition, to determine the between the buying and selling spot rates for currency global valuation of all the existing securities of a given transactions. C. The entries in the balance sheet 13.26 Definitions of the assets in the balance sheet at the most financial assets. Definitions are repeated in this section detailed level of the classification of assets are given in only to the extent needed to provide the context for chapter 10 for non-financial assets and in chapter 11 for 262 The balance sheet information on valuation specific to particular assets and 13.31 Markets for existing automobiles, aircraft, and other other specialized topics. transportation equipment may be sufficiently representative to yield useful price observations for valuation of these stocks or at least to use in conjunction with a set of PIM 1. Produced assets assumptions. In the case of existing industrial plant and equipment, however, observed prices on markets may not Fixed assets be suitable for determining values for use in the balance sheets, either because many of the transactions involve assets that for some reason are not typical, or because they 13.27 In principle, fixed assets should be valued at the prices embody specialized characteristics, or because they are prevailing in the market for assets in the same condition as obsolete or because they are being disposed of under regards technical specifications and age. In practice, this financial duress. sort of information is not available in the detail required and recourse must be had to valuation by another method, 13.32 For balance sheet purposes, livestock that continue to be most commonly the value derived by adding the used in production year after year should be valued on the revaluation element that applied to the asset during the basis of the current purchasers' prices for animals of the period covered by the balance sheet to the opening balance same age. Such information is less likely to be available for sheet value (or the time since acquisition for newly trees (including shrubs) cultivated for products they yield acquired assets) and deducting the consumption of fixed year after year; in this case they should then be recorded at capital estimated for the period as well as any other volume the current written-down value of the cumulated capital changes and the value of disposals. In calculating the value formation. of consumption of fixed capital, assumptions have to be made about the decline in price of the asset and even where full market information is not available, partial information 13.33 Research and development expenditure carried out on should be used to check that the assumptions made are contract is valued at the contract price. If carried out on consistent with this. own account, it is valued as cumulated costs. If it is carried out by a market producer, the costs include a return to capital. Both valuations need to be increased for changes in 13.28 Estimates of consumption of fixed capital must include the prices and reduced because of consumption of fixed capital decline in value of the purchasers' costs of ownership over the life of the asset. transfer on acquisition and disposal associated with these assets. These are to be written off over the period the purchaser expects to own the asset. In many cases, this 13.34 Even though costs of ownership transfer on non-produced period may coincide with the expected life length of the assets (other than land) are shown separately in the capital asset but for some types of asset, particularly vehicles, the account, and treated as gross fixed capital formation, in the purchaser may intend to sell them after a certain period, for balance sheets these costs are incorporated in the value of example, in order to acquire a newer model with a higher the asset to which they relate even though the asset is non- level of specification and lower maintenance costs. produced. Thus there are no costs of ownership transfer Installation costs should be treated in a similar manner. shown separately in the balance sheets. The costs of Where possible, the estimates of consumption of fixed ownership transfer on financial assets are treated as capital should also allow for anticipated terminal costs such intermediate consumption when the assets are acquired by as decommissioning or rehabilitation. Further explanation corporations or government, final consumption when the of these adjustments can be found in chapters 10 and 19. assets are acquired by households and exports of services More detail on the application of a perpetual inventory when the assets are acquired by non-residents. method (PIM) of estimating the value of capital stock of fixed assets can be found in Measuring Capital. 13.35 Mineral exploration and evaluation should be valued either on the basis of the amounts paid under contracts awarded to 13.29 For dwellings, there may be adequate information available other institutional units for the purpose or on the basis of from the sale of both new and existing buildings to assist in the costs incurred for exploration undertaken on own making balance sheet estimates of the total value of account. These costs should include a return to the fixed dwellings. However house prices depend to a considerable capital used in the exploration activity. That part of extent on location and the geographical pattern of sales in exploration undertaken in the past that has not yet been the period may not cover all areas adequately, in which fully written off should be revalued at the prices and costs case a technique such as a PIM will have to be used. This of the current period. technique will probably also apply to many other buildings and structures since their characteristics are often specific to the structure concerned. 13.36 Originals of intellectual property products, such as computer software and entertainment, literary or artistic originals should be entered at the written down value of 13.30 The value of land improvements is shown as the written their initial cost, revalued to the prices of the current down value of the improvements as originally carried out, period. Since these products will have often been produced suitably revalued. This will always be equal to the on own account, the initial cost may be estimated by the difference in value between the land concerned in an sum of costs incurred including a return to capital on the unimproved or natural state, and its value after the fixed assets used in production. If value cannot be improvements have been effected, though both the land and established in this way, it may be appropriate to estimate the land improvements will be subject to price changes the present value of future returns arising from the use of over time. the original in production. 263 System of National Accounts 13.37 Subsequent copies may appear as assets (i) if the original insured against fire, theft, etc., to the extent information is owner has subcontracted the duties of reproducing and available. providing support to users of the copies, or (ii) if a copy is being used under a contract that is effectively a financial 2. Non-produced assets lease. In these cases, market prices should be available to use for valuation. Natural resources Inventories Land 13.38 Inventories should be valued at the prices prevailing on the date to which the balance sheet relates, and not at the prices 13.44 In principle, the value of land to be shown under natural at which the products were valued when they entered resources in the balance sheet is the value of land excluding inventory. In the balance sheets, figures for inventories the value of improvements, which is shown separately frequently have to be estimated by adjusting figures of under fixed assets, and excluding the value of buildings on book values of inventories in business accounts, as the land which is also to be shown separately under fixed described in chapter 6. assets. Land is valued at its current price paid by a new owner, excluding the costs of ownership transfer which are 13.39 As is the case elsewhere in the SNA, inventories of treated, by convention, as gross fixed capital formation and materials and supplies are valued at purchasers' prices, and part of land improvements and are subject to consumption inventories of finished goods and work-in-progress are of fixed capital. valued at basic prices. Inventories of goods intended for resale without further processing by wholesalers and 13.45 Because the current market value of land can vary retailers are valued at prices paid for them, excluding any considerably according to its location and the uses for transportation costs that have been separately invoiced to which it is suitable or sanctioned, it is essential to identify the wholesalers or retailers and included in their the location and use of a specific piece or tract of land and intermediate consumption. to price it accordingly. 13.40 For inventories of work-in-progress, the value for the 13.46 For land underlying buildings, the market will, in some closing balance sheet should be consistent with the value of instances, furnish data directly on the value of the land. the opening balance sheet, plus any work put in place More typically, however, such data are not available and a during the current period, less any work completed and more usual method is to calculate ratios of the value of the reclassified as finished goods. In addition, an allowance for site to the value of the structure from valuation appraisals any necessary revaluation for changes in prices in the and to deduce the value of land from the replacement cost period must be included. As explained in chapter 6 and of the buildings or from the value on the market of the chapter 19, the time series of the value of work in progress combined land and buildings. When the value of land put in place over a period of time should reflect the increase cannot be separated from the building, structure, or in value of work put in place earlier as the delivery date plantation, vineyard, etc. above it, the composite asset approaches. should be classified in the category representing the greater part of its value. Similarly, if the value of the land improvements (which include site clearance, preparation 13.41 Standing single-use crops (including timber) cultivated by human activity and livestock being raised for slaughter are for the erection of buildings or planting of crops and costs also counted as inventories in work-in-progress. The of ownership transfer) cannot be separated from the value of land in its natural state, the value of the land may be conventional way of valuing standing timber is to discount the future proceeds of selling the timber at current prices allocated to one category or the other depending on which after deducting the expenses of bringing the timber to is assumed to represent the greater part of the value. maturity, felling, etc. For the most part, other crops and livestock can be valued by reference to the prices of such 13.47 It is usually much easier to make a division between land products on markets. and buildings for the total economy than for individual sectors or subsectors. Separate figures are needed for studies of national wealth and environmental problems. Valuables Fortunately, combined figures are often suitable for purposes of analysing the behaviour of institutional units 13.42 Given their primary role as stores of value, it is especially and sectors. important to value works of art, antiques, jewellery, precious stones and metals at current prices. To the extent 13.48 Land appears on the balance sheet of the legal owner that well-organized markets exist for these items, they except when it is subject to a financial lease as may most should be valued at the actual or estimated prices that often occur in connection with a financial lease over a would be paid for them to the owner were they sold on the building or plantation on the land. By convention, an market, excluding any agents' fees or commissions payable exception is made for cases where the legal owner of a by the seller, on the date to which the balance sheet relates. building is not the legal owner of the land on which the On acquisition they are valued at the price paid by the building stands but the purchase price of the building purchaser including any agents' fees or commissions. includes an upfront payment of rent on the land beneath without any prospect of further payments being due in 13.43 An approach in the absence of organized markets is to future. In such a case, land is recorded on the balance sheet value these items using data on the values at which they are of the owner of the building on the land. 264 The balance sheet Mineral and energy resources financial account when an enterprise is taken over or when a marketing asset is sold. These entries are not revalued. 13.49 The value of subsoil mineral and energy resources is usually determined by the present value of the expected net 3. Financial assets and liabilities returns resulting from the commercial exploitation of those resources, although such valuations are subject to 13.54 In line with the general valuation principles described uncertainty and revision. As the ownership of mineral and above, whenever financial assets and liabilities are energy resources does not change frequently on markets, it regularly traded on organized financial markets, they may be difficult to obtain appropriate prices that can be should be valued at current prices. Financial claims that are used for valuation purposes. In practice, it may be not traded on organized financial markets should be valued necessary to use the valuations that the owners of the assets by the amount that a debtor must pay to the creditor to place on them in their own accounts. extinguish the claim. Financial claims should be assigned the same value in the balance sheets whether they appear as 13.50 It is frequently the case that the enterprise extracting a assets or liabilities. The prices should exclude service resource is different from the owner of the resource. In charges, fees, commissions and similar payments for many countries, for example, oil resources are the property services provided in carrying out the transactions. There is of the state. However, it is the extractor who determines more detailed discussion on the definition of financial how fast the resource will be depleted and since the assets and their recording in chapter 11 and part 4 of resource is not renewable on a human time-scale, it appears chapter 17. as if there has been a change of economic ownership to the extractor even if this is not the legal position. Nor is it Monetary gold and SDRs necessarily the case that the extractor will have the right to extract until the resource is exhausted. Because there is no wholly satisfactory way in which to show the value of the 13.55 Monetary gold is to be valued at the price established in asset split between the legal owner and the extractor, the organized markets or in bilateral arrangements between whole of the resource is shown on the balance sheet of the central banks. legal owner and the payments by the extractor to the owner shown as rent. (This is therefore an extension of the 13.56 The value of the SDR is determined daily by the IMF on concept of a resource rent applied in this case to a the basis of a basket of currencies. Rates against domestic depletable asset.) currencies are obtainable from the prices in foreign exchange markets; both the basket and the weights are revised from time to time. Non-cultivated biological resources, water resources and other natural resources Currency and deposits 13.51 Non-cultivated biological resources, water and other 13.57 For currency, the valuation is the nominal or face value of natural resources are included in the balance sheet to the the currency. For deposits, the values to be recorded in the extent that they have been recognized as having economic balance sheets of both creditors and debtors are the value that is not included in the value of the associated amounts of principal that the debtors are contractually land. As observed prices are not likely to be available, they obliged to repay the creditors under the terms of the are usually valued by the present value of the future returns deposits when the deposits are liquidated. The amount of expected from them. principal outstanding includes any interest and service charge due but not paid. Currency and deposits in foreign Contracts, leases and licences currency are converted to domestic currency at the mid- point of the bid and offer spot exchange rates prevailing on 13.52 Contracts, leases and licences may be marketable operating the date of the balance sheet. Repayable margin payments leases, licences to use natural resources, permits to in cash related to financial derivatives contracts are undertake specific activities and entitlement to future goods included in other deposits. and services on an exclusive basis. As explained in part 5 of chapter 17, these sorts of contracts are regarded as assets Debt securities only if the existence of the legal agreement confers benefits on the holder in excess of the price paid to the lessor, owner 13.58 Short-term securities, and the corresponding liabilities, are of the natural resource or permit issuer and the holder can to be valued at their current market values. Such a valuation realize these benefits legally and practically. It is is particularly important under conditions of high inflation recommended that such assets be recorded only when the or high nominal interest rates. value of the asset is significant and is realized, in which case a suitable market price necessarily exists. The asset does not exist beyond the length of the contract agreement 13.59 Long-term securities should always be valued at their and its value must be reduced accordingly as the remaining current prices on markets, whether they are bonds on which contract period shortens. regular payments of interest are paid or deep-discounted or zero-coupon bonds on which little or no interest is paid. The price should always be that including accrued interest Goodwill and marketing assets (the so-called "dirty" price). Although the nominal liability of the issuer of a long-term security may be fixed in money 13.53 The balance sheet entry for goodwill and marketing assets terms, the market prices at which fixed interest securities is the written-down value of the entry that appears in the are traded may vary considerably in response to variations 265 System of National Accounts in general market rates of interest. As the issuer of a long- a loan is deemed to be non-performing. Once a loan is term security usually has the opportunity to refinance the classified as non-performing, it (or any replacement loans) debt by repurchasing the security on the market, valuation should remain classified as such until payments are at market prices is generally appropriate for both issuers received or the principal is written off on this or subsequent and holders of long-term securities, especially financial loans that replace the original. transactors who actively manage their assets or liabilities. 13.67 Two memorandum items are recommended relating to non- 13.60 An index-linked debt security is also valued at its market performing loans. The first is the nominal value of the loans price in the balance sheet whatever the nature of the index so designated, including any accrued interest and service to which the security is linked. charge. The second is the market equivalent value of these loans. The closest approximation to market equivalent 13.61 If both the principal and coupons of a debt instrument are value is fair value, which is "the value that approximates indexed to a foreign currency, the security should be treated the value that would arise from a market transaction as if it is denominated in that foreign currency with between two parties". Fair value can be established using conversion to domestic currency at the mid-point of the transactions in comparable instruments, or using the rates prevailing on the date of the balance sheet. discounted present value of cash flows, or may sometimes be available from the balance sheets of the creditor. In the absence of fair value data, the memorandum item will have Loans to use a second best approach and show nominal value less expected loan losses. 13.62 The values of loans to be recorded in the balance sheets of both creditors and debtors are the amounts of principal 13.68 These memorandum items should be standard for both the outstanding. This amount should include any interest that government sector and the financial corporations sector. If has been earned but not been paid. It should also include they are significant for other sectors, or for loans with the any amount of indirectly measured service charge (the rest of the world, they should be shown as supplementary difference between bank interest and SNA interest) due on items. the loan that has accrued and not been paid. In some instances, accrued interest may be shown under accounts receivable or payable but inclusion in loans is to be Equity and investment funds preferred if possible. Equity 13.63 The value of a loan does not reflect the consequences of any interest payments due after the date of the balance 13.69 Listed shares are regularly traded on stock exchanges or sheet, even if these were specified in the original loan other organized financial markets. They should be valued agreement. in the balance sheets at their current prices. 13.64 If there is evidence of a secondary market for a loan, and 13.70 For unlisted shares, there may be no observable market frequent market quotations are available, the loan is prices for positions in equity not listed on a stock exchange. reclassified as a security. A loan that is traded once only This situation often arises for direct investment enterprises, and for which there is no evidence of a continuing market is private equity, equity in unlisted and delisted companies, not reclassified but continues to be treated as a loan. The listed but illiquid companies, joint ventures, and valuation rules for debt securities and loans then apply. unincorporated enterprises. 13.65 Loans where the principal is index-linked, or both principal 13.71 When actual market values are not available, an estimate is and interest are indexed to a foreign currency, should be required. Alternative methods of approximating market treated in the manner described above for debt securities value of shareholders' equity in a direct investment with these characteristics. enterprise follow. These are not ranked according to preference, and each would need to be assessed according Non-performing loans to the circumstances and the plausibility of results. 13.66 Despite the fact that loans are to be recorded in the balance a. Recent transaction price. Unlisted instruments may sheets at nominal values, certain loans that have not been trade from time to time, and recent prices, within the serviced for some time should be identified and past year, at which they were traded may be used. memorandum items concerning them should be included in Recent prices are a good indicator of current market the balance sheet of the creditor. These loans are termed values to the extent that conditions are unchanged. This non-performing loans. A common definition of such a loan method can be used as long as there has been no is as follows. A loan is non-performing when payments of material change in the corporation's position since the interest or principal are past due by 90 days or more, or transaction date. Recent transaction prices become interest payments equal to 90 days or more have been increasingly misleading as time passes and conditions capitalized, refinanced, or delayed by agreement, or change. payments are less than 90 days overdue, but there are other good reasons (such as a debtor filing for b. Net asset value. Appraisals of untraded equity may be bankruptcy) to doubt that payments will be made in full. conducted by knowledgeable management or directors This definition of a non-performing loan is to be interpreted of the enterprise, or provided by independent auditors flexibly, taking into account national conventions on when to obtain total assets at current value less total liabilities 266 The balance sheet (excluding equity) at market value. Valuations should represents owners' funds. The means through which equity be recent (within the past year). can be generated may take various forms, such as share issues, equity injections without any commensurate issue of c. Present value/price to earnings ratios. The present shares (sometimes called "contributed surplus" or "capital value of unlisted equity can be estimated by contributions"), share premiums, accumulated reinvested discounting the forecast future profits. At its simplest, earnings, or revaluation. While these should be taken into this method can be approximated by applying a market account when cumulated flows need to be used as a starting or industry price-to-earnings ratio to the (smoothed) point to measure the value of equity, the different recent past earnings of the unlisted enterprise to categories are all components of equity and need not be calculate a price. This method is most appropriate identified separately in other cases. where there is a paucity of balance sheet information but earnings data are more readily available. 13.73 If the current market price is not directly observable, the decision about the method to adopt should take into account the availability of information as well as judgments d. Book values reported by enterprises with macrolevel as to which available method best approximates market adjustments by the statistical compiler. For untraded values. Different methods may be suitable for different equity, information on "own funds at book value" can circumstances and a standard ranking of the alternative be collected from enterprises, then adjusted with ratios methods is not proposed for valuing instruments when based on suitable price indicators, such as prices of current market prices are not directly observable. listed shares to book value in the same economy with Compilers should be transparent and should state clearly similar operations. Alternately, assets that enterprises the method(s) used. Methods for valuation of direct carry at cost (such as land, plant, equipment, and investment equity positions are discussed in more detail in inventories) can be revalued to current period prices the OECD Benchmark Definition of Foreign Direct using suitable asset price indices. Investment, fourth edition (Organisation for Economic Co- operation and Development, 2008) referred to as the BD. e. Own funds at book value. This method for valuing equity uses the value of the enterprise recorded in the 13.74 Other equity covers equity in any corporation or quasi- books of the direct investment enterprise, as the sum of corporation that does not issue shares or units. Such (i) paid-up capital (excluding any shares on issue that corporations include public enterprises, the central bank, the enterprise holds in itself and including share some special government units, partnerships, unlimited premium accounts); (ii) all types of reserves identified liability companies and quasi-corporations whenever they as equity in the enterprise's balance sheet (including are institutional units without shares. Other equity should investment grants when accounting guidelines consider be valued as equal to the value of the unit's assets less the them company reserves); (iii) cumulated reinvested value of its liabilities. earnings; and (iv) holding gains or losses included in own funds in the accounts, whether as revaluation reserves or profits or losses. The more frequent the Investment fund shares or units revaluation of assets and liabilities, the closer the approximation to market values. Data that are not 13.75 Shares (or units) in money market funds or in other revalued for several years may be a poor reflection of investment funds should be valued in a manner similar to market values. the proposals under equity. Listed shares should be valued using the market price of the share. Unlisted shares should f. Apportioning global value. The current market value of be valued according to one of the methods described above a global enterprise group can be based on the market for unlisted equity. price of its shares on the exchange on which its equity is traded, if it is a listed company. Where an appropriate Insurance, annuities, pension and standardized indicator may be identified (for example, sales, net guarantee schemes income, assets, or employment), the global value may be apportioned to each economy in which it has direct Non-life insurance technical reserves investment enterprises, on the basis of that indicator, by making the assumption that the ratio of net market value to sales, net income, assets, or employment is a 13.76 The amount of the reserves for non-life insurance to be constant throughout the transnational enterprise group. recorded in the balance sheet covers premiums paid but not (Each indicator could yield significantly different earned at the date for which the balance sheet is drawn up results from the others.) plus the amount set aside to meet outstanding claims. This latter amount represents the present value of the amounts expected to be paid out in settlement of claims, including 13.72 In cases where none of the above methods is feasible, less disputed claims, as well as allowances for claims for suitable data may need to be used. For example, cumulated incidents which have taken place but have not yet been flows or a previous balance sheet adjusted by subsequent reported. flows may be the only sources available. Since these sources use the prices of previous periods, they should be adjusted for subsequent price developments, for example Life insurance and annuities entitlements by using aggregate share price or asset price indices, and taking into account exchange rate movements, where 13.77 The amount to be recorded under the stock values for life relevant. The use of unadjusted summing of past insurance and annuities entitlement is similar to that for transactions is not a recommended practice. Equity non-life insurance technical reserves in that it represents 267 System of National Accounts reserves sufficient to meet all future claims. However, in Forwards the case of life insurance, the level of the reserves is considerable and represents the present value of all 13.82 A forward is recorded at market value. When payments are expected future claims. In the commercial accounts of effected, the value of the asset and associated liability is insurance corporations, some of these will be described as amortized and subsequently reflected in the balance sheet provisions for bonuses and rebates. These are the result of value on the appropriate accounting date. The market value the insurance industry's practice of smoothing benefits over of a forward contract can switch between an asset position time and possibly retaining some benefits until the policy and a liability position between accounting dates depending matures. on price movements in the underlying item(s). All price changes, including those that result in such switches, are Pension entitlements treated as revaluations. 13.78 The entitlements due under pension schemes comprise two Employee stock options elements; one when the formula determining the amount of the pension is agreed in advance (as under a defined benefit 13.83 Employee stock options (ESOs) should be valued by scheme) and one where the amount of the pension depends reference to the fair value of the equity instruments granted. on the performance of financial assets acquired with the The fair value of equity instruments should be measured at future pensioner's contributions (a defined contribution grant date using a market value of equivalent traded options scheme). For the former, an actuarial estimation of the (if available) or using an option pricing model (binomial or liabilities of the pension provider is used; for the latter the Black-Scholes) with suitable allowance for particular value is the market value of the financial assets held by the features of the options. The IASB gives detailed pension fund on behalf of the future beneficiaries. The recommendations on how ESOs may be valued and their basis on which pension entitlement is calculated and the recommendations are likely to be followed by corporations alternative means of representing these in the accounts of using ESOs as a form of compensation for their employees. the SNA are described in detail in chapter 17. The value of the ESO alters between grant date and vesting date and then between the vesting date and exercise date as the value of the shares covered changes. Part 6 of chapter Provisions for calls under standardized guarantees 17 covers ESOs in more detail. 13.79 The value to be entered in the balance sheet for provisions Other accounts receivable or payable for calls under standardized guarantees is the expected level of claims under current guarantees less any expected 13.84 Trade credit and advances and other items due to be recoveries. Strictly speaking, these amounts will represent a received or paid (such as taxes, dividends, rent, wages and degree of double counting in the assets of the units salaries, and social contributions) should be valued for both benefiting from the guarantees. For example, if financial creditors and debtors at the amount of principal the debtors institutions make 1 000 loans of 20 each that are covered by are contractually obliged to pay the creditors when the guarantees and 10 are expected to default, the value of the obligation is extinguished. Interest due on other accounts loans made is still shown as 20 000 and in addition the receivable or payable may be included here but, in general, lenders have an asset of 200 in respect of the expected calls interest due on debt securities is recorded as increasing the under the guarantee. However, the unit offering the value of the asset concerned. Interest accruing on deposits guarantee has a liability of 200 with no matching asset so and loans may have to follow national practices and be the net worth for the whole economy is not overstated. classified here if it is not incorporated into the principal of the relevant loan or deposit. Financial derivatives 4. Net worth 13.80 The treatment of derivatives is discussed in chapter 11. Financial derivatives should be included in the balance 13.85 Net worth is the difference between the value of all sheets at market value. If market value data are unavailable, financial and non-financial assets and all liabilities at a other fair value methods to value derivatives, such as particular point in time. For this calculation, each asset and options models or present values, may be used. each liability is to be identified and valued separately. As the balancing item, net worth is calculated for institutional units and sectors and for the total economy. Options 13.86 For government, households and NPISHs, the value of net 13.81 Options should be valued in the balance sheets as either the worth is clearly the worth of the unit to its owners. In the current value of the option, if this is available, or the case of quasi-corporations, net worth is zero, because the amount of the premium payable. A liability should be value of the owners' equity is assumed to be equal to its entered in the sector of the writer of the option to represent assets less its liabilities. For other corporations, the either the current cost of buying out the rights of the option situation is less clear-cut. holder or the accrual of a holding gain. Depending on how margin systems operate, it may be appropriate to enter zero 13.87 In the SNA, net worth of corporations is calculated in for the value of an option, as any profits (losses) will have exactly the same way as for other sectors, as the sum of all been received (paid) daily by the holder. The counterpart of assets less the sum of all liabilities. In doing so, the value of these asset entries should be entered as liabilities. shares and other equity, which are liabilities of 268 The balance sheet corporations, are included in the value of liabilities. Shares They may be augmented by an injection of capital by the are included at their market price on the balance sheet date. owners or by the receipt of investment grants. Thus, even though a corporation is wholly owned by its shareholders collectively, it is seen to have a net worth 5. Memorandum items (which could be positive or negative) in addition to the value of the shareholders' equity. 13.92 In addition to the memorandum items on non-performing loans, the SNA allows for two memorandum items to the 13.88 An alternative calculation is similar to the treatment of balance sheets in order to show items not separately quasi-corporations. This calculates the value of the identified as assets in the central framework that are of shareholders' equity in such a way that net worth is zero. more specialized analytic interest for particular institutional This calculation of shareholders' equity is called own funds sectors. These two are consumer durables and foreign and is calculated as the sum of its assets less the sum of its direct investment. liabilities other than shares. Consumer durables 13.89 A non-zero value of own funds comes about through a number of factors. One reason is the existence of "assets" that are not recognized as such in the SNA such as goodwill 13.93 Households acquire durable goods such as cars and and marketing assets. Another is that the view in the SNA electrical goods. However, these are not treated as being that the value of some financial assets, such as bonds and used in a production process giving rise to household non-performing loans, may not coincide with a fair value services. They therefore do not constitute fixed assets and approach. Some or all of these items may be available from are not shown as such in the balance sheet. Nevertheless, it the balance sheet of the corporation and it may be useful to is useful to have data on these goods and so consumer compare the sum of these with the amount derived as the durables are included in the balance sheets as a difference between net worth and the value of owner's memorandum item. The stocks of consumer durables held equity. (For unlisted shares, indeed, this may be one way to by households are to be valued at current prices, both gross value these shares.) Further, the market value of shares and net of accumulated depreciation equivalent to reflects market sentiment about future income streams consumption of fixed capital. The figures shown as which may fluctuate with much more volatility than the memorandum items in the balance sheet should be net of underlying value of the corporation. these accumulated charges. 13.90 Own funds include accumulation over time of retained and 13.94 Durable goods held by owners of unincorporated reinvested earnings. Once current transfers receivable are enterprises may be used partly by the enterprise for added to entrepreneurial income and current transfers production and partly by members of the household for payable (and the pension entitlement adjustment) are final consumption. The values shown in the balance sheet deducted, what remains is available for distribution in the for the enterprise should reflect the proportion of the use form of dividends. Retained earnings are the amount of a that is attributable to the enterprise, but this may not always corporation's income available for distribution as dividends be known in practice. that is not so distributed. This amount may be negative on occasion, representing a withdrawal from own funds. In the Foreign direct investment case of a direct investment enterprise a proportion of retained earnings is treated as reinvested earnings, the 13.95 Just as flows of foreign direct investment are shown in the proportion depending on the extent of the direct investor's financial account, so it is interesting to have similar items ownership of the corporation. These earnings are recorded in the balance sheets showing the stock of assets and in the financial account as being reinvested in the liabilities invested in the country by non-residents and corporation and form part of own funds at that time. invested abroad by residents. All sectors may have investment abroad; only financial and non-financial 13.91 From time to time, some of own funds may be assigned to corporations (excluding non-profit institutions within them) (or withdrawn from) either general or special reserves. may receive investment from abroad. 269 System of National Accounts 270 Chapter 14: The supply and use tables and goods and services account A. Introduction 14.1 The sequence of accounts described in chapters 6 to 13 14.5 The accounting rules from chapter 3 including the time of portrays the working of the economy with particular recording and the valuation rules from chapter 6 and emphasis on how income is generated, distributed, elsewhere apply to each of the entries in this identity. redistributed and used for consumption or the acquisition of Because the uses of products are usually valued at assets and when assets are disposed of, or a liability is purchasers' prices, but production at basic prices, it is incurred, to acquire other assets or undertake more necessary to add trade and transport margins, and taxes on consumption than current income permits. An alternative products less subsidies on products to the left-hand (or view of the economy focuses less on income and more on supply) side of the identity so both sides are expressed in the processes of production and consumption. Where do purchasers' prices. Thus a fuller articulation of the product products come from and how are they used? The present balance for any product recognizes that the sum of output chapter is concerned with this aspect of the accounts. It at basic prices plus imports plus trade and transport consists of a description of a product balance and the margins plus taxes on products less subsidies on products generalization of this to the goods and services account, as is equal to the sum of intermediate consumption, final well as the practical and conceptual benefits of these consumption and capital formation, all expressed at accounts. It also shows how supply and use tables can be purchasers' prices, plus exports. The treatment of margins compiled for the economy and provides a link to input- and taxes is complex and is described at length in section B. output tables, which are described in chapter 28. The valuation applied to imports and exports requires special consideration and is described in sections B and C below. 14.2 In this chapter, and elsewhere, the expressions "product balance" and "product flow" methods are used in preference to "commodity balance" and "commodity flow 14.6 A product balance is an especially powerful tool for a method" as reflecting more recent usage of the word compiler as is best illustrated by example. Typically the product in place of commodity. The change in terminology production of tobacco products, mainly cigarettes, is well does not indicate a change in methodology, however. measured but consumption of cigarettes is not, because of the reluctance of respondents to report accurately how much is spent on them in a household budget survey. 14.3 Supply and use tables are a powerful tool with which to Assuming that output, imports and exports are well compare and contrast data from various sources and measured then the identity of the product balance can be improve the coherence of the economic information used to generate data for consumption that will be system. They permit an analysis of markets and industries consistent with other items in the identity. The compiler and allow productivity to be studied at this level of can then use judgement to reach a balance by adjusting the disaggregation. When, as is usually the case, supply and components as necessary. use tables are built from establishment data, they provide a link to detailed economic statistics outside the scope of the SNA. 14.7 It is not always final consumption that is the weakest component of the identity. In some cases, consumption data may be more reliable than output data. For example, in the 1. Product balances case of taxi services where much may be supplied by unregulated and unmeasured activity, the estimate of how much households spend on taxis may help improve the 14.4 The amount of a product available for use within the estimates of output to include these aspects of the non- economy must have been supplied either by domestic observed economy. production or by imports. The same amount of the product entering an economy in an accounting period must be used for intermediate consumption, final consumption, capital 14.8 Even for items where informal activity is not an issue, a formation (including changes in inventories) or exports. product balance may be useful. Aircraft manufacture is a These two statements can be combined to give a statement long process. Work in progress may be measured either by of a product balance: the amount the manufacturer claims to have completed or by the amounts the potential purchaser has paid for by means of stage payments. These two sources of data need Output + imports = intermediate consumption + final to be reconciled with adjustments in the financial accounts consumption + capital formation + exports for accounts receivable or payable as necessary. 271 System of National Accounts 2. The goods and services account covering all products available in an economy arranged in the form of a rectangular matrix with the products, valued at purchasers' prices, appearing in the rows and 14.9 If a product balance is drawn up for all goods and services the columns indicating the disposition of the products to in the economy (either individually or in groups of various types of uses. A supply table at purchasers' prices products) and these are aggregated, the totals for output, consists of a rectangular matrix with the rows imports, intermediate consumption, final consumption, corresponding to the same groups of products as the capital formation and exports must be equal to the matching use tables and columns corresponding to the corresponding items identified in the sequence of accounts supply from domestic production valued at basic prices elaborated in previous chapters. The trade and transport plus columns for imports and the valuation adjustments services embodied in margins represent products that may necessary to have total supply of each [group of] also be seen as being used for intermediate or final product[s] valued at purchasers' prices. consumption, capital formation or exports. The fact that the value of the margins may be included with the value of the goods they apply to does not invalidate the identity. Thus 14.14 Sections B and C below describe the supply and use tables when product balances are aggregated across all goods and respectively. services, these margins are necessarily included and do not need to be specified additionally. 14.15 Supply and use tables are a necessary first step in preparing input-output tables as described in chapter 28 but have 14.10 Since the figures for output and intermediate consumption important uses on their own, both analytically and as correspond to the entries for output and intermediate quality control tools. When supply and use tables are first consumption in the production account, the identity of the prepared, they are unlikely to balance and until they are sum of all product balances may be rearranged to become brought into balance, GDP measured from the production the goods and services account, which reads: approach will differ from the expenditure measure of GDP. Only supply and use tables provide a sufficiently rigorous framework to eliminate discrepancies in the measured Output - intermediate consumption + taxes on products ­ flows of goods and services throughout the economy to subsidies on products = final consumption + capital ensure the alternative measures of GDP converge to the formation + exports ­ imports. same value. As explained in chapter 6, the left-hand side of this identity is equivalent to GDP at market prices. The right-hand side 14.16 Some countries with less advanced statistical systems still is therefore also equal to GDP at market prices and is the have difficulty in deriving a detailed breakdown of well-known statement of GDP often described as the household consumption expenditure from direct sources on "expenditure approach". By contrast, the definition coming a regular basis. Such a breakdown is necessarily available from the left-hand side of the identity is known as the from within a set of supply and use tables. One benefit of "production approach" to GDP. this is that the proportionate distribution of expenditure on different product groups can be compared with the weights used in a consumer price index (CPI) as a means of 14.11 The goods and services account is one of the most basic, if checking both the CPI weights and the supply and use not the most basic, identity in the SNA. It captures the idea tables for plausibility and consistency. that all output from within the production boundary, plus imports, must be accounted for in one of the other two basic activities of the SNA, consumption of goods and services 4. The industry dimension or accumulation of goods and services. Without the goods and services account, a supply and use table would not be 14.17 It is conceptually possible to compile a set of supply and fully articulated and exhaust all products available within use tables with intermediate consumption treated in total the economy. The whole sequence of accounts can be only, with the use table showing how much of each product viewed as built around the goods and services account by is used for intermediate consumption but with no further adding transactions relating to the generation, distribution detail. Such a presentation has little value as either a and redistribution of income and saving. When these compilation or analytical tool but from the earliest transactions are aggregated across all sectors and the rest of elaboration of supply and use tables and input-output tables the world, total resources are equal to total uses. If these onwards, further detail was introduced to relate the were to be "consolidated" out of the sequence of accounts, products used in the economy to the units producing them. only the goods and services account would be left. The simplest case and the one most often elaborated in text books assumes that it is possible to establish a one-to-one 14.12 Every row of the supply and use tables is a reminder of the correspondence between products and producing units. basic identity of the goods and services account. This indeed is the motivation for defining an establishment as a unit producing only one type of product. However, there is no necessary reason for the match to be one-to-one 3. Supply and use tables and many countries now work with matrices where many more groups of products are distinguished than groups of 14.13 With a complete set of product balances, supply and use producing units. The most important reason for this is that tables can be created. Supply and use tables exist in pairs most units produce very many products, for example, a with common valuation and level of detail as regards the footwear manufacturer may make sandals, sports shoes, products identified. The most common format of supply uniform boots and fashion shoes, and it would be neither and use tables is at purchasers' prices. A use table at practicable nor interesting to try to create an establishment purchasers' prices consists of a set of product balances for each type of footwear. 272 The supply and use tables and goods and services account 14.18 Once a set of producing units is determined, the supply information relating to capital formation and number of matrix is expanded to show exactly which products each of employees, for instance, may also be added. These the groups of producing units supplies and the use matrix is extensions are discussed in section D. expanded to show intermediate demand for each of these groups of producing units. In addition, extra information relating to the producing units is appended below the 5. A numerical example demand for intermediate consumption so that the columns corresponding to the producing units contain the components of value added as well as total output. In other 14.19 Tables illustrating supply and use tables are shown in words, the identity that section E with associated descriptive text. These tables contain all the features described in the chapter but at a intermediate consumption + value added = output high level of aggregation since they are intended for illustrative purposes only. In addition, some extracts from is apparent for each group of producing units (industry) in these tables are included in the text to illustrate the features addition to the aggregate product based equivalent. Further being described. B. The supply table 14.20 The main part of the supply matrix is a matrix of products arranged so that the entries for the principal products fall on (or commodities) by industry showing which industry the diagonal of the resulting matrix. supplies or "makes" which product. For this reason, it used sometimes to be described as a "make matrix". 14.25 In practice, it is common for there to be more products than types of producing units. For example it is interesting to 1. Products and producing units specify different sorts of agricultural crops but less interesting or practical to distinguish farms specializing in 14.21 While it is possible to compile a supply table using each of the possible sorts of crop. For this reason, the enterprises as the basic building block, it is more common supply table (make matrix) may be rectangular with more and generally recommended to work with establishments. rows than columns but arranged with similar products in As noted in the introduction, the idea of an establishment as adjacent rows so that an aggregation of the rows for similar a unit where only one type of product is produced derives products would again produce a square matrix. from the idea of an input-output table where there is a one- to-one correspondence between the groups of products 14.26 The greater the amount of product detail that is used, the distinguished and the groups of producing units more there will be a scatter of entries around the entries for distinguished. All the conventions described in chapter 5 the principal products, for example when a farm produces about when an establishment is identified apply in the more than one crop or a manufacturer of machinery context of using establishment data for a supply matrix; produces different types of machines. At a level of detail indeed although establishment-level data may be used in such as "agricultural product"' and "machinery" these off- the context of short-term economic indicators, they are diagonal elements will be merged in a larger diagonal used in the SNA only in the context of the supply and use element. tables. 14.22 The basis for grouping products is most commonly an 14.27 However, as well as similar products, many establishments aggregation of CPC and the resulting groups were often produce some retail and wholesale services, some transport described as "commodities" though modern usage would services and some construction, the last sometimes being be "products". The basis for grouping producing units is produced for own use as capital formation. most commonly ISIC and the resulting groups are often described as "industries". 2. Accounting rules 14.23 In the case where there are the same number of groups of producing units as there are products, there will be a large 14.28 All the rules about time of recording, re-routing and entry in one cell of the column representing the principal partitioning of transactions described in chapter 3 apply to product of that group of producing unit, that is the product the entries in the supply and use tables. that gives rise to the largest proportion of value added. If the group of producing units contains only pure 14.29 Although the supply and use tables do not record property establishments, there will be no other entries in the column income flows, the financial services associated with the but most often there will be some secondary production payment of interest and with the acquisition and disposal of showing as smaller entries in other cells in the column. financial assets and liabilities are recorded in the supply and use tables. Chapter 17 explains in detail what sorts of 14.24 When there are the same number of groups of producing financial service flows are associated with transactions in units as groups of products, the rows and columns are financial assets and property income flows. 273 System of National Accounts 14.30 The re-routing of flows associated with margins is corresponding to groups of producing units. The entries in described below under valuation. this matrix show the value of output of each type of product by each group of producing unit. The goal of creating 3. Production establishments is to partition horizontally and vertically integrated enterprises so that each row and column of the matrix is dominated by one entry with only a few non-zero 14.31 The principles for recording output in the supply and use entries, which are typically fairly small, elsewhere. There is tables are exactly the same as those for recording output in more discussion on this sort of partitioning of enterprises in the production account, as described in chapter 6. It should chapter 5. be emphasized that all the concepts and definitions of the SNA elaborated in previous chapters describing the sequence of accounts apply equally and exactly to supply 14.35 Table 14.1 shows columns 16, 20, 23 and 24 of the supply and use tables and input-output tables. The only difference matrix shown in table 14.12. In the full version it is clear is in the manner of presentation of the accounts, not in the that most entries in the sub-matrix for market production underlying fundamentals of the SNA. are zero. Even in the abbreviated table, this is obvious for production for own final use and for non-market production. 14.32 As noted in the introductory section, the producing units to be identified in the supply and use tables are determined by reference to an industrial classification such as ISIC. 4. Imports However, it may also be useful to distinguish which producing units are market and which are non-market. This Classification may be applied generally or to just those groups where significant production on both bases is common, for instance in health and education services. Similarly, 14.36 In order to add imports to domestic production to reach production on own account may also be of special interest total supply, imports must be classified by products in a and can be distinguished within the ISIC categories, for manner consistent with that used for domestic production. instance for construction. This is not always straightforward since imports (and exports) are classified not according to CPC but according to the HS or SITC. Finding a level of aggregation of the Table 14.1: Abbreviated version of the production trade data that is sufficiently detailed but also consistent part of the supply table with domestic production may be a factor in determining Production Non- the level of detail to be adopted in the supply and use Market for own market tables. production final use production Total Agriculture, forestry and fishery products (0) 78 9 0 87 Goods for processing Ores and minerals; electricity, gas and water (1) 195 0 0 195 Manufacturing (2-4) 1 707 7 0 1 714 14.37 The traditional view of an input-output table or a supply Construction (5) 213 31 0 244 and use table was that it portrayed the physical or Trade, accommodation, food & technological process of production. The aim was to show beverages; transport services (6) 233 0 0 233 which products were combined, and in what proportions, to Finance and Insurance (7 less 72- make other products. One consequence of this, in 73) 146 0 0 146 combination with the idea of establishments, was that if one Real estate services; and rental and establishment of an enterprise was responsible for making leasing services (72-73) 100 95 0 195 steel and another for making steel products, the steel from Business and production services the first establishment was shown as being delivered (or (8) 256 0 0 256 "sold") to the second. This meant the final customer for the Community and social services (92- steel products bought them entirely from the second 93) 63 0 212 275 establishment and the production account showed the value Other services (94-99) 86 5 0 91 0 168 168 of the steel included in both intermediate inputs and output. Public administration (91) Total 3 077 147 380 3 604 A similar approach was taken for goods sent abroad for processing but then returned to the original economy. 14.33 In general, in keeping with the guidance on their treatment 14.38 In terms of the SNA, this approach amounts to imputing a given in chapters 4 and 5, ancillary activities are not treated change of ownership when goods are delivered from the as giving rise to products that are recorded as output in the first unit to the second. For imports and exports, this is accounts. One exception is when some products are used particularly inappropriate in the case of goods sent abroad both for own ancillary use and are supplied to another unit. for processing since to ensure consistency in the SNA, Another exception is where it is appropriate to treat the unit financial transactions that do not take place have to be producing the ancillary products as a separate imputed to match the imputed change in ownership of the establishment, for example because of its geographical goods. In reality, though, the unit processing the goods location where it may be a source of significant assumes no risk associated with the eventual marketing of employment. the products; the risk remains with the legal owner. The processor is not at risk from (and does not benefit from) 14.34 Bearing in mind the discussion about units, the production any unexpected changes in prices of either the components part of the supply matrix is a matrix with rows or the final product. The only risk the processor accepts is corresponding to product groups and columns limited to meeting the contractual commitment in the most 274 The supply and use tables and goods and services account cost-effective manner. The value of the output of the goods by third parties occurs, this may be the largest single processor is the fee agreed for the processing. Any other factor contributing to change in the coefficients. change in the value of the goods and services processed, for example due to holding gains or losses or to the 5. Valuation incorporation of R&D or the benefits of marketing assets accrue to the legal owner of the product. When the processing is carried out abroad, exports from the 14.44 As explained in the introduction, in order to balance total processing country consist only of the processing fee. supply with total use, both must be valued in the same way. The most usual way to achieve this is to raise total supply to purchasers' prices and this is the approach described 14.39 With the increasing importance of outsourcing under here. However, the alternative, of reducing total use to globalization of markets, there is great interest in knowing basic prices is also considered in section D under where the returns to labour arise and how far operating discussion about deflating the supply and use tables to surplus accrues to the processor and how far to the unit that prices of another year. contracts the processing. 14.45 It is helpful to begin by recapitulating the distinction 14.40 The pattern of inputs for an establishment processing goods between the purchaser's, producer's and basic prices as on behalf of another unit is quite different from the pattern explained in chapter 6 and, because of the complexity of of inputs when the establishment is manufacturing similar VAT and similar deductible taxes, to itemize the difference goods on their own account. A simple illustration may be between the three ways in which VAT is recorded. given by referring to crude petroleum. The unit refining on own account has intermediate consumption of crude oil and a. Invoiced VAT is the VAT payable on the sales of a output of refined petroleum products; the unit processing producer; it is shown separately on the invoice that the on behalf of another unit has all the other similar inputs and producer presents to the purchaser; uses the same sort of fixed capital but shows neither the crude petroleum nor the refined products in its production account. For similar amounts of crude oil processed, the b. Deductible VAT is the VAT payable on purchases of value added and other inputs will be comparable and when goods or services intended for intermediate the process is carried out for a non-resident, imports will consumption, gross fixed capital formation or for resale exclude the crude oil and exports will exclude the refined that a producer is permitted to deduct from his own products but include the processing fee. As a result, the VAT liability to the government in respect of VAT current external balance will be unaffected by this invoiced to his customers; treatment. The result of recording only the processing fee rather than the full value of the goods processed does, c. Non-deductible VAT is VAT payable by a purchaser however, affect the ratios of imports and exports to GDP that is not deductible from his own VAT liability, if and gives a more realistic picture of the extent to which any. domestic financial resources are required to fund imports or benefit from exports. 14.46 Bearing these ways of recording VAT in mind, the price bases in the SNA are expressed as follows: 14.41 Similar consequences hold for processing by resident producers. There is discussion in chapter 6 about whether a. The purchaser's price is the amount paid by the or not to record deliveries from one establishment to purchaser, excluding any deductible VAT or similar another in the same enterprise. deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the 14.42 Measuring goods for processing by the processing fee purchaser. The purchaser's price of a good includes any instead of by the full value of the processed goods changes transport charges paid separately by the purchaser to the nature of input-output coefficients. They no longer take delivery at the required time and place; represent the technological structures of an industrial process but an economic process. Changes in coefficients b. The producer's price is the amount receivable by the may result not from changes in technology but from producer from the purchaser for a unit of a good or changes in the proportion of oil (in this case) processed on service produced as output minus any VAT, or similar own account and processed on behalf of another unit. More deductible tax, invoiced to the purchaser. It excludes extensive discussion on the treatment of goods for any transport charges invoiced separately by the processing (and the similar but distinct case of merchanted producer; goods) is given in chapter 26 but the consequences for supply and use tables and input-output tables are extremely c. The basic price is the amount receivable by the significant and change many of the traditional perceptions producer from the purchaser for a unit of a good or about what information is conveyed in these tables. service produced as output minus any tax payable, and plus any subsidy receivable, on that unit as a 14.43 Interpreting input-output coefficients as representing the consequence of its production or sale. It excludes any technological structure of an industry does not recognize transport charges invoiced separately by the producer. the role of other factors, such as whether fixed capital is rented or owned, the importance of ancillary activities or 14.47 When an item is not sold directly by the producer but the consequences of a statistician balancing the tables. passes through the hands of one or more wholesaler or These factors still play an important part in determining retailer, it is necessary to consider the distribution margins input-output coefficients but where extensive processing of these wholesalers and retailers add to the cost of the 275 System of National Accounts product. One possibility is to treat distribution margins as 14.2 shows the adjustment column (2) from the full supply another element increasing the value of the purchaser's table 14.12. price over the producer's price. An alternative possibility is to treat the purchaser as undertaking two quite different 14.52 Trade margins are usually produced within the economy transactions; one is the purchase of the item directly from but may apply to both domestic production and to imports. the producer, the second is the purchase of the margins Transport margins, on the other hand, may be provided by involved. A supply and use table at purchasers' prices both residents and non-residents and may be provided to assumes the former; a supply and use table at basic prices both residents and non-residents. This aspect of transport assumes the latter. margins is discussed in the following paragraphs. 14.48 Whichever alternative for handling trade margins is chosen, Table 14.2: An example of the entries to adjust the three price valuations can be linked schematically as supply to include trade and transport margins follows: Trade and transport Purchasers' prices margins minus wholesale and retail distribution margins (trade Agriculture, forestry and fishery products (0) 2 margins), Ores and minerals; electricity, gas and water (1) 2 minus transportation charges invoiced separately (transport Manufacturing (2-4) 74 margins), Construction (5) 0 Trade, accommodation, food & beverages; minus non-deductible VAT, transport services (6) -78 Finance and Insurance (7 less 72-73) 0 Real estate services; and rental and leasing equals producers' prices; services (72-73) 0 Business and production services (8) 0 minus taxes on products resulting from production Community and social services (92-93) 0 excluding invoiced VAT, Other services (94-99) 0 Public administration (91) 0 Total 0 plus subsidies on products resulting from production, equals basic prices. Transport margins 14.49 Thus the three factors that need to be considered in 14.53 It is helpful to consider the case of domestic transport converting the values of output and imports to purchasers' charges first and see how they are included in the supply prices are: and use tables before turning to transport margins on imports. a. Trade margins, Domestic transport charges b. Transport margins, 14.54 As explained in paragraphs 6.65 to 6.66, if the producer c. Taxes less subsidies on products. agrees to deliver the product to the purchaser without explicit charge, the cost of delivery is included in the basic price. Only if the purchaser is explicitly invoiced for the Each of these is considered in turn below. Trade margins delivery is there a specific transportation margin that is part are typically more significant in size than transport margins of the purchaser's price. but are conceptually more straightforward. Transport margins are complex because of the different ways in which the cost of transport can be recovered. 14.55 Consider the situation where a unit, A, sells a product to unit B. For simplicity it is assumed they are both producers with factories some distance apart. If B collects the product Trade margins from A, the price charged is 200. The cost of transport from A's factory to that of B is 10. Both A and B have delivery 14.50 Trade margins may be significant and may apply to fleets that can transfer the product from A to B or either virtually all goods. When a supply and use table is may use a third party, C, to make the transfer. Ten per cent compiled at purchasers' prices, the distribution margins tax (not VAT) is payable on both the cost of the product need to be added to the rows for each group of products. and the transport costs. Different values of the three possible prices result from the alternative means of moving 14.51 In order to account for the use of wholesalers and retailers the product from A to B as shown in table 14.3. margins, an adjustment column is added to the supply part of the supply and use tables. This column shows the 14.56 The entries in the use matrix will be quite different for each addition to the value of each group of goods to which the of these six cases, even though the total cost to B is similar margins apply with an offsetting negative entry for the throughout. Only when B collects the product itself is the rows corresponding to the margins. Typical entries for purchaser's price for the product plus delivery less than transport margins are treated in the same manner. Table 231. In this case it must be assumed that the internal costs 276 The supply and use tables and goods and services account of collection are 10, as before, so only the tax payable on information collected from domestic establishments. In the this, 1, is a reduction in the total cost of taking delivery of example above, information from A, B and C would, in A's product even though the purchaser's price is 220 principle, be available. For products delivered to compared with 231 for other modes of delivery. establishments abroad, this is not the case. Either A or B is non-resident and possibly C also. The most common 14.57 When A or B undertake transport as an ancillary activity, situation is where information coming from the the cost of petrol and other consumables will appear in administrative records compiled by customs authorities intermediate consumption, the driver's wages in must be used. Increasingly, however, some products compensation of employees and there will be consumption circulate without direct customs supervision and recording. of fixed capital recorded in respect of the vehicle used. This applies to services but services seldom if ever have transportation charges associated with their delivery. 14.58 These entries will appear for A when it is undertaking a secondary activity but the cost of the secondary activity 14.62 The following are examples of goods that may not be will appear as intermediate consumption of A's primary covered in customs statistics: activity. a. Goods circulating within a single customs area that 14.59 When C acts as an agent for A, whether A charges B spans several economies; directly for C's services or not, the cost of C's services forms part of A's intermediate consumption. When C is b. Goods delivered to offshore establishments such as oil hired directly by B, then the service cost is part of B's platforms; intermediate consumption. c. Certain types of goods, such as diamonds and other 14.60 The rationale behind these different recordings is that the precious goods of high value but small volume, that point when change of ownership occurs is different under may be carried by persons; the different scenarios. If A agrees or is obliged to provide transport to B, even for a charge, then change of ownership d. Ships and aircraft, which, while hardly concealable in a takes place when the product is delivered to B's factory. If physical sense, may be difficult to distinguish from the B agrees or is obliged to arrange delivery itself, then vehicles that belong to another economy and simply change of ownership takes place when the product leaves transit through the domestic economy. A's factory. It is therefore appropriate to consider products subject to International transport charges customs documentation separately from other internationally traded products. Separate consideration also 14.61 The information for allocating domestic transport charges must be given to transport related to merchanted goods and is typically available to national accountants from survey goods sent abroad for processing. Table 14.3:Example of the impact on prices of transport charges Transport Pro- Pur- Basic margin plus Delivery method Tax ducer's chaser's Comment price tax on price price transport A charges B an all-inclusive price Transport is an ancillary activity 210 21 231 231 and uses own delivery fleet of A A charges B for delivery but uses Transport is a secondary activity 200 20 220 11 231 own delivery fleet of A A charges B an all-inclusive price C's production is intermediate 210 21 231 231 but uses C to deliver consumption of A A charges B for delivery but uses C's production is intermediate 200 20 220 11 231 C to deliver consumption of A B collects the product from A Transport is an ancillary activity 200 20 220 220 using own delivery fleet of B B uses C to collect product from A B buys 2 products; one from A 200 20 220 220 and deliver to B for 220 and one from C for 11 10 1 11 11 277 System of National Accounts Products not included in customs documentation Products covered by customs documentation 14.69 In most countries, most information on imports and exports 14.63 In the absence of customs documentation, information must of goods will come from customs declarations. These be obtained from surveys and other sources and will declarations are compiled for administrative purposes, typically record the prices at which transactions are actually namely the levy of import and export duties, and are undertaken. The analysis above for goods transported therefore not necessarily ideal for use in the national within the domestic economy is likely to apply to accounts or balance of payments context but are used international transport also. When the supplier (exporter) because of their general availability and consistency of commits to deliver goods to the importer, the value of the valuation. goods will include the transport costs. When the purchaser (importer) is responsible for transport, the value of the 14.70 Within customs declarations, imports are usually valued goods excludes the transport costs and these feature as a CIF (that is, they include cost, insurance and freight) at the separate purchase. Whichever of the units takes point of entry into the importing economy. This valuation is responsibility for the transport, the values of the goods for standard, regardless of whether any of the CIF elements are both the exporter and importer are identical. This is an provided by domestic enterprises because import duties are important distinction from the valuation used in customs typically imposed on the CIF valuation. It also excludes the merchandise trade statistics as discussed in the immediately cost of transport from the border of the importing economy following section. to the premises of the importer. This transport also may be provided by either a resident or non-resident carrier. 14.64 Following the example in the previous section, if A and B Exports are valued FOB (free on board) at the point of exit are resident in different economies, whenever A takes from the exporter's economy. It includes the cost of responsibility for delivery to B, the value of exports from A transport from the exporter's premises to the border of the (and the corresponding value of imports to B) includes the exporting economy. The CIF/FOB valuation principles arise from the common situation where goods are transport element. If B takes responsibility for the transport transported by ship from one country to another and it is from A, then neither the value of exports from A nor the not unreasonable to assume that transport to and from the value of imports into B includes the value of the transport. ship would be undertaken by carriers resident in the relevant economy. This assumption may still hold in the 14.65 If the third party, C, is used to undertake the transport, the main for goods transported by sea and air. It is much less residence of C is important in determining the value of total satisfactory for goods transported overland where a single imports and exports. If C is co-resident with A and provides vehicle may transport goods from the exporter to importer services to A, this is a domestic transaction within A's without a break at national borders. economy. However, the value of the exports of goods from A will reflect the fact that they must cover the cost of 14.71 As noted already, if it is the exporter that contracts the services bought from C. If C is co-resident with A but delivery (whatever the nationality of the carrier), it is provides services to B to transport the goods from A to B, correct that the cost of transport is included in the value of then C also provides exports to B but these are shown as the good imported, though describing this as CIF is not exports of transport services, not of goods. helpful in the context of the SNA since it is a legitimate part of the cost of the imported good and should not be seen as a separate import of transport services. The delivery 14.66 If C is co-resident with B and contracts with A to transport contractor provides services to the exporter and these are goods to B, there are imports of transport services from B's shown as an import of services to the exporting economy if economy to A's which are then included in the value of the contractor is not co-resident with the exporter. exports from A to B. If C contracts with B to transport the goods, this is a domestic transaction for B's economy even 14.72 If it is the importer that contracts the delivery and if the though C is operating in foreign territory in collecting and carrier is not co-resident with the importer, an import of moving the goods. services takes place and, ideally, for the SNA it would be desirable to separate the CIF value into the value of the good only and the value of the transport service. If the 14.67 If C is resident in an economy other than that of A and B, importer undertakes delivery itself or contracts with a unit then the services provided to A constitute exports of resident in the same economy, there is in fact no import of services from C's economy to A's and the value of the services even though it will appear there when imports of goods exported from A to B are sufficient to cover this cost goods are recorded CIF. To counteract this, a fictional of imports just as previously they covered the cost of a export of the same amount of services must be shown to domestic transaction. If C contracts with B to move the leave the current balance of goods and services correct. goods, the cost shows as an export of services from C's economy to B's. Transport on merchanted goods 14.68 As in the domestic case, the question of whether the value 14.73 Merchanting is a process whereby a unit in economy X of goods covers the cost of transportation or not depends on purchases goods from economy Y for sale in economy Z. whether the exporter or importer is responsible for The goods legally change ownership but do not physically transport. Again this is equivalent to whether change of enter the economy where the owner is resident. By ownership takes place after or before transportation from A convention, the acquisition of the goods intended for resale to B. is shown as negative exports. When the goods are sold, 278 The supply and use tables and goods and services account they are shown as [positive] exports. When acquisition and Recording transport margins in the supply and use sale take place in the same period, the difference shows as tables an addition to exports. If only the acquisition takes place in an accounting period, the negative export is offset by an 14.76 In the supply and use tables, either supply must be adjusted increase in inventories of goods for resale, even though to be at purchasers' prices or use must be adjusted to be at those goods are held abroad. In a subsequent period when basic prices since both sides of the balance must be the goods are sold, the exports recorded for their sale are expressed in the same prices. It is common to compile the offset by a withdrawal from inventories. As normal, the use table, initially at least, in purchasers' prices. As shown withdrawals should be valued at the cost of the goods at the in table 14.3, this value will often be the same however the date of the withdrawal, any increase in value due to a good is transported from the seller to the buyer. The only change in the price of the goods being shown as a holding exception is when the buyer fetches the goods using its own gain or loss. resources. The way the transport service shows in the use table, however, depends critically on how the service is provided (using own resources or a third party contractor) 14.74 The services provided to transport the goods from Y to Z and to whom (the buyer or seller). The different forms of may be paid for by any of the units in X, Y or Z and should recording in different circumstances are indicated in table be recorded consistently with the principles outlined above. 14.3. (See chapter 26 for more on merchanting.) 14.77 Imports of goods are to be recorded in the supply table at Table 14.4: An example of imports entries in the basic prices with taxes and margins added subsequently. supply table with the global CIF-to-FOB There is no universally appropriate valuation for imports of adjustment goods at basic prices. The following recommendations should be noted. CIF/FOB adjustment Goods Services Agriculture, forestry and fishery products a. If the data come from other than customs (0) 37 documentation, it is to be assumed that actual Ores and minerals; electricity, gas and transaction prices are used and it should be clear water (1) 61 whether transport services are separately invoiced or Manufacturing (2-4) 284 not. If they are, the basic price excludes the value of Construction (5) transport; if not, the basic price value of goods includes Trade, accommodation, food & beverages; transport costs. The purchaser's price will differ from transport services (6) -6 62 the basic price only because of any taxes payable by the Finance and Insurance (7 less 72-73) -4 17 purchaser. Real estate services; and rental and leasing services (72-73) Business and production services (8) 5 b. If the data come from customs documentation and if it Community and social services (92-93) is the exporter of the goods who is responsible for Other services (94-99) meeting the transportation costs, the value of the goods Public administration (91) at basic prices should include the transport costs. In this CIF/FOB adjustment 10 -10 case a CIF valuation will approximate the basic price Purchases abroad by residents 20 23 (approximate unless a domestic carrier assumes Total 0 392 107 responsibility for transport from the border of the importing country). The purchaser's price will differ from the basic price only because of any taxes and Transport on goods sent abroad for processing subsidies payable by the purchaser. c. If the data come from customs documentation and if it 14.75 Goods sent abroad from economy X to economy Y for is the importer of the goods who is responsible for processing without changing ownership, after which they meeting the transportation costs, the value of the goods are returned to economy X, are not shown as either exports at basic prices should exclude the transport costs. In of goods from X to Y or subsequently as exports of goods this case an FOB valuation will approximate the basic from Y to X. As explained above, only the agreed price (approximate because the value of transport from processing fee is shown as an export of service from Y to the place of origin to the border of the exporting X. However, there are costs of transporting the goods on economy is included in the FOB valuation). The both the journey from X to Y and then on the return journey purchaser's price will differ from the basic price from Y to X. The costs of these journeys, excluding the because of the transport costs incurred plus any taxes value of the goods themselves, must be shown as and subsidies payable by the purchaser. transportation services. If X is responsible for transport on either the outward or inward journey, the cost is an import d. It may not be possible to determine from customs to X's economy unless it is carried out by X or another unit declarations which unit is responsible for the transport co-resident with X. If Y is responsible for the transport, the costs and, even when it is and conceptually the cost is an import to Y unless it is carried out by Y or transport costs should be separated from the value of another unit co-resident with Y. When Y is responsible for the goods themselves, there may be no information and transport costs (on either or both journeys) the costs will be no resources available to make the separation in covered by the agreed processing fee and hence in the value practice. In such a case the CIF value of imports may of the exports of services from Y to X. be the only source with a disaggregation by type of 279 System of National Accounts good. If the disaggregated CIF figures are used for · Any goods or services subject to a zero rate of VAT imports of goods, though, that part of the transport regardless of their use costs and insurance also included in imports of services · Any producers exempted from VAT registration (small would be double-counted. In order to avoid this, therefore, an adjustment column is inserted into the businesses or the like). supply table. The adjustment column consists of a deduction from the services items for transport and 14.81 When output is at basic prices, the taxes column contains insurance equal to the CIF-to-FOB adjustment for these total non-deductible VAT on products, taxes and duties on items with an offsetting global adjustment made to imports excluding VAT, export taxes and taxes on products imports of goods. Table 14.4 gives an example of such excluding VAT, import and export taxes. When output is at an adjustment. producers' prices, the taxes column includes only taxes and duties on imports (excluding VAT), plus total non- Taxes and subsidies on products deductible VAT on those products. 14.78 The taxes and subsidies on products that add to the value of 14.82 Subsidies are recorded as if they were negative taxes on products available in the economy are exactly those products or negative taxes on production. Only subsidies on described as taxes and subsidies on products in chapter 7. products (if any) are entered into the column for the tax Other taxes on production are included in the basic price adjustment to the valuation of supply; they appear with a measurement of output and other subsidies on production negative sign to indicate they reduce the value of are excluded so do not feature in the adjustment for taxes purchasers' prices rather than increase it. that intervenes between a valuation at basic prices and purchasers' prices. 14.83 Table 14.5 shows columns 3 and 4 from the full supply matrix in table 14.12 that show the adjustments for taxes 14.79 Value added type taxes in the SNA include VAT proper and subsidies on products. and taxes that are deductible in a way similar to VAT. The SNA recommends that output, even at producers' prices, is valued excluding VAT invoiced by the producer; imports Table 14.5: An example of the entries to adjust also are valued excluding invoiced VAT. For intermediate supply to include taxes less subsidies on and final uses, the purchases of goods and services are products recorded including non-deductible VAT only. Taxes on Subsidies on products products 14.80 The general cases in which VAT is usually deductible, non- deductible or just not applicable are as follows: Agriculture, forestry and fishery products (0) 5 -3 Ores and minerals; electricity, gas and water (1) 5 Deductible VAT: Manufacturing (2-4) 94 -5 · Most of intermediate consumption Construction (5) 17 · Most of gross fixed capital formation Trade, accommodation, food & beverages; · Part of changes in inventories. transport services (6) 5 Non-deductible VAT: Finance and Insurance (7 less 72-73) 0 · Most of final consumption expenditure Real estate services; and rental and leasing services (72-73) 0 · Part of gross fixed capital formation Business and production services (8) 11 · Part of changes in inventories Community and social services (92-93) 0 · Part of intermediate consumption. Other services (94-99) 4 VAT not applicable: Public administration (91) 0 · Exports Total 141 -8 C. The use table 14.84 A use table can be viewed as a rectangular table with four contains information on value added disaggregated to show quadrants, two in the upper part and two in the lower part. the elements of the generation of income account, that is The upper left quadrant consists of a sub-matrix showing compensation of employees, gross operating surplus or the use of different products by different groups of gross mixed income and taxes less subsidies on production. producing units. In other words, this quadrant contains Each of these five sub-matrices is described below. The intermediate consumption, disaggregated by product in the lower right quadrant is empty. rows and by industries in the columns. The upper right quadrant consists of a sub-matrix showing the use of different products by final consumers, a sub-matrix for 14.85 The upper part of the use matrix (the intermediate and final exports and a sub-matrix showing the use of different demand quadrants) can be valued at purchasers' prices or at products for capital formation. Together these three sub- basic prices. In this section sub-matrices at purchasers' matrices show final demand. The lower left quadrant prices are discussed. The alternative valuation at basic 280 The supply and use tables and goods and services account prices is discussed in section D along with considerations 14.92 Table 14.6 shows columns 16, 20, 23 and 24 of the use about expressing the use table in volume terms. matrix that include the intermediate consumption by each type of production. This contrasts with table 14.1 which 14.86 Together the left-most quadrants (the intermediate shows the same columns for the supply part of table 14.12. consumption and value added quadrants) can be viewed as Whereas table 14.1 shows that most manufactured products a set of columns, each relating to a group of producing are produced by the market producers in the manufacturing units, containing information relating to the production and industry, table 14.6 shows that all three types of producers generation of income accounts plus other information that use manufactured products and that only about half of can be attributed to groups of producing units at a more manufactured products are used in manufacturing disaggregated level than groups of enterprises. This other industries. While the proportion quoted depends on this information most often includes capital formation and the example, the phenomenon is generally observed. number of employees for each group of producing units. These aspects are also discussed in section D. Table 14.6:Abbreviated version of the intermediate consumption part of the use table 1. The use of products by producing units Production Non- Market for own market production final use production Total 14.87 The sub-matrix showing the use of specific products by Agriculture, forestry and fishery products each type of producing unit (the upper left quadrant of the (0) 82 1 5 88 table) has long been considered one of the more interesting Ores and minerals; electricity, gas and aspects of supply and use tables and input-output tables. It water (1) 208 0 9 217 gives a picture of how products are converted to more Manufacturing (2-4) 878 32 80 990 complex products either for yet further processing or for Construction (5) 22 0 18 40 sale to final users or as exports. Unlike the supply table or Trade, accommodation, food & make matrix, which also shows products by producing beverages; transport services (6) 110 0 9 119 Finance and Insurance (7 less 72-73) 76 5 23 104 units, the sub-matrix of the use table (sometimes called the "absorption matrix") is densely rather than sparsely Real estate services; and rental and leasing services (72-73) 39 0 18 57 populated. The patterns of inputs for market, own final use Business and production services (8) 171 12 39 222 and non-market producers of the same products are likely Community and social services (92-93) 2 0 32 34 to bear a strong resemblance to one another but the Other services (94-99) 6 0 4 10 variations give insights into how the characteristics of the Public administration (91) 0 0 2 2 three sorts of production vary. Total 1 594 50 239 1 883 14.88 The definition of intermediate consumption and the borderlines with payments for the use of labour and capital 2. The use of products for final consumption are exactly as explained in chapter 6. 14.93 As explained in chapter 9, there are three types of units that 14.89 Compiling the sub-matrix usually starts from information undertake final consumption; households, NPISHs and provided by establishments about their intermediate general government. The manner of compiling the sub- consumption. These may be classified according to the matrix of the use table showing the use of products for final purpose they serve rather than the type of good. The consumption is similar for each of the three types of classification of outlays of producers by purpose (COPP) consumer but starts from a different classification for each consists of six main headings that apply to intermediate of them. consumption of establishments, only one of which relates to current production techniques. The other five cover more 14.94 Information on consumption by households usually starts general categories such as outlays on marketing and human from household surveys. In these, household expenditures resource development that are common to most are classified according to the classification of individual establishments. Use of this detail in the form of a satellite consumption by purpose (COICOP). COICOP classifies account is discussed in chapter 29. household expenditure into ten main categories, such as food, clothing and housing. This is useful for analysis of 14.90 When this is all the information available to the compiler, how much of household consumption goes on essentials, he must make a judgement of what type of products will be for instance, and is basic to the establishment of weights for covered in each heading allowing for variations between the consumer price index but it is not in the necessary producing units of different types. format for inclusion in the use table. For that a conversion table is necessary showing which of the designated 14.91 It is important to bear in mind the interpretation of data in products are purchased as food, which as clothing and so this sub-matrix. The total across the rows show how much on. It should be noted that household surveys typically of a given product is used as intermediate consumption by include expenditure by households abroad, for example on all producing units. The total down a column shows the holidays, which must be separated from demand in the total of all types of products used as intermediate domestic economy in the supply and use tables. consumption inputs by a single type of producing unit. There is absolutely no reason why the relative size of these 14.95 A similar approach is used for consumption expenditure by two entities should be related in any systematic manner but NPISHs but starting from the classification of the purposes mistaking one concept for the other is a common error of non-profit institutions serving households (COPNI). made by users not very familiar with the nature of a supply COPNI spells out the different sorts of NPISHs there may and use table. be by their objectives, for example, whether they undertake 281 System of National Accounts research and scientific services, education services or are made by households for items supplied at nominal prices religious associations. Given this knowledge, it should be by government and NPISHs. possible to determine whether the NPISH is one with costs mainly limited to those associated with running an office with few paid employees or whether there are significant 3. The use of products for capital formation costs associated with acquiring goods and services to pass on to households, for instance. 14.100 There are three types of capital formation to be examined, gross fixed capital formation, changes in inventories and 14.96 For general government consumption expenditure the acquisition less disposal of valuables. starting classification is the classification of functions of government (COFOG). This classification is consistent Gross fixed capital formation with that proposed in the GFSM2001 and shows a breakdown of government expenditure by standard functions associated with general public services, defence, 14.101 Allocating gross fixed capital formation to products is the law and order and so on. As with the classification for easiest part of the use table since the categories of fixed NPISHs, knowing the type of function gives a way to start capital fall quite naturally into product groups. Further, to allocate the expenditure between intermediate they will often be exempt from taxes on products and not consumption and other expenditure and to allocate subject to trade margins. However, some assets are subject intermediate consumption to specific product types. to costs of ownership transfer on acquisition and disposal and these costs need to be allocated to the appropriate product. This product may be trade or transport but may 14.97 It may be useful if possible to split the columns for general also be legal services or real estate services, for example, government (and NPISHs if appropriate) to show depending on the asset concerned. individual consumption expenditure and collective consumption expenditure separately in order to calculate actual consumption rather than consumption expenditure as 14.102 One aspect that does need to be mentioned, though, is the explained in chapter 9. treatment of existing goods that are resold to another unit. (This applies to consumption expenditure also but is Table 14.7:The final consumption part of a use described here because it is most common for fixed table capital.) General Households NPISHs government Total Resale of existing goods Agriculture, forestry and fishery products (0) 28 0 2 30 Ores and minerals; electricity, gas and 14.103 Strictly speaking, it is not exactly true that all goods water (1) 40 0 0 40 available for purchase in the domestic market come from Manufacturing (2-4) 570 0 3 573 domestic production or imports. Some goods may exist in Construction (5) 2 0 0 2 the economy already and simply change owners. The most Trade, accommodation, food & obvious example is fixed capital, where buildings and beverages; transport services (6) 42 0 0 42 vehicles are regularly sold before their useful life is Finance and Insurance (7 less 72-73) 53 0 0 53 exhausted. In this case, the supply of goods is recorded not Real estate services; and rental and as a positive entry in the supply table but as a negative leasing services (72-73) 115 0 0 115 Business and production services (8) entry in the use table. 40 0 0 40 Community and social services (92-93) 21 14 204 239 Other services (94-99) 85 0 0 85 14.104 When a building is sold, for example, the seller records Public administration (91) 5 2 159 166 negative fixed capital formation and the purchaser records Purchases abroad by residents 43 0 0 43 positive fixed capital formation. These items frequently do Domestic purchases by non-residents - 29 0 0 - 29 not offset one another exactly as there may be costs of Total 1 015 16 368 1 399 ownership transfer associated with the exchange. As explained in chapter 10, costs of ownership transfer 14.98 When these entries are compiled at purchasers' prices, as incurred by the seller should be written off during the assumed in this section, there are no entries for period the seller has owned the asset, so that by the time the consumption of wholesale and retail services as these are item is sold, all the costs of ownership transfer on included with the expenditure on the products to which acquisition should have been written off. For the purchaser, they apply. Equally, taxes payable on products are included costs of ownership transfer on acquisition of the asset are in the purchaser's value and do not show separately. (These recorded as part of gross fixed capital formation and, in statements apply equally to products used for intermediate turn, are written off over the period the purchaser expects to consumption and for capital formation but are much more use the asset. In this way costs of ownership transfer of significant for final consumption.) both disposal and acquisition are treated as new fixed capital formation. 14.99 Table 14.7 illustrates the part of the use table for final consumption (columns 30, 31, 32 and 29 of table 14.12). 14.105 Fixed assets may not always be sold to other producers in The entry for production for own final use by households the same economy. For example, it is common for aircraft includes the estimate for the rental of owner-occupied to be sold abroad. In this case, the supply of the aircraft is dwellings. The item for expenditure on non-market still recorded as negative capital formation but the use is production by households represents the partial payments recorded as an export. 282 The supply and use tables and goods and services account 14.106 Even when an asset is no longer cost effective, it may have the fact that even the valuation of changes in inventories a residual value, for example as scrap. (It should be noted, may be less robust than desired, means that inventories are though, that the margins of scrap merchants are often very often estimated indirectly and with the need to balance the high compared to the prices paid by them to acquire the supply and use table as one of the operating constraints. scrap.) In that case the supply is recorded as negative capital formation and the use as intermediate consumption Valuables of a producing unit processing the scrap. Chapter 10 also explains why the total of consumption of fixed capital over the life of the asset is not necessarily the whole value of the 14.112 The range of products held as valuables is quite extensive asset on acquisition but the difference between the value of and it is an area where existing goods may feature. For the asset on acquisition and its value on final disposal, in example, antiques and old masters, by their very nature, are this case the scrap value. In cases where the scrap value not output of the current period. The importance of the does not coincide with the residual balance sheet value of value of acquisition less disposals of valuables as an item the asset immediately before disposal, an adjustment is to of capital formation, though, tends to be limited and any be made to the value of the asset via the other changes in major disposal, such as sales by a museum, are likely to be the volume of assets account. well known. 14.107 Second-hand assets may also become household 14.113 Table 14.8 illustrates the capital formation part of a use consumption expenditure, as for example when a hire car table. company sells its cars to households for recreational purposes. Table 14.8:The capital formation part of a use table 14.108 If a unit disposes of more assets than it acquires in a period, Acquisition it will have negative capital formation. It is possible, Gross fixed less though not very common, for the figure of capital capital Changes in disposals of formation for a group of producing units also to be negative formation inventories valuables Total in such a case. Agriculture, forestry and fishery products (0) 2 1 0 3 Ores and minerals; electricity, gas and 14.109 As explained in chapter 9, it is assumed that a household water (1) 0 -1 0 -1 consumes products at the moment they are acquired. In the Manufacturing (2-4) 161 5 10 176 case of consumer durables this is not strictly so and Construction (5) 190 23 0 213 consumer durables may be sold or donated to other units at Trade, accommodation, food & a later time (for example in response to requests for disaster beverages; transport services (6) 0 0 0 0 relief). In this case also, the supply of the goods in question Finance and Insurance (7 less 72-73) 0 0 0 0 is treated as negative expenditure by the previous owner Real estate services; and rental and leasing services (72-73) 22 0 0 22 and positive use by the new owner (including households in Business and production services (8) 1 0 0 1 the rest of the world). The way in which the income Community and social services (92-93) 0 0 0 0 element of donations to other units is handled is via Other services (94-99) 0 0 0 0 transfers, as explained in chapter 8 but for a supply and use Public administration (91) 0 0 0 0 table this aspect is not relevant since it is only the physical Total 376 28 10 414 disposition of the product that is recorded. 4. Exports Changes in inventories 14.114 The allocation of exports by product requires the same 14.110 While allocating fixed capital formation to product type is conversion between SITC or HS codes as the allocation of relatively straightforward, allocating changes in inventories imports does. The valuation of exports is easier, though, to product type is challenging. Chapter 10 explains how the since in trade statistics exports are uniformly valued FOB. types of inventories identified in the SNA are materials and This valuation may not be in perfect accord with the supplies, work-in-progress, finished goods, and goods for recording in the SNA since the point of valuation is at the resale. Work-in-progress and finished goods are border, not necessarily where change of ownership takes straightforward to allocate since the products concerned place. As with the valuation of imports, ideally exports must be those that the unit reporting the inventories should be valued when and where they change ownership produces. Materials and supplies are more complex. Some from a resident unit to a non-resident unit but, again as with will be specific to the producing unit reporting them but imports, the assumption that this change of ownership takes virtually all producing units will hold some office supplies place at the national border may be the only practical and cleaning materials, for example, though maybe not to a assumption given existing data sources. significant degree. For goods for resale, however, practically all types of goods may be included in inventories. Not only is the range of goods extensive, the 5. Introducing value added pattern of goods held for resale is subject to a high degree of variation over time and even within an accounting 14.115 The sum across the rows of the use table, encompassing period. intermediate consumption, final consumption, capital formation and exports, for each product type must be equal 14.111 In the exercise of balancing a supply and use table, this to the sum across the rows of the supply table (domestic uncertainty over the composition of inventories, added to production plus imports plus valuation adjustments to make 283 System of National Accounts the valuation in the supply table consistent with that in the 14.119 More generally it should be noted that once the supply and use table) for the same product type. The sum down each use tables are balanced, any increase in final use for a column of the supply table shows the value of output for particular good must be met from increased total supply or the relevant type of producing unit. The sum down the decreased intermediate consumption for the same good. If column of the use table for the same type of producing unit the increased supply comes from domestic production, then shows the amount of intermediate consumption of that type value added increases in line with the increases in final use; of producing unit. It is an obvious extension, therefore, to if the increased supply comes from increased imports, then add two further lines to the use table for the column both value added and GDP are unaffected (or only corresponding to producing units. The second of these marginally if there are import taxes on the good in contains the values of output from the supply table, the first question). Similarly, any increase in intermediate contains the difference between this total and the value of consumption without an increase in domestic output must intermediate consumption just described and so represents lead to a decrease in final use and also a decrease in value value added for that type of producing unit. added. 14.116 Introducing the entries for value added and output is key to Table 14.9:The value added part of a use table one of the main purposes of the supply and use tables, that Production of using the structure to ensure the accounts are internally Market for own final Non-market production use production Total consistent. Returning to some of the examples quoted in the Intermediate consumption 1 594 50 239 1 883 introductory section illustrates this point. Total gross value added/GDP 1 483 97 141 1 721 Compensation of employees 1 041 0 109 1 150 14.117 Suppose the data from a household survey for cigarette Taxes less subsidies on consumption is assumed to be accurate and suppose for production and imports 56 0 2 58 simplicity there are no exports of cigarettes. This figure Mixed income, gross 46 15 0 61 Operating surplus, gross 340 82 30 452 then virtually determines the total use of tobacco products Consumption of fixed capital - and subtracting imports of cigarettes gives a figure for the mixed income 5 3 8 output of the domestic cigarette factories. This may be Consumption of fixed capital - much lower than the amounts reported by the cigarette other 168 16 30 214 manufacturers and the compiler may be inclined to think Total output 3 077 147 380 3 604 the output of cigarette manufacturers is overstated. However, the main intermediate input to cigarette manufacture will be tobacco and there will be other figures 6. Expanding value added for either production or imports of tobacco. Given there are few uses for tobacco other than input into tobacco products 14.120 Useful as it is to add value added to the bottom of the use and exports, if the supply and use table compiler wishes to table, it is possible and even more helpful to disaggregate adhere to the household expenditure survey data, he is value added and show all the entries in the generation of faced with assuming either that there are errors of income account (described in chapter 7). Table 14.9 shows overstatement of cigarette manufacture, tobacco production the entries for each type of production in rows 14 and 17 to or imports or the household figures for tobacco 25 of the use part of table 14.12. consumption are understated. 7. Adding other variables 14.118 Consider the case of taxi services in a country where communal taxis are the main form of personal transport. As 14.121 As well as the entries for the generation of income account, well as the value of taxi services reported by the taxi it is possible to add memorandum items relating to other drivers, there may well be information about the number of variables that are useful in a study of production at the cars and amount of petrol or diesel claimed as tax establishment level. These are gross fixed capital formation deductions because they are used for taxi services. A by establishment and the number of employees. As judgement can be made about whether these inputs are discussed in chapter 19, it is preferable to show more consistent with the figure from the household employment on a full time equivalent basis if this is expenditure survey than with the reported output figures. available. D. Further elaboration of the use table 1. Cross-classification by industry and allocated either to general government or NPISHs. Other institutional sectors columns are mainly allocated to non-financial corporations but with those parts that represent unincorporated enterprises being allocated to households. Such a table 14.122 It is possible to take each column of the use table relating to provides the link between the supply and use tables and the production units and allocate all the entries to one of the sequence of accounts since the totals by institutional sector institutional sectors of the economy. The column for ISIC correspond to the data in the production and generation of class K (finance and insurance) is allocated to financial corporations. The columns for non-market output are 284 The supply and use tables and goods and services account income accounts. Further discussion of this presentation 14.127 As long as the use table is shown at purchasers' prices, and a numerical example is given in chapter 28. there is no separate use of the trade margins provided by wholesalers and retailers. Table 14.4 shows that the 2. A use table at basic prices additions to the values of various goods are exactly offset by negative entries for the supply of trade margins so that in effect there is no remaining supply to be explained in the 14.123 So far in this chapter, it has been assumed that both the use table. supply and use tables have been expressed in purchasers' prices and this is done by adding to supply valuation terms 14.128 As explained in chapters 3 and 6, the activity of wholesale that explain the differences between basic prices and and retail trade is one where the SNA imposes a purchasers' prices. It is also possible to bring the two tables partitioning of transactions. Considering the supply and use to a common valuation basis by reducing the use table to tables explains why this is desirable. Suppose all goods basic prices, which is the subject of this section. One reason handled by wholesalers and retailers were shown as being to undertake this more arduous task is to facilitate delivered to the wholesaler or retailer and then supplied by compiling a supply and use table in volume terms, as them to the purchaser. The rows for goods in the supply and described below. use tables would then be rather uninteresting. Virtually all goods would be used by wholesalers and retailers and 14.124 In looking at any element of the use table at purchasers' almost none would be supplied to other producing units, prices it is clear that it may be made up of as many as six households or government. The pattern of household components: consumption would show one large item for purchases from wholesalers and retailers and none from any a. domestic production at basic prices, manufacturing industry or agriculture. Even with grocers distinguished from furniture stores, it would no longer be possible to see exactly what types of food were being b. imports, purchased and whether it was wooden or metal furniture being sold. c. trade margins, 14.129 The standard treatment in a supply and use table, therefore, d. transport margins, follows the rules for partitioning transactions adopted for measuring the output of the wholesale and retail activity. Each acquisition of a product from a wholesaler or retailer e. taxes on products, is regarded as being the acquisition of two distinct products. One is the physical good, valued at producers' f. subsidies on products. prices, the other is the trade margin. The purchase of the good is shown as a use of that good; the margin is shown as 14.125 In order to reduce the use table to basic prices, each a use of services provided by wholesalers and retailers. As element of the table must be decomposed into these six noted, though, portraying the activity of wholesalers and items. This can be seen as creating six similarly sized retailers in this way in a supply and use table is resource tables, each of which contains all the items for one of the intensive since it is often the case that different components. This is much more resource intensive than proportionate margins are charged to different types of bringing the supply table up to purchasers' prices where purchasers, for example households paying higher margins only six columns are needed, one for each of the six than enterprises. Indeed, even within households the components. margin on the same good in the same outlet may differ with larger quantities having a smaller proportionate margin than smaller quantities. The compiler has thus to apply a Trade margins considerable amount of specialized knowledge and judgement to make this partition and make it at the detailed 14.126 Margin services are an important kind of activity in the product level. SNA. Many goods pass from the producer to the purchaser by means of a wholesaler or retailer. Indeed, some goods Transport margins may pass through the hands of several wholesalers on the way to the retailer. Many services, on the other hand, are 14.130 As explained in reviewing the difference between supplied directly by the producer to the purchaser. This is purchasers', producers' and basic prices, transport margins by no means universal, though. Travel agents and offices only occur when transport services are separately invoiced. offering tickets for sports and entertainment events are If they are separately invoiced, then no partitioning is examples of a kind of "retailing" for services. In addition, necessary because the transport service is already treated as many financial instruments are offered for sale (and are a separate product. The compiler's task is demanding repurchased) with a spread between the buying and selling because, for instance, suppliers may sometimes offer free price. The most obvious example is perhaps foreign transport for purchases over a certain value and charge for exchange. These spreads also represent a margin service smaller deliveries. supplied to the customer. In the case of services, though, the margin is treated as one of the products of the relevant service industries. In the case of goods, a separate type of Taxes on products activity, wholesale and retail services, covers the margins on all goods Many of these are the output of wholesaler and 14.131 The fact that VAT on the same product may be deductible retail traders but some are provided as secondary activity. for some users (typically producing units) and not 285 System of National Accounts deductible for others (households) is one reason why a Table 14.10:The imports content of the use matrix supply and use table at purchasers' prices may be difficult to interpret. The apparent share of total use by households Intermediate Final Capital Total will be inflated by the element of non-deductible tax as consumption consumption formation imports compared with the proportion of use by producing units. After removing trade and transport margins from Agriculture, forestry and fishery products purchasers' prices estimates, the next step is therefore to (0) 27 10 0 37 remove non-deductible VAT. Removing non-deductible Ores and minerals; electricity, gas and water (1) 61 0 0 61 VAT is reasonably straightforward for final users but may Manufacturing (2-4) 100 100 84 284 be more complicated for intermediate consumption where Construction (5) 0 0 0 0 most, but not all, VAT may be deductible. Once non- transport services (6) 37 25 0 62 deductible VAT is subtracted, the entries in the use table Finance and Insurance (7 less 72-73) 17 0 0 17 are valued at producers' prices. Real estate services; and rental and leasing services (72-73) 0 0 0 0 Business and production services (8) 0 5 5 Community and social services (92-93) 0 0 0 0 14.132 For some countries it may not be possible to go beyond this Other services (94-99) 0 0 0 0 but if possible removing other taxes on products as well is Public administration (91) 0 0 0 0 desirable, leaving the entries in the use table at basic prices. CIF/FOB adjustment -5 -3 -2 -10 When this is done, it is necessary to introduce a new row Direct purchases abroad by residents 43 43 into the use table. This is a row that shows the taxes on Total imports 237 180 82 499 products payable by the producing unit concerned. This row is part of the cost of intermediate consumption at 3. Expressing the use table in volume terms purchaser's prices in the same way as the entries for trade and transport margins are. It will include some taxes on 14.136 The supply and use framework not only constrains the imports when imports that are part of intermediate current value estimates of supply and use to balance consumption are subject to taxes on entry to the economy. exactly, it also provides a way to ensure that the This row of taxes within the intermediate consumption part corresponding volume estimates, expressed in the prices of of the use table should not be confused with the row that another year, are in balance and that the series of prices may appear in the value added part of the use table when implied by the existence of one table in current prices and output is valued at producers' prices. That row shows the one in volume terms are strictly consistent. In general, the amount of taxes on products payable on the products best way to ensure mutual consistency is to prepare the supplied by the unit, not the taxes on products payable by supply and use tables in current values and in volume terms the unit on products used by them. at the same time. 14.137 In most countries there are sets of price indices available Subsidies on products for consumer prices, producer prices and import and export prices. Separate international manuals on the methodology and compilation of these exist. The general question of the 14.133 If it is possible to remove taxes on products from the entries development and use of appropriate prices to deflate in the use table, then subsidies on products must be added national accounts is the subject of chapter 15. What back also. There is no counterpart to VAT within subsidies follows, therefore, anticipates that general discussion but is so the elimination of subsidies matches the elimination of provided here to complete the discussion on supply and use taxes on products other than VAT. tables. The section illustrates the problems that need to be addressed in expressing a supply and use table in volume terms rather than giving detailed compilation advice. For Separating imports from domestic production that, reference should be made to the price manuals and to documents dedicated to the compilation of supply and use tables and input-output tables such as the Eurostat Manual 14.134 A further refinement of the use table in basic prices is to of Supply, Use and Input-Output Tables (Eurostat, 2008). separate imports from domestic production. In some cases, if the only source of a product is from the rest of the world, or if none of the product is imported, there is no problem in Deflating which tables? making the separation. When products are available from both domestic and foreign sources, making the separation is 14.138 The first decision to be made in compiling supply and use difficult. One solution may be to work at a more tables in volume terms is whether to work with tables in disaggregated level if that helps identify products that are basic prices or in purchasers' prices. There are arguments always or never imported, but in general making the for and against each choice. separation is a process involving considerable expert knowledge and informed judgement. 14.139 When working with a basic price table, all the elements relating to trade and transport margins and to taxes less subsidies on products will have been separated from the 14.135 Table 14.15 shows the import content of table 14.12. Table value of goods and services at basic prices. Confusingly, 14.10 shows columns 24, 29 and 35 indicating the amount the prices known as producer price indices (PPIs) of imports going to each of intermediate consumption, final correspond not to the concept of producer prices in the consumption and capital formation. SNA but to basic prices. They exclude both trade and 286 The supply and use tables and goods and services account transport margins and the effect of taxes less subsidies on may exclude some categories of expenditure. The CPIs are products. PPIs therefore seem well suited to deflating the likely to have been derived from a household survey. rows of a basic price supply and use table on the grounds Household surveys often exclude the richest and poorest that the entries along a row of the use table are more households, so the coverage is less comprehensive than the homogeneous than in the case of a purchasers' price table. household consumption figures in the supply and use However, the claim that the resulting entries are tables. As explained above, the act of balancing the table sufficiently homogeneous to justify using a single price may cause some elements from the household survey to be index for each of them must be qualified. In addition, the amended. In the case of tobacco products, for instance, in elements referring to margins and taxes must be deflated principle similar adjustments to the CPI weights should separately and this raises conceptual and practical issues also have been made but in some other cases matching also. adjustments to the CPI weights may not have been made. 14.140 When working with purchasers' prices, greater use is made Imports and exports of CPIs and fewer problems arise about the treatment of margins and taxes. However, although CPIs are generally 14.146 Import price indices can be problematical. Many countries held to be robust, their underlying assumptions might not rely on unit value indices that do not take quality change always be entirely compatible with those in the supply and into account adequately. Even when true import price use tables. indices are available, there is the problem of matching the degree of detail in the price indices with that of the 14.141 Whether a purchasers' price table or a basic price table is products in the supply and use tables. Further, as mentioned being deflated, there are likely to be problems in deflating in describing the correct valuation of imports, import price exports and imports. indices inevitably make different assumptions about how trade and transport margins are paid for than may be the Homogeneity case for individual purchasers. This can be seen clearly in the case of export prices. The difference between export prices and PPIs for an identical product is due to the 14.142 The justification for using PPIs to deflate the rows of a assumption that export prices are valued at the border of the supply and use table is that the elements of the rows are economy whereas PPIs are valued as the goods leave the sufficiently homogeneous to use a single price throughput factory. the row. There are two reasons why this may not be so. Trade and transport margins 14.143 The elements of the rows at purchasers' prices are certainly not homogeneous as they include trade and transport margins on the one hand and taxes less subsidies on the 14.147 Trade and transport margins also need to be expressed in other. As noted, these may not fall on the same product in volume terms. If the margin is the same proportion of the the same proportion for different users. Eliminating these purchaser's price in the current year as in the base year, entries should reduce this cause of non-homogeneity but then the volume measure of the margin is simply that there will inevitably be a degree of approximation involved proportion of the volume of the expenditure in question; in the exercise so some residual non-homogeneity from this volume measure and price move in line with the product to cause will persist. which the margin applies. Often the rate of the margin will change between the base year and the current period either because of a difference in the rates of margins charged or 14.144 The other cause of non-homogeneity is due to aggregation. because of a change in the mix of products in a group. Even with a very large number of products distinguished in Further discussion of the way to derive estimates of the supply and use tables, there is still a considerable margins in volume terms may be found in the manuals on degree of aggregation in each row. Even if screws were CPIs and PPIs. separated from other metal products, the price of screws varies according to the length, diameter, type of head and material they are intended to be used in. It is obviously Taxes less subsidies on products impracticable to introduce a degree of disaggregation that would identify each of these types of screw separately and 14.148 Different approaches to expressing taxes less subsidies in the thought of identifying screws separately from nails and volume terms are required depending on the way in which other metal construction materials is already implausible. the tax is levied. The problem of non-homogeneity is thus inevitable but may be reduced by considering the level of detail available 14.149 If a tax is calculated as a percentage of the value of an item in PPIs when determining the type of products to be (an ad valorem tax) such as VAT, the volume measure is identified in the supply and use tables. calculated in the same manner as that described for trade and transport margins. The applicability of CPIs 14.150 Some taxes are levied according to the quantity of the item 14.145 Consumer price indices (CPIs) are applicable for deflating purchased. These are called specific taxes and excise duties household consumption at purchasers' prices but at a typically are levied this way. For these taxes, the volume disaggregated level. The weights used to compile CPIs are effect is strictly limited to changes in the quantity of the usually not entirely consistent with the weights implicit in item purchased; any change in the rate of the specific tax is the column of expenditures for household consumption. a price increase. The price increase of a specific tax may This is because the weights may relate to another year and change in line with the general level of inflation but quite 287 System of National Accounts often it will move quite differently, for example if value added for each type of producing unit as a residual. It government wants to discourage spending on the item in is this residual that is described as being "in real terms". It question such as tobacco or alcohol. is also possible to derive an implied deflator for value added by dividing the current value by the value in real 14.151 Changes in tax regimes mean that from one year to the next terms. the range of taxes levied changes with one disappearing and another replacing it. Volume series imply using not just the 14.155 Many analysts are interested in pursuing the question of prices of the base year but also the tax structure. Thus deflating value added more explicitly. Calculating volume series for an item may include a tax element that compensation of employees in volume terms is possible if does not exist in the current values of the item and the tax enough information is available on wage rates and numbers element in the current value may not affect the volume employed by category of worker. Allowance must be made series. In such a case a purchaser's price index is still valid for changes in non-wage compensation and changes but the concept of a "tax price index" is meaningless. between full-time and part-time staff but there are few conceptual problems in deflating compensation. 14.152 Subsidies on products are less common than taxes but if they exist, volume measures should be calculated using the same principles. 14.156 In order to deflate taxes less subsidies on production, it is necessary to consider the basis on which the tax is levied. Value added In most cases, taxes on production relate to the numbers of some or all employees or the capital used in production. As with taxes on products, there may be both a price element 14.153 In the SNA, balancing items such as value added are and a quantity element involved in calculating changes in regarded as not having price and volume dimensions. the volume measure. Nevertheless, it is possible to express them "in real terms" by using the balancing item approach to derive a figure from the volume estimates of the other items in the account. 14.157 Deriving figures for operating surplus and mixed income in real terms is possible by subtracting compensation of 14.154 Given the existence of PPIs for the rows of the use table, employees and taxes less subsidies on production in these can be applied to the rows of the supply table also and volume terms from value added in real terms. However, the the column sums then give a figure for output in volume advocates of the capital services approach to measuring terms. Deducting the figures for intermediate consumption operating surplus suggest a more direct means of deriving in volume terms derived from the deflation exercise for the operating surplus in real terms. This approach is not a product rows in the use table permits the calculation of standard part of the SNA but is described in chapter 20. E. Numerical example 1. The full supply and use table 14.160 Below the product part of the use table is the value added part. In the columns for taxes and subsidies, information on taxes and subsidies on production is shown. Details of the 14.158 Table 14.12 shows a full supply and use table. The topmost generation of income account for each of the types of part consists of the supply table. The first column shows producing unit are shown under their use of products as total supply at purchasers' prices. This is followed by intermediate consumption. These entries correspond to the information first on trade and transport margins, as in table summary information in table 14.9. Information on capital 14.2, and then on taxes and subsidies on products, as in formation by type of producing unit and employment are table 14.5. Deducting the elements in all these columns also shown. There are no entries under the columns for from the corresponding elements in the column for total exports, final consumption or capital formation. supply at purchasers' prices gives the next column, which is total supply at basic prices. This is followed by the largest part of the table, the supply of products by type of 2. Margins and taxes domestic producing units. This is an expanded form of table 14.1. At the extreme right of the supply table is the 14.161 Within table 14.12, row 3 shows that the value of information on imports, corresponding to table 14.4. manufactured products at basic prices is 1 998. To this value, subsidies of 5 are deducted, taxes of 94 and trade and 14.159 The middle part of table 14.12 is the product part of the use transport margins of 74 are added to give a value at table. The first column is total supply at purchasers' prices purchasers' prices of 2 161. Within the use part of table and corresponds exactly to the column above in the supply 14.12, the whole of the value of 2 161 is accounted for. table. The next three columns are blank in the use table. This means that the margins of 74 are accounted for in this Then the detailed information on use of products by type of way and not as demand on the trade and transport industry producing unit is shown. This is the expanded version of directly. In row 5 of the supply part of the table, therefore, table 14.6. The column for exports and columns for final these margins are shown as offsetting supply of trade and consumption and capital formation follow. These transport services (along with margins of 2 apply to each of correspond to tables 14.7 and 14.8. agricultural products and ores and minerals) so the total of 288 The supply and use tables and goods and services account trade and transport margins at purchasers' prices shown in 3. A use table at basic prices column 1 is less than the total at basic prices shown in column 5. 14.164 Table 14.14 is the use table expressed in basic prices. It is derived by deducting all the relevant elements of table 14.13 from the corresponding elements of table 14.12. For 14.162 The right-most part of the supply table shows the way the reasons of compactness, it is presented in the abbreviated margins on imports are handled. It is assumed that imports form with no distinction between market production, of goods are only available on a CIF basis. Within the production for own final use and non-market production balance of payments figures for imports of services, but the column numbering corresponds to the full version however, the figures of 6 and 4 will be included in the for ease of reference. imports of services of these products. Thus column 26 shows the necessary adjustments. The negative entries of 6 4. The imports matrix and 4 are offset within the column by an adjustment item of 10 in a special row for the CIF/FOB adjustment. This in 14.165 As well as removing the margin and tax elements from turn is offset by a negative entry in the same row within the table 14.12, it is possible to also identify and remove that column for the import of goods (column 27). part of each element that represents supply from imports rather than from domestic production. In order to do this, a 14.163 Instead of handling margins in this way, it is possible to matrix similar to tables 14.1 and 14.14 must be compiled including imports only. Table 14.15 is such a table. This reduce a supply and use table at purchasers' prices to basic may then be deducted, element by element from table 14.14 prices by removing the margins and taxes from the to deduce a matrix showing the use of domestic production purchasers' price estimates of all use elements. As at basic prices only. (The imports matrix excludes margins explained in the last part of section D, this is often done as a and taxes applying to imports so must be deducted from the basis for deflation of the table to volume terms. Table 14.13 basic price table and not the purchasers' prices one.) shows the elements of trade and transport margins, taxes on products and subsidies on products included in table 14.12. 14.166 Although a complete table showing domestic use only is This table does not distinguish all the columns for each not presented, table 14.11 shows in summary form how the type of production but for ease of reference the column total value of supply at purchasers' prices is built up from numbers in table 14.13 (and indeed for tables 14.14 and domestic supply, imports, trade and transport margins, 14.15) correspond exactly to those used in table 14.12. subsidies on products and taxes on products. Table 14.11: Breakdown of use by producing units into the five elements making up purchasers' price valuation Trade and Domestic transport Subsidies Taxes on production Imports margins on products products Total 1 Agriculture, forestry and fishery products (0) 59 27 1 0 0 87 2 Ores and minerals; electricity, gas and water (1) 148 61 2 0 4 215 3 Manufacturing (2-4) 788 100 35 0 32 955 4 Construction (5) 40 0 0 0 0 40 5 Trade, accommodation, food & beverages; transport services (6) 117 37 0 0 3 157 6 Finance and Insurance (7 less 72-73) 87 17 0 0 0 104 7 Real estate services; and rental and leasing services (72-73) 57 0 0 0 0 57 8 Business and production services (8) 213 0 0 0 9 222 9 Community and social services (92-93) 34 0 0 0 0 34 10 Other services (94-99) 10 0 0 0 0 10 11 Public administration (91) 2 0 2 Total 1 555 242 38 0 48 1 883 289 System of National Accounts Table 14.12:Supply and use tables at purchasers' prices Output by industries (by ISIC Categories) Total supply at purchasers' prices Market Trade and transport margins Total supply (basic prices) accommodation and food Subsidies on products (-) Education, human health Manufacturing and other Agriculture, forestry and Finance and insurance Real estate activities Taxes on products Business services Trade, transport, Sub-total market Information and and social work communication Other services Construction industry fishing Supply of products R-T and (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q) U (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) Products (by CPC sections) 1 Agriculture, forestry and fishery products (0) 128 2 5 -3 124 78 0 0 0 0 0 0 0 0 0 78 2 Ores and minerals; electricity, gas and water (1) 263 2 5 0 256 0 195 0 0 0 0 0 0 0 0 195 3 Manufacturing (2-4) 2 161 74 94 -5 1 998 0 1 650 6 24 18 0 0 9 0 0 1 707 4 Construction (5) 261 0 17 0 244 0 7 201 3 2 0 0 0 0 0 213 Trade, accommodation, food & beverages; transport 5 services (6) 216 - 78 5 0 289 0 6 1 226 0 0 0 0 0 0 233 6 Finance and Insurance (7 less 72-73) 159 0 0 0 159 0 0 0 0 0 146 0 0 0 0 146 Real estate services; and rental and leasing 7 services (72-73) 195 0 0 0 195 0 2 0 4 0 0 94 0 0 0 100 8 Business and production services (8) 272 0 11 0 261 0 1 0 3 80 0 0 172 0 0 256 9 Community and social services (92-93) 275 0 0 0 275 0 0 0 0 0 0 0 0 63 0 63 10 Other services (94-99) 95 0 4 0 91 0 0 0 2 0 0 0 2 82 86 11 Public administration (91) 91 91 12 CIF/FOB adjustment on imports 0 0 13 Direct purchases abroad by residents 43 43 14 Total 4 159 0 141 -8 4 026 78 1 861 208 262 100 146 94 183 63 82 3 077 Intermediate consumption of industries (by ISIC categories) Total supply at purchasers' prices Market accommodation and food Education, human health Manufacturing and other Agriculture, forestry and Finance and insurance Subsidies on products Real estate activities Taxes on products Business services Trade, transport, Sub-total market Information and and social work communication Other services Construction industry fishing Use of products R-T and (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q) U (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) Products (by CPC section) Total uses 1 Agriculture, forestry and fishery products (0) 128 2 71 0 3 1 2 1 2 0 0 82 2 Ores and minerals; electricity, gas and water (1) 263 3 190 1 6 3 2 1 2 0 0 208 3 Manufacturing (2-4) 2 161 27 675 63 44 16 16 9 19 4 5 878 4 Construction (5) 261 1 9 5 3 1 1 1 1 0 0 22 Trade, accommodation, food & beverages; transport 5 services (6) 216 3 65 3 25 4 4 2 4 0 0 110 6 Finance and Insurance (7 less 72-73) 159 1 36 5 18 1 3 3 7 1 1 76 Real estate services; and rental and leasing 7 services (72-73) 195 1 15 1 8 2 5 2 4 0 1 39 8 Business and production services (8) 272 2 70 12 15 10 18 9 19 7 9 171 9 Community and social services (92-93) 275 0 1 0 0 0 0 1 0 0 2 10 Other services (94-99) 95 1 1 0 1 1 1 0 1 0 0 6 11 Public administration (91) 168 0 0 0 0 0 0 0 0 0 0 0 12 Direct purchases abroad by residents 43 0 13 Domestic purchases by non-residents 0 0 14 Total 4 236 41 1 133 90 123 39 52 28 60 12 16 1 594 15 Total gross value added/GDP 141 -8 37 728 118 139 61 94 66 123 51 66 1 483 16 Compensation of employees 19 547 79 102 32 44 49 79 43 47 1 041 17 Taxes less subsidies on production and imports 141 -8 -2 43 5 -5 -1 4 6 4 1 1 56 18 Mixed income, gross 4 30 3 9 0 0 0 0 0 0 46 19 Operating surplus, gross 16 108 31 33 30 46 11 40 7 18 340 20 Consumption of fixed capital -mixed income 1 3 0 1 0 0 0 0 0 0 5 21 Consumption of fixed capital - other 8 80 11 30 7 12 5 12 1 2 168 22 Total output 78 1 861 208 262 100 146 94 183 63 82 3 077 23 Labour inputs (hours worked) 1 840 31 962 4 244 8 786 1 332 1 290 920 1 562 494 642 53 072 24 Gross fixed capital formation 10 122 8 49 14 7 5 7 1 2 225 25 Closing stocks of fixed assets 142 1 861 143 731 208 143 102 147 22 29 3 528 290 The supply and use tables and goods and services account Table 14.12 (cont):Supply and use tables at purchasers' prices Own final use Non-market Imports Education, human health CIF/FOB adjustments on Agriculture, forestry and Real estate and private Sub-total own final use Sub-total non-market Public Administration household services and social services Total economy Total industry Construction Services imports fishing Goods (A) (F) (L+T) (P-Q) (O) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) 1 9 0 0 9 0 0 0 87 37 2 0 0 0 0 0 0 0 195 61 3 2 5 0 7 0 0 0 1 714 284 4 0 31 0 31 0 0 0 244 5 0 0 0 0 0 0 0 233 -6 62 6 0 0 0 0 0 0 0 146 -4 17 7 0 0 95 95 0 0 0 195 8 0 0 0 0 0 0 0 256 5 9 0 0 0 0 212 0 212 275 0 10 0 0 5 5 0 0 0 91 0 11 168 168 168 12 10 - 10 13 20 23 14 11 36 100 147 212 168 380 3 604 0 392 107 Intermediate consumption of industries (by ISIC categories) Final consumption expenditure Gross capital formation Own final use Non-market Sub-total final consumption Exports General government Acquisition less disposals Education, human health Agriculture, forestry and Real estate and private Changes in inventories Sub-total own final use Sub-total gross capital Sub-total non-market Public Administration household services and social services Gross fixed capital Total economy Total industry Construction of valuables Households expenditure Collective formation formation Individual Sub-total Services NPISHs fishing Goods (A) (F) (L) (P-Q) (O) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) 1 1 0 0 1 3 2 5 88 7 0 30 28 0 2 0 2 3 2 1 2 0 0 0 0 5 4 9 217 7 0 40 40 0 0 0 0 -1 0 -1 3 5 17 10 32 42 38 80 990 422 0 573 570 0 3 0 3 176 161 5 10 4 0 0 0 0 11 7 18 40 6 0 2 2 0 0 0 0 213 190 23 5 0 0 0 0 4 5 9 119 0 55 42 42 0 0 0 0 6 0 2 3 5 6 17 23 104 0 2 53 53 0 0 0 0 7 0 0 0 0 8 10 18 57 0 1 115 115 0 0 0 0 22 22 0 8 0 5 7 12 15 24 39 222 0 9 40 40 0 0 0 0 1 1 0 9 0 0 0 0 24 8 32 34 0 2 239 21 14 204 0 204 10 0 0 0 0 2 2 4 10 0 0 85 85 0 0 0 0 11 0 0 0 0 1 1 2 2 0 166 5 2 159 156 3 12 43 43 13 20 9 - 29 - 29 14 6 24 20 50 121 118 239 1 883 462 78 1 399 1 015 16 368 156 212 414 376 28 10 15 5 12 80 97 91 50 141 1 721 1 854 16 0 0 0 70 39 109 1 150 1 150 17 0 0 0 0 1 1 2 58 191 18 3 12 0 15 61 61 19 2 0 80 82 20 10 30 452 452 20 3 0 0 3 8 8 21 1 0 15 16 20 10 30 214 214 22 11 36 100 147 212 168 380 3 604 23 218 780 0 998 7 299 8 000 15 299 69 369 24 1 1 124 126 13 12 25 376 25 17 17 1 851 1 885 201 169 370 5 783 291 292 ` Intermediate consumption of industries (by ISIC categories) Market Own final use Non-market Exports Final consumption expenditure Gross capital formation System of National Accounts General government Uses of products Total uses Agriculture, hunting, forestry, fishing Manufacturing, and other industry Construction Trade, transport, accommodation and food Information and communication Finance and insurance Real estate activities Business services Education, human health and social work Other services Sub-total market Agriculture, hunting, forestry, fishing Construction Real estate, household services Sub-total own final use Education, health, social services Public administration, defence, social security, other public services Sub-total non-market Total industry Sub-total Gross fixed capital formation Changes in inventories Acquisition less disposals of valuables Goods Services Sub-total Households NPISHs Sub-total Collective Individual (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q)R-T and U) (A) (F) (L+T) (P-Q) (O) (1) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) Products (by CPC sections) Total uses 1 Agriculture, forestry and fishery products (0) Trade and transport margins 2 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 0 0 1 1 0 0 0 0 0 0 0 Taxes on products 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 0 0 0 0 0 0 Subsidies on products -3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -3 -3 0 0 0 0 0 0 0 2 Ores and minerals; electricity, gas and water (1) Trade and transport margins 2 0 2 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 Taxes on products 5 0 4 0 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4 0 0 1 1 0 0 0 0 0 0 0 3 Manufacturing (2-4) Trade and transport margins 74 1 25 3 2 0 0 0 0 0 0 31 0 0 0 0 0 4 4 35 16 0 20 20 0 0 0 0 3 3 0 0 Taxes on products 94 1 26 4 0 0 0 0 0 0 0 31 0 0 0 0 0 1 1 32 10 0 48 48 0 0 0 0 4 4 0 0 Subsidies on products -5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -5 -5 0 0 0 0 0 0 0 0 4 Construction (5) Taxes on products 17 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 17 17 0 0 final use of products Trade, accommodation, food & beverages; 5 transport services (6) Taxes on products 5 0 2 0 1 0 0 0 0 0 0 3 0 0 0 0 0 0 0 3 0 0 2 2 0 0 0 0 0 0 0 0 6 Finance and Insurance (7 less 72-73) Taxes on products 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Real estate services; and rental and leasing 7 services (72-73) Taxes on products 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 Business and production services (8) Taxes on products 11 0 3 1 1 0 1 1 0 0 0 7 0 0 0 0 1 1 2 9 0 0 2 2 0 0 0 0 0 0 0 0 9 Community and social services (92-93) Taxes on products 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 Other services (94-99) Taxes on products 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 4 0 0 0 0 0 0 0 0 11 Public administration (91) Taxes on products 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total trade and transport margins 78 1 28 3 2 0 0 0 0 0 0 34 0 0 0 0 0 4 4 38 16 0 21 21 0 0 0 0 3 3 0 0 Total taxes on products 141 1 35 5 2 0 1 1 0 0 0 45 0 0 0 0 1 2 3 48 10 0 62 62 0 0 0 0 21 21 0 0 Total subsidies on products -8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -8 -8 0 0 0 0 0 0 0 0 Table 14.13:Supply and use table: trade and transport margins, taxes and subsidies on intermediate and Final consumption expenditure Intermediate consumption of industries (by ISIC categories) Exports General government Gross capital formation Use of products Total uses at basic prices Taxes less subsidies on products Agriculture, forestry and fishing Manufacturing and other industry Construction Trade, transport, accommodation and food Information and communication Finance and insurance Real estate activities Business services Education, human health and social work Other services Public administration Total industry Total economy Goods Services Sub-total final consumption expenditure Households NPISHs Sub-total Collective Individual Sub-total gross capital formation Gross fixed capital formation Changes in inventories Acquisition less disposals of valuables (R-T) + (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q) U (O) (1) (3)-(4) (6)+(17) (7) (8)+(18) (9) (10) (11) (12) (13) (14)+(21) (15) (22) (24) (25) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) Products (by CPC section) Total uses Agriculture, forestry and fishery products 1 (0) 124 3 70 0 3 1 2 1 2 3 0 2 87 7 0 27 25 0 2 0 2 3 2 1 Ores and minerals; electricity, gas and 2 water (1) 256 3 184 1 6 3 2 1 2 5 0 4 211 7 0 39 39 0 0 0 0 -1 0 -1 3 Manufacturing (2-4) 1 998 30 624 73 42 16 16 19 19 46 5 33 923 396 0 510 507 0 3 0 3 169 154 5 10 4 Construction (5) 244 1 9 5 3 1 1 1 1 11 0 7 40 6 0 2 2 0 0 0 0 196 173 23 Trade, accommodation, food & 5 beverages; transport services (6) 289 4 91 6 26 4 4 2 4 4 0 9 154 16 55 61 61 0 0 0 0 3 3 0 6 Finance and Insurance (7 less 72-73) 159 1 36 7 18 1 3 6 7 7 1 17 104 0 2 53 53 0 0 0 0 0 0 0 Real estate services; and rental and 7 leasing services (72-73) 195 1 15 1 8 2 5 2 4 8 1 10 57 0 1 115 115 0 0 0 0 22 22 0 8 Business and production services (8) 261 2 67 16 14 10 17 15 19 21 9 23 213 0 9 38 38 0 0 0 0 1 1 0 9 Community and social services (92-93) 275 0 1 0 0 0 0 0 1 24 0 8 34 0 2 239 21 14 204 0 204 0 0 0 10 Other services (94-99) 91 1 1 0 1 1 1 0 1 2 0 2 10 0 0 81 81 0 0 0 0 0 0 0 11 Public administration (91) 168 0 0 0 0 0 0 0 0 1 0 1 2 0 0 166 5 2 159 156 3 0 0 0 12 Domestic purchases by non­residents 0 0 0 0 0 20 9 - 29 - 29 13 Direct purchases abroad by residents 43 0 0 0 0 0 43 43 Total uses at basic prices 4 060 46 1 098 109 121 39 51 47 60 132 16 116 1 835 452 78 1 302 918 16 368 156 212 393 355 28 Taxes less subsidies on products 133 1 35 5 2 0 1 1 0 1 0 2 48 10 0 54 54 0 0 0 0 21 21 0 14 Total uses in purchasers' prices 4 193 47 1 133 114 123 39 52 48 60 133 16 118 1 883 462 78 1 400 1 016 16 368 156 212 414 376 28 10 15 Total gross value added/GDP 133 42 728 130 139 61 94 146 123 142 66 50 1 721 1 854 16 Compensation of employees 19 547 79 102 32 44 49 79 113 47 39 1 150 1 150 Taxes less subsidies on production and 17 imports 133 -2 43 5 -5 -1 4 6 4 2 1 1 58 191 18 Mixed income, gross 7 30 15 9 0 0 0 0 0 0 0 61 61 19 Operating surplus, gross 18 108 31 33 30 46 91 40 27 18 10 452 452 Consumption of fixed capital - mixed 20 income 4 3 0 1 0 0 0 0 0 0 0 8 8 21 Consumption of fixed capital - other 9 80 26 30 7 12 5 12 21 2 10 214 214 22 Total output 89 1 861 244 262 100 146 194 183 275 82 168 3 604 Table 14.14:Supply and use table: Final and intermediate uses at basic prices, ISIC breakdown 293 The supply and use tables and goods and services account Final consumption expenditure Intermediate consumption General government Gross capital formation Imports Products (by CPC section) Agriculture, forestry and fishing Manufacturing and other industry Construction Trade, transport, accommodation and food Information and communication Finance and insurance Real estate activities Business services Education, human health and social work Other services Public administration, defence, social security, other public services Total industry Sub-total Households NPISHs Sub-total Collective Individual Sub-total Gross fixed capital formation Changes in inventories Acquisition less disposals of valuables Goods Services R-T and (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q) U (O) (6)+(17) (7) (8)+(18) (9) (10) (11) (12) (13) (14)+(21) (15) (22) (24) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) (27) (28) Total uses Agriculture, forestry and fishery products 1 (0) 0 27 0 0 0 0 0 0 0 0 0 27 10 10 0 0 0 0 0 0 0 0 37 Ores and minerals; electricity, gas and 2 water (1) 0 61 0 0 0 0 0 0 0 0 0 61 0 0 0 0 0 0 0 0 0 61 3 Manufacturing (2-4) 0 95 0 5 0 0 0 0 0 0 0 100 100 100 0 0 0 0 84 74 0 10 284 4 Construction (5) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 beverages; transport services (6) 0 25 0 11 0 0 0 1 0 0 0 37 25 25 0 0 0 0 0 0 0 0 0 62 6 Finance and Insurance (7 less 72-73) 0 5 0 0 0 7 0 5 0 0 0 17 0 0 0 0 0 0 0 0 0 0 0 17 Real estate services; and rental and 7 leasing services (72-73) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 Business and production services (8) 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 5 9 Community and social services (92-93) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 Other services (94-99) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11 Public administration (91) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12 CIF/FOB adjustment -5 -5 -3 -3 -2 -2 -10 13 Direct purchases abroad by residents 43 43 20 23 14 Total imports 0 208 0 16 0 7 0 6 0 0 0 237 180 180 0 0 0 0 82 72 0 10 392 107 Table 14.15:Imports used for intermediate consumption and final demand 294 The supply and use tables and goods and services account Chapter 15: Price and volume measures A. Introduction 15.1 Chapter 14 describes how the goods and services account International Monetary Fund, Organisation for Economic may be compiled and elaborated within a supply and use Co-operation and Development, United Nations Economic table. The changes in the values of flows of goods and Commission for Europe and World Bank (2009)). These services can be directly factored into two components, one manuals have been prepared with a common structure to reflecting changes in the prices of the goods and services help readers. In particular chapter 14 of the CPI and PPI concerned and the other the changes in their volumes. One manuals and chapter 15 of the XMPI manual outline how major advantage of compiling price and volume measures such indices fit into the framework of the SNA. within an accounting framework, such as that provided by the supply and use tables, is that a check is provided on the 15.4 The first topic in section B concerns the choice of an numerical consistency and reliability of the set of measures appropriate methodology for compiling inter-temporal as a whole. This is particularly important when every flow price and volume measures for flows of goods and services of goods and services in the economy has to be covered, in a national accounting context. Section B also deals with including non-market goods and services whose valuation the consequences of price variation due to price is even more difficult in volume terms than at current discrimination; that is, how to treat goods or services that prices. are sold to different purchasers on the same market in the same period at different prices. Such differences need to be 15.2 Another advantage of compiling price and volume clearly distinguished from price differences attributable to measures within an accounting framework is that implicit differences in qualities. This section also discusses the price or volume measures can be derived for certain treatment of changes in quality over time, including the important balancing items. In particular, gross value added appearance of new products and the disappearance of old can be measured in real terms by subtracting intermediate products. consumption in volume terms from output in volume terms, the so-called "double deflation" method. Double deflation 2. Inter-temporal price and volume series may be used at the level of an individual enterprise, industry or sector. However, the primary objective of the SNA is not simply to provide guidelines on measures of 15.5 Section C shows how the considerations in section B can be changes in prices and volumes for the main aggregates of applied to the SNA and time series of volumes and prices the SNA but to assemble a set of interdependent measures be derived. It discusses not only the elements of the goods that make it possible to carry out systematic and detailed and services account but also how stocks of non-financial analyses of inflation and economic growth. assets can be decomposed into price and volume elements. Further, the section addresses the question of expressing key aggregates of the SNA that do not themselves have 1. Index number theory price and volume components in real terms, allowing an analysis of the impact of terms of trade on national income, 15.3 Section B gives an overview of the theory of index for instance. numbers as applied in the SNA. There have been significant developments in this area over the last decade. 15.6 Like section B, section C does not aim to be exhaustive in New manuals have been published on the theory and its coverage but draws on, and refers to, other manuals practice of consumer price indices (CPIs) and on producer developed over the last decade, specifically the Handbook price indices (PPIs). These are Consumer Price Index on Price and Volume Measures in National Accounts Manual: Theory and Practice, (International Labour (Eurostat, 2001) and chapter IX of Quarterly National Organization, International Monetary Fund, Organisation Accounts Manual: Concepts, Data Sources and for Economic and Co-operation and Development, Compilation (International Monetary Fund (IMF), 2001b). Eurostat, United Nations Economic Commission for Europe and World Bank (2004)) and Producer Price Index Manual: Theory and Practice, (International Labour 3. International price comparisons Organization, International Monetary Fund, Organisation for Economic Co-operation and Development, United 15.7 Although most price and volume index numbers were Nations, Economic Commission for Europe and the World developed to measure changes in prices and volumes over Bank (2004).) A further manual on export and import price time, they can also be adapted to compare levels of prices indices (XMPIs), Export and Import Price Index Manual: and volumes between different regions or countries in the Theory and Practice (International Labour Organization, same period of time. Such comparisons are needed in order 295 System of National Accounts to be able to compare standards of living, levels of describes the methodology underlying the 2005 round of economic development or levels of productivity in different the International Comparison Program (ICP). countries. 4. Further information 15.8 These topics are addressed in section D, first in theoretical 15.9 This chapter aims to do no more than introduce the most terms and then in terms of the implications for national important concepts and considerations of the application of accountants. The Global Purchasing Power Parities and index number theory to the derivations of volume series Real Expenditure - 2005 International Comparison within the SNA. Further information should be sought from Program Methodological Handbook (World Bank, 2008) the other manuals cited. B. An overview of index number theory 1. Quantities, prices and values c. Values are expressed in terms of a common unit of currency and are additive across different products. Values are invariant to the choice of quantity unit. 15.10 For each individual type of good or service it is necessary to specify an appropriate quantity unit in which that good or service can be measured. Goods or services may be 15.12 In a market system, the relative prices of different goods supplied in units that are either discrete or continuously and services should reflect both their relative costs of variable. Automobiles, aircraft, microcomputers, haircuts production and their relative utilities to purchasers, whether and appendectomies are examples of goods or services the latter intend to use them for production or consumption. provided in discrete or integral units. The quantities of such Relative costs and relative utilities influence the rates at goods and services are obtained simply by counting the which sellers and buyers are prepared to exchange goods number of units. Oil, electricity, sugar and transportation and services on markets. An aggregation of the values of are examples of goods or services provided in units that different goods and services necessarily reflects the choices vary continuously in respect of characteristics such as of which goods and services have been produced and weight, volume, power, duration and distance. The choice consumed at the currently prevailing prices. of physical unit, and its price in relation to the unit selected, is therefore a matter of convenience. For example, the price Volume, quantity, price and unit value indices quoted per tonne is one thousand times greater than one quoted per kilo. As long as the price is expressed in a manner consistent with the unit of volume, the value (v) at 15.13 A volume index is an average of the proportionate the level of a single, homogeneous good or service is equal changes in the quantities of a specified set of goods or to the price per unit of quantity (p) multiplied by the services between two periods of time. The quantities compared over time must be those for homogeneous items number of quantity units (q), that is: v = p q . and the resulting quantity changes for different goods and services must be weighted by their economic importance, Additivity of quantities, prices and values as measured by their relative values in one or other, or both, periods. For this reason volume is a more correct and appropriate term than quantity in order to emphasize that 15.11 Certain important properties in relation to the additivity of quantities must be adjusted to reflect changes in quality. quantities, prices and values may be briefly noted: 15.14 Unfortunately, it may sometimes happen, especially in the a. Quantities are additive only for a single homogeneous field of foreign trade statistics based on customs product. For example, it is not economically documentation, that the data from which price and volume meaningful to add 10 tonnes of coal to 20 tonnes of indices have to be calculated are not sufficiently detailed or sugar. Less obviously, the addition of 10 automobiles are otherwise inadequate for the purpose. For example, the of one type to 20 automobiles of another type would basic information available may be limited to the total not be economically meaningful either if they differ in number of units of some group of products imported or quality. exported, or their total weight, for example, the total number of pairs of shoes, or total weight of equipment of a b. The price of a good or service is defined as the value certain type. Indices built up from information of this kind of one unit of that good or service. It varies directly are not volume indices when the numbers, or weights, with the size of the unit of quantity selected and in cover different items selling at different prices. They are many cases can be made to vary arbitrarily by changing sometimes described as "quantity indices" for this reason. the unit of quantity, for example, by choosing to The "price" indices associated with such indices are usually measure in tonnes instead of in kilograms. Prices, like described as average or "unit value" indices. Unit value quantities, are not additive across different goods or indices measure the change in the average value of units services. An average of the prices of different goods or that are not necessarily homogeneous and may be affected services has no economic significance and cannot be by changes in the mix of items as well as by changes in used to measure price changes over time. their prices. Unit value indices cannot therefore be 296 Price and volume measures expected to provide good measures of average price average and the fixed period volumes or prices are those of changes over time for groups of non-homogeneous items. the current period t. The Paasche price index is given by: 2. Inter-temporal index numbers of prices and n volumes n p t 1 1 pq t t i i PP i0 sit i 1 i 1 pi n p q 0 t (3) 15.15 The index numbers of interest within the SNA are designed i i i 1 to decompose changes in value aggregates into their overall change in price and volume components. A price index can be written and calculated as a weighted average of the and a Paasche volume index, with fixed current period proportionate changes in the prices of a specified set of weights or prices, by: goods and services between two periods of time, say a reference period 0 and current period t. Similarly, a volume n index can be written and calculated as a weighted average n q t 1 1 pq t i t i of the proportionate changes in the volumes of a specified PQ i0 sit i 1 (4) i 1 qi n set of goods and services between two periods of time, say pqi 1 t i 0 i a reference period 0 and current period t. There are many index number formulae differing from each other mainly in the weights which they attach to the individual price or Deflation and volume series using Laspeyres and quantity relatives and the particular form of average used, Paasche formulae whether it is arithmetic, geometric, harmonic, etc. These alternative formulae, their properties and relative merits, are outlined in detail in the CPI and PPI manuals. 15.19 The index of the change in monetary values between two n n Laspeyres and Paasche indices periods, IV = v v i 1 t i i 1 t 1 i , reflects the combined effects of both price and quantity changes. When Laspeyres and 15.16 The two most commonly used index formulae are the Paasche indices are used, the value change will exactly Laspeyres and Paasche indices. The Laspeyres price index decompose into a price index times a volume index only if (Lp) is defined as a weighted arithmetic average of the price the Laspeyres price index is matched with the Paasche relatives using the value shares of the reference period 0 as volume index, that is: L P I or the Laspeyres volume P Q V weights: index is matched with the Paasche price index LQ PP IV . n p it 0 0 For example, a price index, 1.05 representing a 5 per cent n n p 0t 0 pi pi qi p it q i0 change multiplied by a volume index of 1.08, an 8 per cent i 1 change, yields a value change index of 1.134, a 13.4 per LP si i 0 n i 1 n (1) p cent change. i 1 i i 1 p i0 q i0 i 1 p i0 q i0 15.20 This relationship can be exploited whenever the total current values for both periods are known and either of a that is, where p , q and v p q are the prices, 0 i 0 i 0 i 0 i 0 i price or volume index. Suppose, for example, compilers quantities and values in period 0 of i=1,...,n products and want to derive a volume index. Laspeyres and Paasche n volume indices are derived by dividing (deflating) the value si0 vi0 / vi0 , the value shares in period 0. Similar change by appropriate price indices: LQ IV / PP and i 1 expressions with superscripts t refer to period t. PQ IV / LP respectively. Note that LQ from the right-hand side of equation (2) generates a time series of Laspeyres 15.17 Note from (1) that the Laspeyres price index can be defined volume indices, for periods t = 1,...,T of: as the change in value of a basket of products whose composition is kept fixed as it was in the reference period n n n 0. The Laspeyres volume index (LQ) can be similarly defined as the change in the value of a basket whose p q p q i 1 0 1 i i i 1 0 2 i i p q i 1 0 T i i , ,........, n n n (5) composition every period is updated but the prices of the reference period 0 are applied to the new quantities (or p q p q i 1 0 0 i i i 1 0 0 i i p q i 1 0 0 i i volumes), that is: Multiplying through the series by the common denominator i 1 pi0 qi0 yields the volume series: n p q n 0 t n qt i i LQ i0 si0 in 1 (2) i 1 qi p0 q0 i i n n n i 1 p q , p q ,........., p q i 1 0 1 i i i 1 0 2 i i i 1 0 T i i (6) 15.18 Paasche indices also exist in both price and volume forms. The Paasche index differs from the Laspeyres index in two The relative movements from period to period for this respects. It uses a harmonic mean instead of an arithmetic series are identical with those of the associated Laspeyres 297 System of National Accounts volume indices given by (5), the two series differing only substitution. Similarly, the Paasche index can be shown to by a scalar that is the value in period 0. provide a lower bound to the theoretical Paasche COLI. 15.21 Series using the prices of a base year throughout, as Other index number formulae illustrated by (6), are easy to understand but are not best practice in national accounts if the time period T is a 15.25 Because different formulae give different results, a lengthy one over which there are changes in the structure of consideration of alternative approaches to choosing among the economy. For example, if volume changes are them is needed and this in turn gives rise to a consideration measured over a 10 year period, say 1995 to 2005, at of further index number formulae. constant 1995 prices, then the volume movements in later years are based on a price configuration that is likely to have changed. A better practice is to change the weights of 15.26 It is apparent from the Laspeyres and Paasche price indices (rebase) the Paasche deflator in 2000 and link the resulting in equations (1) and (3) that both indices hold the basket of index to the 1999 one. The resulting volume series over the quantities fixed. The formulae differ in that Laspeyres 10 year period will no longer be at constant 1995 prices, but holds the basket fixed in the reference period and Paasche be a more representative volume index. Even better in the current period. If the objective is simply to measure practice, resources permitting, is to form a series of annual the price change between the two periods considered in bilateral links of constant price comparisons. It is isolation, there is no reason to prefer the basket of the preferable to use the term volume series to describe such earlier period to that of the later period, or vice versa. Both series rather than "in" or "at constant prices". baskets are equally justifiable from a conceptual point of view. Thus, although they yield different results, neither formula can be judged superior to the other. The relationship between Laspeyres and Paasche indices 15.27 A compromise solution for the price index is to use a formula that makes symmetric use of the base and current 15.22 Before considering other possible formulae, it is useful to period information on quantities. The Fisher index can be establish the behaviour of Laspeyres and Paasche indices shown to be the most suitable in this regard. (For an explanation of why this is so, see chapter 15 of the CPI and vis-ŕ-vis each other. In general, a Laspeyres index tends to register a larger increase over the base year than a Paasche PPI manuals.) The Fisher index (F) is defined as the index, that is, in general: geometric mean of the Laspeyres and Paasche indices, that is, for price and quantity indices respectively: both LP > PP and LQ > PQ (7) FP = {LP.PP}˝ and FQ = {LQ.PQ}˝ (8) It can be shown that relationship (7) holds whenever the 15.28 Economic theory postulates indifference curves that show price and quantity relatives (weighted by values) are how consumers would alter their expenditure patterns in negatively correlated, that is, as prices go up the quantities response to changes in prices. Unless the utility functions purchased go down or vice versa. Such negative correlation the indifference curves represent are similar in periods 0 is to be expected for price takers, including consumers and and t, a Laspeyres and a Paasche index for this period will firms purchasing intermediate inputs, who react to changes each refer to a differently shaped utility function. In in relative prices by substituting goods and services that general, the Laspeyres index will provide an upper bound have become relatively less expensive for those that have to its underlying utility function while the Paasche index become relatively more expensive. A positive correlation will give a lower bound to its underlying utility function would be expected for price setting firms that substitute but the two utility functions will be different. output towards goods and services that have become relatively more expensive. In such circumstances the inequalities in equation (7) would be reversed. 15.29 In order to resolve this dilemma, a series of indices called superlative indices have been derived that relate to utility functions that adapt over time to the changes in quantities 15.23 Consumers are assumed to maximize utility, which in turn brought about by changes in prices. The Fisher index is one is related to combinations of goods and services purchased. example of a superlative index; a Törnqvist index is Theoretical cost of living indices (COLIs) are defined as another example. A Törnqvist index is the geometric the ratio of the minimum expenditures required to enable a average of the price relatives weighted by average consumer to attain a fixed level of utility under the two sets expenditure shares in two periods. Thus the Törnqvist price of prices. The COLI increases if it becomes more expensive and volume indices are defined as: to maintain the same level of utility. A Laspeyres COLI would hold the preferences and utility fixed in the reference period and a Paasche COLI would hold them fixed in the si0 sit / 2 si0 sit / 2 pt n qit and TQ q 0 n current period. TP i0 (9) i 1 i i 1 pi 15.24 The Laspeyres price index provides an upper bound to the theoretical Laspeyres COLI. Under the COLI, consumers Both Fisher and Törnqvist indices utilize and attach equal can substitute products that have become relatively less importance to information on the value shares in both expensive for ones that have become relatively more periods for weighting purposes. For this reason they may be expensive to obtain the same level of utility, whereas the expected to lie between the bounds of Laspeyres and fixed basket Laspeyres index does not allow such Paasche indices, as is desired. The difference between the 298 Price and volume measures numerical values of the Törnqvist and Fisher indices and b weights si instead of si0 . This index is a Young index other such symmetric indices is likely to be very small. Neither Törnqvist or Fisher volume indices use the prices and, like the Laspeyres index, has the undesirable property of a specific single period. The term "at constant prices" is of failing the time reversal test. a misnomer for such series; the correct term is a series in volume terms. 15.35 Statistical offices often try to overcome this by adjusting the value shares used as weights by the changes in prices 15.30 The above analysis has been from the consumer's or between b and 0 to form a Lowe index given by: purchaser's perspective. Economic theory also defines Laspeyres and Paasche bounds from the producer's n pit pi0 b p n pq perspective. Revenue maximizing producers are expected 0 vi t b pb i i n i 0i to increase the relative quantities they produce in response i 1 i 1 to increases in relative prices. The resulting Laspeyres- LoweP (10) p n Paasche bounds are the reverse of those described above, as vib pib p q 0 b i i quantities produced are substituted towards commodities i 1 i i 1 with above average changes in prices. But the implication for removing substitution bias by the use of Törnqvist and 3. Chain indices Fisher indices still holds. The rebasing and linking of indices Desirable index number characteristics 15.31 There are two frequently quoted characteristics that it is felt 15.36 As noted in the previous section, over time the pattern of index numbers for deflating national accounts should relative prices in the base period tends to become satisfy. These are the "time reversal" and "factor reversal" progressively less relevant to the economic situations of tests. The time reversal test requires that the index for later periods to the point where it becomes unacceptable to period t compared with period 0 should be the reciprocal of continue using them to measure volume changes from one that for period 0 compared with t. The factor reversal test period to the next. It is then necessary to update the requires that the product of the price index and the volume weights. With long time series, it is as inappropriate to use index should be equal to the proportionate change in the the most current weights for a date long in the past as it is to current values. It follows from the discussion in the use the weights from a long time in the past for the current preceding section that Laspeyres and Paasche indices on period. It is therefore necessary to link the old series to the their own do not pass either of these tests. However, it new reweighted series by multiplication. This is a simple follows from the definitions of Fisher indices in (8) that the numerical operation requiring estimates for an overlapping Fisher index does pass these tests. period of the index or series calculated using both the old and new weights. 15.32 The Fisher index therefore has a number of attractions that have led it to be extensively used in general economic 15.37 The linking calculation can be undertaken in a number of statistics. Indeed, Fisher described his index as "ideal". ways. The current index on the new weights can be However, the Fisher index requires both reference and multiplied by a linking coefficient of the old to new index current period information for weights, which may affect to convert the new index to the old index reference period. the timeliness of the index, nor is it as easy to understand as Alternatively, the index may have its reference period Laspeyres or Paasche indices. changed at the time of the introduction of new weights and the old index may be revised by dividing it by the linking coefficient. The process of linking an old series and a new 15.33 The CPI and PPI manuals provide in chapters 15, 16 and 17 one by means of a link for an overlap period is referred to an extensive account of the various approaches to choosing as chaining. among index numbers. Also included in chapter 16 is the stochastic approach that favours the Törnqvist index. What is apparent from this extensive body of work is that all 15.38 Whether the chaining is done so as to preserve the earlier three approaches favour the Fisher index; that superlative reference period in the new series or to change the indices such as the Fisher and Törnqvist indices produce reference period of the old series to the new one, the very similar results and can all be justified from the calculations have to be undertaken at each level of economic theoretical approach and that the difference aggregation. Each component as well as each aggregate has between superlative indices and the Laspeyres or Paasche to be linked individually because of non-additivity. indices, or their spread, is due to substitution bias. Chaining each period Index numbers in practice 15.39 The more frequently weights are updated the more 15.34 The Laspeyres price index in equation (1) has the same representative will the resulting price or volume series be. price and weight reference period 0. In practice, especially Annual chain indices result from compiling annual indices for CPIs where timeliness is of the essence, the price over two consecutive years each with updated weights. reference period 0 differs from the earlier weight reference These "links" are combined by successive multiplication to period, say b, since it takes time to compile the results from form a series. In order to understand the properties and the survey of households, establishments and other sources behaviour of chain indices in general, it is necessary to for the weights to use in the index. The Laspeyres index establish first how chain Laspeyres and Paasche indices given by the first expression in equation (1) may have as its behave in comparison with fixed base indices. 299 System of National Accounts Chain Laspeyres and Paasche indices Annually chained quarterly Laspeyres-type indices 15.40 A chain Laspeyres volume index, LQ, connecting periods 0 15.45 Quarterly chain indices can be constructed that use annual and t, is an index of the following form: weights rather than quarterly weights. Consider a quarterly Laspeyres-type volume index that measures the volume change from the average of year y-1 to quarter c in year y. n n n p 0 qi1 p q 1 2 p t 1 t q P i i i i i y 1 LQ i 1 i 1 ..., i 1 i qic , y n n n (11a) qic , y y 1 p p q p = 0 t 1 t 1 ( y 1) ( c , y ) i qi0 1 1 si P q LQ = y 1 y 1 (12a) i 1 i i 1 i i i 1 i i i Q i i Qiy 1 i The corresponding chain Paasche volume index, PQ, has the The upper case letters P and Q denote average quarterly following form: values over a year, while p and q denote specific quarterly values. The superscripts denote the year (y) and quarter n n n (c). Pi y 1 denotes the average price of item i in year y-1 p1i q1i pi2qi2 pit qit c,y1 (11b) and pi denotes the price of item i in quarter c of year y-1 PQ i1 n i1 n ..., i1 n y1 pq 1 0 i i p q 2 1 i i p q t t1 i i and si is the base period value share, that is the share of item i in the total value in year y-1. i1 i1 i1 Thus: Laspeyres and Paasche price indices are obtained by interchanging the p's and q's in the expressions for the volume indices. p c,y1 c,y1 i q i q c,y1 i Pi y1 c ; Q y1 c ; and 15.41 In general, if fixed base indices are replaced by chain q c,y1 i i 4 indices, the index number spread between Laspeyres and c Paasche is likely to be greatly reduced. Chain indices thus have an advantage over fixed base ones. The relationship between a fixed base index and the corresponding chain Pi y 1Qiy 1 p c,y1 c,y1 i i q index is not always the same, however, as it depends upon y 1 c s Pi y 1Qiy 1 = p i the paths followed by individual prices and quantities over = c,y1 c,y1 q (12b) i i time. i i c 15.42 If individual prices and quantities tend to increase or 15.46 The quarterly Laspeyres-type volume indices can then be decrease steadily over time it can be shown that chaining chained together with annual links. One of two alternative will significantly reduce the index number spread, possibly techniques for the annual chaining of quarterly data is almost eliminating it. Chapters 9 and 19 of the CPI and PPI usually applied, annual overlaps and one-quarter overlaps. manuals provide illustrative examples and chapter 15 In addition to these two conventional chaining techniques, explains the theory underlying these findings. a third technique sometimes is used based on changes from the same period in the previous year (the "over-the-year technique"). While in many cases all three techniques give 15.43 On the other hand, if individual prices and quantities similar results, in situations with strong changes in relative fluctuate so that the relative price and quantity changes quantities and relative prices, the over-the-year technique occurring in earlier periods are reversed in later periods, can result in distorted seasonal patterns in the chained chaining will produce worse results than a simple index. series. While standard price statistics compilation exclusively uses the one-quarter overlap technique, the 15.44 On balance, situations favourable to the use of chain annual overlap technique may be more practical for Laspeyres and Paasche indices over time seem more likely Laspeyres-type volume measures in the national accounts than those that are unfavourable. The underlying economic because it results in data that aggregate exactly to the forces that are responsible for the observed long-term corresponding direct annual index. In contrast, the one- changes in relative prices and quantities, such as quarter overlap technique and the over-the-year technique technological progress and increasing incomes, do not do not result in data that aggregate exactly to the often go into reverse. Hence, it is generally recommended corresponding direct annual index. The one-quarter overlap that annual indices be chained. The price and volume provides the smoothest transition between each link in components of monthly and quarterly data are usually contrast to the annual overlap technique, which often subject to much greater variation than their annual introduces a step between each link, that is, between the counterparts due to seasonality and short-term fourth quarter of one year and the first quarter of the irregularities. Therefore, the advantages of chaining at following year. these higher frequencies are less and chaining should definitely not be applied to seasonal data that are not 15.47 The technique of using annual overlaps implies compiling adjusted for seasonal fluctuations. estimates for each quarter at the weighted annual average 300 Price and volume measures prices of the previous year, with subsequent linking using Laspeyres indices, however, do not require current period the corresponding annual data to provide linking factors to data for weights and thus may lead to more timely scale the quarterly data upward or downward. The estimates. Retrospective studies of the difference in technique of one-quarter overlaps requires compiling national accounts estimates from using chain Laspeyres as estimates for the overlap quarter at the weighted annual against chain Fisher or Törnqvist can help in determining average prices of the current year in addition to estimates at the advantage of using the latter formulae. the average prices of the previous year. The ratio between the estimates for the linking quarter at the average prices of the current year and at the average prices of the previous Annually chained quarterly Fisher-type indices year then provides the linking factor to scale the quarterly data up or down. The over-the-year technique requires 15.53 Just as it is possible to derive annually chained Laspeyres- compiling estimates for each quarter at the weighted annual type quarterly indices, so it is possible to derive annually average prices of the current year in addition to estimates at chained Fisher-type quarterly indices. For each pair of the average prices of the previous year. The year-on-year consecutive years Laspeyres-type and Paasche-type changes in these volume series are then used to extrapolate quarterly indices are constructed for the last two quarters of the quarterly volume series of the chosen reference period. the first year, year y-1 and the first two quarters of the second year, year y. The Paasche-type quarterly indices are 15.48 Discrepancies between an annual chain volume series and constructed as backward-looking Laspeyres-type quarterly the sum of the four quarters of an annually chained indices and then inverted. This is done to ensure that the quarterly volume series derived using the one-quarter Fisher-type quarterly indices are derived symmetrically. In overlap technique can accumulate over time. Hence, the forward-looking Laspeyres-type indices the annual quarterly chain volume series derived this way are usually value shares relate to the first of the two years, whereas in benchmarked to the corresponding annual chain volume the backward-looking Laspeyres-type indices the annual series using a procedure that minimizes the disturbance to value shares relate to the second of the two years. the quarterly volume series whilst achieving consistency with the annual chain volume series. There is discussion on this in chapter VI of Quarterly National Accounts. P i y 1 q ic qic LQ ( y 1) c = i = Q y 1 s (13) P y 1 y 1 y 1 i 15.49 If annual volume series are derived from data balanced in a i Q i i i i supply and use table expressed in the prices of the previous year as recommended in section C, then it is standard practice to benchmark quarterly data to the corresponding y c 1 annual balanced estimates. The benchmarking eliminates PQ = Ly c (14a) Q all discrepancies between the quarterly and annual chain volume series, including those arising from the use of the one-quarter overlap technique. y c P q i y c i q ic LQ = i = Q s iy (14b) P Q y y y 15.50 To conclude, chaining using the one-quarter overlap i i i i technique combined with benchmarking to remove any i resulting discrepancies between the quarterly and annual data gives the best result. In many circumstances, however, the annual overlap technique may give similar results. The and qic is the quantity of item i in quarter c in the second over-the-year technique should be avoided. two quarters of year y-1 or the first two quarters of year y. Chain Laspeyres or chain superlative indices? 15.54 For each of the four quarters a Fisher-type index is derived as the geometric mean of the corresponding Laspeyres-type 15.51 As explained earlier, the index number spread between and Paasche-type indices. Consecutive spans of four Laspeyres and Paasche indices may be greatly reduced by quarters can then be linked using the one-quarter overlap chaining when prices and quantities move smoothly over technique. The resulting annually chained Fisher-type time. In such circumstances the choice of index number quarterly indices need to be benchmarked to annual chain formula assumes less significance as all relevant index Fisher indices to achieve consistency with the annual numbers lie within the bounds of the Laspeyres and estimates. Paasche indices. Nevertheless, there may still be some advantages to be gained by choosing an index for chaining, 15.55 A difficulty arises at the end of the series because it is not such as the Fisher or Törnqvist, that treats both periods possible to construct Paasche-type quarterly indices that being compared symmetrically. use annual weights for the current year, at least using actual observed data. One solution is to construct "true" quarterly 15.52 Such indices are likely to approximate more closely the chain Fisher indices for the latest year or two and use these theoretical indices based on underlying utility or production to extrapolate the annually chained Fisher-type indices. But functions even though chaining may reduce the extent of this should only be done using seasonally adjusted data. As their advantages over their Laspeyres or Paasche long as the irregular variation in quarterly price and volume counterparts in this respect. A chain symmetric index, such relativities is not very great, quarterly chain Fisher indices as Fisher or Törnqvist, is also likely to perform better when of seasonally adjusted data can be expected to produce there are fluctuations in prices and quantities. Chain satisfactory results in most circumstances. 301 System of National Accounts Chaining and data coverage by the disadvantage of increasing irrelevance of the weights in use. Rates of change for subperiods of a series, including annual rates, can be usefully phrased in terms of 15.56 One major practical problem in the construction of index contributions to change, as explained below. numbers is the fact that products are continually disappearing from markets to be replaced by new products as a result of technological progress, new discoveries, Variables that change sign changes in tastes and fashions, and catastrophes of one kind or another. Price and volume indices are compiled by comparing the prices or quantities of goods of the same 15.62 Index number formulae are generally not applicable to time characteristics or quality (that is, homogenous goods) over series that can take positive, negative and zero values. time. This is not easy in product areas such as personal Nevertheless, there are ways of deriving pseudo chain computers where quality changes rapidly. volume series expressed in terms of monetary values in such cases. The most commonly used approach is to identify two associated time series that take only positive 15.57 Chaining helps ameliorate the problems of such constant values and are such that when differenced yield the target quality comparisons since the likelihood of an overlap of a series. An example is the stock of inventories at the start product in two consecutive price periods is almost bound to and end of the period as opposed to the change during the be greatest and the chain indices can accommodate the period. Chain volume series are not additive and so it is changes in weight that accompany a new and a evident that this is an imperfect method since by disappearing product. construction an additive relationship is produced. It follows that the series to be differenced should be as closely aligned Additivity and chaining in terms of price and volume composition as possible with the target series. Hence, a chain volume series of changes in inventories is derived as a chain volume series of closing 15.58 An aggregate is defined as the sum of its components. inventories less a chain volume series of opening Additivity in a national accounts context requires this inventories. Sometimes public gross fixed capital formation identity to be preserved for a volume series. Although can take negative values as a result of the sale of assets to desirable from an accounting viewpoint, additivity is the private sector, in which case the chain volume series of actually a very restrictive property. Laspeyres volume acquisitions and sales could be differenced. indices are the only index number formulae considered here that are additive. Contributions to growth 15.59 A single link in a chain index is sufficient to destroy additivity even when additive indices, such as Laspeyres 15.63 When the Laspeyres formula is used and the base year and volume indices, are linked together. Consequently, if chain reference year coincide, the resulting volumes are additive volume indices are converted into time series of values by in subsequent periods and the contribution by a component using the indices to extrapolate the values of the base period, the index components may fail to add to aggregates Ii to the growth of an aggregate, such as GDP, between two in later periods. A perverse form of non-additivity can periods (t-n) and t can be obtained readily as follows: occur when the chain index for the aggregate lies outside the range spanned by the chain indices for its components, a result that may be regarded as intuitively unacceptable by 100( I it I it n ) %(it n )t (15) many users. Whether published in monetary terms or indices, it is advisable to inform users via a footnote or I it n i other meta-data that chain volume series are not additive. When chain volume series are derived using either the 15.60 There is a general tendency for the discrepancies from Laspeyres formula for annual indices or the annual chaining to become larger the further a period is away from chaining of Laspeyres-type quarterly indices, then year-to- the reference year. If the reference year is chosen to be near year or quarter-to-quarter contributions to growth can be the end of the series then the discrepancies will be derived easily using data expressed in the prices of the relatively small for the latest quarters. Indeed, if the chain previous year prior to chaining. Such data are additive and Laspeyres formula is used and if the reference year is so equation (15) can be used with n=1. If contributions to chosen to coincide with the latest base year then the growth are not published by the national statistical office, quarters following the reference year are additive. Another the user can estimate them. Assuming the one-quarter advantage of having the reference year near the end of overlap technique has been used, the formula for chain volume series is that when they are expressed as calculating the contribution to the percentage change from monetary values their magnitudes do not differ greatly from period t-1 to period t is: the current values for the latest periods if price change is occurring at a modest rate. Maintaining this situation requires rereferencing the series every year when a new 100.( I it I it 1 ) sit 1 (16) link is added to the chain and this entails revising the chain % (it 1)t volume series for their entire lengths. Note that I it 1 sit 1 i rereferencing entails revising levels but not growth rates. 15.61 Although additivity may be preserved by never undertaking where the s are the shares of the items in the total as in a weight change this advantage is significantly outweighed equations (12). 302 Price and volume measures 4. Causes of price variation whose quality is the same and remains unchanged, by assumption. It also raises the average price received by the seller without any change in quality. This must be recorded Price variation due to quality differences as a price and not a volume increase. 15.64 In general, most types of goods or services, whether simple Price variation without quality differences food products such as potatoes or high technology products such as computers, are available on the market in many different qualities whose physical characteristics differ 15.69 Nevertheless, it must be questioned whether the existence from each other. For example, potatoes may be old or new, of observed price differences always implies corresponding red or white, washed or unwashed, loose or pre-packed, differences in quality. There are strong assumptions graded or ungraded. Consumers recognize and appreciate underlying the standard argument which are seldom made the differences and are prepared to pay different prices. For explicit and are often not satisfied in practice: for example, some goods and services, such as personal computers and that purchasers are well informed and that they are free to telecommunication services, there is a rapid turnover in the choose between goods and services offered at different highly differentiated varieties and this, as considered prices. below, creates severe problems for the measurement of price changes. 15.70 In the first place, purchasers may not be properly informed about existing price differences and may therefore 15.65 The same generic term, such as potato, computer or inadvertently buy at higher prices. While they may be transportation is used to describe goods and services that expected to search for the lowest prices, costs are incurred differ from each other in their price-determining in the process. Given the uncertainty and lack of characteristics. The price or quantity of a good or service of information, the potential costs incurred by searching for one quality cannot be directly compared to that of a outlets in which there is only a possibility that the same different quality. Different qualities have to be treated in goods and services may be sold at lower prices may be exactly the same way as different kinds of goods or greater than the potential savings, so that a rational services. purchaser may be prepared to accept the risk that he or she may not be buying at the lowest price. Situations in which 15.66 Differences in quality may be attributable to differences in the individual buyers or sellers negotiate, or bargain over the physical characteristics of the goods or services prices, provide further examples in which purchasers may concerned and be easily recognized, but not all differences inadvertently buy at a higher price than may be found in quality are of this kind. Goods or services delivered in elsewhere. On the other hand, the difference between the different locations, or at different times, such as seasonal average price of a good purchased in a market or bazaar in fruits and vegetables, must be treated as different qualities which individual purchasers bargain over the price and the even if they are otherwise physically identical. The price of the same good sold in a different type of retail conditions of sale, or circumstances or environment in outlet, such as a department store, should normally be which the goods or services are supplied or delivered can treated as reflecting differences in quality attributable to the make an important contribution to differences in quality. differing conditions under which the goods are sold. For example, a durable good sold with a guarantee, or free after-sales service is higher quality than the same good sold Price discrimination without guarantee or service. The same goods or services sold by different kinds of retailers, such as local shops, 15.71 Secondly, purchasers may not be free to choose the price at specialist shops, department stores or supermarkets may which they purchase because the seller may be in a position have to be treated as different qualities. to charge different prices to different categories of purchasers for identical goods and services sold under 15.67 It is generally assumed in economic analysis that whenever exactly the same circumstances, in other words, to practise a difference in price is found between two goods and price discrimination. Economic theory shows that sellers services that appear to be physically identical there must be have an incentive to practise price discrimination as it some other factor, such as location, timing or conditions of enables them to increase their revenues and profits. sale, that is introducing a difference in quality. Otherwise, However, it is difficult to discriminate when purchasers can it can be argued that the difference could not persist, as retrade amongst themselves, that is, when purchasers rational purchasers would always buy lower priced items buying at the lowest prices can resell the goods to other and no sales would take place at higher prices. purchasers. While most goods can be retraded, it is usually impossible to retrade services, and for this reason price 15.68 When there is price variation for the same quality of good discrimination is extensively practised in industries such as or service, the price relatives used for index number transportation, finance, business services, health, calculation should be defined as the ratio of the weighted education, etc., in most countries. Lower prices are average price of that good or service in the two periods, the typically charged to purchasers with low incomes, or low weights being the relative quantities sold at each price. average incomes, such as pensioners or students. When Suppose, for example, that a certain quantity of a particular governments practise or encourage the practice of price good or service is sold at a lower price to a particular discrimination it is usually justified on welfare grounds, but category of purchaser without any difference whatsoever in market producers also have reasons to discriminate in the nature of the good or service offered, location, timing or favour of households with low incomes as this may enable conditions of sale, or other factors. A subsequent decrease them to increase their profits. Thus, when different prices in the proportion sold at the lower price raises the average are charged to different consumers it is essential to price paid by purchasers for quantities of a good or service establish whether or not there are in fact any quality 303 System of National Accounts differences associated with the lower prices. For example, 5. The measurement of changes in quality over if senior citizens, students or schoolchildren are charged time lower fares for travelling on planes, trains or buses, at whatever time they choose to travel, this must be treated as pure price discrimination. However, if they are charged 15.76 Goods and services and the conditions under which they lower fares on condition that they travel only at certain are marketed are continually changing over time, with times, typically off-peak times, they are being offered some goods or services disappearing from the market and lower quality transportation. new qualities or new goods or services replacing them. National accountants use disaggregated price indices to deflate changes in consumption, production and investment The existence of parallel markets values as the principle means of determining volume changes in such aggregates. Deficiencies in price indices carry over to estimates of volume changes. For example, 15.72 Thirdly, buyers may be unable to buy as much as they estimates of price indices for computers that do not fully would like at a lower price because there is insufficient incorporate the increases in quality over time will overstate supply available at that price. This situation typically price changes and understate volume changes. National occurs when there are two parallel markets. There may be a accountants need to be aware of the extent and nature of primary, or official, market in which the quantities sold, methods used by price compilers to take account of such and the prices at which they are sold, are subject to quality changes, if they are to use them properly as government or official control, while there may be a deflators. This in turn requires that price compilers keep secondary market, either a free market or unofficial market, explanatory notes on such methods used, a policy whose existence may or may not be recognized officially. If advocated by chapter 8 in each of the CPI and PPI manuals. the quantities available at the price set in the official market are limited there may be excess demand so that supplies 15.77 There are, of course, costs associated with implementing have to be allocated by rationing or some form of queuing. quality adjustment procedures tailored to the specific As a result, the price on the secondary or unofficial market product groups. What is important for national accountants will tend to be higher. It is also possible, but less likely, that and price index compilers to appreciate is that quality lower prices are charged on the secondary or unofficial change is an increasing feature of product markets. The market, perhaps because the payment of taxes on products default procedures of dealing with quality change, can be evaded in such a market. specifically by treating all replacements as comparable, or dropping varieties from the sample if missing, implicitly 15.73 For the three reasons just given, lack of information, price incorporate valuations of quality differences. Such discrimination or the existence of parallel markets, valuations are unlikely to be appropriate and improvements identical goods or services may sometimes be sold to can and should be made. different purchasers at different prices. Thus, the existence of different prices does not always reflect corresponding 15.78 An unfortunate common procedure to deal with missing differences in the qualities of the goods or services sold. values is to carry forward the price from the previous period into the current period. This may well bias the index and is strongly discouraged. 15.74 When there is price variation for the same quality of good or service, the price relatives used for index number calculation should be defined as the ratio of the weighted 15.79 A brief overview of some of the more common techniques average price of that good or service in the two periods, the follows. More extensive discussion can be found in all the weights being the relative quantities sold at each price. three price manuals, those for CPI, PPI and XMPI. The Suppose, for example, that a certain quantity of a particular techniques can be divided into those that are direct or good or service is sold at a lower price to a particular explicit methods and those that are indirect or implicit. category of purchaser without any difference whatsoever in the nature of the good or service offered, location, timing or Direct methods conditions of sale, or other factors. A subsequent decrease in the proportion sold at the lower price raises the average 15.80 In principle, the price relatives that enter into the price paid by purchasers for quantities of a good or service calculation of inter-temporal price indices should measure whose quality is the same and remains unchanged, by pure price changes by comparing the prices of a assumption. It also raises the average price received by the representative sample of identical goods and services in seller without any change in quality. This must be recorded different time periods. This is called the matched-models as a price and not a volume increase. method. Price index compilers maintain detailed product descriptions of the items being priced in successive periods 15.75 It may be difficult to distinguish genuine price to ensure proper matching. When a model is missing discrimination from situations in which the different prices because it is obsolete, a problem of quality adjustment reflect differences in quality. Nevertheless, there may be arises. A number of methods can be used to take account of situations in which large producers (especially large service the quality change in order to continue the series. producers in fields such as transportation, education or health) are able to make the distinction and provide the 15.81 One possibility is to use the estimated relative costs of necessary information. If there is doubt as to whether the production as the basis for estimates of their relative prices price differences constitute price discrimination, it seems and hence their relative qualities. It may often be feasible preferable to assume that they reflect quality differences, as for producers to provide such estimates. If, however, the they have always been assumed to do so in the past. new quality feature was available as an option in the 304 Price and volume measures previous period, but now is a standard feature, the estimate services in the index. The assumptions behind such of the valuation of the quality change may be based on the imputations are less soundly based than those behind the (relative) price of this option. more targeted imputation. In either case, items subject to quality change tend to be atypical and unrepresentative, so 15.82 An extension of the costs of production approach is known that assuming that their prices change at the same rate as as model pricing. It is often applied to products made to for goods or services whose characteristics do not change is order. A particular case in point is measuring building questionable. costs. The characteristics of buildings and other structures are so variable that it may be almost impossible to find 15.87 If the replacement model is not directly comparable in identical buildings and structures being produced in quality, then the price change of the new model may be successive periods of time. In these circumstances, a small readily linked to the price series of the old one if the two number of hypothetical and relatively simple standard models are for sale in the market at the same time, in an buildings and structures may be specified and their prices overlap period. The implicit assumption is that the estimated in each of the periods. The specifications of these difference in prices at the time of the overlap link is a good standard buildings or structures are chosen on the advice of valuation of the difference in quality, an assumption that construction experts who are also asked to estimate what will not be valid if the overlap period is at an unusual point their prices would be in each of the periods. Model pricing in time in the model's life cycle, for example when it is for services is described in Methodological Guide for about to become obsolete and discontinued or has just been Developing Producer Price Indices for Services. (Eurostat introduced at an unusually high price to obtain temporary and the Organisation for Economic Co-operation and monopoly profits in a segmented market. Development, 2005) Rapidly changing differentiated product markets Hedonics 15.88 Problems of adjusting price changes for changes in quality 15.83 A more general and powerful method of dealing with in product markets with a rapid turnover of differentiated changes in quality is to make use of estimates from hedonic varieties require special consideration. The matched model regression equations. Hedonic regression equations relate method breaks down. Models of like quality can only be the observed market prices of different models to certain compared over relatively short periods and are not measurable price-determining characteristics. Provided representative of the overall market. The summation in sufficiently many differentiated models are on sale at the index number formulae such as the Laspeyres price index same time, the estimated regression equation can be used to in equation (1) is misleading since in period t the n items determine by how much prices vary in relation to each of produced or consumed may be quite different from those the characteristics or to predict the prices of models with on the market in period 0. different mixes of characteristics that are not actually on sale in the period in question. 15.89 Price index number compilers use a short-run formulation to ameliorate the difficulties of comparing the prices of like 15.84 Hedonic regression equations have been estimated for high with like when there is a rapid turnover in differentiated technology goods such as computers and electronic goods goods and services. A Laspeyres price index, for example, and for services such as air transportation. The technique comparing prices in period 0 and t, is given as: has also been used for housing by regressing house prices (or rents) on characteristics such as area of floor space, number of rooms or location. The method has been used n pit 1 pit not only for inter-temporal price measurements but also for p q 0 0 i i 0 t 1 international comparisons. LP i 1 pi pi n (17) p q 0 0 i i Indirect methods i 1 15.85 When the two qualities are not produced and sold on the 15.90 If a new type of good, for example a digital camera, is market at the same time it becomes necessary to resort to introduced in period t-1 to replace a non-digital one, then indirect methods of quantifying the change in quality the compiler has only to wait for the good to be on the between the old and new qualities. In such cases it is market for two successive periods before it can be included necessary to estimate what would be the relative prices of in the index. This provides a mechanism for changing the the old and new models, or qualities, if they were produced representative items to include the new, higher quality, item and sold on the market at the same time and to use the within a product category that has an assigned weight. estimated relative prices to determine measures of the Additional weighting information may be required to relative qualities. augment the weighting given to cameras within the wider group. However, a chain formulation in which weights are 15.86 When a model is missing a replacement of a comparable regularly updated would be a better mechanism to achieve quality may be found and the price comparisons continued. this. If there is no comparable replacement, the price in the missing period may be imputed using the measured price 15.91 While a chain index with a short-run formulation such as in changes of a product group expected to experience similar equation (17) will ameliorate the measurement problem in price changes. Dropping the product from the calculation is markets with a rapid turnover of differentiated varieties, it equivalent to an imputation that assumes the price change cannot take account of the effect on the overall price for the missing model would follow those of all goods and change from period t-1 to period t of the new variety 305 System of National Accounts introduced in period t and of the old model that was 6. Practical advantages of compiling chain dropped in period t-1. Two successive price quotes are indices required to implement the formula in (17) and a chain index. Hedonic indices are a means of incorporating such 15.94 It has been shown on theoretical grounds that long time affects. They can take a number of forms, but essentially series of volume and price indices are best derived by being the prices and values of price-determining quality chained. The question is how often in the time series should characteristics, say the speed, RAM, etc. of different a link occur. It has been argued that annual chaining is varieties of personal computers are collected in each generally best on theoretical grounds, but what of the period. A Paasche-type hedonic imputation (or practicalities? There are a number of matters to consider, characteristics) price index would be derived by first including data requirements, computing requirements, estimating a hedonic regression of price on quality human resource requirements, loss of additivity, revisions and informing users. variables based on period t-1 data and then using the estimated coefficients to impute for t -1 the prices of the a. If annual current values and corresponding volume or varieties available in period t, including those not available price data are available, then annual chaining is in t-1. Prices for period t characteristics valued at period t possible. No other data are required. prices can be directly compared with the estimated period t- 1 valuation of period t characteristics to yield a Paasche- b. The computing requirements of deriving annual chain type price index. A Laspeyres-type hedonic index can be indices are greater than those for fixed-weighted similarly defined using an estimated period t regression and Laspeyres-type indices and should not be attempted constant period t-1 characteristics set, as can a Fisher-type without adequate, tailored software. The complexity of hedonic index as a geometric mean of the two. An the software needed depends on the formula used and alternative formulation is to pool the two sets of the method of linking. For instance, it is quite simple to observations in periods 0 and t and include a dummy develop software to derive annually chained Laspeyres- variable in the hedonic regression equation to distinguish type quarterly volume measures using the annual observations in one period from those in the other. The overlap method. coefficient on the dummy variable would be an estimate of the price change between the two periods having controlled c. Experience has shown that if the benefits of chain for the effect of quality changes. volume measures, along with the loss of additivity, are carefully explained to users via documentation and seminars before their introduction, chain volume Further elaboration measures are generally accepted. Particular attention should be given to informing the key users, including economic journalists, well beforehand. 15.92 A detailed account of all the methods referred to above is available in chapters 7 and 8 of the CPI and PPI manuals. d. When volume estimates are rebased, say every five or These chapters include the use of imputations, overlap ten years, then it is typically the case that the growth prices, comparable replacements, non-comparable rates are revised. If price and volume relativities have replacements using estimates from production costs, option been changing rapidly, then the changes in the growth rates can be dramatic. Such is usually the case for any costs and hedonic regressions, as well as methods for aggregate in which computers have a significant share. markets with a rapid turnover of differentiated varieties With annual chaining history is only "rewritten" a little including short-run relatives, chaining, product each year, not in one large jump every five or ten years. augmentation and hedonic indices. Not surprisingly, the sort of big revisions associated with chaining only every five or ten years can have a detrimental effect on user confidence in the national 15.93 Further discussion of this topic can also be found in accounts, not least because users learn they can expect Handbook on Hedonic Indices and Quality Adjustments in similar revisions in the future. Annual chaining not Price Indexes: Special Application to Information only measures changes better, it is likely to increase Technology Products (Organisation for Economic Co- confidence in the resulting national accounts volume operation and Development, 2004). indices. C. Derivation of volume measures in the national accounts 1. Introduction account. Ideally this should be done within the context of supply and use tables, as explained below. Just as flows of capital formation can be expressed in volume terms, so can 15.95 This section is concerned with the application of the theory stocks of non-produced assets. It is not considered possible described in section B to the practice of deriving volume to separate all income flows into price and volume measures of parts of the SNA. The parts concerned are components but some limited measures of real income are primarily the components of the goods and services possible, as also explained below. 306 Price and volume measures 15.96 The ideal way of producing volume estimates of of stocks of non-financial assets have this characteristic but macroeconomic aggregates is to work at a very detailed income flows and financial assets and liabilities do not. level, deflating each component by a strictly appropriate Some balancing items have the characteristic but others do price index. There are cases, though, where this approach is not and so they need to be considered individually. not possible; either appropriate price indices do not exist, or there may be inconsistencies in the current value data or the price indices, that make the results of deflation 15.102 While both volume and price measures are of major questionable. In such cases, alternative approaches must be importance in the national accounts, the principal focus of considered including the possibility of projecting (or users is on the growth rates of volume measures, rather than extrapolating) forward estimates for earlier years or using prices. The compilation of the national accounts in volume alternative indicators of the volume growth in a particular and current value terms reflects this priority, with the price case. aggregates being derived implicitly, by dividing the current values by the corresponding volumes. 15.97 Once a set of volume measures is available for a given period, it needs to be presented with data for other periods 15.103 When independent, reliable and comprehensive data are in time series form. This is when chaining should be available at current values it is generally not necessary to introduced for data derived by deflation of individual construct volume measures by aggregating quantity components. As recommended in section B, this should relatives. In most cases it is preferable and more practicable ideally be done annually using price indices of the previous to use price indices to deflate current value data. Even for year but if this is not possible, chaining over a longer period cases like electricity where the volume measure seems to be should be adopted. Major changes in economic structure, easily available, a direct volume measure is inappropriate such as the impact of rapid fluctuations in oil prices on an because of the treatment of prices applying in different oil exporting economy indicate that using the same base markets as explained in paragraphs 15.69 to 15.75. A year before and after the change is likely to give quite change in the composition of the type of user leads to a misleading indications of the evolution of the economy. change in the price and volume of electricity in the SNA Chaining becomes essential rather than just desirable in even though the physical measure of electricity distributed such cases. may not have changed. Terminology for volume estimates 15.104 As explained in section B, price information is easier to collect and aggregate than volume information because all prices are expressed in a common unit whereas volumes 15.98 When time series are constructed by dividing the current come in a multitude of units. Further, price relatives for a values for each year at the most detailed level possible by representative sample of goods and services can be used as fixed base year Laspeyres price indices, it is appropriate to typical for all goods and services in the same group in a describe the resulting series as being at the constant prices way that volume measures would not be representative. of the base year. (This is because as long as the work is More importantly, the volume changes associated with new done at a sufficiently detailed level, the result approximates and disappearing products can be properly reflected when using a Paasche price index.) However, when each year's current values are deflated by price indices as described in value is deflated by a price index with a different base year, section B. it is no longer strictly correct to describe the resulting time series in this way. More accurate terms are "chain volume series", "chain volume measure" or "chain volume index" 15.105 For some products, for example closely specified if the series is expressed in index number form. If it is agricultural products or minerals, it may be that the current desirable to specify the reference year in the term, then value data have been constructed by multiplying a volume "chain volume series in reference year [currency units]" measure by an appropriate price. These are instances when may be used. there is no aggregation problem across the group of products and adjustments for quality differences are more 15.99 The use of the term "at constant prices" is also easily and more satisfactorily made to the volume measures inappropriate for series that are linked less frequently than directly. While some such products may be of significant annually and to volume series based on the use of Fisher or value in some countries, it will be a small number of the Törnqvist formulae, whose price configurations are not total number of products that can best be treated in this constant over the duration of the series. For such series the way. terms "volume series" or "volume index" are appropriate to describe a series or index. 15.106 To obtain a Laspeyres volume measure the appropriate price index used to deflate the current value is a Paasche 15.100 The change of terminology also reflects the loss of index and vice versa. However, the available price indices additivity of the resulting time series since only series are nearly always constructed using the Laspeyres or Lowe expressed in the same set of prices throughout, for example formulae, because construction of a Paasche price index by using Laspeyres indices, are additive. has exactly the same data requirements as the direct derivation of a Laspeyres volume index and faces the same problems. If robust current value data and Laspeyres price 1. Price deflation vs. quantity revaluation indices are available at a sufficiently detailed level then Paasche volume indices, at the detailed level, can be 15.101 Volume and price indices can only be derived for variables aggregated using the Laspeyres formula to obtain an that have price and quantity elements. All transactions approximation of a true Laspeyres volume measure of the involving the exchange of goods and services and the levels aggregate. 307 System of National Accounts 15.107 A Fisher volume index can be obtained either by taking the compiled at current values and in volume terms at the same geometric mean of Laspeyres and Paasche volume indices time and balanced simultaneously. or by deflating an index of the current values by a Fisher price index. 15.112 In order to derive a set of supply and use tables in volume terms that are additive, the appropriate way to proceed is 2. Available price indices first to express the table in the prices of the previous year, that is, as Laspeyres volume indices linking the previous 15.108 There are four major types of price index available to year to the current year, referenced to the values in the derive volume measures in the national accounts: consumer previous year. In order to obtain annual chain Fisher price indices (CPIs), producer price indices (PPIs), export volume measures, it also necessary to derive supply and use price indices (XPIs) and import price indices (MPIs). CPIs tables of the previous year in the prices of the current year. are measures of purchasers' prices and PPIs are measures Such values are in effect backward-looking Laspeyres of basic prices. XPIs are measures of FOB prices; MPIs indices referenced to the prices of the current year. Paasche may measure FOB or CIF prices. volume indices are obtained by taking the inverse of the backward-looking Laspeyres indices. Fisher volume indices can then be derived as the geometric mean of the 15.109 There are two defining aspects of recording transactions: Laspeyres and Paasche volume indices between two timing and valuation. It is therefore critical that the price adjacent years. indices and the current values they are used to deflate correspond in both these aspects, as well as scope. The four types of price indices are usually available monthly and so 4. Volume measures of the output estimate of quarterly and annual deflators can be obtained for flow and GDP stock variables by averaging the monthly indices appropriately to centre the average at the desired valuation point. For flow variables this is usually the mid-point of the Market output period, while for stock variables it is usually, but not always, the end of the period. For flow variables, the 15.113 In principle, PPIs can be compiled for all market output and average price of the period should reflect known variations then they can be used to deflate current values to obtain within the period. This is particularly important when there volume estimates. is a strong seasonal pattern, large irregular movements in certain months or hyperinflation. When none of these factors is present, the average price will be close to the 15.114 In practice, there are some products for which it is very observed price at the middle of the time period. The fact difficult to derive price indices and special steps must be that this is frequently the case does not imply that the mid- taken to derive the corresponding volume measures. A period price is always the conceptually correct one to take, particular case is those of margin industries including however. financial services. Output of a margin industry is usually calculated as the margin rate times the value of a transaction. To determine a volume figure the base year 3. The supply and use tables as the basis for rate is applied to the value of the transaction suitably volume measures of GDP deflated to base year values. In the case of FISIM, the reference rate and the rates of bank interest are used in 15.110 Chapter 14 describes the supply and use tables. It explains conjunction with figures of loans and deposits deflated by how the supply table itemizes the products each industry the general price increase since the base year. produces which are then identified in the use table where the allocation of each product between intermediate 15.115 In other cases where there is no suitable deflator to apply to consumption and final demand is spelled out. Compiling a current value, volume indices may be derived by supply and use tables at current values ensures consistency extrapolating the current values in the base period by in the different measures of GDP. More powerfully, suitable indicators. compiling supply and use tables in volume terms ensures that both the volumes and prices in the SNA are consistent. In principle, tables at current values and in volume terms Non-market output of government and NPISHs should be compiled at the same time in order to make the best use of all the information available to the compiler. 15.116 The current value of the output of non-market goods and services produced by government units or NPISHs is 15.111 It is often the case that not all the detailed data required for estimated on the basis of the sum of costs incurred in their compiling supply and use tables are available each period production, as explained in chapter 6. This output consists and estimates have to be made to fill the empty cells. For of individual goods and services delivered to households example, detailed data for intermediate consumption by and collective services provided to the community as a product by industry are often collected infrequently. It is whole. The fact that such output is valued on the basis of generally better to make an initial assumption of a constant the value of inputs needed to produce them does not mean composition of intermediate inputs over time in volume that it cannot be distinguished from the inputs used to terms than in current values. Furthermore, adjustments to produce it. In particular, the change in the volume of output the raw and estimated data can be greatly assisted by can be different from the change in the volume of inputs. evaluating growth rates in prices and volumes from the Changes in productivity may occur in all fields of previous or following period. For these reasons it is production, including the production of non-market recommended that supply and use tables should be services. 308 Price and volume measures 15.117 In practice, there are three possible methods of compiling change in the indicators of outcome. This is because volume estimates of the output of non-market goods and indicators of outcome can be affected by other aspects that services. The first is to derive a pseudo output price index are not directly related to the activity of the non-market such that when it is compared to the aggregate input price services. For example, in the case of health, it is well- index the difference reflects the productivity growth known that there are many factors other than the output of thought to be occurring in the production process. Pseudo the non-market health units, such as sanitation, housing, output price indices can be derived in various ways, such as nutrition, education, consumption of tobacco, alcohol and by adjusting the input price index according to the observed drugs, pollution, whose collective impact on the health of productivity growth of a related production process or by the community may be far greater than that of the provision basing the growth of the pseudo output price index on the of health services. Similarly, the output of education observed output price indices of similar products. However, services is quite different from the level of knowledge or such data are rarely available for the goods and services skills possessed by members of the community. Education produced by government and NPISHs. services consist principally of teaching provided by schools, colleges, universities to the pupils and students 15.118 The second approach, the "output volume method," is who consume such services. The level of knowledge or recommended for individual services, in particular, health skills in the community depends in addition on other and education. It is based on the calculation of a volume factors, such as the amount of study or effort made by indicator of output using adequately weighted measures of consumers of education services and their attitudes and output of the various categories of non-market goods and motivation. services produced. These measures of output should fully reflect changes in both quantity and quality. 15.122 In the light of these observations, the "output volume method" is the recommended method for compiling 15.119 The third approach, called the "input method", may be used indicators of volume change of non-market services. The for collective services such as defence for which the method is based on quantity indicators, adequately quality- "output volume method" is hardly applicable because there adjusted, weighted together using average cost weights. are, in general, no adequate quality-adjusted quantity Two criteria should be respected to compile adequate measures of output. The "input method" consists of indicators of volume change. In the first place, the measuring changes in output by changes in the weighted quantities and costs used should reflect the full range of sum of volume measures of all the inputs. The latter should services for the functional area under review and cost fully reflect both changes in quantity and quality. They are weights should be updated regularly. If part of the costs of generally best derived by deflating the various input costs the functional area is not covered by the quantity indicator, by corresponding constant-quality price indices, or when it should not be assumed that the uncovered part follows such price indices are unavailable, using volume indicators the changes of the part that is covered. If no direct output that reflect input volume change (for example, number of volume method is applicable for this part, an input method hours worked by employees). should be used for it. Secondly, quantity indicators should be adjusted for quality change. For example, services 15.120 It is useful at this stage to define the terms input, activity, should be sufficiently differentiated with the aim of output and outcome. Taking health services as an example, arriving at categories that can be regarded as homogeneous. input is defined as the labour input of medical and non- An aspect of quality change is then captured by changes in medical staff, the drugs, the electricity and other inputs the proportions of different categories if the weights purchased and the consumption of fixed capital of the assigned to each category are frequently updated. In equipment and buildings used. These resources are used in addition, the quantity indicator of each category can be the activity of primary care and in hospital activities, such augmented by an explicit quality adjustment factor. One as a general practitioner making an examination, the way of identifying explicit quality adjustment factors is by carrying out of a heart operation and other activities reviewing the effects that the service has on measures of designed to benefit the individual patient. The benefits to outcome. the patient constitute the output associated with these input activities. Finally there is the health outcome, which may 15.123 It is recommended these volume indicators be tested for a depend on a number of factors apart from the output of substantial period of time with the aid of experts in the health care, such as whether or not the person gives up domain prior to their incorporation in the national accounts. smoking. Expert advice is particularly relevant in the areas of health and education, which usually dominate the provision of 15.121 The measurement of the volume of output of non-market individual services. Further, the consequences of the individual services should avoid two pitfalls. The first of estimates including the implications for productivity these is that it should not be restricted to reflect the inputs measures should be fully assessed before adoption. Unless or the activity of the unit producing the services. Inputs are and until the results of such investigations are satisfactory, not an appropriate measure and while activities may be the it might be advisable to use the second best method, the only available indicator and hence have to be used, they too "input method". are an intermediate variable. What should be measured is the service rendered to the customer. The second risk is that 15.124 Measuring changes in the volume of collective services is if outcome is defined in terms of the welfare objectives of generally more difficult than measuring the volume the non-market service (for example, changes in the quality changes in individual services because the former are hard of health for the measurement of the health service, or to define and to observe. One reason is that many collective changes in the quality of education for the measurement of services are preventative in nature, protecting households the education service) the change in the volume of the or other institutional units from acts of violence including output of the non-market unit cannot be reflected by the acts of war, or protecting them from other hazards, such as 309 System of National Accounts road accidents, pollution, fire, theft or avoidable diseases 15.131 Chapter 14 describes how the intermediate consumption are concepts that are difficult to translate into quantitative part of the use matrix can be partitioned to show the measures. This is an area in which further research is domestic inputs at basic prices, imports, margins and taxes needed. separately. If this information is available, the quality of the resulting deflation exercise will be improved since it will 15.125 When it is not possible to avoid using an input measure as a not be necessary to use the assumption that import, tax and proxy for an output measure, the input measure should be a margin proportions apply uniformly across the elements of comprehensive one, it should not be confined to labour the rows of the use matrix. inputs but cover all inputs. In addition, explanatory information should accompany the national estimates that Gross domestic product and gross value added draw users' attention to the methods of measurement. 15.132 When gross domestic product (GDP) is derived by Output for own final use summing final domestic expenditures and exports and subtracting imports, or by subtracting intermediate consumption from output and adding taxes less subsidies 15.126 Output for own final use falls into two categories, goods on products, volume measures of GDP can be obtained produced and consumed by households and fixed assets provided that the volumes being aggregated are additive, produced for own use. Included in the above are changes in (that is, are based on the Laspeyres formula). inventories of finished goods and work-in-progress. 15.133 The gross value added of an establishment, enterprise, 15.127 For most output for own final use the use of pseudo output industry or sector is measured by the amount by which the price indices is an effective, low-cost option. For goods value of the outputs produced by that establishment, produced and consumed by households, CPIs are likely to enterprise, industry or sector exceeds the value of the be available for similar goods. (However, for agricultural intermediate inputs consumed. This may be written as: output grown and consumed by households, the price index PQ pq used should not include any margins or taxes not actually incurred.) Similarly, there are likely to be output price (18a) indices available for fixed assets such as equipment, buildings and structures produced for own use as capital where the Q's refer to outputs, P's their basic prices, q's to formation. For some types of fixed asset produced on own intermediate inputs and p's their purchasers' prices. Value account there may be no output price indices available for added in year t at prices of year t is given by: similar products and different strategies may need to be considered. This is discussed further in the section on gross fixed capital formation. P Q p q t t t t (18b) Intermediate consumption while value added in year t at the prices of the base year, 0, is given by: 15.128 As noted earlier, the most robust way of estimating intermediate consumption in volume terms is within the P Q p q 0 t 0 t (18c) framework of a supply and use table in volume terms where information on volume growth rates as well as price This measure of value added is generally described as information may be used. being obtained by "double deflation" as it can be obtained by deflating the current value of output by an appropriate 15.129 Countries that compile PPIs generally do so for outputs, (Paasche-type) price index and by similarly deflating the though countries with developed statistical systems may current value of intermediate consumption. also compile input PPIs. Such input PPIs are directly applicable to the deflation of intermediate consumption. 15.134 While the double deflation method is theoretically sound, the resulting estimates are subject to the errors of 15.130 If input PPIs are not compiled, output PPIs, MPIs and, to a measurement in the volume estimates of both output and limited extent, CPIs may be used instead. Intermediate intermediate consumption. This may be especially true if consumption is valued at purchasers' prices, while output output PPIs are applied to inputs, many of which are PPIs are valued at basic prices. There is thus a margin imported. Because value added is the relatively small between the valuation of goods used as intermediate difference between two much larger figures, it is extremely consumption at purchasers' prices and output PPIs, which sensitive to error. It is therefore advisable to compare the is accounted for by transportation costs (unless the growth rates of the price and volume measures of value producer provides these services without a separate added over recent years with the corresponding growth invoice), possible insurance costs, wholesale and retail rates of output and intermediate inputs and, if possible, trade margins and taxes less subsidies on products. The size with volume estimates of inputs of labour and capital of this margin will depend on circumstances. Often trade services to check for plausibility. margins on goods for intermediate consumption are much smaller than for final consumption and the taxes may be 15.135 Because of the possible problems in trying to estimate smaller under a VAT system. For services used as value added using the double deflation approach, it is also intermediate consumption, the difference in valuation common to estimate the volume movements of value added usually consists of only taxes less subsidies on products. directly using only one time series, that is a "single 310 Price and volume measures indicator" method instead of double deflation. One such 15.141 A major component where CPIs are unlikely to be available single indicator method is to extrapolate value added in is the measure of the rental services of owner-occupied proportion to the volume changes in the corresponding dwellings. Three alternative approaches are outlined in levels of output. chapters 10 and 23 of the CPI manual, but only the use- based approach is recommended for measuring the consumption of housing services in the national accounts. 15.136 The choice to be made between the use of a single indicator This approach can take either a user-cost formulation that method (which may yield biased results) or a double attempts to measure the changes in the cost to owner- deflation method (which may yield volatile results) must be occupiers of using the dwelling, or a rental-equivalence based on judgement. The same choice need not be made for formulation based on how much owner-occupiers would all industry groups. Further, the single indicator method have to pay to rent their dwellings. The latter method is may be used for quarterly figures until the year is complete more generally adopted for CPIs. and better double deflation estimates are available. Final consumption expenditure by government 15.137 In certain non-market service industries, it may be and NPISHs necessary to estimate movements in the volume of value added on the basis of the estimated volume changes of the inputs into the industries. The inputs may be total inputs, 15.142 The final consumption expenditure of general government labour inputs on their own or intermediate inputs on their and NPISHs consists of their non-market output less any own. For example, it is not uncommon to find the revenue from incidental sales plus the value of goods and movement of the implicit volume of value added estimated services purchased from market producers for onwards by means of changes in compensation of employees at transmission to individual households at prices that are not constant wage rates, or even simply by changes in numbers economically significant less any partial payments. (The employed, in both market and non-market service derivation of this identity is discussed in chapter 9.) industries. (There is extensive work being carried out to improve these working assumptions by trying to measure 15.143 Each of these items should be expressed in volume terms the outputs of government-provided health and education separately. The problem of measuring non-market output in more objectively.) volume terms is discussed above. For goods and services transferred to households, the price indices used should be those paid for the goods less the proportion that households 15.138 Compilers of data may be forced to adopt such expedients, pay. If the proportion of the price paid by government (or even when there is no good reason to assume that labour NPISHs) alters from one year to another, this is seen as a productivity remains unchanged in the short- or long-term. volume change in expenditure on the part of both general Sometimes, volume changes for intermediate inputs may be government (or NPISHs) and households. used, for example, short-term movements in value added in real terms for the construction industry may be estimated from changes in the volume of building materials Gross fixed capital formation consumed such as cement, bricks, timber, etc. The use of indicators of this kind may be the only way in which to 15.144 The availability of appropriate price indices for gross fixed estimate short-term movements in output or value added, capital formation varies considerably between different but they are not acceptable over long time periods. types of asset. 5. Volume measures of the expenditure 15.145 There are often CPIs for new dwellings and PPIs for new buildings and structures. The costs of ownership transfer estimate of GDP should be deflated separately. The current value and volume estimates are usually derived from separate 15.139 Each of the components of the expenditure estimate of estimates of the constituent parts, legal fees, transport and GDP should be expressed in volume terms. The main installation costs etc. approaches to deriving these estimates are described in turn below. 15.146 For standard products used as capital formation, PPIs are likely to be available but much capital formation is specific to the purchaser and appropriate indices may have to be Household final consumption expenditure developed using the best information available. 15.140 Household consumption expenditure should be deflated at 15.147 Price indices for equipment vary considerably in their as detailed a degree as possible. In general this will involve growth rates. For example, price indices for computer making use of CPIs though care is needed to ensure that the equipment have fallen rapidly year after year while price coverage of the CPI being used matches the category of indices for transport equipment have tended to increase. It consumption expenditure being deflated. Even where is important in such cases that the different types of detailed estimates of consumption expenditure are not equipment are deflated separately using the matching price compiled from household surveys and other primary indices (or, equivalently, an appropriately weighted sources, having an estimate of household consumption Paasche price index is used to deflate the aggregate). expenditure by type of product from a supply and use table for deflation will significantly improve the estimate of 15.148 Intellectual property products are generally not well consumption expenditure in volume terms as compared covered by available price indices. There are several with the single deflation of a total figure only. reasons for this. One is that many intellectual products are 311 System of National Accounts produced for own use and there may be no observed market weighting together price indices of the inputs. As already prices. Another is that intellectual property products are noted, input volume estimates used as a proxy for output do very heterogeneous. However, these are not not reflect any productivity growth and so this is not insurmountable difficulties and there are strategies for recommended. In the absence of a better alternative, the addressing them. As examples, the two major items in this most obvious option is to use the price index for custom- category, software and databases and research and made software. experimental development, are considered. 15.154 Databases are generally heterogeneous products with a 15.149 When deriving volume estimates of the capital formation of small market since most databases are made for in-house software and databases it is advisable to decompose purposes. For own-account software, it is difficult, if not software into three components: packaged (or off-the- impossible, to develop a true output price index and once shelf), custom-made and own account and to deflate them again the choice is between a pseudo output price index and and databases separately. There are several reasons for an input price index though a pseudo output index may be doing this. difficult to envisage. a. The three components of software and databases vary 15.155 Research and experimental development (R&D) is another in the extent to which price data are available to activity that is often undertaken on own account. However, compile price indices. given the heterogeneous nature of R&D, the choice for deflation lies between deriving pseudo output price indices b. It is likely that their prices and volumes grow at and using input price indices. different rates, particularly between packaged software, the other two software components and databases. Changes in inventories c. Despite the previous point, price indices for packaged software may be used to construct price indices for the 15.156 Although changes in inventories may be small relative to other two software components if more appropriate other components of GDP, the fact that their relative size price indices are unavailable. might change quite significantly from one period to the next means that they can make a significant contribution to changes in the size of GDP particularly in the quarterly d. Volume estimates of the items are useful indicators in national accounts. For this reason, the calculation of their own right. changes in inventories in volume terms is particularly important. However, it is also a challenging task. As noted 15.150 Packaged software is purchased on a very large scale, in paragraph 15.62, because changes in inventories can take generally via licences-to-use and there is an abundance of positive, negative or zero values, a chain index should not price data available. The challenge is to construct price be derived directly. Chain volume estimates of changes in indices free of the effects of changing specifications and inventories should be derived by first deriving chain any other aspects of quality change. volume estimates of the opening and closing stocks of inventories and then differencing them. 15.151 Custom-made software is also sold on the market, but each custom-made software product is a one-off, which presents 15.157 Volume estimation should be undertaken at a detailed level an obvious problem for compiling price indices. Although for different types of inventories, (work-in-progress, each custom-made product is different, different products finished goods, materials and supplies, goods for resale). may share common components, or a strategy used to Deflation of stocks of inventories must be related to the develop one product may be able to be used for another. composition of those inventories in terms of products rather This not only suggests a possible way of compiling a price than to the industry holding those inventories. PPIs, MPIs, index, but also suggests means by which productivity gains CPIs and labour cost indices are all commonly used in could be made that would put downward pressure on deriving deflators, with adjustments to the appropriate prices. In section B the use of model pricing was outlined valuation basis. It is important to understand how for measuring price changes of custom-made buildings. A enterprises value their inventories as this can provide similar approach may be applied to custom-made software. information on not only the type of products but also the average length of time over which goods are kept in 15.152 Methods for compiling price indices for heterogeneous inventories. groups of products and products whose specifications are changing rapidly are described in the Handbook on 15.158 When goods are sent abroad for processing without a Hedonic Indices and Quality Adjustments and in Producer change of ownership, it must be remembered that some Price Index Manual: Theory and Practice, (the inventories may be held outside the national territory but International Labour Organization, International Monetary national prices should be applied to them to derive their Fund, Organisation for Economic Co-operation and corresponding volumes. Development, United Nations, Economic Commission for Europe and the World Bank, 2004). Acquisition less disposal of valuables 15.153 A substantial proportion of software in gross fixed capital formation is undertaken on own account. Hence, it is not 15.159 National statistical offices generally do not compile possible to derive a true output price index for such specific price indices for valuables. The major constituents software. It is then a matter of choosing between a pseudo should be deflated using the most suitable price indices output price index and an input price index, obtained by available. 312 Price and volume measures Exports and imports changes in the mix of the heterogeneous items recorded in customs documents, but also to the often poor quality of recorded data on quantities. The former is particularly 15.160 Exports and imports consist of both goods and services. For important in modern product markets given the increasing both exports and imports, goods and services are expressed differentiation of products. Unit value indices may suffer in volume terms using quite different deflators because of further in recent times due to an increasing lack of the very different sources available for goods and services. comprehensiveness of the source data with increasing New initiatives are under way to improve price indices for proportions of trade being in services and by e-commerce external trade in services that should lead to improved data and hence not covered by merchandise trade data. Further, in this area. countries in customs and monetary unions are unlikely to have intra-union trade data as a by-product of customs 15.161 The valuation of imports and exports of goods is discussed documentation. Finally, some trade may not be covered by in chapter 14. In principle, they should be valued when customs controls, such as electricity, gas and water, or be of change of ownership between a resident unit and a non- "unique" goods, such as ships and large machinery, with resident owner takes place and include or exclude profound measurement problems for unit values. transportation costs according to whether the supplier does not or does include transportation to the purchaser in the 15.165 As noted above, current data sources for price indices for price charged. In practice, however, many countries are international trade in services are less comprehensive than dependent for data on imports and exports of goods on in other areas. If MPIs and XPIs are available for exports customs declarations that value imports on a CIF basis but and imports of services they can be readily used to derive exports on a FOB basis. This assumes that change of the required volume estimates. If they are not, volume ownership always takes place at the border of the exporting estimates of exports of services can be mostly derived country. For balance of payments purposes, imports of using an assortment of PPIs and CPIs. For example, goods should be converted to a FOB basis also but this is volume estimates of freight transport services could be usually done at an aggregate level and may only be derived using PPIs according to the form of transport, while disaggregated in the supply and use context if at all. volume estimates of accommodation services could be derived using the appropriate CPIs. If MPIs are not 15.162 Given the existence of detailed XPI and MPI for goods, it available for imports of services then price indices of the should be a simple matter to deflate the current value countries exporting the services, adjusted for changes in the estimates of exports and imports of goods at as detailed a exchange rate, may have to be used. level as practical in order to approximate the use of Laspeyres volume or Paasche price indices. In order to 15.166 It must be remembered that if imports of goods are valued compile detailed volume estimates of imports of goods in including transport services, then these transport services the supply and use tables either the CIF estimates should be should be excluded from total imports of services. put onto a FOB basis or the MPIs need to be adjusted to a CIF basis. The usual working assumption is that CIF and FOB approximate purchasers' and basic prices respectively 6. Volumes and prices for stocks of fixed but as explained in chapter 14, the adequacy of the assets and consumption of fixed capital approximation depends on circumstances surrounding transport margins. 15.167 Consider first a single type of asset. The stock of this type of asset consists of a number of items, typically of different 15.163 XPIs and MPIs are compiled by three general methods the vintages, that are valued and aggregated with a consistent nature of which is largely dependent on the source data set of prices. "Consistent" is to be understood here meaning used. The first and predominant method, at least in terms of the prices relate to the same period or point in time and the number of countries using it, is unit value indices being based on the same price concept, such as purchasers' compiled from detailed import and export merchandise prices. Measuring stocks at historical prices, that is, by trade data derived from administrative customs documents. adding up quantities that have been valued with prices of As pointed out in section B, unit value indices are not price different periods is therefore an inconsistent valuation. It is indices since their changes may be due to price and sometimes found in enterprise accounts but does not (compositional) quantity changes. However, they are used constitute an economically meaningful measure in the by many countries as surrogates for price indices. The context of the SNA. second method is to compile price indices using data from surveyed establishments on the prices of representative 15.168 The price vector used to value the quantities of assets has to items exported and imported. The surveyed prices will be refer to a point in time (beginning or end of period) when of items that are defined according to detailed the values of stocks are compiled for the opening or closing specifications so that the change in price of the same item balance sheets. For other purposes, quantities of assets may specification can be measured over time. The third method be valued with a price vector that refers to the average of an is a hybrid approach that involves compiling establishment accounting period. For example, measures of consumption survey-based price indices for some product groups and of fixed capital may be derived by subtracting the closing customs-based unit value indices for others. stock of assets from the opening stock plus gross capital formation as long as average-period prices are used for 15.164 The case for unit value indices derived from merchandise each component in order to eliminate holding gains and trade figures is based on the relatively low cost of such losses (and assuming no other volume changes in assets). data. Their use as deflators requires some caution as they have been shown to be subject to bias when compared with 15.169 The process by which many capital stock measures are price indices. The bias in unit value indices is mainly due to constructed is the perpetual inventory method (PIM). For a 313 System of National Accounts given type of asset, time series of gross fixed capital current values by an index of hourly rates of compensation, formation are deflated by means of the purchasers' price the latter should be a Paasche-type index. index of the same asset type, so that the quantities of assets are expressed in volume terms of a particular reference Taxes and subsidies on products period. These time series in volume terms are then aggregated to yield a stock measure, where account is taken of retirement, efficiency losses or consumption of fixed 15.175 Taxes on products are of two kinds, specific taxes linked to capital, depending on the nature of the stock measure the volume of the product and ad valorem taxes levied on constructed. The resulting stock measure is thus expressed the value of the product. A measure of the tax volume of in volume terms of the reference period chosen. This the former can be derived by applying the base year rate of reference period may be the current period and stock the specific taxes to suitably deflated current value figures measures valued in this way have often been labelled of the items bearing the specific tax and for the latter by "current price capital stocks". However, this is not entirely applying the base year ad valorem rates to current values of accurate; as the description of the PIM showed, deflation is items subject to ad valorem taxes deflated by appropriate needed to arrive at these measures. Thus, they constitute a prices. It is possible to derive a ratio of the tax data in special case of a constant price valuation, namely valuation current values and in volume terms but it is difficult to at the price vector of the current period. interpret this as a price index since it reflects changing tax rates and changing composition of the purchases of items subject to tax. The calculation for subsidies is carried out in 15.170 Even when the PIM is not applied, for example in the case an analogous manner. of direct surveys of assets, the valuation of different vintages of a particular asset should not use book values that reflect historical prices. Consistent valuation requires 15.176 There is more discussion on this in paragraphs 14.148 to that older vintages are valued by the prices of assets of 14.152. specified ages at the point in time to which the survey refers. Net operating surplus and net mixed income 15.171 The next step is to aggregate the movements in capital 15.177 When GDP is determined as the difference between output stocks of individual asset types in volume terms. The use of and intermediate consumption plus taxes less subsidies on linked or chain indices, as discussed earlier, is appropriate production, gross value added is derived as an accounting when building up a series that extends to the distant past residual. This is so in both current values and volume since the current period price configuration will not remain terms. In order for there to be an identity between different representative. estimates of GDP in volume terms, it is not possible to give a price and volume dimension to gross value added. Rather 15.172 Further details on the PIM, on the different types of capital the residual item is described as being "in real terms". If stocks and their measurement are provided in chapter 20 volume estimates of consumption of fixed capital and and in Measuring Capital. compensation of employees are available, net operating surplus and net mixed income can be derived but only in real terms and without a volume and price dimension. Thus 7. Components of value added it is not possible to derive an independent measure of GDP from the income approach since one item is always derived 15.173 The price and volume measures considered up to this point residually. relate mainly to flows of goods and services produced as outputs from processes of production. However, it is 15.178 The limit to a set of integrated price and volume measures possible to decompose some other flows directly into their within the accounting framework of the SNA is effectively own price and volume components. reached with net operating surplus. It is conceptually impossible to factor all the flows in the income accounts of Compensation of employees the SNA, including current transfers, into their own price and volume components into unequivocal price and volume components. However, any income flow can be deflated by 15.174 The quantity unit for compensation of employees may be a price index for a numeraire set of goods and services to considered to be an hour's work of a given type and level of measure the increase or decrease of the purchasing power skill. As with goods and services, different qualities of of the income over the numeraire but this is quite different work must be recognized and quantity relatives calculated from decomposing a flow into its own price and volume for each separate type of work. The price associated with components. A particular instance where this is common is each type of work is the compensation paid per hour which in the calculation of the terms of trade effect on real income may vary considerably between different types of work. A as described in section D. volume measure of work done may be calculated as an average of the quantity relatives for different kinds of work weighted by the relative values of compensation of 8. Quarterly and annual estimates employees in the previous year or a fixed base year. Alternatively, a "price" index may be calculated for work 15.179 In principle, the same methods used to derive annual by calculating a weighted average of the proportionate volume estimates should be used to derive quarterly changes in hourly rates of compensation for different types volume estimates. Guidelines on data sources and methods of work, again using relative compensation of employees as for compiling price and volume quarterly estimates are weights. If a Laspeyres-type volume measure is calculated given in chapters 3 and 9 of the Quarterly National indirectly by deflating the compensation of employees at Accounts Manual. The main considerations are those 314 Price and volume measures described in paragraphs 15.45 to 15.50. In practice, annual available then satisfactory estimates can often be data are generally more comprehensive and accurate than obtained using an indicator of output, at least in the quarterly data. Although there are important exceptions, short term. For quarterly data this is the preferred such as exports and imports of goods, the overall situation approach, albeit with the estimates benchmarked to is one of a much richer and more accurate, albeit less annual data. An output indicator derived by deflation is timely, set of annual data than quarterly data. For this generally preferred to one derived by quantity reason, a sound approach is to compile balanced annual extrapolation. supply and use tables expressed in current values and in the prices of the previous year and to derive quarterly estimates e. Estimates of output and value added in volume and real that are consistent with them. This approach lends itself to terms should only be derived using inputs as a last the compilation of annually chained quarterly Laspeyres resort since they do not reflect any productivity change. volume measures, although it can be adapted to the compilation of annually chained quarterly Fisher measures, f. The preferred measure of year-to-year movements of too. GDP volume is a Fisher volume index; changes over longer periods being obtained by chaining, that is, by 9. Summary recommendations cumulating the year-to-year movements. 15.180 The recommendations reached above on expressing g. The preferred measure of year-to-year inflation for national accounts in volume terms may be summarized as GDP and other aggregates is, therefore, a Fisher price follows: index; price changes over long periods being obtained by chaining the year-to-year price movements, or a. Volume estimates of transactions in goods and services implicitly by dividing the Fisher chain volume index are best compiled in a supply and use framework, into an index of the current value series. preferably in conjunction with, and at the same time as, the current value estimates. This implies working at as h. Chain indices that use Laspeyres volume indices to detailed a level of products as resources permit. measure year-to-year movements in the volume of GDP and the associated implicit Paasche price indices b. In general, but not always, it is best to derive volume to measure year-to-year inflation provide acceptable estimates by deflating the current value with an alternatives to Fisher indices. appropriate price index, rather than constructing the volume estimates directly. It is therefore very important i. Chain indices for aggregates cannot be additively to have a comprehensive suite of price indices consistent with their components whichever formula is available. used, but this need not prevent time series of values being compiled by extrapolating base year values by c. The price indices used as deflators should match the the appropriate chain indices. values being deflated as closely as possible in terms of scope, valuation and timing. j. A sound approach to deriving quarterly current value and volume estimates is to benchmark them to annual d. If it is not practical to derive estimates of value added estimates compiled in a supply and use framework. in real terms from a supply and use framework and This approach lends itself to the construction of either the volume estimates of output and intermediate annually chained quarterly volume measures using consumption are not robust or the latter are not either the Fisher or Laspeyres formulae. D. Measures of real income for the total economy 1. The concept of real income the purchasing power of the item in question over a designated numeraire set of goods and services. By 15.181 Many flows in the SNA, such as cash transfers, do not have comparing the deflated value of the income with the actual price and quantity dimensions of their own and cannot, value of the income in the base year, it is possible to therefore, be decomposed in the same way as flows related determine by how much the purchasing power of the to goods and services. While such flows cannot be income has increased or decreased. Income deflated in this measured in volume terms they can nevertheless be way is generally described as "real income". measured "in real terms" by deflating their values with price indices in order to measure their real purchasing 15.183 Despite the terminology used, "real" incomes are artificial power over some selected basket of goods and services that constructs that are dependent on two points of reference. serves as the numeraire. 15.182 It is possible by use of a numeraire to deflate any income a. Real incomes are measured with reference to the price flow in the accounts and even a balancing item such as level in some selected reference year; they vary saving may be deflated by a price index in order to measure depending upon the choice of reference year. 315 System of National Accounts b. Real incomes measure changes in purchasing power described as the "trading gain" (or loss) or, to turn this over some selected numeraire; they vary according to round, the trading gain or loss from changes in the terms the choice of numeraire. of trade is the difference between real GDI and GDP in volume terms. The differences between movements in 15.184 As there may often be no obvious or uncontroversial choice GDP in volume terms and real GDI are not always small. If of numeraire there has always been some reluctance to imports and exports are large relative to GDP and if the show real incomes in national accounts on the grounds that commodity composition of the goods and services that the choice of numeraire should be left to the user of the make up imports and exports is very different, the scope for statistics and not the compiler. However, when major potential trading gains and losses may be large. This may changes in prices occur, it can be argued that compilers of happen, for example, when the exports of a country consist statistics are under an obligation to present at least some mainly of a small number of primary products, such as measures of real income. Not all users of the accounts have cocoa, sugar or oil, while its imports consist mainly of the opportunity, inclination or expertise to calculate the real manufactured products. Trading gains or losses, T, are incomes which may be most suited to their needs. usually measured by the following expression: Moreover, there is a demand from many users for T X M {X M} multipurpose measures of real income, at least at the level of the economy as a whole and the purpose of this section is P Px Pm to indicate how such measures may be compiled. (19) 2. Trading gains and losses from changes in where the terms of trade X = exports at current values 15.185 In a closed economy without exports or imports, GDP is M = imports at current values equal to the sum of final consumption plus capital formation. This sum is described as domestic final expenditures. GDP is also a measure of the income Px = the price index for exports generated in the economy by production. Although income cannot be expressed as the product of prices and volumes, Pm = the price index for imports if GDP can be deflated, then in effect this must also be a measure of income in real terms. However, with the P = a price index based on some selected numeraire. inclusion of imports and exports, GDP is no longer identical to domestic final expenditure and deflation of Px, Pm and P all equal 1 in the base year. The term in GDP must allow for the deflation of imports and exports as well as of domestic final expenditures. Even if imports and brackets measures the trade balance calculated at the export exports are equal in current values, they usually have and import prices of the reference year whereas the first different prices so there is an impact on real income term measures the actual current trade balance deflated by measures of import and export prices. This is generally the numeraire price index. It is perfectly possible for one to done by considering the terms of trade and calculating what have a different sign from the other. is known as the trading gains and losses from changes in the terms of trade. 15.189 There is one important choice to be made in the measurement of trading gains or losses, the selection of the 15.186 Further, the total real income that residents derive from price index P with which to deflate the current trade domestic production depends also on the rate at which balance. There is a large but inconclusive literature on this exports may be traded against imports from the rest of the topic, but one point on which there is general agreement is world. that the choice of P can sometimes make a substantial difference to the results. Thus, the measurement of real GDI can sometimes be sensitive to the choice of P and this 15.187 The terms of trade are defined as the ratio of the price of has prevented a consensus being reached on this issue. exports to the price of imports. If the prices of a country's exports rise faster (or fall more slowly) than the prices of its imports (that is, if its terms of trade improve) fewer exports 15.190 It is not necessary to try to summarize here all the various are needed to pay for a given volume of imports so that at a arguments in favour of one deflator rather than another, but given level of domestic production goods and services can it is useful to indicate the main alternatives that have been be reallocated from exports to consumption or capital advocated for P. They can be grouped into three classes, as formation. Thus, an improvement in the terms of trade follows. makes it possible for an increased volume of goods and services to be purchased by residents out of the incomes a. One possibility is to deflate the current balance, X-M, generated by a given level of domestic production. either by the import price index (which has been strongly advocated) or by the export price index, with 15.188 Real gross domestic income (real GDI) measures the some authorities arguing that the choice between Pm purchasing power of the total incomes generated by and Px should depend on whether the current trade domestic production. It is a concept that exists in real terms balance is negative or positive. only. When the terms of trade change there may be a significant divergence between the movements of GDP in b. The second possibility is to deflate the current balance volume terms and real GDI. The difference between the by an average of Pm and Px various different kinds of change in GDP in volume terms and real GDI is generally averages have been suggested, simple arithmetic or 316 Price and volume measures harmonic averages, or more complex trade weighted b. equals real gross domestic income; averages. plus real primary incomes receivable from abroad; c. The third possibility is to deflate the current balance by some general price index not derived from foreign trade; for example, the price index for gross domestic minus real primary incomes payable abroad; final expenditure, or the consumer price index. c. equals real gross national income; 15.191 The failure to agree on a single deflator reflects the fact that no one deflator is optimal in all circumstances. The choice of deflator may depend on factors such as whether the plus real current transfers receivable from abroad; current balance of trade is in surplus or deficit, the size of imports and exports in relation to GDP, etc. On the other minus real current transfers payable abroad; hand, there is general agreement that it is highly desirable and, for some countries vitally important, to calculate the trading gains and losses resulting from changes in the terms d. equals real gross national disposable income; of trade. In order to resolve this deadlock it is recommended to proceed as follows: minus consumption of fixed capital in volume terms; a. Trading gains or losses, as defined above, should be treated as an integral part of the SNA; e. equals real net national disposable income. b. The choice of appropriate deflator for the current trade 15.194 The transition from (a) to (b) is the trading gain from balances should be left to the statistical authorities in a changes in the terms of trade explained immediately above. country, taking account of the particular circumstances The steps needed in order to move from (b) to (d) above of that country; involve the deflation of flows between resident and non- resident institutional units, namely, primary incomes and current transfers receivable from abroad and payable to c. If the statistical authorities within a country are abroad. There may be no automatic choice of price deflator, uncertain what is the most appropriate general deflator P to be used, some average of the import and export but it is recommended that the purchasing power of these price indices should be used, the simplest and most flows should be expressed in terms of a broadly based transparent average being an unweighted arithmetic numeraire, specifically the set of goods and services that average of the import and export price indices. (This is make up gross domestic final expenditure. This price index referred to in the specialist literature on the subject as should, of course, be defined consistently with the volume the Geary method.) and price indices for GDP. 15.192 These proposals are intended to ensure that the failure to 15.195 Each step in the process should first be calculated for agree on a common deflator does not prevent aggregate real adjacent years in additive volume terms and longer series income measures from being calculated. Some measure of derived as chain indices. the trading gain should always be calculated even if the same type of deflator is not employed by all countries. When there is uncertainty about the choice of deflator, an 15.196 A possible alternative approach is to move from GDP in average of the import and the export price indices is likely volume terms to net domestic final expenditure in volume to be suitable. terms and then make a single adjustment for the impact on purchasing power of the current external balance using the deflator for net final domestic expenditure to reduce the 3. The interrelationship between volume current external balance to real terms. The advantage of this measures of GDP and real income alternative is a single numeraire, the set of goods and aggregates services making up net domestic final expenditures being used throughout. It may be easier, therefore, to grasp the significance of real net national disposable income as this 15.193 The usual way to calculate real income figures is to start deflator is explicit. from real GDI and then follow the normal sequence of income aggregates, but with every intervening adjustment deflated to real terms. This is illustrated as follows: 15.197 However, the alternative framework measures the trading gain or loss by using the deflator for net domestic final expenditures as the general deflator P, for the trading gain a. Gross domestic product in volume terms; or loss from changes in the terms of trade whereas it can be argued that P ought always to be based on flows which plus the trading gain or loss resulting from changes in the enter into foreign trade. On balance, therefore, the original terms of trade; framework presented above is to be preferred. 317 System of National Accounts E. International price and volume comparisons 1. Introduction consequence there is no predetermined way to order countries when compiling chain indices. 15.198 Users want to compare GDP and its components not only over time for a given country or countries in analyzing b. For international price comparisons different price economic growth, for example, but also across countries for collectors will be reporting on the prices of the items in a given time period in analyzing relative economic size. A different countries. There thus is a need for flexible but commonly used method of making such comparisons is to detailed structured product descriptions (SPDs) for adjust national accounts values to a common currency each item so that only the prices of like items are using exchange rates, which has the advantage that the data compared, either by comparing the prices of exactly the are readily available and completely up to date. This is same item specification drawn from the SPD in both adequate if users need a ranking of a country's relative countries, or by adjusting the prices of different spending power on the world market. However, it is not specifications drawn from the SPD for quality adequate for comparisons of productivity and standards of differences. living because it does not adjust for the differences in price levels between countries and thus does not give a measure c. International comparisons are conducted on a less of countries' relative sizes in the volume of goods and regular basis, in part because they present a large scale services they produce. coordination challenge, involving the statistical offices of all participating countries as well as international 15.199 Purchasing power parities (PPPs) are used in producing a organizations. reliable set of estimates of the levels of activity between countries, expressed in a common currency. A purchasing 15.203 At the heart of the PPPs are price comparisons of identical power parity (PPP) is defined as the number of units of or closely similar product specifications. The 2005 ICP B's currency that are needed in B to purchase the same round used SPDs to define these specifications and to quantity of individual good or service as one unit of A's ensure the quality of the detailed price comparisons. For currency will purchase in A. Typically, a PPP for a each item there is a specification describing the technical country is expressed in terms of the currency of a base characteristics of the item in detail so a price collector can country, with the US dollar commonly being used. PPPs precisely identify it in the local market. Besides the are thus weighted averages of the relative prices, quoted in technical characteristics, the specification also includes national currency, of comparable items between countries. other variables that need to be considered when pricing the Used as deflators, they enable cross-country comparisons item, such as the terms of sales, accessories and of GDP and its expenditure components. transportation and installation costs. The database formed from these structured descriptions and the prices collected 15.200 This section first examines the index number issues in for them permit more precise matching of items between aggregate comparisons of prices and volumes across countries. countries. The ICP produces internationally comparable economic aggregates in volume terms as well as PPPs and Representativity versus comparability price level indices (PLIs). Established in 1968, the ICP has grown to cover all regions of the world and for the 2005 round involved 107 countries. The results were combined 15.204 Two critical criteria in selecting products to be priced for with the OECD/Eurostat PPP program for 43 countries, calculating PPPs are "representativity" and bringing the total to 150 countries. "comparability". Representative products are those products that are frequently purchased by resident 15.201 Compiling PPP-based data is a costly and time-consuming households and are likely to be widely available throughout a country. Representativity is an important criterion in the exercise, so it is not possible to make such comparisons as a matter of course. Worldwide coordination is required to ICP because the price levels of non-representative products collect the data and compile the PPP-based estimates. are generally higher than those of representative products. Therefore, if one country prices representative products However, national accountants in participating countries while another prices non-representative products in the need to understand the basic principles of the comparison and the practical demands that are made on them for data to same expenditure category, then the price comparisons between the countries will be distorted. On the other hand, compile PPP indices and thus GDP volume comparisons. comparability relates to the physical characteristics of a This material is the subject of the last part of this section. product. Products are considered to be comparable if their physical characteristics, such as size and quality, and 2. Index number issues economic characteristics, such as whether candles are used as a primary source of light or are primarily decorative, are 15.202 The theory of index numbers developed in a time series identical. context cannot be applied mechanically to international comparisons simply by replacing the term "period" by the 15.205 In practice, difficult trade-offs are involved in selecting term "country." International comparisons differ in a products that are both representative and comparable to use number of respects. in calculating PPPs. The product lists for calculating PPPs are developed in a way that balances the competing aims of a. Time series are ordered by the date of the observation, within-country representativity and cross-country but countries have no such a priori ordering. In comparability. In this respect, they are generally quite 318 Price and volume measures different from the products that would be priced by any 15.208 Given the complementary relationships between Laspeyres individual country to compile its price indices (such as the and Paasche price and volume indices noted earlier, it consumer price index or any of a range of producer price follows that a Laspeyres-type volume index for B indices) and which are used in producing the deflators used compared with A can be derived by deflating the ratio of to calculate volume estimates in the time series national the values in B to A, each expressed in their own accounts. In the case of time series within a country, currencies, by the Paasche-type price index (20b). A representativity is the key criterion in selecting the products Paasche-type volume index is similarly derived by to be priced while comparability with other countries is deflating the ratio of values of B to A by a Laspeyres-type unimportant. Once a representative product is selected for price index (20a). pricing, the important issue is to price the same product in subsequent periods so that price changes in the product can 15.209 The differences between the patterns of relative prices and be measured over time. For the ICP, representativity is quantities for two different countries tend to be relatively required only at a point in time and not over time. large, compared with those between time periods for the same country. The resulting large spread between the Aggregation Laspeyres- and Paasche-type intercountry price and volume indices in turn argues for an index number formula, such as Fisher, that makes symmetric use of both country's price 15.206 PPPs are calculated and aggregated in two stages: and quantity information. estimation of PPPs at the level of basic headings and aggregation across basic heading PPPs to form higher-level Multilateral comparisons aggregates. The estimation of basic heading level PPPs is based on price ratios of individual products in different countries. Typically no information about quantities or 15.210 The need for multilateral international comparisons may expenditures is available within a basic heading and, thus, arise, for example, to determine GDP aggregates for blocks the individual price ratios cannot be explicitly weighted of more than two countries or rankings of the volumes of when deriving PPPs for the whole basic heading. Two GDP, or per capita GDP, for all the countries in a block. It aggregation methods dominate PPP calculations at this is desirable that such rankings are transitive. level, the EKS method (described below) and the Country Product Dummy (CPD) method. A description of these Transitivity methods can be found in chapter 11 of the 2005 ICP Methodological Handbook. Weights are of crucial 15.211 Consider a group of m countries. As binary comparisons of importance at the second stage when the basic heading volumes and prices may be made between any pair of PPPs are aggregated up to GDP. The main approaches used countries, the total number of possible binary comparisons in the aggregation are summarized in the paragraphs below. is equal to m(m-1)/2. Let the price, or volume, index for country j based on country i be written as iIj. A set of Binary comparisons indices is said to be transitive when the following condition holds for every pair of indices in the set: 15.207 As outlined in section C, the monetary value of GDP, or one of its components, (IV) reflects the combined iIj jIk = iIk (21) differences of both price and quantities, that is: LP PQ IV or LQ PP IV . Price and volume indices may This condition implies that the direct (binary) index for be compiled between pairs of countries using the same country k based on country i is equal to the indirect index kinds of index number formula as those used to measure obtained by multiplying the direct (binary) index for changes between time periods. A Laspeyres-type price country j based on country i by the direct (binary) index for index for country B compared with country A is defined as: country k based on country j. If the entire set of indices is transitive, the indirect indices connecting pairs of countries are always equal to the corresponding direct indices. In n practice, none of the standard index formulae in common n pB p B A q i i use, such as Laspeyres, Paasche or Fisher, is transitive. LP iA siA i 1 n (20a) i 1 pi p i 1 A A q i i 15.212 The objective is to find a multilateral method that generates a transitive set of price and volume measures while at the same time assigning equal weight to all countries. There are and a Paasche-type index as: four quite different approaches that may be used. The first approach achieves transitivity by using the average prices within the block to calculate the multilateral volume n indices. The second approach starts from the binary n p A 1 1 p B B q i i comparisons between all possible pairs of countries and PP iB siB i 1 (20b) transforms them in such a way as to impose transitivity. i 1 pi n p i 1 A B q i i The third method uses regression techniques to estimate missing prices by using price relatives for other products on a country-by-country basis. The fourth method is a A B multilateral chaining method based on linking bilateral where the weights si and si are component shares of GDP comparisons such that countries that are most similar in at current values of countries A and B. their price structures are linked first. 319 System of National Accounts The block approach c. It is possible to compare ratios, such as the shares of GDP devoted to gross fixed capital formation, because the same vector of prices is used for all countries. 15.213 The most widely used form of the block approach uses the average prices of the block to revalue quantities in all 15.216 However, comparisons between any two countries, based countries in the block. This automatically ensures on the multilateral block results, may not be optimally transitivity. The volume index for country B relative to defined. It was shown in the description on transitivity that country A is defined in the first expression in equation (20) best practice price and volume comparisons between as: countries A and B should make symmetric use of information on their prices and quantities. If A's relative n n n prices are higher than average and B's are lower, the use of p q i i B p q i C i p q i i B average prices decreases A's expenditures expressed in average international prices and increases those of B GK Q i 1 n i 1 n i 1 n (22) relative to a country whose prices are close to the pi qiA i 1 pi qiA i 1 p q i 1 i C i international average. Such a disparity is often noted in the case of services between developed and developing countries. Consequently, when using the GK method, PPP- based expenditures are generally overstated for poor and can be seen to be transitive. The average price pi for countries. each individual good or service is defined as its total value in the block, expressed in some common currency, divided The binary approach by its total quantity: 15.217 An alternative approach to the calculation of a set of m multilateral volume measures and PPPs is to start from the c j pij qij m m vi j binary comparisons between all possible m(m-1)/2 pairs of pi j 1 m where q j j (23) countries. If each binary comparison is considered in qij j 1 j 1 j 1 pi isolation, the preferred measure is likely to be a Fisher index. 15.218 Fisher indices are not transitive but it is possible to derive and the summation is over the m different countries in the from them a set of m-1 transitive indices that resemble the block. The term c j in expression (23) is a currency original Fisher indices as closely as possible, using the least converter which could be either a market exchange rate or a squares criterion. Minimizing the deviations between the PPP used to convert each country's expenditure on item original Fisher indices and the desired transitive indices leads to the so-called EKS formula, proposed i, vi pi qi into the common currency. independently by Elteto, Koves and Szulc. 15.219 The EKS index between countries i and k is the geometric 15.214 The most common block method is the Geary Khamis average of the direct index between i and k and every (GK) method in which the currency converters used in (23) possible indirect index connecting countries i and k, in are the PPPs implied by the volume indices defined by (20). which the direct index is given twice the weight of each In this method, the average prices and PPPs are indirect index. Transitivity is achieved by involving every interdependent being defined by an underlying set of other country in the block in the EKS index for any given simultaneous equations. In practice, they can be derived pair of countries. iteratively, initially using exchange rates as currency converters for average prices, for example. The resulting volume indices are then used to derive the implied set of 15.220 The EKS index: PPPs, which are themselves used in turn to calculate a second set of average prices, volume indices and PPPs, etc. a. provides the best possible transitive measure for a single aggregate between a pair of countries, in much the same way as a chain Fisher index may provide the 15.215 The advantages of a block method such as the GK method best possible measure of the movement of a single include: aggregate over time; a. The block of countries is recognized as an entity in b. gives equal weights to the two countries being itself; compared; and b. The use of a single vector of prices ensures transitivity c. is not affected by the relative sizes of the countries, a and the volume measures are additively consistent and desirable attribute. can be presented in value terms using the average prices of the block (it is possible to present the results However, the consequences are similar to those for chain for a group of countries in the form of a table with indices in a time series context. It is not possible to convert countries in the columns and the final expenditure the EKS volume indices for an aggregate and its components in the rows, in which the values add up in components into a set of additively consistent values. This the columns as well as across the rows); and is in contrast to the GK method. 320 Price and volume measures Ring comparisons would be considered "cheap" by the other country, regardless of whether its PLI is above or below 100. 15.221 The outline of the above methods assumes that there is one set of comparisons comprising all the countries in a block. 15.227 In practice, PPPs do not change rapidly over time and so a As the number of countries participating increases, it large change in a country's PLI is usually due to a large becomes difficult to administer them as a single group. change in exchange rates. Moreover, it is difficult to find items that are both nationally representative and globally comparable at the 15.228 It is important that the volumes in the ICP not be confused same time for countries far apart both geographically and in with the time series volumes described earlier in this their level of development. There are thus advantages to a chapter because they are different measures, although there regionalized approach to the compilation of PPPs. Product are some similarities in that they are both designed to specifications are prepared for each region and independent measure values that have had the direct effects of price sets of PPPs prepared for countries on a region by region differences removed from them. In a time series of basis. volumes, the effects of price changes from one period to another are removed to produce the volume measures from 15.222 While this approach probably improves the quality of PPPs which rates of economic growth are calculated. In the case at the regional level, there is still the need to combine the of an intercountry comparison, which is the basis for PPP- regions to obtain a global comparison. Traditionally, a based volume measures, the effects of differences due to "bridge country" was chosen to provide the link between exchange rates and those due to different price levels within regions. The bridge country participated in the price each country are removed from the national accounts surveys of more than one region. The ring approach values to provide a comparison between the volumes in the extends this idea and identifies a subset of countries in each countries concerned. region to act as "ring countries". These countries comprise a synthetic "region" that intersects with all of the regions 15.229 The lowest level for which PPPs can be compared across whose comparisons are to be linked together. all countries involved in a comparison is referred to as the "basic heading" and it is also the lowest level for which 15.223 The method chosen depends on a number of factors national accounts values are required as weights. In effect, including the purpose of the analysis, level of aggregation, the national accounts values provide the weights to sparseness of data, whether the aggregation is within aggregate the basic heading level data to broader national regions, across ring countries, or for the whole data set and accounting aggregates, including GDP itself. The basic the importance attributed to additivity and symmetric heading is also the level at which product specifications are treatment of countries. determined, with a number of products representative of the expenditure within each basic heading being specified for pricing. 3. Practical considerations for national accountants 15.230 Expenditure-based estimates of GDP have been used in most PPP-based comparisons during the past half-century PPPs and the national accounts or so because the prices for final expenditures are more readily observable than those for outputs and inputs, which would be required for a comparison of the production- 15.224 One of most important uses of PPPs is to calculate based estimates of GDP. Consistency in the national comparable estimates of GDP and its major components, accounts is critical in producing comparable estimates expressed in a common currency where the effects of across countries so the SNA has played an important part in differences in price levels between countries are removed. PPP-based comparisons by providing the framework for The national accounts are integral to PPP estimates in two obtaining consistent estimates of GDP and its major ways. In the first place, the national accounts provide the aggregates. weights that are used to aggregate prices from a detailed level to broader aggregates, up to GDP itself. Secondly, the national accounts provide the values that are "deflated" by 15.231 The ICP is the broadest-based project to produce PPPs; the PPPs to provide the volumes (also referred to as "real about 150 countries participated worldwide in the 2005 expenditures") expressed in a common currency that enable round of the ICP. The volume estimates produced from the GDP and its expenditure components to be compared 2005 ICP present a snapshot of the relationships between between countries. countries from all over the world, expressed in a common currency. The ICP is a very expensive and resource- consuming project and so it provides benchmarks at 15.225 The PPP exercise also produces comparative price level infrequent intervals. As a result, PPP benchmarks, such as indices (PLI). A PLI is the ratio of the PPP for a country the one from the 2005 ICP, have to be extrapolated using relative to the official exchange rate, both measured with time series from the national accounts of the countries respect to a reference currency. PLIs are generally involved. It is interesting to compare the outcomes of an expressed on a base of 100, with the base being either a extrapolation with the benchmarks from two sets of PPPs single reference country or a regional average. compiled several years apart. In practice, the extrapolated series do not tie in exactly with the benchmarks and there 15.226 If a country has a PLI less than 100, then its price level is are several reasons for the differences that arise. An lower than the numeraire country (or region). Similarly, important one is the issue of the consistency between the any pair of countries can be compared directly. If one has a prices used in the time series national accounts and those PLI less than the other, then the country with the lower PLI used in calculating PPPs as explained in the section on 321 System of National Accounts representativity and comparability earlier. Further, the price with those in one that does not do so will lead to potentially and volume structure may change significantly over time in large inconsistencies between the benchmarks and the a way not picked up in the extrapolation techniques. extrapolated series. Why ICP growth rates differ from national growth 15.235 Possibly the single biggest factor that affects the difference rates between extrapolated GDP series and PPP benchmark results is due to exports and imports. GDP volume measures in the national accounts are unaffected by 15.232 The method commonly used to extrapolate PPPs from their changes in terms of trade whereas they influence real GDP benchmark year to another year is to use the ratio of the in spatial comparisons directly. For example, an increase in national accounts deflators from each country compared energy prices results in an increase in nominal GDP. In a with a numeraire country (generally the United States of spatial comparison, the outcome will be an increase in GDP America) to move each country's PPPs forward from the volumes for energy exporting countries relative to other benchmark. The PPPs derived are then applied to the countries because the net trade PPPs are based on exchange relevant national accounts component to obtain volumes rates, which do not respond to a change in the terms of expressed in a common currency for the year in question. trade to a significant extent in the short term. The result is that the increase in the terms of trade is treated as a volume 15.233 Theoretically, the best means of extrapolating PPPs from a effect in the PPP-based benchmark. On the other hand, in benchmark year would be to use time series of prices at the the national accounts of energy exporting countries, GDP individual product level from each country in the ICP to volumes remain unchanged if the same amount of energy is extrapolate the prices of the individual products included in exported and so the increase in the terms of trade is treated the ICP benchmark. In practice, it is not possible to use this as a price effect, which is observed in the GDP deflator type of procedure in extrapolating PPP benchmarks used as the price extrapolator. because the detailed price data needed are not available in all the countries. Therefore, an approach based on Non-market services extrapolating at a macro level (for GDP or for a handful of components of GDP) is generally adopted. Leaving aside the data problems involved in collecting consistent data 15.236 Another area that leads to consistency problems between from all the countries involved, a major conceptual countries' PPP-based volumes is the group of so-called question arises with this process because it can be "comparison-resistant services". They are predominantly demonstrated mathematically that it is impossible to (although not exclusively) non-market services, with maintain consistency across both time and space. In other government services being a major part of the non-market words, extrapolating PPPs using time series of prices at a services that have to be priced for PPP projects. The main broad level such as GDP will not result in a match with the problems in pricing non-market services relate to the benchmark PPP-based estimates even if all the data are quality of the services being produced and the productivity perfectly consistent. of the labour used in producing them. One of the conventions used in producing the estimates for the 15.234 One of the reasons for differences between GDP time series government sector in most countries' national accounts is and PPP benchmark comparisons stems from the definition that the value of output is measured as the sum of the of a product. As explained in paragraphs 15.66 to 15.67, labour and material inputs used in producing the service(s), location is an essential product characteristic in the national which involves an assumption that an increase in costs accounts whereas the PPP comparisons use average prices translates into an equivalent increase in output. In addition, of the whole country. Another problem is that the an assumption that is commonly made in the national weighting patterns underlying the deflators in the time accounts is that the productivity of the labour involved in series national accounts will differ from those in the PPP producing such services does not change over time either. benchmarks over time. In addition, as noted above, the A similar assumption, that productivity is identical in all products priced for the PPPs will differ from those the countries in a comparison, generally has to be made underlying the time series because of the requirements in between countries in calculating PPPs. It is a reasonable spatial price indices for representativity within each assumption when countries at roughly the same level of country and comparability between countries, while in time economic development are involved in the PPP series the main requirement is for consistency over time. comparison. However, when countries at very different Generally, many more products will be priced for a levels of economic development are being compared then country's price indices than it is possible to price for the validity of the assumption breaks down. calculating PPPs. Finally and often most critically, the prices underlying the deflators in the national accounts are 15.237 The choices faced by the compilers of PPPs are either to adjusted to remove changes in quality over time and the assume that productivity levels are identical across methods of making such quality adjustments can differ countries, even when they are at very different stages of significantly between countries. In particular, the extent of economic development, or to adjust the non-market using hedonic methods for adjusting products whose services estimates in some way to account for productivity characteristics change rapidly varies significantly from differences. Apart from the problems involved in country to country. Electronic products (such as computers) determining an appropriate conceptual approach to adjust feature prominently in hedonic quality adjustment, for productivity differences between disparate economies, although some countries also use hedonics to quality adjust obtaining the data required to make such adjustments also products such as clothing and housing. Comparing price proves problematical particularly when the method changes in a country that uses hedonics in quality adjusting involves adjustments based on relative levels of capital the price indices underlying its national accounts deflators intensity in the countries involved. Despite the problems, it 322 Price and volume measures is sometimes necessary to make productivity adjustments Conclusion for non-market services because the problems involved in doing so are rather less than the consequences of assuming equal productivity in all the countries in a comparison. 15.238 PPP-based comparisons of activity levels between countries are an important use of national accounts. Despite the conceptual and empirical difficulties, PPP-based volumes provide a much firmer basis for international comparisons than the commonly used alternative of converting national accounts aggregates to a common currency using exchange rates. 323 System of National Accounts 324 Chapter 16: Summarizing and integrating the accounts A. Introduction 16.1 This chapter provides a synthesis of the sequence of rest of the world. It describes the articulation of the accounts presented in chapters 6 to 13 and shows how they accumulation accounts. relate to the tables in chapter 2. It shows how the most common aggregates in the SNA, GDP, NDP and GNI are related to the balancing items in the various accounts. It 16.2 The chapter lays the groundwork for greater elaboration of shows the impact on national aggregates of transactions the accounts, in both manners of presentation and further undertaken between a resident unit and one resident in the analysis that form the subject matter of later chapters. B. Integrating the accounts 16.3 The tables presented in the previous chapters use a format The production account very common in published tables; the items representing resources are shown in the right-hand side of the table and 16.6 The immediately following rows show the main entries the items representing uses in the left-hand side of the table. from the production account, output and taxes less This format is flexible because it allows a multiple number subsidies on the resource side and intermediate of columns to be shown for both parts of the table and even consumption on the use side. The balancing item for the for the two parts to be shown on different pages if the production account, value added, appears next, also on the columns are sufficiently numerous. However, there is use side as the closing item of the production account. another format for the tables that is particularly useful for Value added is the basic building block for determining explanatory purposes, the T account. GDP. 16.4 In a T account, only one set of descriptive headings (stubs) The generation of income account is shown in the middle of the table with values representing resources in columns to the right and values representing 16.7 The next few rows correspond to the generation of income uses in columns to the left. An example of a T account is account. This is the first part of the primary distribution of given in table 16.1. The rows in the table show the rows income account. Value added, the balancing item from the from tables 6.1, 7.1, 7.2, 8.1 and 9.1 at a high level of production account, appears as the only entry on the aggregation. Data for the individual sector accounts are not resources side of the account. The entries on the left-hand shown but the total for the economy as well as for the rest side of the account under uses show how much of value of the world and the total of both these are shown. In added is generated by labour in the form of compensation addition, the column for the goods and services account is of employees and how much of the value of output is retained. payable to government in the form of taxes on products less subsidies on products not already included in the value of output. The balancing items, operating surplus and mixed 1. Summarizing the current accounts income, represent the contribution of capital to the generation of value added. 16.5 The current accounts included in table 16.1 consist of the production account and accounts showing the primary The allocation of primary income account distribution of income, the secondary distribution of income and the use of income. In addition to these 16.8 In the allocation of primary income account, these accounts, table 16.1 begins with imports and exports of contributions to value added appear as resources of the goods and services, the entries from the rest of the world relevant sectors; compensation of employees to account that show the value of goods and services that households, taxes less subsidies to government and reach the national economy from the rest of the world and operating surplus and mixed income to the sectors those that are produced in the national economy but are containing the relevant production units. In addition, provided to the rest of the world. however, the allocation of primary income account shows 325 System of National Accounts Table 16.1:Summary of the current accounts in the sequence of accounts Uses Resources Total economy Total economy Goods and Goods and Rest of the Rest of the services services world world Total Total Transactions and balancing items 499 499 Imports of goods and services 499 499 392 392 Imports of goods 392 392 107 107 Imports of services 107 107 540 540 Exports of goods and services 540 540 462 462 Exports of goods 462 462 78 78 Exports of services 78 78 Production account 3 604 3 604 Output 3 604 3 604 3 077 3 077 Market output 3 077 3 077 147 147 Output for own final use 147 147 380 380 Non-market output 380 380 1 883 1 883 Intermediate consumption 1 883 1 883 141 141 Taxes on products 141 141 -8 -8 Subsidies on products (-) -8 -8 1 854 1 854 Value added, gross / Gross domestic product 222 222 Consumption of fixed capital 1 632 1 632 Value added, net / Net domestic product - 41 - 41 External balance of goods and services Generation of income account Value added, gross / Gross domestic product 1 854 1 854 Value added, net / Net domestic product 1 632 1 632 1 150 1 150 Compensation of employees 235 235 Taxes on production and imports 141 141 Taxes on products 94 94 Other taxes on production - 44 - 44 Subsidies -8 -8 Subsidies on products - 36 - 36 Other subsidies on production 452 452 Operating surplus, gross 61 61 Mixed income, gross 214 Consumption of fixed capital on gross operating surplus 8 Consumption of fixed capital on gross mixed income 238 238 Operating surplus, net 53 53 Mixed income, net Allocation of primary income account Operating surplus, gross 452 452 Mixed income, gross 61 61 Operating surplus, net 238 238 Mixed income, net 53 53 6 6 Compensation of employees 1 154 2 1 156 0 Taxes on production and imports 235 235 0 Subsidies - 44 - 44 391 44 435 Property income 397 38 435 1 864 1 864 Balance of primary incomes, gross / National income, gross 1 642 1 642 Balance of primary income, net / National income, net Secondary distribution of income account Balance of primary incomes, gross / National income, gross 1 864 1 864 Balance of primary income, net / National income, net 1 642 1 642 1 212 17 1 229 Current transfers 1 174 55 1 229 212 1 213 Current taxes on income, wealth, etc. 213 0 213 333 0 333 Net social contributions 333 0 333 384 0 384 Social benefits other than social transfers in kind 384 0 384 283 16 299 Other current transfers 244 55 299 1 826 1 826 Disposable income, gross 1 604 1 604 Disposable income, net Use of disposable income account Disposable income, gross 1 826 1 826 Disposable income, net 1 604 1 604 1 399 1 399 Final consumption expenditure 1 399 1 399 11 0 11 Adjustment for the change in pension entitlements 11 0 11 427 427 Saving, gross 205 205 Saving, net - 13 - 13 Current external balance 326 Summarizing and integrating the accounts Table 16.2:Summary of the accumulation accounts and balance sheets Changes in assets Changes in liabilities and net worth Total economy Total economy Goods and Goods and Rest of the Rest of the services services world world Total Total Transactions and balancing items Capital account Saving, net 205 205 Current external balance - 13 - 13 414 414 Gross capital formation 414 414 192 192 Net capital formation 192 192 376 376 Gross fixed capital formation 376 376 - 222 - 222 Consumption of fixed capital - 222 - 222 Gross fixed capital formation by type of asset 28 28 Changes in inventories 28 28 10 10 Acquisitions less disposals of valuables 10 10 0 0 Acquisitions less disposals of non-produced assets 0 0 Capital transfers, receivable 62 4 66 Capital transfers, payable - 65 -1 - 66 Changes in net worth due to saving and capital transfers 202 - 10 192 10 - 10 0 Net lending (+) / net borrowing (­) Financial account Net lending (+) / net borrowing (­) 10 - 10 0 436 47 483 Net acquisition of liabilities 426 57 483 -1 1 0 Monetary gold and SDRs 89 11 100 Currency and deposits 102 -2 100 86 9 95 Debt securities 74 21 95 78 4 82 Loans 47 35 82 107 12 119 Equity and investment fund shares 105 14 119 48 0 48 Insurance, pension and standardized guarantee schemes 48 0 48 14 0 14 Financial derivatives and employee stock options 11 3 14 15 10 25 Other accounts receivable/payable 39 - 14 25 Other changes in the volume of assets account 13 13 Total other changes in volume 3 3 -7 -7 Produced non-financial assets 17 17 Non-produced non-financial assets 3 3 Financial assets 3 3 Changes in net worth due to other changes in volume of assets 10 Revaluation account Nominal holding gains and losses 280 280 Non-financial assets 84 7 91 Financial assets/liabilities 76 15 91 Changes in net worth due to nominal holding gains/losses 288 -8 280 Neutral holding gains and losses 198 198 Non-financial assets 136 12 148 Financial assets/liabilities 126 22 148 Changes in net worth due to neutral holding gains/losses 208 - 10 214 Real holding gains and losses 82 82 Non-financial assets - 52 -5 - 57 Financial assets/liabilities - 50 -7 - 57 Changes in net worth due to real holding gains/losses 80 2 66 Stocks and changes in assets Opening balance sheet 4 621 4 621 Non-financial assets 8 231 805 9 036 Financial assets/liabilities 7 762 1 274 9 036 Net worth 5 090 - 469 4 621 Total changes in assets and liabilities 482 482 Non-financial assets 523 54 577 Financial assets/liabilities 505 72 577 Changes in net worth, total 500 - 18 482 Saving and capital transfers 202 - 10 192 Other changes in volume of assets 10 10 Nominal holding gains/losses 288 -8 280 Neutral holding gains/losses 208 - 10 198 Real holding gains/losses 80 2 82 Closing balance sheet 5 103 5 103 Non-financial assets 8 754 859 9 613 Financial assets/liabilities 8 267 1 346 9 613 Net worth 5 590 - 487 5 103 327 System of National Accounts how much of each of these three items is payable to non- 16.14 Disposable income is an important balancing item in the resident units and where comparable items generated in accounts since it shows how much can be consumed non-resident units are payable to resident sectors. without the need to run down assets or incur liabilities. It thus corresponds to the economic theoretical concept of income. 16.9 In the course of production, producers may have made use of financial and non-produced assets belonging to other units. The payments for the use of these assets are shown as The use of income accounts property income. Property income may be payable by residents or non-residents and may be receivable by 16.15 The use of disposable income account shows how much residents or non-residents. Once the values for three of disposable income is in fact used for consumption and how them are known, the value of the last is necessarily much is saved. When looking at the sector accounts, the determined. For example, property income receivable by adjustment for the change in pension entitlements has to be residents must be equal to property income payable by both made to ensure that these form part of the saving of residents and non-residents less property income receivable households and not of pension funds. However, in the by non-residents. Thus property income receivable by both aggregate only flows relating to pension entitlements residents and non-residents (shown under resources) must involving non-resident employees or resident employees of be equal to property income payable by both residents and non-resident enterprises appear. non-residents (shown under uses). 16.16 Table 16.1 does not include the redistribution of income in 16.10 Value added as a resource plus the resource entries of kind account and the use of adjusted disposable income compensation of employees, operating surplus, mixed account but these could be inserted either in place of, or as income and property income, less the corresponding entries a complement to, the use of disposable income account. for these items as uses leads to the balance of primary incomes. This is the balancing item for the allocation of 2. Summarizing the accumulation accounts primary income account shown as a use, and the first item, a resource, of the secondary distribution of income account. 16.17 Table 16.2 presents a summary of the accumulation accounts and balance sheets with the same degree of detail 16.11 From the balance of primary incomes, another key as used for the current accounts in table 16.1. In this case, aggregate of the SNA, national income, is derived. Value the titles given to the right- and left-hand columns are added is determined by the criterion of residence; all changed; the columns to the right are described as changes resident units and only resident units contribute to the total. in liabilities and net worth, and those to the left show For the balance of primary income, however, the focus changes in assets. changes not just from production to income but to the residence of the units receiving the income generated by The capital account production rather than the residence of the producing units themselves. Further discussion of national income appears 16.18 The first items appearing on the right-hand side of the below in connection with the discussion of the rest of the capital account are saving and the current external balance. world account. Also appearing as resources are capital transfers receivable. By convention, capital transfers payable also appear under The secondary distribution of income account resources but with a negative sign. For the economy as a whole, including transactions with the rest of the world, capital transfers receivable and payable exactly offset one 16.12 The secondary distribution of income account shows how another in the same way that property income and current primary income is transformed to disposable income by the transfers do. However, this equality is not generally true for payment and receipt of current transfers. Various factors the total economy excluding the rest of the world nor for stimulate redistribution of income between sectors of the individual sectors within it. economy. One of these is the role of government in levying current taxes on income and wealth; one is the role played 16.19 Together, saving plus capital transfers (net) show how by social insurance schemes in redistributing contributions much is available within the economy to acquire non- by current workers to retirees; another is the role of financial capital, primarily capital formation but also non- insurance in providing a mechanism whereby small regular produced non-financial assets. This total is shown as a payments by many units are channelled to a few units special aggregate called changes in net worth due to saving suffering predefined sorts of losses. Among other types of and capital transfers. It is not a balancing item but has the current transfers, the role of purely voluntary transfers is of same characteristic of being an analytical construct of increasing interest. Such transfers may provide the main particular interest. source of finance for NPISHs, in the form of international cooperation between governments, or may be between resident and non-resident households in the form of 16.20 The uses shown in the capital account are the acquisition of workers' remittances. produced and non-produced non-financial assets. The balancing item of the capital account is net borrowing or lending. When there is net lending, it shows the extent to 16.13 Current transfers payable by resident and non-resident units which the sum of saving and capital transfers is actually must be equal to current transfers receivable by both used to finance the acquisition of non-financial assets and resident and non-resident units, and thus total uses and how much is lent to the rest of the world. When there is net resources are equal as is the case for property income. borrowing, saving plus capital transfers are insufficient to 328 Summarizing and integrating the accounts finance all the acquisition of non-financial assets and 16.26 The equation reflects the notion that goods and services borrowing from the rest of the world is necessary. produced in the current period are used either to generate more goods and services in the current period (intermediate The financial account consumption) or to generate more goods and services in future periods (capital formation) or to satisfy human wants immediately (final consumption). However, because no 16.21 The financial account shows exactly how net lending or economy is entirely closed, it is necessary to allow for borrowing takes place by showing all the transactions in those goods and services supplied from outside the financial instruments. Transactions in financial assets economy (imports) and those goods and services used by shown as changes in assets exactly balance the amounts other economies (exports). shown as changes in liabilities and net worth because when all transactions of resident units with either other resident 16.27 This identity comprises the goods and services account. units or non-resident units are taken into account, there can The goods and services account shows the balance be no net lending or borrowing left unexplained. between the total goods and services supplied as resources to the economy as output and imports (including the value 16.22 Because the financial account does not introduce any new of taxes less subsidies on products not already included in balancing items and only explains how net lending or net the valuation of output) and the use of the same goods borrowing is effected, and because it requires quite and services as intermediate consumption, final different data sources and understanding of the data consumption, capital formation and exports. sources, this account is not always compiled by national accountants. However, without the financial account, the 4. The accounts for the rest of the world compiler cannot be certain that the estimates for the other accounts are fully consistent and complete. Just as the national accountant must have an understanding of the 16.28 The entries in the integrated accounts for the rest of the balance of payments system and ensure that the world correspond to the entries in the balance of payments transactions relating to the rest of the world are fully as laid out in BPM6. Table 16.3 shows the entries for the captured in the accounts, so there is a need to appreciate the rest of the world in the structure of the balance of payments implications of systems of monetary and financial statistics. accounts. Two later chapters, chapters 26 and 27, discuss the relationships with these other statistical systems in more 16.29 There are three current accounts; one for goods and detail. services, one for primary income and one for secondary income. Each of these has a balancing item but, unlike the 3. The goods and services account accounts in the SNA, the balancing items do not carry down from one account to the next. However, other balancing items that do match those in the SNA are allowed 16.23 Throughout the sequence of accounts, each transaction line for. Thus the external balance of goods, services and is balanced. For the distributive and redistributive primary income is the sum of the [external] balance of transactions, this is automatically the case if the data are goods and services and the [external] balance of primary fully reconciled since whatever is shown as payable by one incomes and corresponds to the balance of primary income unit must be shown as receivable by another. However this for the total economy. When this item is added to the is not obviously the case for the transactions relating to external balance of secondary income, the current external goods and services. In order to preserve the balancing balance is derived which corresponds to saving for the total nature of the accounts, a column headed "goods and economy. services" is included on each side of the accounts. In every case where there is a transaction relating to goods and 16.30 In the capital account of the rest of the world, the only services, an entry in the goods and services column on the entries are for capital transfers receivable from and payable other side of the account is made. to the rest of the world and acquisition less disposals of non-produced non-financial assets involving non-resident 16.24 Ultimately the entries on the left-hand side of the account units. These give the capital external balance. When this is show the value of all goods and services supplied to the added to the current external balance, the result is net economy, either as production or imports, plus the taxes on lending to or borrowing from the rest of the world. products less subsidies paid on them. On the right-hand side of the account, the use of the goods and services is shown, as intermediate or final consumption, capital 5. Integration of stock and flow data formation or exports. Linking the opening and closing balance sheets 16.25 Clearly, ex post the total amount of goods and services supplied to the economy must be equal to the total use 16.31 The balance sheets are an integral part of the SNA. An made of those goods and services. Setting the entries in the understanding of the articulation of the balance sheets with left-hand goods and services column equal to those in the the flows relating to assets in the capital, financial and other right-hand side column gives the familiar goods and changes in assets accounts is fundamental to understanding services account, described in chapter 14: the role capital accumulation plays in the SNA. Output + imports + taxes less subsidies on products 16.32 The basic accounting identity linking the opening and the = intermediate consumption + final consumption + exports closing balance sheet values for a single type of asset can + capital formation be summarized as follows: 329 System of National Accounts The value of the stock of a specific type of asset in the entry in the closing balance sheet can, in principle, be opening balance sheet valued at the prices prevailing at the constructed by taking the value in the opening balance date the balance sheet refers to; sheet and adding to it the entries relating to the same asset in each of the four accumulation accounts. plus the total value of the assets acquired, less the total value of those disposed of (including consumption of fixed 16.34 A nominal holding gain may be decomposed into a neutral capital where appropriate), in transactions that take place holding gain and a real holding gain. The nominal holding within the accounting period; gain indicates by how much the value of an asset has increased over the period. The neutral holding gain plus the value of other positive or negative changes in the indicates the increase that would have been necessary for volume of the assets held (for example, as a result of the the asset to exactly maintain its purchasing power over the discovery of a subsoil resource or the destruction of assets period. If the nominal holding gain is larger than the neutral as a result of war or a natural disaster); holding gain, the owner of the asset has a real holding gain (equal to the difference between the nominal and neutral plus the value of the positive or negative nominal holding holding gains). If the nominal holding gain is less than the gains accruing during the period resulting from a change in neutral holding gain, then the owner suffers a real holding the price of the asset; loss. equals the value of the stock of the asset in the closing 16.35 The identity linking the opening and closing balance sheets balance sheet valued at the prices prevailing at the date the and the accumulation account is valid even in the case of balance sheet refers to. assets that are held only temporarily within the accounting period and that do not appear in either the opening or the 16.33 The value of the non-financial assets acquired, less the total closing balance sheets. For example, an asset may be value of those disposed of, in transactions that take place acquired in a period, increase in price due to a holding gain within the accounting period is recorded in the capital and then suffer some destruction before being sold again account and the value of transactions in financial assets and before the end of the period. liabilities in the financial account. The value of other positive or negative changes in the volume of the assets 16.36 The nominal holding gains and losses shown in the held is recorded in the other changes in the volume of revaluation account include both realized and unrealized assets account. The value of the positive or negative holding gains and losses but the realized holding gains and nominal holding gains accruing during the period resulting losses are incorporated in the value of transactions of the from a change in the price of the asset is recorded in the assets, leaving only the unrealized holding gains and losses revaluation account. This means that the value of each in the closing balance sheet. Table 16.3:Entries for the rest of the world using the BPM6 structure of accounts Uses Resources Rest of the Rest of the world world Transactions and balancing items Goods and services account Imports of goods and services 499 540 Exports of goods and services - 41 External balance of goods and services Primary income account 6 Compensation of employees 2 Taxes on production and imports Subsidies 44 Property income 38 - 10 External balance of primary income - 51 External balance of goods, services and primary income Secondary income account 17 Current transfers 55 38 External balance of secondary income Adjustment for the changes in pension entitlements - 13 Current external balance Capital account Acquisitions less disposals of non-produced assets Capital transfers, receivable 4 Capital transfers, payable -1 3 External capital account balance - 10 Net lending (+) / net borrowing (­) 330 Summarizing and integrating the accounts 16.37 The link between the balance sheet and flow accounts in the current external balance. This result can be seen from respect of financial assets and liabilities is often recognized the following: and presented. Less attention has been focused on the links for non-financial assets though, as chapter 20 on capital a. Resources services makes clear, it is no less important, especially as regards an understanding of productivity growth in the economy. · Imports 499; · Output 3 604; Net worth · Taxes on products 141; 16.38 The balancing item on a balance sheet is equal to the sum of all the assets less all the liabilities and is called net worth. The change in net worth between the opening and · Subsidies on products -8; closing balance sheet can be shown to be composed of three items. · Total 4 236; a. The first of these is the change in net worth due to b. Uses saving and capital transfers. This comes from the capital account and is the item shown as the total of · Exports 540; resources on that account. · Intermediate consumption 1 883; b. The second item is the change in net worth due to other changes in the volume of assets and is the sum of all the · Final consumption 1 399 entries for assets in the other changes in the volume of assets account less all the entries for liabilities. · Saving 427; c. The third item is the change in net worth due to nominal holding gains and losses. This is the sum of the · Current external balance -13; entries for nominal holding gains and losses for all assets recorded in the revaluation account less the · Total 4 236. entries for nominal holding gains and losses on all liabilities. This can be broken down into the change in 16.42 The current external balance (-13) is equal to the external net worth due to neutral holding gains and losses and balance of goods and services (-41) plus the flows of the change in net worth due to real holding gains and income coming from the rest of the world (28). If imports, losses in an obvious manner. exports and the external balance of goods and services are removed from the consolidation just described, the Asset accounts following result can be derived: 16.39 The identity linking opening and closing balance sheets Output 3 604 holds for assets in total, for every separate class of asset and indeed for every individual asset. An asset account plus taxes on products 141 describes the changes in the stock of an asset or class of assets from one balance sheet to the next, itemizing which minus subsidies on products 8 changes are due to capital transactions, which to financial transactions and which to other changes in volume and revaluation. Asset accounts are described in chapter 13. minus intermediate consumption 1 883 6. Consolidating the accounts (result 1 854) 16.40 Although it is not usual to present the accounts in a fully equals consolidated form, it is useful from a pedagogical point of view to consider what results from a full consolidation of final consumption 1 399 the accounts. plus saving 427 Consolidating the current accounts plus income from the rest of the world 28. 16.41 All the items in table 16.1 relating to the distribution and redistribution of income appear on both sides of the 16.43 The first part of this identity is the definition of income account. Their inclusion permits the derivation of generated in the economy. If the income from the rest of the significant balancing items but it is also possible to world is regarded as an analogue to saving generated within consider what entries are left if they are eliminated by the domestic economy, this identity can be seen as the consolidation. In fact what remains are the entries in the simple economic concept that income is equal to goods and services columns plus the entries for saving and consumption plus saving. 331 System of National Accounts Consolidating the accumulation accounts minus capital transfers payable (1) 16.44 When the capital and financial accounts are consolidated, equals net lending or borrowing (-10). all the entries in the financial account are eliminated and the entries for net lending or borrowing that appear in each 16.46 Combining this identity with the previous one reduces to: account cancel. All that is left is: Capital formation (414) capital formation (414) plus the acquisition less disposals of non-produced assets plus the acquisition less disposals of non-produced assets (0) (0) equals equals saving (427) saving (427) plus the current external balance (-13). plus net lending or borrowing to the rest of the world (-10) Consolidating the rest of the world account minus capital transfers payable to the rest of the world (4). 16.45 Looking only at the capital and financial account of the rest plus capital transfers receivable from the rest of the world of the world: (1). the current external balance (-13) In other words investment is equal to saving generated from within the total economy or drawn in from the rest of plus capital transfers receivable (4) the world. C. The macroeconomic aggregates in the SNA 1. The GDP identities a. the production measure of gross domestic product (GDP) is derived as the value of output less intermediate consumption plus any taxes less 16.47 Rearranging the order of items appearing in the goods and subsidies on products not already included in the services account leads to the most familiar definitions of value of output, GDP: b. the expenditure measure of gross domestic product Output (3 604) (GDP) is derived as the sum of expenditure on final consumption plus gross capital formation plus exports minus intermediate consumption (1 883) less imports. 16.48 The production measure of GDP can also be expressed as plus taxes less subsidies on products (141 - 8) value added adjusted to ensure all taxes less subsidies on products are included. As described in chapter 7, value equals added can be viewed as the elements comprising income: compensation of employees, operating surplus, mixed final consumption (1 399) income and other taxes less subsidies on production. If separate estimates are available of these components, then a third way of compiling GDP is possible, that is, from the plus capital formation (414) income side. Because other taxes less subsidies on production are included in value added and taxes less plus exports (540) subsidies on products are to be included also, the two tax items can be replaced by the term that is the sum of them both, taxes less subsidies on production and imports. minus imports (499) GDP (1 854) equals GDP (1 854). equals There are thus two separate ways in which GDP can be defined: compensation of employees (1 150) 332 Summarizing and integrating the accounts plus gross operating surplus (452) c. to replace gross operating surplus by net operating surplus and gross mixed income by net mixed income plus gross mixed income (61) in the income measure of GDP. plus taxes less subsidies on production and imports (191). 16.52 Each deduction from GDP is equivalent because the difference between gross and net capital formation is the The third way in which GDP can be defined is thus consumption of fixed capital as is the difference between the sum of operating surplus and mixed income on a gross basis as opposed to a net basis. Thus, net domestic product c. the income measure of gross domestic product (GDP) (NDP) is defined as gross domestic product (GDP) less is derived as compensation of employees plus gross the consumption of fixed capital. operating surplus plus gross mixed incomes plus taxes less subsidies on both production and imports. NDP (1 632) 2. A note on the valuation of output equals 16.49 In chapter 6, it is explained that the preferred measurement of output in the system is basic prices. At basic prices, the GDP (1 854) value of output excludes all taxes on products and includes all subsidies on products. It includes all other taxes on minus consumption of fixed capital (222). production and excludes all other subsidies on production. However, the data sources in some countries may not 4. Gross and net national income permit this valuation to be followed. In this case, output will be valued at producers' prices. All taxes on both products and production (possibly excluding any VAT type 16.53 In some countries, border or seasonal workers may have a taxes) will be included in the value of output and all significant effect on the amount of compensation of subsidies on both products and production will be employees that is either payable abroad or receivable from excluded. abroad. Compensation earned abroad but repatriated to the country where the employee is resident (as opposed to 16.50 For this reason, the definition of GDP from the production where he or she works) adds to the income of households side given above includes the phrase "plus any taxes less available for consumption. The concept of national income subsidies on products not already included in the value of as opposed to domestic production is thus another key output". When output is valued at producers' prices, there aggregate of the SNA. As well as labour income from will be no further taxes on products to add in (except abroad in the form of compensation of employees, income possibly VAT type taxes); they will be already included in earned abroad on capital, especially financial capital, in the the measure of output (and similarly subsidies on products form of property income, is included in national income as will already be deducted). In this case, GDP may be well as any taxes on products payable by non-residents. defined as the production measure of gross domestic Similar payments flowing out of the total economy to the product (GDP) is derived as the value of output at rest of the world have to be deducted from GDP to reach producers' prices less intermediate consumption. When national income. output is measured at basic prices (as preferred in the SNA and as followed in the numerical example) the definition 16.54 Gross national income (GNI) is defined as GDP plus can be rephrased as the production measure of gross compensation of employees receivable from abroad plus domestic product (GDP) is derived as the value of output property income receivable from abroad plus taxes less at basic prices less intermediate consumption plus taxes subsidies on production receivable from abroad less less subsidies on products. compensation of employees payable abroad less property income payable abroad and less taxes plus subsidies on 3. Gross and net domestic product production payable abroad. In the terms of an equation, 16.51 While the third definition of GDP is correct both GNI (1 864) economically and statistically, it is held not to be the best measure of income. Income is usually defined as the equals amount that can be consumed while keeping the level of capital intact. (For further discussion on this see the GDP (1 854) introduction to chapter 8.) It is for this reason that the item consumption of fixed capital is so important in the accounts plus compensation of employees receivable from abroad and appears in every account as the difference between (6) balancing items on a gross and net basis. To measure domestic production on a net basis, it is necessary: plus property income receivable from abroad (44) a. to deduct consumption of fixed capital from the production measure of GDP, plus taxes less subsidies on production and imports receivable from abroad (0) b. to replace gross capital formation by net capital formation in the expenditure measure of GDP, minus compensation of employees payable abroad (2) 333 System of National Accounts minus property income payable abroad (38) year) to be treated as resident elsewhere. However, like compensation of employees payable from abroad, these minus taxes less subsidies on production and imports transfers from non-residents can have a major impact on the payable abroad (0). resources available to the national economy. Overseas assistance, other than development assistance for capital 16.55 As mentioned above, an income concept is better measured projects, is also shown here. As before, transfers payable after deducting consumption of fixed capital so Net abroad must be deducted in moving from national income national income (NNI) is defined as GNI less the to national disposable income. consumption of fixed capital. 16.57 National disposable income, more often than domestic NNI (1 642) product and national income, is usually shown on a net basis. Net national disposable income (NNDI) is defined as net national income (NNI) plus current transfers equals receivable from abroad less current transfers payable abroad. In equation terms, GNI (1 864) NNDI (1 604) minus consumption of fixed capital (222). equals 5. National disposable income NNI (1 642) 16.56 A further step in examining the impact of the rest of the world on the national economy is to consider current transfers receivable from abroad and those payable abroad. plus current transfers receivable from abroad (17) Transfers receivable from abroad include remittances from nationals working abroad for long enough (more than one minus current transfers payable abroad (55). D. An example set of integrated economic accounts 16.58 The T accounts shown in table 16.1 and 16.2 can be 1. Institutional sector accounts extended to cover all the sectors of the economy and as much detail as required in the accounts. Such an extended Current accounts presentation is referred to as a set of integrated economic accounts. An example is tables 16.4 and 16.5 which show, simultaneously, the general accounting structure of the 16.61 As an example of the institutional sectors current accounts, SNA and present a set of data for the individual consider the column for non-financial corporations. institutional sectors, the economy as a whole and the rest of the world. 16.62 The production account shows output (2 808) on the right- hand side, intermediate consumption (1 477) and value 16.59 The table brings together in one presentation: added (1 331 gross, 1 174 net, the difference referring to consumption of fixed capital (157), on the left-hand side). the institutional sector accounts, Value added, the balancing item of the production account, appears again in the same row as a resource of the generation of income account. the rest of the world accounts, and 16.63 The uses of the generation of income account the goods and services account. (compensation of employees (986) and other taxes (88) less subsidies on production (35)) are shown on the left-hand 16.60 In order to simplify this table while still having it side, the balancing item being net operating surplus (135), comprehensive, classifications of sectors, transactions and which appears again as a resource of the allocation of other flows, assets and liabilities are at the highest level of primary income account. aggregation compatible with understanding the structure of the SNA. However, columns and rows can be subdivided to 16.64 In the allocation of primary income account, property introduce subsectors or more detailed classifications of income receivable (96), along with operating surplus is transactions and other flows, assets and liabilities. recorded on the right-hand side, and property income payable (134) is recorded on the left-hand side. The balancing item is the net balance of primary incomes (97), which appears again as a resource of the secondary distribution of income account. The secondary distribution of income account shows current transfers, payable (98) and receivable (72), leading to the balancing item of net 334 Summarizing and integrating the accounts disposable income (71). This item, which can also be from all changes in these assets recorded in the described as the undistributed income of non-financial accumulation accounts, gross fixed capital formation (35), corporations, appears as a resource in the use of income consumption of fixed capital (-27), acquisitions less account. disposals of valuables (3), acquisitions less disposals of non-produced non-financial assets (2), other volume 16.65 The only transaction appearing in the use of income changes (0) and nominal holding gains (44). Financial account for the corporations sectors is an entry for the assets decrease by 9 (net disposal of financial assets, 10, change in pension entitlements. In this case the entry has a other volume changes, 0, nominal holding gains, 1). On the value of zero so the balancing item of the use of income right-hand side, liabilities increase by 102, which results account, saving, has the same value as disposable income. again from all changes in liabilities recorded in the accumulation accounts (net incurrence of liabilities (93), other volume changes (2), revaluation of liabilities (7)). So 16.66 The accounts for other institutional sectors may be read the the closing assets are 1 233 (846 + 387) and the closing same way, the relevant transactions varying according to liabilities are 789; closing net worth (444) shows a decrease the sector involved. over the year of 54. The sources of this change in net worth are summarized on the right-hand side of the account The use of income account showing the change in balance sheets, changes in net worth due to saving and capital transfers (-90, see also the right- 16.67 The presentation of the two ways in which disposable hand side of the capital account), to other changes in income is associated with final consumption, one taking volume of assets (-2, see also the right-hand side of the account of the redistribution of income in kind leading to other changes in volume of assets account), and to nominal actual consumption and the other showing final holding gains or losses (38, see also the right-hand side of consumption expenditure to disposable income directly, is the revaluation account). simplified in table 16.4. The redistribution of income in kind account and the use of adjusted disposable income 2. The rest of the world account account are merged with the use of income account as follows. Disposable income, net, is 317 for general 16.70 As explained earlier, the rest of the world accounts are government, 37 for NPISHs and 1 219 for households. presented from the viewpoint of the rest of the world. Final consumption expenditure is 352 for government, 32 Imports of goods and services (499) are a resource for the for NPISHs and 1 015 for households. Total consumption rest of the world, even though they represent an outflow expenditure is 1 399. Saving is given by disposable income from the national economy and exports (540) are a use of less final consumption expenditure. the rest of the world. Thus imports appear on the right-hand side of the table and exports on the left. The external The accumulation accounts account of goods and services is shown at the same level as the production account for institutional sectors. The 16.68 The accumulation accounts follow the sequence of current external balance of goods and services is -41. With a accounts for the institutional sectors. For example, net positive sign, it is a surplus of the rest of the world (a deficit saving of households is 192. Households receive 23 and of the nation) and vice versa. pay 5 as capital transfers. Thus the value of the changes in their net worth due to saving and capital transfers is 210. 16.71 As explained in connection with table 16.3, the external Households have 48 as gross fixed capital formation (25 as balance on primary income is -10 and on secondary income net fixed capital formation after deduction of consumption is 38, giving a current external balance of -13. of fixed capital (23)), changes in inventories of 2 and acquisitions less disposals of valuables of 5. Their 16.72 Transactions of the accumulation accounts appear in the acquisitions less disposals of non-produced non-financial columns for the rest of the world when relevant (mainly assets (land) are 4. The net lending of households is 174. capital transfers and financial transactions). The rest of the They incur financial liabilities (net) of 15 and acquire world columns show the assets and liabilities position of financial assets (net) of 189. Other changes in volume of the rest of the world vis-ŕ-vis the nation (external assets assets are 2. The value of the assets held by households and liabilities account). The row "changes in net worth due increases by 96 due to changes in the prices of both non- to saving and capital transfers" corresponds, for the rest of financial assets (80) and financial assets (16); there are no the world, to the current external balance and capital nominal gains or losses on their liabilities, which means transfers. that all their liabilities are denominated in monetary terms and probably in the national currency of the economy in 3. The goods and services account question. 16.73 In the integrated economic accounts, the goods and services The balance sheets account is shown in a column, not in a row. It reflects the various transactions in goods and services that appear in the 16.69 The balance sheets are also part of the integrated economic accounts of the institutional sectors. Intermediate accounts. In order to see the relationships between the consumption and final consumption appear as uses in the accumulation accounts and balance sheets, take general institutional accounts on the left-hand side of the accounts. government as the example. The opening assets are 1 185 For the goods and services account, they appear in the (789 non-financial assets and 396 financial assets) and the right-hand side column, even though the right-hand side is opening liabilities 687, net worth thus being 498. The total generally reserved for resources and consumption is a use. value of non-financial assets increases by 57, which results This device of using the opposite side of the account from 335 System of National Accounts Table 16.4:Summary current account with sector details ­ uses Uses Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services General NPISHs world Total Transactions and balancing items Imports of goods and services 499 499 Imports of goods 392 392 Imports of services 107 107 Exports of goods and services 540 540 Exports of goods 462 462 Exports of services 78 78 Production account Output 3 604 3 604 Market output 3 077 3 077 Output for own final use 147 147 Non-market output 380 380 Intermediate consumption 1 477 52 222 115 17 1 883 1 883 Taxes on products 141 141 Subsidies on products (-) -8 -8 Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 Consumption of fixed capital 157 12 27 23 3 222 222 Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 External balance of goods and services - 41 - 41 Generation of income account Compensation of employees 986 44 98 11 11 1 150 1 150 Taxes on production and imports 235 235 Taxes on products 141 141 Other taxes on production 88 4 1 0 1 94 94 Subsidies - 44 - 44 Subsidies on products -8 -8 Other subsidies on production - 35 0 0 -1 0 - 36 - 36 Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Consumption of fixed capital on gross operating surplus 157 12 27 15 3 214 Consumption of fixed capital on gross mixed income 8 8 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Allocation of primary income account Compensation of employees 6 6 Taxes on production and imports 0 Subsidies 0 Property income 134 168 42 41 6 391 44 435 Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Secondary distribution of income account Current transfers 98 277 248 582 7 1 212 17 1 229 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 Net social contributions 333 333 0 333 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 Social assistance benefits in cash 52 52 52 Other current transfers 12 62 136 71 2 283 16 299 Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 Use of disposable income account Final consumption expenditure 352 1 015 32 1 399 1 399 Adjustment for the change in pension entitlements 0 11 0 0 11 0 11 Saving, gross 228 14 - 35 215 5 427 427 Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 336 Summarizing and integrating the accounts Table 16.4 (cont):Summary current account with sector details ­ resources Resources Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services General NPISHs world Total Transactions and balancing items Imports of goods and services 499 499 Imports of goods 392 392 Imports of services 107 107 Exports of goods and services 540 540 Exports of goods 462 462 Exports of services 78 78 Production account Output 2 808 146 348 270 32 3 604 3 604 Market output 2 808 146 0 123 0 3 077 3 077 Output for own final use 0 0 0 147 0 147 147 Non-market output 348 32 380 380 Intermediate consumption 1 883 1 883 Taxes on products 141 141 Subsidies on products (-) -8 -8 Generation of income account Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 Compensation of employees Taxes on production and imports Taxes on products Other taxes on production Subsidies Subsidies on products Other subsidies on production Allocation of primary income account Operating surplus, gross 292 46 27 84 3 452 452 Mixed income, gross 61 61 61 Operating surplus, net 135 34 0 69 0 238 238 Mixed income, net 53 53 53 Compensation of employees 1 154 1 154 2 1 156 Taxes on production and imports 235 235 235 Subsidies - 44 - 44 - 44 Property income 96 149 22 123 7 397 38 435 0 0 Secondary distribution of income account Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 Current taxes on income, wealth, etc. 213 213 0 213 Net social contributions 66 213 50 0 4 333 0 333 Social benefits other than social transfers in kind 384 384 0 384 Social assistance benefits in cash 52 52 52 Other current transfers 6 62 104 36 36 244 55 299 Use of disposable income account Disposable income, gross 228 25 317 1 219 37 1 826 1 826 Disposable income, net 71 13 290 1 196 34 1 604 1 604 Final consumption expenditure 1 399 1 399 Adjustment for the change in pension entitlements 11 11 0 11 337 System of National Accounts Table 16.5: Summary of the accumulation accounts and balance sheets with sector details ­ assets and changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services General NPISHs world Total Transactions and balancing items Capital account Gross capital formation 308 8 38 55 5 414 414 Net capital formation 151 -4 11 32 2 192 192 Gross fixed capital formation 280 8 35 48 5 376 376 Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 26 0 0 2 0 28 28 Acquisitions less disposals of valuables 2 0 3 5 0 10 10 Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 Capital transfers, receivable Capital transfers, payable Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 Financial account Net acquisition of financial assets 83 172 - 10 189 2 436 47 483 Monetary gold and SDRs -1 -1 1 0 Currency and deposits 39 10 - 26 64 2 89 11 100 Debt securities 7 66 4 10 -1 86 9 95 Loans 19 53 3 3 0 78 4 82 Equity and investment fund shares 10 28 3 66 0 107 12 119 Insurance, pension and standardized guarantee schemes 1 7 1 39 0 48 0 48 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 Other accounts receivable/payable 4 1 5 4 1 15 10 25 Other changes in the volume of assets account Total other changes in volume 14 -1 0 0 0 13 13 Produced non-financial assets -2 -2 -3 0 0 -7 -7 Non-produced non-financial assets 14 0 3 0 0 17 17 Financial assets 2 1 0 0 0 3 3 Revaluation account Nominal holding gains and losses Non-financial assets 144 4 44 80 8 280 280 Financial assets/liabilities 8 57 1 16 2 84 7 91 Neutral holding gains and losses Non-financial assets 101 3 32 56 6 198 198 Financial assets/liabilities 18 71 8 36 3 136 12 148 Real holding gains and losses Non-financial assets 43 1 12 24 2 82 82 Financial assets/liabilities - 10 - 14 -7 - 20 -1 - 52 -5 - 57 Stocks and changes in assets Opening balance sheet Non-financial assets 2 151 93 789 1 429 159 4 621 4 621 Financial assets/liabilities 982 3 421 396 3 260 172 8 231 805 9 036 Total changes in assets and liabilities Non-financial assets 300 -2 57 116 11 482 482 Financial assets/liabilities 93 230 -9 205 4 523 54 577 Closing balance sheet Non-financial assets 2 451 91 846 1 545 170 5 103 5 103 Financial assets/liabilities 1 075 3 651 387 3 465 176 8 754 859 9 613 338 Summarizing and integrating the accounts Table 16.5 (cont): Summary of the accumulation accounts and balance sheets with sector details ­ liabilities, net worth and changes in them Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services General NPISHs world Total Transactions and balancing items Capital account Saving, net 71 2 - 62 192 2 205 205 Current external balance - 13 - 13 Gross capital formation 414 414 Net capital formation 192 192 Gross fixed capital formation 376 376 Consumption of fixed capital - 222 - 222 Gross fixed capital formation by type of asset Changes in inventories 28 28 Acquisitions less disposals of valuables 10 10 Acquisitions less disposals of non-produced assets 0 0 Capital transfers, receivable 33 0 6 23 0 62 4 66 Capital transfers, payable - 16 -7 - 34 -5 -3 - 65 -1 - 66 Changes in net worth due to saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 Financial account Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 Net acquisition of liabilities 139 173 93 15 6 426 57 483 Monetary gold and SDRs Currency and deposits 65 37 102 -2 100 Debt securities 6 30 38 0 0 74 21 95 Loans 21 0 9 11 6 47 35 82 Equity and investment fund shares 83 22 105 14 119 Insurance, pension and standardized guarantee schemes 48 0 48 0 48 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 Other accounts receivable/payable 26 0 9 4 39 - 14 25 Other changes in the volume of assets account Total other changes in volume 0 0 2 1 0 3 3 Produced non-financial assets Non-produced non-financial assets Financial assets 0 0 2 1 0 3 3 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 Revaluation account Nominal holding gains and losses Non-financial assets Financial assets/liabilities 18 51 7 0 0 76 15 91 Changes in net worth due to nominal holding gains/losses 134 10 38 96 10 288 -8 280 Neutral holding gains and losses Non-financial assets Financial assets/liabilities 37 68 13 5 3 126 22 148 Changes in net worth due to neutral holding gains/losses 82 6 27 87 6 208 - 10 214 Real holding gains and losses Non-financial assets Financial assets/liabilities - 19 - 17 -6 -5 -3 - 50 -7 - 57 Changes in net worth due to real holding gains/losses 52 4 11 9 4 80 2 66 Stocks and changes in liabilities and net worth Opening balance sheet Non-financial assets Financial assets/liabilities 3 221 3 544 687 189 121 7 762 1 274 9 036 Net worth - 88 - 30 498 4 500 210 5 090 - 469 4 621 Total changes in assets and liabilities Non-financial assets Financial assets/liabilities 157 224 102 16 6 505 72 577 Changes in net worth, total 236 4 - 54 305 9 500 - 18 482 Saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 Other changes in volume of assets 14 -1 -2 -1 0 10 10 Nominal holding gains/losses 134 10 38 96 10 288 -8 280 Neutral holding gains/losses 82 6 27 87 6 208 - 10 198 Real holding gains/losses 52 4 11 9 4 80 2 82 Closing balance sheet Non-financial assets Financial assets/liabilities 3 378 3 768 789 205 127 8 267 1 346 9 613 Net worth 148 - 26 444 4 805 219 5 590 - 487 5 103 339 System of National Accounts normal gives a balance for the row for each of the items institutional sectors. The production account for the total appearing in the goods and services account. On the economy includes, as resources, output (that is, the total resources side of the table, the figures appearing in the output of the economy (3 604)) and taxes less subsidies on column for goods and services are the counterparts of the products (133), the latter being the counterpart of the figure uses made by the various sectors and the rest of the world: appearing on the left-hand side in the column for goods and exports (540), intermediate consumption (1 883), final services. The uses side of the production account for the consumption expenditure or actual final consumption total economy shows intermediate consumption (1 883) (1 399), gross fixed capital formation (376), changes in and domestic product at market prices (1 854 gross, 1 632 inventories (28) and acquisitions less disposals of valuables net). The latter is the sum of value added of the various (10). On the use side of the table, the figures in the column sectors and taxes less subsidies on products. Domestic for goods and services are the counterparts of the resources product then appears on the right-hand side as a resource of of the various sectors and the rest of the world: imports the generation of income account for the total economy. (499) and output (3 604). On the same side taxes less Taxes less subsidies on products are shown again on the subsidies on products (133) are shown directly in the left-hand side in the column for total economy and on the column for goods and services. They are a component of right-hand side as a resource of government (and the rest of the value of the supply of goods and services that has no the world if relevant). This double routing of taxes less counterpart in the value of the output of any institutional subsidies on products is made in order to get domestic sector. product, gross and net, directly in the overall accounts, as explained above. 4. The total economy column 16.75 The other items in the columns for the total economy are 16.74 The columns for the total economy remain to be explained. self-explanatory. Net national income at market prices Except for taxes less subsidies on products and gross and (1 642) is shown directly as the sum of balance of primary net domestic product, the figures in these columns are incomes of the various sectors; national disposable income, simply the sum of the corresponding figures for the national saving, etc. are also obtained directly. 340 Chapter 17: Cross-cutting and other special issues Part 1: The treatment of insurance A. Introduction 17.1 At its simplest, an insurance policy is an agreement For example, if an annual policy with a premium of 120 between an insurance corporation and another institutional units comes into force on April 1 and accounts are being unit, called the policyholder. Under the agreement, the prepared for a calendar year, the premium earned in the policyholder makes a payment (a premium) to the calendar year is 90. The unearned premium is the amount insurance corporation and, if or when a specified event of the actual premium received that relates to the period occurs, the insurance corporation makes a payment (claim) past the accounting point. In the example just given, at the to the policyholder. In this way, the policyholder protects end of the accounting period there will be an unearned itself against certain forms of risk; by pooling the risks the premium of 30, intended to provide cover for the first three insurance corporation aims to receive more from the receipt months of the next year. A claim (benefit) is the amount of premiums than it has to pay out as claims. However, payable to the policyholder by the direct insurer or simply recording the actual premiums and claims paid in reinsurer in respect of an event covered by the policy the accounts of the SNA would not reflect the links occurring in the period for which the policy is valid. between premiums and claims. Instead, some actual Claims generally become due when the event occurs, even transactions are partitioned and others are imputed in order if the payment is made some time later. (The exception to to bring out the underlying economic processes actually the general rule is described in section C.) Claims that taking place. become due are described as claims incurred. In some contested cases the delay between the occurrence of the 17.2 The most common form of insurance is called direct event giving rise to the claim and the settlement of the insurance whereby the policy is issued by an insurance claim may be several years. Claims outstanding cover corporation to another type of institutional unit but an claims that have not been reported, have been reported important form of insurance is provided by one insurance but are not yet settled or have been both reported and corporation to another insurance corporation. This sort of settled but not yet paid. insurance is called reinsurance. 1. Direct insurance 17.3 This part of chapter 17 is concerned with direct insurance and reinsurance. It attempts to bring together all the entries 17.6 There are two types of direct insurance, life and non-life in the accounts connected with insurance and explain their insurance. Life insurance is an activity whereby a interconnection. Part 2 deals with pension and non-pension policyholder makes regular payments to an insurer in benefits under social insurance schemes. return for which the insurer guarantees to provide the policyholder (or in some cases another nominated person) 17.4 Defining some of the terms peculiar to the insurance with an agreed sum, or an annuity, at a given date or industry is a helpful preliminary to further discussion. For earlier if the policyholder dies beforehand. The sum direct insurance, the term premiums is used for payment to payable under the policy (benefit) may be fixed or may the insurance corporation; payments by the insurance vary to reflect the income earned from the investment of corporation are called claims in the case of non-life policies premiums during the period for which the policy operates. and benefits in the case of life policies. The actual For policies with varying returns, the terms "with-profits" premium is the amount payable to the direct insurer or life insurance or endowment policy are generally used. reinsurer to secure insurance cover for a specific event Although the date and sum may be variable, a claim is over a stated time period. Actual premiums are measured always paid in respect of a life policy. Non-life insurance by the amounts payable after all allowances, discounts or is an activity similar to life insurance except that it covers bonuses are taken into account. Cover is frequently all other risks, accidents, sickness, fire, etc. A policy that provided for one year at a time with the premium due to be provides a benefit in the case of death within a given period paid at the outset though cover may be provided for shorter but in no other circumstances, usually called term (or longer) periods and the premium may be payable in insurance, is regarded as non-life insurance because, as instalments, for example monthly. with other non-life insurance, a claim is payable only if a specified contingency occurs and not otherwise. In practice, 17.5 The premium earned is the part of the actual premium because of the way in which insurance corporations keep that relates to cover provided in the accounting period. their accounts, it may not always be possible to separate 341 System of National Accounts term insurance from other life insurance. In these 2. Reinsurance circumstances, term insurance may have to be treated in the same way as life insurance for purely practical reasons. 17.10 Just as an individual institutional unit protects itself against the financial consequences of loss or damage, so an 17.7 What life and non-life insurance have in common is that insurance corporation may also protect itself against an they both involve spreading risk. Insurers receive many unexpectedly large number of claims, or exceptionally (relatively) small regular payments of premiums from heavy claims, by taking out a reinsurance policy with policyholders and pay much larger sums to claimants when another insurance corporation. All insurance corporations the contingencies covered by the policy occur. For non-life may take out some form of reinsurance but there tend to be insurance, the risks are spread over the whole population a few large corporations that specialize in issuing that takes out the insurance policies. For example, an reinsurance policies. Because these corporations are insurance corporation determines the premiums charged for concentrated in a few financial centres, many of the flows vehicle insurance in a year by relating them to the amount associated with reinsurance involve transactions with the of claims it expects to pay on vehicle insurance in the same rest of the world. It is common for reinsurers to take out year. Typically, the number of claimants is much smaller reinsurance policies with other insurance corporations to than the number of policyholders. For an individual non- spread their risks further. This sort of reinsurance is called life policyholder there is no relationship between the retrocession. premiums paid and the claims received, even in the long run, but the insurance corporation establishes such a 17.11 Reinsurance policies are most common for non-life policies relationship for every class of non-life insurance on a but may also apply to life insurance policies. There are two yearly basis. For life insurance, a relationship between types of reinsurance, proportionate reinsurance and excess premiums and claims over time is important both to the of loss reinsurance. Under a proportionate reinsurance policyholders and to the insurance corporation. For contract, the reinsurer accepts an agreed proportion of the someone taking out a life policy, the benefits to be received risks; this proportion of the premiums is "ceded" to the are expected to be at least as great as the premiums paid up reinsurer who then meets the same proportion of the claims. until the benefit is due and can be seen as a form of saving. In this case, any reinsurance commission paid by the The insurance corporation must combine this aspect of a reinsurer to the policyholder (either a direct insurer or single policy with the actuarial calculations about the another reinsurer) is treated as a reduction in reinsurance insured population concerning life expectancy (including premiums payable. In excess of loss reinsurance, the the risks of fatal accidents) when determining the reinsurer undertakes to pay all losses over a given relationship between the levels of premiums and benefits. threshold. If there are no or few claims above the threshold, Further, in the interval between the receipt of premiums the reinsurer may pass a share of his profits to the direct and the payment of benefits, the insurance corporation insurer. By convention, profit-sharing is treated as a current earns income from investing the premiums received. This transfer from the reinsurer to the direct insurer in a way income also affects the levels of premiums and benefits set similar to the payment of claims. by the insurance corporations. 3. The units involved 17.8 Despite the similarity of the activity of life and non-life insurance, there are significant differences between them 17.12 The institutional units involved in direct insurance and that lead to different types of entries in the accounts of the reinsurance are pre-eminently insurance corporations. In SNA. Non-life insurance consists of redistribution in the principle it is possible for another type of enterprise to current period between all policyholders and a few carry out insurance as a non-principal activity, but usually claimants. Life insurance mainly redistributes premiums the legal regulations surrounding the conduct of insurance paid over a period of time as benefits paid later to the same mean that a separate set of accounts covering all aspects of policyholder. Essentially life insurance premiums and the insurance activity must be kept; thus in the SNA a benefits are financial transactions and not current separate institutional unit, classified to the insurance transactions. corporations and pension funds subsector, is identifiable. Sometimes government may conduct other insurance 17.9 One way in which a regular income stream can be obtained activities, but again it is likely that a separate unit can be in return for an upfront payment of a lump sum is via an identified. Having noted that exceptionally other sectors annuity. Annuities are usually offered by life insurance may be involved, in what follows it is assumed that all corporations and so a discussion of the recording for insurance is carried out by insurance corporations, either annuities in the SNA is given at the end of this part. resident or non-resident. B. Output of direct insurance 17.13 Under a non-life insurance policy, the insurance company which to meet any claim due. The investment income accepts a premium from a client and holds it until a claim is represents income foregone by the client and so is treated made or the period of the insurance expires. In the as an implicit supplement to the actual premium. The meantime, the insurance company invests the premium and insurance company sets the level of the actual premiums to the investment income is an extra source of funds from be such that the sum of the actual premiums plus the 342 Cross-cutting and other special issues investment income earned on them less the expected claim of benefits in future. Usually the reserves are invested in will leave a margin that the insurance company can retain; financial assets and the income is in the form of investment this margin represents the output of the insurance company. income (interest and dividends). Sometimes, however, they Within the SNA, the output of the insurance industry is may be used to generate net operating surplus either in a determined in a manner intended to mimic the premium separate establishment or as a secondary activity. The most setting policies of the insurance corporations. To that end, common example is from real estate. four separate items need to be defined. These are premiums earned, premium supplements, claims (or benefits) incurred 17.18 It is common with life insurance policies for amounts to be and reserves. Each of these is discussed in turn before explicitly attributed by the insurance corporation to the discussing the measurement of output for direct non-life policyholders in each year. These sums are often described insurance, direct life insurance and reinsurance as bonuses. The sums involved are not actually paid to the respectively. policyholders but the liabilities of the insurance corporation towards the policyholders increase by this amount. This 1. Premiums earned amount is shown as investment income attributed to the policyholders. The fact that some of it may derive from 17.14 As explained in section A, an important distinction is made holding gains does not change this designation; as far as the between actual premiums, which are payable for cover in a policyholders are concerned it is the return for making the given period and premiums earned that are the proportion financial asset available to the insurance corporation. In of actual premiums, relating to the accounting period in addition, all the income from the investment of non-life question rather than to the period covered by the insurance reserves and any excess of income from the investment of policy. life reserves over any amounts explicitly attributed to the policyholders, are shown as investment income attributed to policyholders, regardless of the source of the income. 2. Premium supplements 17.19 All investment income attributed to policyholders, whether 17.15 For life insurance in particular, but also to a lesser extent explicitly by the insurance corporation or implicitly within for non-life insurance, the total amount of claims payable in the SNA, is shown as payable to the policyholders in the a given period often exceeds the premiums receivable. The distribution of primary income account. For non-life insurance corporation can accept this because the insurance, the same amount is then repaid to the insurance contingencies covered by the policies do not occur, even corporation as premium supplements in the secondary for the whole population covered, at the same time as the distribution of income account. For life insurance, premiums are paid. Premiums are usually paid regularly, premiums and premium supplements as well as benefits are often at the start of an insurance period, whereas claims fall shown in the financial account. due later, in the case of life insurance often many years later. In the time between the premium being paid and the claim being payable, the sum involved is at the disposal of 17.20 For direct non-life insurance, the investment income the insurance corporation to invest and earn income from it. attributed to the policyholders should, in principle, be made These amounts are called reserves. The income earned on according to the proportion of reserves attributed to the the reserves allows the insurance corporations to charge different classes of insurance and policyholders. In lower premiums than would be the case otherwise. An practice, the usual method is to distribute the investment adequate measure of the service provided must take income in proportion to the actual premiums payable. For account of the size of this income as well as the relative direct life insurance, all policyholders are individuals and size of premiums and claims. so the investment income is attributed to households (possibly including some non-resident households). 17.16 The income concerned comes from the investment of the reserves of the insurance corporations, which represent 3. Claims and benefits liabilities towards the policyholders. For non-life insurance, even though a premium may be payable at the start of a period of cover, the premiums are only earned on a Non-life insurance claims continuous basis as the period passes. At any point before the end of the cover, the insurance corporation holds an 17.21 The level of claims made on non-life insurance policies amount due to the policyholder relating to services and varies from year to year and there may be exceptional possible claims to be provided in the future. This is a form events that cause a particularly high level of claims. of credit extended by the policyholder to the insurance However, the concept of insurance service is the service of corporation described as unearned premiums. Similarly, providing cover against risk; production occurs although claims become due for payment by the insurance continuously and not simply when the risk occurs. As such, corporation when the contingency specified in the policy its measurement should not be affected by the volatility of eventuates, they may not be actually payable until some the occurrence of the risk. Neither the volume nor the price time later, often because of negotiation about the amounts of insurance services is directly affected by the volatility of due. This is another similar form of credit, described as claims. The insurance company sets the level of premiums reserves against claims outstanding. on the basis of its own estimation of the likelihood of claims. For this reason, the formula used in the SNA for the 17.17 Similar reserves exist for life insurance but in addition calculation of output should use not actual claims but a there are two other elements of insurance reserves, actuarial figure based on past experience and future expectations. reserves for life insurance and reserves for with-profit The term "adjusted claims" is used to describe the level of insurance. They represent amounts set aside for payments claims used in determining the value of output. 343 System of National Accounts 17.22 The figure for adjusted claims may be derived statistically since premium supplements are less volatile than claims, in in an expectations approach based on previous experience practice no such adjustment may be necessary. If a of the level of claims. In considering the past history of statistical basis is to be used for estimating output, it is claims payable, however, allowance must be made for the advisable to use information broken down by "line of share of these claims that are met under the terms of the business", that is for motor insurance, buildings insurance, direct insurer's reinsurance policy (if any). For example, etc. separately. when the direct insurer has an excess of loss reinsurance, he sets the level of premiums to cover losses up to the 17.28 Alternatively, an accounting approach may be used maximum loss covered by his reinsurance policy plus the whereby output is calculated as: reinsurance premium he must pay. Under a proportionate reinsurance policy, he sets his premiums to cover the proportion of claims he has to pay plus the reinsurance Actual premiums earned; premium. plus premium supplements; 17.23 Alternatively, an approach using information from the accounts of the insurance corporation may be adopted. minus adjusted claims incurred; These may include an equalization provision, which is an adjustment to reflect the variations in claims from one year where adjusted claims are determined by using claims due to another. Whichever method is used, therefore, the plus the changes in equalization provisions and, if adjusted claim figure approximates the expected level of necessary, changes to own funds. claims. 17.29 If the necessary accounting data are not available and the Life insurance benefits historical statistical data are not sufficient to allow reasonable average estimates of output to be made, the 17.24 Life insurance benefits are the amounts payable under the output of non-life insurance may be estimated as the sum of policy in the accounting period in question. No adjustment costs (including intermediate costs, labour and capital for unexpected volatility is necessary in the case of life costs) plus an allowance for "normal profit". However, insurance. since any reasonable estimate for "normal profit" is likely to involve expected claims, this option is hardly different 4. Reserves from the expectations approach. 17.25 The concept of reserves used in the formula for deriving the Life insurance value of insurance output corresponds to the definition of non-life insurance technical reserves and life insurance and 17.30 The output of direct life insurance is calculated separately annuities entitlements as defined in chapter 13. These cover as: provisions for unearned premiums, for unexpired risks, claims outstanding and reserves for bonuses and rebates, Actual premiums earned; the latter applying in the main to life insurance only. The coverage of unearned premiums and claims outstanding is given in section A. plus premium supplements; 5. Defining insurance output minus benefits due; minus increases (plus decreases) in actuarial reserves and Non-life insurance reserves for with-profits insurance. 17.26 The output of the insurance corporation represents the 17.31 If adequate data are not available for the calculation of life service provided to the policyholders. The output of direct insurance according to this formula, an approach based on non-life insurance is based on the principle of adding the sum of costs, similar to that described for non-life premiums and premium supplements and deducting insurance, may be used. As for non-life insurance, an adjusted claims incurred. allowance for normal profits must be included. 17.27 If an expectations approach is being used, the formula to calculate output takes the following form: Reinsurance Actual premiums earned; 17.32 The formula to calculate the output of reinsurance services is exactly analogous to those for direct insurance. However, because the primary motivation of reinsurance is to limit plus premium supplements; the direct insurer's exposure to risk, a reinsurer deals with exceptionally large claims as a matter of normal business. minus adjusted claims incurred; For this reason, and because the market for reinsurance is concentrated in relatively few large firms worldwide, it is where adjusted claims are estimated from past experience. less likely that the reinsurer will experience an In such a case, conceptually premium supplements should unexpectedly large loss than a direct insurer does, also be estimated on the basis of past experience. However, especially in the case of excess of loss reinsurance. 344 Cross-cutting and other special issues 17.33 The output of reinsurance is measured in a way similar to Total actual premiums earned less commissions payable; that for direct non-life insurance. However, there are some payments peculiar to reinsurance. These are commissions plus premium supplements; payable to the direct insurer under proportionate reinsurance and profit sharing in excess of loss reinsurance. minus both adjusted claims incurred and profit sharing. Once these are taken into account the output of reinsurance can be calculated as: C. All the transactions associated with non-life insurance 17.34 This section describes the full set of entries needed in the asbestos was established as a cause of serious illness and accounts to record all the implications of a non-life was judged to give rise to claims under an insurance policy insurance policy. Policies may be taken out by valid at the time of the exposure. In such cases the claim is corporations, government units, NPISHs, households and recorded at the time that the insurance company accepts the units in the rest of the world. However, when a policy taken liability. This may not be the same time as when the size of out by a member of a household qualifies as social the claim is agreed on or when the claim is paid. insurance, the entries required are as described in part 2 of this chapter on social insurance and not as described here. 17.38 Because the formula for output uses adjusted claims and not actual claims, only when the actual claims happen to be 1. Net premiums and consumption of insurance the same value as expected claims will net premiums and services claims be equal in a given period. They should however be approximately equal over a period of years excluding a year in which a disaster is recorded. 17.35 The actual premiums payable and the premium supplements are shown in the SNA divided between two types of transactions. The first is the value of the output of 17.39 Claims are normally recorded as current transfers payable insurance, which is shown as either consumption or export by the insurance corporation to the policyholder. In some of insurance services. The second is net premiums earned circumstances, an insurance corporation may set the level by the insurance corporations. Net premiums are defined of premiums so low that they are not expected to cover as actual premiums plus premium supplements less the costs and the predicted level of claims. This may happen insurance service charge payable by the policyholders. when the surplus from one line of business, for example Because of the way in which the value of the service output home insurance, is being used to cross-subsidise another is defined, net premiums for non-life insurance are equal in line of business, for example, vehicle insurance. total to adjusted, and not actual, claims. Any variation between adjusted and actual claims represents a transfer 17.40 There is one case where claims may be recorded as capital between the policyholders and the insurance corporation. transfers rather than current transfers and that is in the wake Over time, a transfer in one direction is offset by one in the of a major catastrophe. The criteria for when the effects of a other. catastrophe should be treated like this must be determined according to national circumstances but these may involve 17.36 Insurance services are consumed by those sectors (and the the number of policyholders affected and the amount of the rest of the world) that pay premiums. Estimates of the value damage done. The rationale for recording the claims as of consumption by sector are usually made by allocating capital transfers in this case comes from the fact that many the total value of the service in proportion to the actual of the claims will relate to destruction or serious damage to premiums payable. Estimates of net premiums are then assets such as dwellings, buildings and structures. Damage made by deducting the consumption of services from the corresponding to a normal level of claims is covered by, for total actual premiums payable plus the value of the example, consumption of fixed capital or losses from premium supplements. (Because premium supplements are inventories. These losses are thus captured as current also allocated in proportion to actual premiums, the net expenditure elsewhere in the system. However, major premiums are also in effect allocated in the same losses in the wake of a catastrophe are recorded as the proportions as the actual premiums.) result of unforeseen events in the other changes in assets accounts and omitted from current expenditures. The recommendation is thus to record claims as current or 2. Recording non-life insurance claims capital transfers analogously. 17.37 The time of recording claims incurred is generally in the 17.41 It is recommended that following a catastrophe, the total period in which the event to which the claim relates took value of the claims related to the catastrophe should be place. This principle is applied even when, in the case of recorded as a capital transfer from the insurance disputed claims, the settlement may take place years after corporation to the policyholders. Information on the level the event concerned. An exception is made in cases where of claims to be met under insurance policies should be the possibility of making a claim is recognized only long obtained from the insurance industry. If the insurance after the event has happened. For example, an important industry cannot provide this information, one approach to series of claims were recognized only when exposure to estimating the level of the catastrophe-related claims is to 345 System of National Accounts take the difference between the adjusted claims and the premium supplements to actual premiums in the economy actual claims in the period of the catastrophe. providing the services could be used to estimate the investment income receivable and premium supplements payable. 17.42 A consequence of recording such claims as capital transfers means that the disposable income of households and other policyholders does not increase counter-intuitively as 4. The accounting entries would be the case if the claims were recorded, as normal, as current transfers. The net worth of the policyholders will show the effects of both the destruction of assets (as an 17.45 Altogether six pairs of transactions need to be recorded in other volume change) and an increase (initially) in financial respect of non-life insurance that is not part of social assets from the capital transfers. This recording is insurance; two pairs relating to the measurement of the consistent with the recording of assistance by government production and consumption of the insurance service, three of an NPISH to cover some or all of the costs of repairing pairs relating to redistribution and one in the financial or replacing the assets of those affected by the catastrophe account. Under exceptional circumstances, a seventh who are not covered by an insurance policy. transaction relating to redistribution may be recorded in the capital account. The value of the output of the activity, the investment income to be attributed to the policyholders and 3. Insurance services provided to and from the the value of the service charge are calculated specifically rest of the world for other non-life insurance in the manner described above. 17.43 Resident insurance corporations frequently provide 17.46 The production and consumption transactions are as insurance cover to households and enterprises in the rest of follows: the world, and resident households and enterprises may purchase cover from insurance corporations in the rest of a. Since all such activity by resident institutional units is the world. The investment income attributed by resident undertaken by insurance corporations, the output is insurance corporations to policyholders includes an recorded in the production account of insurance allocation to policyholders in the rest of the world. These corporations; non-resident policyholders then also pay premium supplements to the resident insurance corporation. This b. The service may be consumed by any of the sectors of information should be available for resident insurers and the economy or by the rest of the world; the value of the should be included in the rest of the world account. service is payable to insurance corporations. Payments by non-financial corporations, financial corporations, 17.44 Similar considerations also apply to the treatment of general government or non-profit institutions constitute resident enterprises and households taking out policies with intermediate consumption, recorded in their production non-resident insurers. They receive imputed investment account. Insurance clearly associated with the income from abroad and pay premiums and supplements to productive activity of a household unincorporated abroad. Estimation of the size of these flows is more enterprise is also recorded as intermediate consumption difficult, especially when there is no resident insurer of the in the production account of households. Other same type against which to make comparisons. However, insurance payments by households are part of final very often the country providing the service will be known consumption expenditure, recorded in the use of and it may be possible to use counterpart data to make income account. Payments by the rest of the world are estimates for the national economy. The level of recorded as exports in the external account of goods transactions by residents should be known and the ratio of and services. Table 17.1:Accounts for non-life insurance - uses Uses Insurance Other Total Corporations corporations Households sectors economy Production account Intermediate consumption 1.0 3.0 4.0 Output Allocation of primary income account Investment income attributable to non-life insurance policy holders 6.0 6.0 Secondary distribution of income account Net non-life insurance premiums 8.0 31.0 6.0 45.0 Non-life insurance claims 45.0 45.0 Use of income account Final consumption expenditure 0.0 2.0 0.0 2.0 Financial account Non-life insurance technical reserves 0.0 3.0 0.0 3.0 of which unearned premiums 0.0 1.0 0.0 1.0 claims outstanding 0.0 2.0 0.0 2.0 346 Cross-cutting and other special issues 17.47 The redistributive transactions cover investment income d. If some claims are to be treated as capital rather than attributed to policyholders in respect of non-life insurance, current transfers, these are recorded in the capital net non-life insurance premiums, and insurance claims: account as payable to policyholders by insurance corporations. a. Investment income attributed to policyholders in respect of non-life insurance is recorded as payable by 17.48 Net non-life insurance premiums should be recorded on the insurance corporations. It is recorded as receivable by basis of the amounts due to obtain cover in the period of all sectors and the rest of the world. Both payables and account, not the amounts actually paid in the period. receivables are recorded in the allocation of primary Insurance claims should be recorded as payable on the date income account. of the event concerned occurred, except in the type of case described above when the claim is recorded when the b. Net non-life insurance premiums are calculated as insurance company accepts that a liability exists. An entry premiums earned plus premium supplements (equal to in the financial account records any difference between the investment income attributed to policyholders) less premiums payable and premiums earned and claims due the value of the services consumed. These net and claims payable. premiums are payable by all sectors of the economy or the rest of the world and receivable by insurance corporations. 17.49 By convention, unearned premiums and reserves against outstanding claims are shown as a change in liabilities of insurance corporation (with a negative sign if necessary) c. Insurance claims incurred are payable by insurance and a change in assets of all sectors and the rest of the corporations and receivable by all sectors of the world. economy and the rest of the world. Both net premiums and claims are recorded in the secondary distribution of income account. 17.50 An example of these flows is shown in table 17.1. D. All the transactions associated with life insurance 17.51 This section describes the way in which recording of the distribution of income account. The reason for the different entries for life insurance differs from non-life insurance. As treatment is that an individual policy other than social for non-life insurance, but more significantly in practice, a insurance is entered into entirely on the initiative of the life policy that qualifies as social insurance is recorded not policyholder. Policies that qualify as social insurance as described here but as described in part 2 of the chapter. reflect the intervention of a third party, usually the The major difference between a normal life insurance government or the employer, to encourage or oblige the policy and one qualifying as social insurance is that under policyholder to make provision for income in retirement. the former, the benefits from the policy are treated as Distinguishing all payments made under social insurance mainly rundowns of wealth, recorded in the financial schemes, including those coming from qualifying account. For a policy qualifying as social insurance, the individual policies, shows how far social policies to ensure benefits (pensions) are recorded as income in the secondary income in retirement are successful. Table 17.1 (cont):Accounts for non-life insurance - resources Resources Insurance Other Total Corporations corporations Households sectors economy Production account Intermediate consumption Output 6.0 6.0 Allocation of primary income account Investment income attributable to non-life insurance policy holders 5.0 1.0 6.0 Secondary distribution of income account Net non-life insurance premiums 45.0 45.0 Non-life insurance claims 6.0 35.0 4.0 45.0 Use of income account Final consumption expenditure Financial account Non-life insurance technical reserves 3.0 3.0 of which unearned premiums 1.0 1.0 claims outstanding 2.0 2.0 347 System of National Accounts 17.52 The holder of a life insurance policy is always an insurers. Such payments are treated as imports of individual. (If a company takes out an insurance policy on insurance services. the life of an employee, this should be treated as term insurance and therefore as non-life insurance in the SNA.) c. Investment income attributed to insurance Life insurance transactions therefore take place only policyholders in respect of life insurance is recorded in between insurance corporations and households, resident the allocation of primary income account. Bonuses and non-resident. The production of the insurance services declared in connection with life policies are treated as is matched by the value of the services consumed by being distributed to policyholders even if they exceed households as part of final consumption expenditure and the investment income earned by the institution exports. The investment income attributed to insurance declaring the bonus. The investment income is recorded policyholders is treated as premium supplements. However, as payable by insurance corporations and receivable by premiums and claims are not shown separately in the case resident households or non-resident households in the of life insurance and are not treated as current transfers. rest of the world. Rather they constitute components of a net transaction recorded in the financial account, the financial asset d. In the financial account, the item change in life involved being life insurance and annuities entitlements. insurance and annuities entitlements is shown as a change in assets of households and the rest of the world 17.53 Four pairs of transactions are recorded in the accounts; two and a change in liabilities of insurance corporations. It pairs relate to production and consumption of the insurance is equal to actual premiums plus premium supplements service, one pair shows the attribution of investment (equal to the investment income attributed to income to the property holders and one pair shows the policyholders) less the value of the services consumed change in life insurance and annuities entitlements: and less benefits due. 17.54 An example of these flows is shown in table 17.2. a. The output of the life insurance activity is recorded in the production account for the insurance corporations. 1. Annuities b. The value of the services consumed is recorded as final 17.55 Some life insurance policies yield a lump sum at a given consumption expenditure payable by households in the date rather than a stream of payments. The lump sum may use of disposable income account or as payable by the be used to purchase an annuity that itself converts a lump rest of the world (exports to non-resident households). sum into a stream of payments. The recording of annuities Households may also make payments to non-resident is described in section F. E. All transactions associated with reinsurance 17.56 Before discussing how the various elements contributing to section without any reference to the transactions between the measurement of output of reinsurance are recorded in the direct insurer and the reinsurer. The transactions the SNA, it is necessary to describe how reinsurance is between the direct insurer and the reinsurer are recorded as measured and recorded. an entirely separate set of transactions and no consolidation takes place between the transactions of the direct insurer as 17.57 The transactions between the direct insurer and the issuer of policies to its clients on the one hand and the policyholder are measured as described in the previous holder of a policy with the reinsurer on the other. Table 17.2:Accounts for life insurance - uses Uses Insurance Other Total Corporations corporations Households sectors economy Production account Output Allocation of primary income account Investment income attributable to life insurance policy holders 7.0 7.0 Use of income account Final consumption expenditure 4.0 4.0 Financial account Life insurance and annuity entitlements 22.0 22.0 of which net premiums 113.0 113.0 benefits -91.0 -91.0 348 Cross-cutting and other special issues 17.58 The direct policyholder does not know, or need to know, 17.63 The production and consumption transactions are as whether the direct insurer involves a reinsurer to protect it follows: against loss on the policy. The direct insurer receives actual premiums from its policyholders. Some of these are ceded a. Since all such activity by resident institutional units is to a reinsurer. The premiums are shown as being first undertaken by insurance corporations, the output is payable to the direct insurer and then a lesser premium is recorded in the production account of insurance payable to the reinsurer. This non-consolidation is corporations. Reinsurance services may be, and often sometimes referred to as gross recording on the part of the are, provided by non-resident units and thus are direct insurer. The alternative (net recording) would be to recorded in imports. show part of the direct policyholders' premiums being paid to the direct insurer and part to the reinsurer but this option b. The service may only be consumed by another is not recommended either in commercial accounting or in insurance corporation, though this may be a non- the SNA. resident unit, and is intermediate consumption of that unit unless the policyholder is non-resident in which 17.59 The actual premium payable by the direct insurer to the case it is recorded as exports of the reinsurer. reinsurer is used by the reinsurer to earn investment income. This investment income is treated as investment 17.64 The redistributive transactions cover investment income income payable to the direct insurer and returned to the attributed to policyholders in respect of reinsurance, net reinsurer as a premium supplement. Thus a direct insurer reinsurance premiums and reinsurance claims: pays investment income to its policyholders based on the whole of the premiums earned (or by approximation payable) but also receives investment income from the a. Investment income receivable by reinsurance reinsurer corresponding to the amount of the premiums it policyholders is payable by insurance corporations, has ceded to the reinsurer. The investment income resident or non-resident, and receivable by similar receivable by the direct insurer from the reinsurer may be institutions either resident or non-resident. used to offset some of the investment income payable by the direct insurer to its policyholders but is not recorded b. Net reinsurance premiums are calculated as premiums explicitly as such. earned plus premium supplements (equal to the investment income attributed to policyholders) less the 17.60 As with direct insurance, in exceptional cases for example value of the services consumed. These net premiums following a catastrophic natural disaster, some part of are payable by insurance corporations and receivable reinsurance claims may be recorded as capital transfers by [other] insurance corporations. (Either of the units rather than as current transfers. due to make the payment or to receive it may be non- resident.) 17.61 The whole of the output of the reinsurer represents intermediate consumption of the direct insurer holding the c. Reinsurance claims are payable by insurance reinsurance policy. As noted above, many reinsurance corporations and receivable by [other] insurance policies are between insurance corporations resident in corporations, either resident or non-resident. Both net different economies. Thus the value of the output in these premiums and claims are recorded in the secondary cases represents imports by the insurance corporation distribution of income account. taking out the reinsurance policy and exports by the reinsurance corporation. d. Commissions payable by reinsurers to the insurance corporation as the reinsurance policyholder are treated 17.62 The recording of flows associated with reinsurance as reductions in the premiums payable to the reinsurers. resembles the recording for non-life insurance except that the policyholder of a reinsurance policy is always another e. Profit sharing payable by the reinsurer to the direct insurance corporation. insurer is recorded as a current transfer. (Although they Table 17.2 (cont):Accounts for life insurance - resources Resources Insurance Other Total Corporations corporations Households sectors economy Production account Output 4.0 4.0 Allocation of primary income account Investment income attributable to life insurance policy holders 7.0 7.0 Use of income account Final consumption expenditure Financial account Life insurance and annuity entitlements 22.0 22.0 of which net premiums 113.0 113.0 benefits -91.0 -91.0 349 System of National Accounts are recorded differently, both commissions payable and relating to the same event should also be treated as profit sharing serve to reduce the output of the capital transfers. reinsurer.) 17.65 An entry in the financial account records any difference f. If some direct insurance claims are treated as capital between premiums payable and premiums earned and and not current transfers, any reinsurance claims claims incurred and claims payable. F. Annuities 17.66 The simplest case of a life insurance policy is one where a a drawdown of the value of 1 300 to 1 275. The remaining stream of payments is made by the policyholder to the investment income (435) adds to the value of the net insurance corporation over time in return for a single annuity reserve of 8 700. At the end of the first year, payment received as a claim at some point in the future. therefore, the annuity reserve is 8 535; the original sum of 8 With the simplest form of annuity, the equivalent to the 700 plus the interest of 435 and less the payment of 600. policyholder, called the annuitant, pays a single lump sum The drawdown on the start of year amount of the net to the insurance corporation and in return receives a stream annuity reserve is thus 165 and the drawdown on the of payments either for a nominated period or for the rest of prepaid premiums is 25. the annuitant's life (or possibly for the rest of the life of both the annuitant and a nominated other person). 17.70 This process continues year by year. As time progresses, the drawdown of the remaining reserves is an increasingly 17.67 Annuities are organized by insurance corporations and are a larger part of the payments due and the investment income means of risk management. The annuitant avoids risk by payable a smaller part. In principle, every year the agreeing to accept a known payment stream (known either insurance corporation can review its assumptions about the in absolute terms or subject to a formula, such as being remaining life expectancy of the annuitant and recalculate index-linked) in return for parting with a considerable sum. the amount available as a service charge. (In practice this is The insurance corporation takes the risk of making more likely to be done at intervals and by cohort of annuitants.) from investing the sum than is due to the annuitant. The rates of annuities are determined taking life expectancy into 17.71 The detailed numerical example is intended to demonstrate account. The insurance corporation has to pay more than the way an annuity functions but in fact it is not necessary originally planned to long-lived annuitants who may to undertake all these calculations to determine the output receive more than their original payment and the income of the insurance corporation. The value of output can be earned on it. Those who die early receive less, possibly determined more simply as the total investment income due considerably less, and the insurance corporation receives to the annuitant (500) less the amount payable to him (600) more than expected. less the change in the value of the reserves (a reduction of 190), or 90 (500-600-(-190)). This result can be seen to be 1. How an annuity works parallel to the measurement of life insurance except that there is no actual premium element. 17.68 It is simplest to explain the working of an annuity by means 2. The output associated with an annuity of an example. Suppose an insurance corporation offers an individual payments of 600 for life in return for a lump sum payment of 10 000 and further suppose that the insurance 17.72 The output of an insurance corporation associated with corporation expects the individual concerned to live for 25 administering annuities is calculated as: years and that the discount rate being used is five per cent. As shown in figure 17.1, the net present value of 600 for 25 the investment income attributable to the annuitants. years is only 8 700. Thus the remaining 1 300 represents the net present value of the service charges of about 90 per year the insurance corporation expects to make. Thus, minus the amount payable to the annuitants (or surviving whether the annuitant recognizes it or not, the insurance beneficiaries) under the terms of the annuity; corporation offer of 600 a year is a net figure. The annuitant will actually be entitled to 690 a year but 90 is retained by minus the change in the annuity reserves but excluding the the insurance corporation as a fee for its services. initial payments for new annuities. 17.69 Each year there is investment income payable to the The amount of the investment income attributable to the annuitant equal to the unwinding of the discount factor of annuitants is equal to the discount factor times the start of five percent on the remaining amount held by the insurance year reserves and is independent of actual investment corporation. In the first year, the proportion of the income earned by the insurance corporation. The item is investment income relating to the prepaid premium (1 300) parallel to the concept of premium supplement in the life is 65 and the remaining 25 of the service charge is met from insurance context. 350 Cross-cutting and other special issues 3. All the transactions associated with from the maturing of a normal life insurance policy annuities immediately into an annuity. In such a case there is no need to record the payment of the lump sum and the acquisition of the annuity; there will simply be a change from life 17.73 There are three sets of transactions recorded for an existing insurance reserves to annuity reserves in the insurance annuity and further entries required for the initiation and corporation and pension fund subsector. If an annuity is termination of an annuity. purchased independently of the maturing of a life insurance policy, this is recorded as a pair of financial transactions a. A service charge associated with the annuity is payable between the household and the insurance corporation. The every year. It is recorded as output of the insurance household makes a payment to the insurance corporation corporation and final consumption expenditure of the and receives in return an asset arising from the terms of the household to which the beneficiary belongs. This might annuity. The insurance corporation receives a financial be a non-resident household. asset from the household and incurs a liability towards it. b. Investment income equal to the discount factor times 17.75 Annuities are normally terminated by death, at which point the level of annuity reserves at the beginning of the any remaining reserves for that annuitant are transferred to period is recorded in the primary distribution of income the insurance corporation. However, assuming the account as payable by the insurance corporation and receivable by the household. insurance corporation has predicted life expectancy accurately, for the group of annuitants as a whole, the average funds remaining at death will be zero. If life c. The change in the value of the reserves for annuities is expectancies change, revisions to the reserves must be recorded in the financial account as payable by the made. For annuities in operation, an extension of life household to the insurance corporation. expectancies will reduce the amount available to the insurance corporation as a service charge, possibly making 17.74 When an annuity is initiated, there is a transfer of funds this negative. In such a case, the insurance corporation will from the household to the insurance corporation. In many have to draw on its own funds and hope to build these up cases, however, this may simply be a "rollover" from a again in future by associating higher service charges with lump sum payable by that or another insurance corporation new annuities. Figure 17.1:Example of an annuity Starting position Purchase price of annuity (A) 10 000 NPV of 600 a year for 25 years at 5% (B) 8 700 NPV of service charges (C ) 1 300 Annualized rate (600*1300/8700) 90 First year Second year Investment income (interest) in respect of : Investment income (interest) in respect of : A 500 A 491 B 435 B 427 C 65 C 64 Payments due Payments due A 690 A 690 B 600 B 600 C 90 C 90 Decline in value of stocks Decline in value of stocks A - 190 A - 200 B - 165 B - 173 C - 25 C - 26 End year stocks End year stocks A 9 810 A 9 611 B 8 535 B 8 362 C 1 275 C 1 249 Etc. 351 System of National Accounts Part 2: Social insurance schemes G. Introduction 17.76 Social insurance schemes are an important way in which other unit may be an employer, general government or a individuals who participate in the scheme are paid benefits, financial institution (often an insurance corporation) or described as social benefits, when certain conditions exist sometimes a non-profit institution serving households that would adversely affect their welfare. Some social (NPISH). benefits, however, are payable independently of participation in a social insurance scheme. It is the 17.78 The objective of this part of the chapter is to describe how conditions under which the benefits are payable that the various sorts of social benefits provided under social identify a social insurance scheme, not the nature of the insurance schemes are recorded in the SNA. In order to do benefits in themselves. this, it is necessary to clarify the identifying characteristics of a social insurance scheme, the nature of the other unit 17.77 A social insurance scheme is a form of contract and always involved, the types of benefits payable and the ways in involves at least one unit other than the beneficiary. The which these are funded. H. Basic definitions 1. Social benefits · involuntary unemployment, including temporary lay- offs and short-time working; 17.79 Social benefits become payable when certain events occur, · sickness, accidental injury, the birth of a child, etc., that or certain conditions exist, that may adversely affect the welfare of the households concerned either by imposing prevents a person from working, or working full time. additional demands on their resources or reducing their incomes. Social benefits may be provided in cash or in d. The beneficiaries receive payments to compensate for kind. There are a number of circumstances in which social suffering a reduction in income because of the death of benefits may be payable: the main income earner. e. The beneficiaries are provided with housing either free a. The beneficiaries, or their dependants, require medical, or at prices that are not economically significant or by dental or other treatment, or hospital, convalescent or reimbursing expenditure made by households. These long-term care, as a result of sickness, injuries, are social benefits in kind. maternity, chronic invalidity, old age, etc. The social benefits may be provided in kind in the form of treatments or care provided free or at prices that are not f. The beneficiaries are provided with allowances to economically significant, or by reimbursing cover education expenses incurred on behalf of expenditures made by households. Social benefits in themselves or their dependants. Occasionally education cash may also be payable to beneficiaries needing services may be provided in kind. health care. 17.80 The above are typical circumstances in which social benefits are payable. However, the list is illustrative rather b. The beneficiaries have to support dependants of various than exhaustive. It is possible, for example, that under some kinds: spouses, children, elderly relatives, invalids, etc. social insurance schemes other benefits may be payable. The social benefits are usually paid in cash in the form Conversely, by no means all schemes provide benefits in all of regular dependants' or family allowances. the circumstances listed above. In practice, the scope of social insurance schemes is liable to vary significantly from c. The beneficiaries suffer a reduction in income as a country to country, or from scheme to scheme within the result of not being able to work, or to work full-time. same country. The social benefits are usually paid in cash regularly for the duration of the condition. In some instances a 2. Social benefits provided by general lump sum may be provided additionally or instead of government the regular payment. People may be prevented from working because of: 17.81 Many social benefits are provided by general government. They may appear in the accounts as payments under social · voluntary or compulsory retirement; security, social assistance or social transfers in kind. 352 Cross-cutting and other special issues 17.82 Social security is the name give to the social insurance b. at least one of the three conditions following is met: scheme operated by general government. As will be explained below, in order to receive social security · Participation in the scheme is obligatory either by law benefits, an individual must participate in a social security or under the terms and conditions of employment of scheme. an employee, or group of employees; 17.83 Social assistance is not a scheme and thus does not require · The scheme is a collective one operated for the benefit participation. However, social assistance is frequently restricted to individuals with low incomes, disabilities or of a designated group of workers, whether employed other particular characteristics. In some countries, though, a or non-employed, participation being restricted to universal pension may be paid without any need for members of that group; participation in which case it is part of social assistance also. There is a section discussing the difference between · An employer makes a contribution (actual or social insurance and social assistance at greater length in imputed) to the scheme on behalf of an employee, chapter 8. whether or not the employee also makes a contribution. 17.84 The definition of social benefits includes the possible provision of health and education services. Typically 17.89 Those participating in social insurance schemes make general government makes such services available to all contributions to the schemes (or have contributions made members of the community without requiring participation on their behalf) and receive benefits. Contributions and in a scheme or qualifying requirements. These services are benefits are defined in similar ways to insurance premiums treated as social transfers in kind and not as part of social and claims. A social insurance contribution is the amount security or social assistance. Social transfers in kind are payable to a social insurance scheme in order for a also discussed in chapter 8. designated beneficiary to be entitled to receive the social benefits covered by the scheme. A social insurance benefit 17.85 In addition to health and education services provided by is a social benefit payable because the beneficiary general government, such services may also be provided to participates in a social insurance scheme and the social individuals by NPISHs. These also are treated as social risk insured against has occurred. transfers in kind and not as part of social insurance schemes. 17.90 Social security is a form of social insurance scheme. The relative importance of social security relative to other social 3. Social benefits provided by other insurance scheme varies considerably from one country to institutional units another depending on institutional arrangements. In some countries, social security may be restricted to basic pension provision of the social safety net variety. In such cases even 17.86 Social benefits may also be provided by employers to the the pension provision of general government employees employees and their dependents or may be provided by may be dealt with other than via social security. At the other units such as a trades union. All social benefits other extreme, almost all pension provision, including that provided by units other than general government are made accruing to employees in private enterprises, may be routed under a social insurance scheme. through social security. 4. Social insurance schemes 17.91 The two classes of social insurance schemes are: 17.87 A social insurance scheme is a form of contractual a. Social security, insurance scheme where the policyholder is obliged or encouraged to insure against certain contingencies by the b. Employment-related social insurance schemes other intervention of a third party. For example, government may than social security. oblige all employees to participate in a social security scheme; employers may make it a condition of employment that employees participate in an insurance scheme specified The schemes other than social security may be arranged by the employer; an employer may encourage employees to with an insurance corporation as a group policy or series of join a scheme by making contributions on behalf of the policies or they may be managed by an insurance employee; or a trades union may arrange advantageous corporation in return for a fee. Alternatively, the schemes insurance cover available only to the members of the trades may be managed by an employer directly on his own union. Contributions to social insurance schemes are behalf. usually paid by, or on behalf of employees, though under certain conditions non-employed or self-employed persons Multiemployer schemes may also be covered. 17.92 An insurance corporation may, for a fee, agree not only to 17.88 A social insurance scheme is an insurance scheme where manage a pension scheme but to take on the risks the following two conditions are satisfied: associated with it. This is done in the context of performing this service for a number of schemes collectively under a. the benefits received are conditional on participation what is called a multiemployer scheme. Under many such in the scheme and constitute social benefits as this schemes, the insurance corporation takes over the term is used in the SNA; and responsibility of managing the funds at its disposal so as to 353 System of National Accounts make sufficient funds available to meet pension liabilities schemes are frequently paid on a monthly or even more and to make a surplus it can retain. If it fails to make frequent basis as they are often made directly when wages sufficient funds available for the pension entitlements, it is and salaries are payable. then the responsibility of this firm and not the original employers, to make good the difference from its own 17.96 Most individual policies that qualify as social insurance resources. schemes are likely to be for pension provision but it is possible that they may cover other eventualities, for 17.93 When government takes over the responsibility for example to provide income if the policyholder is unable to providing pensions to large sections of the community, the work for a prolonged period because of ill-health. social security function is in effect filling the role of a multiemployer scheme. Like the insurance corporation, the 17.97 Individual insurance policies that do not qualify as social government then takes on the responsibility for any insurance are described as individual insurance not shortfall in funds to meet the pension liabilities or may be qualifying as social insurance, or in short as other entitled to retain any surplus generated. It is often the case, insurance. They are recorded in the accounts of the SNA as though, that social security is funded on a pay-as-you-go described in part 1 of this chapter. basis so there is no question of a surplus arising and, if there is a shortfall in resources, government may have powers to change the entitlements not just relating to future 6. Benefits payable under social insurance employment but for the past also. schemes 5. Individual insurance policies qualifying as 17.98 In the SNA, social insurance benefits and the social insurance corresponding contributions are divided between those relating to pensions and those relating to all other forms of 17.94 Many social insurance schemes are organized collectively benefit. The most important pension benefit covered by for groups of workers so that those participating do not social insurance schemes is income in retirement but a have to take out individual insurance policies in their own number of other contingencies may be covered also. For names. In such cases, there is no difficulty distinguishing example, pensions may be payable to widows and social insurance from insurance taken out on a personal widowers or to people who suffer an industrial injury and basis. However, some social insurance schemes may are no longer able to work. All of these sorts of permit, or even require, participants to take out policies in contingencies that give rise to payments because the main their own names. The determinants for the insurance to income earner is no longer able, through death or count as a social insurance policy are that the benefits must incapacity, to provide an income for himself or herself and be of the social benefit type and an employer makes an dependants are treated as pensions. actual or imputed contribution to the scheme on behalf of an employee. 17.99 All other benefits are grouped together as non-pension benefits. The distinction between the two is important 17.95 The premiums payable, and claims receivable, under because the SNA recognizes liabilities for some pensions individual policies taken out under a social insurance whether there are actually assets set aside to meet the scheme are recorded as social contributions and social entitlements or not but recognizes reserves for non-pension insurance benefits. Contributions to social insurance benefits only when these actually exist. I. Accounting for non-pension contributions and benefits 17.100 Non-pension benefits may be payable under social security are treated as part of the normal expenditure of general and under employment­related schemes other than social government and so the accounting for social security security. Although in many countries there may in fact be operations does not include measures of output. no non-pension benefits, a description is given of how these should be recorded if they exist. For other social insurance 17.102 In the SNA flows are recorded as follows. schemes, the way of recording varies depending on whether reserves for provision of future benefits are set aside or not. Although in many cases there may be no such reserves and a. Employers' social security contributions are shown as the benefits are paid on a pay-as-you-go basis, a description payable by the sector in which the employer is located of the appropriate recording in each case is given. and receivable by households. The sector of the employer may be any of non-financial corporations, 1. Non-pension benefits payable under social financial corporations, general government (as an employer), employer households, NPISHs or the rest of security the world (when a resident works for a non-resident institutional unit). For resident employers the payables 17.101 As is typical of social security schemes, there may be are shown in the generation of income account; contributions payable by both the employer and the payables by non-resident employers are shown in the employee. The costs of operating social security schemes primary distribution of income account for the rest of 354 Cross-cutting and other special issues the world. Receivables by resident households are account for resident households or as exports for non- shown in the allocation of primary income account and resident households. by non-resident households in the primary distribution of income account for the rest of the world. 17.108 The redistributive transactions are as follows. b. In the secondary distribution of income account, the a. Employers' imputed contributions to unfunded social sum of employers' social security contributions and insurance schemes are shown as a payable by the sector social security contributions by households in their in which the employer is located in the generation of capacities as employees is shown as payable by income account and a receivable by households in the households and receivable by government. Further, allocation of primary income account. social security benefits in cash payable to households are shown as payable by government (or the rest of the b. In the secondary distribution of income account, world if from a foreign government) and receivable by employers' imputed contributions and any actual households. contributions by employees are shown as payable by households and receivable by the employer. Further, 17.103 An example of these flows is shown in table 17.3. benefits payable to households by the employer are shown as payable by the employer and receivable by 2. Unfunded non-pension benefits other than households. from social security 17.109 An example of these flows is shown in table 17.4. 17.104 In the SNA, an employer operating an unfunded scheme is 3. Funded social insurance other than regarded as making an imputed social contribution to the scheme on behalf of the employees. In practice, the value pensions of the employers' and employees' contributions is usually set equal in value to the benefits payable in the period 17.110 As noted above, funded schemes for benefits other than under consideration (plus the cost of operating the scheme pensions are not very common. They may, however, exist as described in the following paragraph). The imputed in two circumstances. The first is when an employer has a contribution forms part of the compensation of employees fund for such benefits and accumulates any underspend in and is also shown as being payable by the employees to the one year to pay for possible overspends in future years. scheme together with any actual payments by the Alternatively, an employer may realize that the employees. Even though the scheme is unfunded, the commitments to make payments in future are such that it is employee may still make a contribution; however, it is not prudent to build reserves to be able to make such payments. uncommon for unfunded schemes to be non-contributory An example of such a scheme might be one that provides for the employees. health cover to present and past employees. Unlike in the case of pensions, estimates of possible future claims on 17.105 Even if a scheme is unfunded, there are costs involved in social insurance benefits other than pensions are not administering it. In principle, output equal to the sum of necessarily included in the SNA. Liabilities are recorded these costs should be treated as being paid for by the only when and to the extent that they exist in the beneficiaries from an imputed element of contributions. employer's accounts. The imputed contribution to employees should include these costs as well as the value of the benefits received by 17.111 Funded social insurance covering benefits other than employees. A value equal to the amount of the costs of pensions may be carried out by insurance corporations or operating the scheme is then recorded in the use of income by employers on behalf of their employees. The output of account as a purchase of a service by the employees from this activity is measured in the same way as the output of the employer. non-life insurance but the matching consumption of the services is payable only by the households of the 17.106 There are two transactions recorded for the production and beneficiaries. These will be resident households except consumption of the services provided by the employer. where a resident producer is liable to pay benefits to a Because the scheme is unfunded, there are no investment present or former employee who is a non-resident or who income flows and no contribution supplements to be has a non-resident family member entitled to the benefits. recorded. There are two sets of redistributive transactions The investment income attributed to the beneficiaries of the recorded. social insurance schemes can only be receivable by the same households. 17.107 The production and consumption transactions are as 17.112 Employers' contributions relate only to employees. follows. However, both current and former employees who are now, or may in future be, beneficiaries may make contributions a. Output of services is imputed in the production account to the scheme and receive investment income from it. This of the employer and the value of the output forms part investment income is then treated as contribution of the imputed employers' contributions to social supplements payable by those receiving it. insurance incorporated in compensation of employees. 17.113 All contributions to the schemes are recorded as payable by b. Consumption of the service is recorded as household households. These contributions include that part paid by final consumption expenditure in the use of income the employer as part of compensation of employees in the 355 System of National Accounts Table 17.3:Accounts for non-pension benefits paid through social security - uses Uses Social security Other Total Employer fund Households sectors economy Generation of income account Employers' actual social security contributions (non-pension) 15.0 15.0 Allocation of primary income account Employers' actual social security contributions (non-pension) Secondary distribution of income account Social security contributions (non-pension) 25.0 25.0 Employers' actual social security contributions (non-pension) 15.0 15.0 Household actual social security contributions (non-pension) 10.0 10.0 Social security non-pension benefits 22.0 22.0 Table 17.4:Accounts for non-pension social insurance benefits from unfunded other employment- related schemes - uses Uses Social insurance Other Total Employer fund Households sectors economy Generation of income account Employers' imputed non-pension contributions 9.0 9.0 Allocation of primary income account Employers' imputed non-pension contributions Secondary distribution of income account Household total non-pension contributions 9.0 9.0 Employers' imputed non-pension contributions 9.0 9.0 Unfunded non-pension benefits 9.0 9.0 Table 17.5:Accounts for non-pension social insurance benefits from funded other employment- related schemes - uses Uses Social insurance Other Total Employer fund Households sectors economy Production account Output Generation of income account Employers' actual non-pension contributions 6.0 6.0 Allocation of primary income account Employers' actual non-pension contributions Investment income 4.0 4.0 Investment income payable on non-pension entitlements 4.0 4.0 Secondary distribution of income account Household total non-pension contributions 14.0 14.0 Employers' actual non-pension contributions 6.0 6.0 Household actual non-pension contributions 5.0 5.0 Household non-pension contribution supplements 4.0 4.0 Social insurance scheme service charges -1.0 -1.0 Funded non-pension benefits 7.0 7.0 Use of income account Final consumption expenditure 1.0 1.0 Adjustment for the change in non-pension entitlements -2.0 -2.0 Saving -6.0 10.0 0.0 -4.0 0.0 Financial account Change in pension entitlements -2.0 2.0 356 Cross-cutting and other special issues Table 17.3 (cont):Accounts for non-pension benefits paid through social security - resources Resources Social Other Total Employer security fund Households sectors economy Generation of income account Employers' actual social security contributions (non-pension) Allocation of primary income account Employers' actual social security contributions (non-pension) 15.0 15.0 Secondary distribution of income account Social security contributions (non-pension) 25.0 25.0 Employers' actual social security contributions (non-pension) 15.0 15.0 Household actual social security contributions (non-pension) 10.0 10.0 Social security non-pension benefits 22.0 22.0 Table 17.4 (cont):Accounts for non-pension social insurance benefits from unfunded other employment-related schemes - resources Resources Social insurance Other Total Employer fund Households sectors economy Generation of income account Employers' imputed non-pension contributions Allocation of primary income account Employers' imputed non-pension contributions 9.0 9.0 Secondary distribution of income account Household total non-pension contributions 9.0 9.0 Employers' imputed non-pension contributions 9.0 9.0 Unfunded non-pension benefits 9.0 9.0 Table 17.5 (cont):Accounts for non-pension social insurance benefits from funded other employment- related scheme - resources Resources Social insurance Other Total Employer fund Households sectors economy Production account Output 1.0 1.0 Generation of income account Employers' actual non-pension contributions Allocation of primary income account Employers' actual non-pension contributions 6.0 6.0 Investment income 4.0 4.0 Investment income payable on non-pension entitlements 4.0 4.0 Secondary distribution of income account Household total non-pension contributions 14.0 14.0 Employers' actual non-pension contributions 6.0 6.0 Household actual non-pension contributions 5.0 5.0 Household non-pension contribution supplements 4.0 4.0 Social insurance scheme service charges -1.0 -1.0 Funded non-pension benefits 7.0 7.0 Use of income account Final consumption expenditure Adjustment for the change in non-pension entitlements -2.0 -2.0 Saving Financial account Change in pension entitlements -2.0 0.0 357 System of National Accounts generation of income account as well as contributions paid c. Investment income attributed to policyholders directly by the employee funded from wages and salaries or (beneficiaries) in respect of these schemes is payable by others including former employees. Further, households by insurance corporations and employers, and receive investment income attributable to policyholders in receivable by households. Both payables and respect of these contributions and this is treated, in total, as receivables are recorded in the allocation of primary contribution supplements. Two items of contributions income account; appear in the secondary distribution of income account. The first, the employers' actual social contributions, is d. Net social contributions are shown in the secondary exactly equal in value to the amount receivable by distribution of income account as payable by households from the employer in the generation of income households and receivable by insurance corporations or account. The second item, called households social the sector of the employer as appropriate; contributions, includes the direct payment by households plus the contribution supplements less the service charge e. Employment-related social benefits other than pensions payable to the social insurance schemes. are also shown in the secondary distribution of income account as payable by insurance corporations or the 17.114 Eight transactions must be recorded, one each relating to sector of the employer and receivable by households; production and consumption of the insurance service, three relating to contributions and benefits, one to the investment f. The value of the service is payable by households as income attributable to policyholders and two relating to the part of final consumption expenditure and is recorded difference between contributions and benefits: in the use of income account, except for non-resident employee households where it is payable by the rest of a. The activity by resident units is undertaken by the world; insurance corporations or by an employer; the output is recorded in the production account of the insurance g. The excess of net contributions over benefits represents corporations or in the sector of the employer as an increase in the liability of the insurance scheme appropriate; towards the beneficiaries. This item is shown as an adjustment in the use of income account. As an increase b. Employers' actual social contributions to employment- in a liability, it is also shown in the financial account. related social insurance schemes are shown as payable As noted, the item is likely to occur only rarely and, for by the sector in which the employer is located in the pragmatic reasons, changes in such non-pension generation of income account and receivable by entitlements may be included with those for pensions. households in the allocation of primary income account; 17.115 An example of these flows is shown in table 17.5. J. Accounting for pension contributions and pensions 17.116 Pensions are provided to individuals in an economy under 17.118 Social insurance pensions in all countries are provided, if at one of three mechanisms, via social security, via all, in part by general government and in part by employers. employment-related schemes other than social security or The part provided by general government is called social via social assistance. Together, social security and security and the part by employers is called employment- employment-related pension schemes other than social related schemes other than social security. The division security constitute social insurance schemes. Although the between which pensions are provided by social security and benefits provided under social assistance and some social which by other employment-related schemes varies insurance schemes may be very similar, the key distinction considerably from country to country with the consequence is that social insurance benefits are only paid if the that the coverage and therefore national perceptions of what beneficiary participates in the social insurance scheme, the term "social security" designates also vary participation being normally evidenced by the beneficiary considerably. In order to make clear the recommendations or another on his behalf having made qualifying in the SNA, it is necessary to consider the types of coverage contributions. Social assistance is paid without qualifying provided in different countries. contributions having been made though means-testing may be applied to applicants. 17.119 The narrowest form of social security pension is very basic. The level may be fixed independently of the size of contributions (though not of the fact that contributions have 17.117 The means by which pensions are provided to persons in been made for a given period of time). An employee's right retirement varies considerable from one country to another. to a pension under social security is often transferable This part of chapter 17 describes the most common forms ("portable") from one employer to another, which is an of pension provision made under social insurance schemes advantage not always applying to other pension provisions, though not all aspects may apply to all countries. Pensions but for many people in low paid jobs, working temporarily provided under social assistance are not discussed in this or intermittently, it may be the only form of pension chapter but in chapters 8 and 9. provision they can expect to receive. 358 Cross-cutting and other special issues 17.120 By contrast, in some countries most or all pension recognized in the main accounts of the SNA although provision may be made via social security. In this case, concern is often expressed that benefits may exceed government acts as an intermediary relative to the employer contributions and this situation is likely to worsen in an so that once the government has received the contributions ageing population. For this reason, estimates of the to the scheme paid by the employer and the households, the liabilities of social security as well as any other pension government then takes on the risk of making the eventual schemes not included in the main accounts are included in a payment. Government relieves the employer of the risk that supplementary table described below in section J. the cost of pensions may be too great for his enterprise to meet and assures the population that pensions will be paid, 17.125 The recording of the flows for social security pension though it may do so with the qualification that it may alter schemes is simple. Any contribution made by the employer the amount of pensions payable, even retrospectively, if is treated as part of compensation of employees. It is economic conditions so dictate. recorded as payable by the employer in the generation of income account and receivable by the employee in the 17.121 Pension schemes run by private employers are usually not distribution of primary income account. The employee then subject to retrospective adjustments of the amounts pays an amount equal to what he receives from the payable, but there is a risk that the employer may be unable employer together with any contribution he is liable to to pay because he has gone out of business. Increasingly, make on his own behalf to the social security fund. This though, protection for the pension entitlements of amount is recorded as payable by households in the individuals is becoming more common. Equally, the secondary distribution of income account and receivable by pension built up with one employer may not be transferable the government in the same account. Any contributions to a new employer though this too is undergoing change. made by self-employed or non-employed people are also While social security may be, and very often is, financed on included with the contributions payable by households to a pay-as-you-go basis, without building up reserves for government. Social security benefits are also recorded as future liabilities, other employer schemes are increasingly payable by government and receivable by households in the likely to have reserves set aside. Even if there are no secondary distribution of income account. reserves, accounting conventions may require them to recognize pension entitlements of present and past 17.126 An example of these flows is shown in table 17.6. It is employees in their accounts. similar in content to table 17.1 except that table 17.1 relates to non-pension benefits and table 17.6 to pension benefits. 17.122 Employment-related pensions, other than the most basic form of social security, are seen as part of the compensation package and negotiations between employees and 2. Employment-related pension schemes other employers may focus on pension entitlements as much as than social security on current conditions of service and pay scales. Often pensions are provided by private employers from funds that 17.127 There are two forms of employment-related pension the employers control or contract to a third party such as an schemes other than social security. One is called a defined insurance corporation. These funds may also provide social contribution scheme, sometimes referred to as a money benefits other than pensions, for example private medical purchase scheme. (The expression "defined contribution coverage. It is sometimes possible for a specialized unit to pension scheme" is not intuitive but is widely used in the agree to assume responsibility for providing pensions for a pension industry.) The other is a defined benefit scheme, number of employers in return for assuming the risk of sometimes referred to as a final salary scheme, though this ensuring adequate funding is available to make the term does not accurately describe all defined benefit promised pensions. Such an arrangement is called a schemes. Typically both schemes are contributory, often by multiemployer pension scheme. both the employer and the employee. 17.123 As with non-pension social benefits, both current 17.128 A defined contribution scheme is one where the benefits employees and former employees who are current or future payable to an employee on retirement are defined beneficiaries may make contributions to the scheme and exclusively in terms of the level of the fund built up from receive investment income from it. This investment income the contributions made over the employee's working life is then treated as contribution supplements by those and the increases in value that result from the investment receiving it. of these funds by the manager of the scheme. The entire risk of the scheme to provide an adequate income in 1. Social security pensions retirement is thus borne by the employee. 17.124 It is common but not essential for both employers and 17.129 A defined benefit scheme is one where the benefits employees to make contributions towards a social security payable to an employee on retirement are determined by pension. It is also common for the contributions to be the use of a formula, either alone or as a minimum compulsory. Social security pensions are frequently funded amount payable. In this case the risk of the scheme to on a pay-as-you-go basis. The normal assumption in the provide an adequate income in retirement is borne either by main accounts of the SNA is that this is how social security the employer or is shared between the employer and pensions are funded. That is the contributions receivable in employee. In certain cases, the employer's risk may be a period are used to fund the benefits payable in the same borne by the multiemployer scheme that operates the period. There is no saving element involved, either for the defined benefit pension scheme on behalf of the employer. government operating the scheme or for the individuals A scheme that may be defined in terms similar to a defined participating in it. No liabilities for the scheme are contribution scheme but with a guaranteed minimum, say, 359 System of National Accounts or other such hybrid schemes are grouped with defined account and receivable by the employee in the distribution benefit pension schemes in the SNA. of primary income account. 17.130 For both types of schemes, pension entitlements of the 17.134 The investment income on the cumulated pension participants are recorded as they build up. In both cases, entitlements is also recorded as being distributed to there is investment income earned on existing entitlements (receivable by) households in the allocation of primary and this is recorded as being distributed to the beneficiaries income account and is shown as payable by the pension and reinvested by them in the pension scheme. There are, fund. The investment income includes interest and though, a number of different features of the two schemes, dividends payable plus the distributed income of collective so the transactions relating to each are described in detail investment schemes if the pension fund holds shares in separately before turning to other changes in the levels of them. It is possible that the pension fund may own property pension entitlements. The recording of transactions for a and generate net operating surplus on this which is also defined contribution scheme is less complicated than the included along with the investment income as being defined benefit scheme and is described first. distributed to the pension beneficiaries. In this case, the term investment income is to be interpreted as being elastic enough to include this source of income if it exists. Holding 17.131 For both types of schemes, a pension fund is assumed to gains and losses generated by the investment of the exist. For a defined contribution pension scheme, a fund cumulated pension entitlements are not included in must exist. For a defined benefit pension scheme a fund investment income. may exist in reality or it may be a notional fund. If it exists, it may be part of the same institutional unit as the employer, it may be a separate institutional unit (an autonomous 17.135 Part of the income distributed to households is used to meet pension scheme) or it may be part of another financial the costs of operating the pension fund. This cost is shown institution, either an insurance corporation or a as the output of the pension fund in the production account multiemployer pension scheme. In describing the recording and as an element of consumption expenditure by of transactions, transactions with the pension fund must be households in the use of income account. The remaining attributed to the sector where the fund is located. part of the distributed income is treated as pension contribution supplements paid back by households to the pension funds. Defined contribution pension schemes 17.136 In the secondary distribution of income account, social 17.132 Recording the transactions related to a defined contribution contributions are shown as payable by households and pension scheme presents no conceptual problems. There receivable by the pension fund. The total amount of the are no associated imputations either for the flows social contributions payable is made up of the actual concerned or for the values appearing in balance sheets for contributions payable by the employers as part of the pension entitlements of the beneficiaries nor any doubt compensation of employees, actual contributions by as to which unit has a liability and which an asset. employees and possibly by other individuals (individuals formerly participating in a scheme, self-employed and non- Transactions recorded for a defined contribution employed persons as well as retirees) plus the contribution pension scheme supplements just specified. For clarity, and to enhance the comparison with defined benefit schemes, the supplements are shown at full value in both the allocation of primary 17.133 The contribution made by an employer to a defined income account where they appear as investment income contribution pension scheme on behalf of his employee is and in the secondary distribution of income account where treated as part of compensation of employees. It is recorded they appear as contribution supplements. However, the as payable by the employer in the generation of income service charge is shown as an offsetting negative element to Table 17.6:Accounts for pension benefits paid through social security - uses Uses Social security Other Total Employer fund Households sectors economy Generation of income account Employers' actual social security contributions (pension) 139.0 139.0 Allocation of primary income account Employers' actual social security contributions (pension) Secondary distribution of income account Social security contributions (pension) 226.0 226.0 Employers' actual social security contributions (pension) 139.0 139.0 Household actual social security contributions (pension) 87.0 87.0 Social security pension benefits 210.0 210.0 360 Cross-cutting and other special issues total household contributions in the secondary distribution entitlement of participants in a defined contribution pension of income account. The total contributions made by scheme, and thus ultimately the funding for the benefits, households to the pensions scheme are net in the same way come from holding gains that are not included in the that insurance premiums are net, that is to say they are the contribution supplements of participants in defined total of all contributions made less the service charge contribution pension schemes, the adjustment for the appearing in the use of income account. change in pension entitlements for these individuals will frequently be negative. 17.137 Those other than employees who contribute to a defined contribution pension scheme may be self-employed persons 17.141 The adjustment for the change in pension entitlements that participating in a defined contribution pension scheme or is included in the use of income account as payable by the may be persons not employed who participate in a defined pension fund to households is shown in the financial contribution pension scheme by virtue of their profession or account as payable by households to the pension fund. The former employment status, for example. effect of any transfer of the obligations to meet pension entitlements from a unit in one sector to another are also 17.138 Also in the secondary distribution of income account, the reflected in the financial account item. pension benefits payable to households by the pension fund are shown. However, the benefits payable under a defined 17.142 The other factors affecting the change in the balance sheet contribution pension scheme take the form of a lump sum entry for the change in pension entitlements are shown in payable at the moment of retirement. It may be a the other changes in assets accounts. In particular, the requirement of the scheme that these sums are to be liabilities of the scheme to the beneficiaries show holding immediately converted to an annuity with the same or gains or losses in the revaluation account corresponding another financial institution but this is not a universal exactly to those on the assets held by the scheme to meet requirement. The appropriate recording of the benefits is these obligations. When payments under a defined not to show the benefit as payable immediately on contribution scheme are made via annuities, other volume retirement and then, where appropriate, reinvested in terms changes may need to be recorded as explained in paragraph of an annuity or other forms of financial assets but 17.136. notionally as a reclassification from life insurance entitlements to annuities entitlements. However, since no 17.143 Table 17.7 illustrates the entries necessary to record the distinction is normally made between these two sets of transaction related to a defined contribution scheme. It is entitlements, no actual classification change will show in simpler than the corresponding table for a defined benefit the accounts. The recording of annuities is discussed in part scheme, which is described in the following section, 1 of this chapter. because of the absence of any imputed transactions. 17.139 In the use of income account, there is an entry for the Defined benefit pension schemes payment of the service provided by the pension fund (equal to the value of the pension fund's output) payable by households to the pension fund. Differences between a defined benefit and a defined contribution pension scheme 17.140 In the same account there is an entry showing the increase (or decrease) in pension entitlements caused by the excess 17.144 The fundamental difference in accounting for a defined (or deficit) of contributions payable less benefits receivable benefit pension scheme as compared with a defined in the secondary distribution of income account. This contribution pension scheme is that, for the defined benefit amount is shown as payable to households by the pension pension scheme, the benefit to the employee in the current fund. Because much of the increase in the pension period is determined in terms of the undertakings made by Table 17.6 (cont):Accounts for pension benefits paid through social security - resources Resources Social security Other Total Employer fund Households sectors economy Generation of income account Employers' actual social security contributions (pension) Allocation of primary income account Employers' actual social security contributions (pension) 139.0 139.0 Secondary distribution of income account Social security contributions (pension) 226.0 226.0 Employers' actual social security contributions (pension) 139.0 139.0 Household actual social security contributions (pension) 87.0 87.0 Social security pension benefits 210.0 210.0 361 System of National Accounts the employer about the level of pension ultimately are usually positive but it is possible for them to be receivable, whereas for the defined contribution pension negative if the sum of the contributions received exceeds scheme the benefit to the employee in the current period is the increase in current service entitlements. The determined entirely by the contributions made to the implications of this case are discussed below when scheme and the investment income and holding gains and examining the relationship between the employer and the losses earned on these and previous contributions. Thus fund. while there is (in principle) exact information available on the benefits for the participant in the defined contribution 17.147 At the end of an accounting period, the level of the pension pension scheme, the benefits for the participants in a entitlements due to past and present employees can be defined benefit pension scheme must be estimated. The calculated by estimating the present value of the amounts source of these estimates is the actuarial estimates the due to be paid in retirement using actuarial estimates of the employer is faced with in drawing up his own accounts. expected life length of the beneficiaries. This is the amount that appears in the balance sheet as the liability towards the 17.145 There are four sources of changes in pension entitlements employees. One element in the increase of this amount year in a defined benefit pension scheme. The first of these, the by year is the fact that the present value of the entitlements current service increase, is the increase in entitlement existing at the beginning of the year and still due at the end associated with the wages and salaries earned in the current of the year have increased because the future is one year period. The second source, the past service increase, is the nearer and so one fewer discount factor must be used to increase in the value of the entitlement due to the fact that calculate the present value. It is this unwinding of the for all participants in the scheme, retirement (and death) are discount that accounts for the past service increase in one year nearer. The third change in the level of entitlement entitlements. is a decrease due to the payment of benefits to retirees of the scheme. The fourth source of change comes from other 17.148 A further basic difference between a defined benefit factors, factors that are reflected in the other changes in pension scheme and a defined contribution pension scheme assets account. concerns the payment for the cost of operating the pension scheme. As already noted, under a defined contribution 17.146 As with a defined contribution pension scheme, both pension scheme all the risk is borne by the beneficiaries. employer and employee may make actual contributions to The pension scheme is operated on their behalf and they the scheme in the current period. However, these payments pay for the cost of it. Since the fund may be operated by a may not be sufficient to meet the increase in the benefits unit other than the employer, it is appropriate to treat the accruing from the current year's employment. Therefore an operating cost as part of the investment income that is additional contribution from the employer is imputed to retained by the fund to meet its costs (and generate a bring equality between the contributions and the increase in profit). In keeping with accounting for insurance, the current service entitlements. These imputed contributions investment income is treated as being attributed in full to Table 17.7:Accounts for pension benefits payable under a defined contribution scheme - uses Uses Pension Other Total Employer fund Households sectors economy Production account Output Generation of income account Employers' actual pension contributions 11.0 11.0 Allocation of primary income account 0.0 Employers' actual pension contributions 0.0 Property income 3.0 3.0 Property income payable on pension entitlements 16.2 16.2 Secondary distribution of income account 0.0 Household total pension contributions 37.3 37.3 Employers' actual pension contributions 11.0 11.0 Household actual pension contributions 11.5 11.5 Household pension contribution supplements 16.2 16.2 pension scheme service charges -1.4 -1.4 Defined contribution pension benefits 26.0 26.0 Use of income account 0.0 Final consumption expenditure 1.4 1.4 Adjustment for the change in pension entitlements 11.3 0.0 11.3 Saving -11.0 -11.8 25.8 -3.0 0.0 Changes in assets Financial account Net borrowing/lending Change in pension entitlements 11.3 11.3 Other financial assets -11.0 -0.5 14.5 -3.0 0.0 362 Cross-cutting and other special issues the beneficiaries, part being used to meet the cost and the Transactions recorded for a defined benefit pension remainder being reinvested with the fund. scheme 17.149 For a defined benefit pension scheme, the situation is 17.151 The initial discussion assumes that the employer retains the somewhat different. The risk that the fund may be whole responsibility for meeting the pension payments. Alternatives involving the use of a multiemployer scheme insufficient to meet the promises of entitlement is met in or where government assumes responsibility on behalf of part or in whole by the pension manager (either the the employer are discussed subsequently. employer or a unit that has assumed the risk of meeting the pension obligations) and not by the beneficiaries alone. The 17.152 The total contribution made by an employer to a defined fund may be directly controlled by the employer and be benefit pension scheme on behalf of his employee must be part of the same institutional unit or may be purely sufficient that, together with any actual contribution by the notional. Even in this case, there are costs associated with employee and excluding the cost of operating the scheme, it operating the scheme. Although these are initially borne by exactly matches the current service increase in the the employer, it is appropriate to regard this as a form of employee's pension entitlements. The contribution by the employer is divided into an actual and an imputed part, the income in kind provided to the employees and for latter being calculated so as to meet the need of an exact convenience it may be included with the employers' match between all contributions to the fund adding to the contributions. There is an element of pragmatism in this entitlements of the employee and the current service cost of since this assumes all the costs are borne by current these entitlements. employees and none by retirees. It also assumes that the attribution that must be made in the case of notional 17.153 The contribution by the employer should be calculated in schemes can be applied in other circumstances also. relation to the pension entitlement earned in the period regardless of any investment income earned by the scheme in the same period or any overfunding of the scheme. The 17.150 For a defined benefit scheme, it is unlikely that self- and current period entitlement is part of compensation of non-employed persons currently contribute though it is employees and not to include the full value of the possible if they were previously in employment giving rise employer's contribution understates compensation of employees and therefore overstates operating surplus. An to a defined benefit pension and have the right to continue extreme case has occurred in the past when the investment to participate. Those previously in employment (whether of the pension entitlements has done so well that the currently in receipt of a pension or not) receive investment employer has taken a "contribution holiday", that is he has income and pay contribution supplements. not made an actual contribution towards new entitlements. Table 17.7 (cont):Accounts for pension benefits payable under a defined contribution scheme - resources Resources Pension Other Total Employer fund Households sectors economy Production account Output 1.4 1.4 Generation of income account Employers' actual pension contributions Allocation of primary income account Employers' actual pension contributions 11.0 11.0 Property income 3.0 3.0 Property income payable on pension entitlements 16.2 16.2 Secondary distribution of income account Household total pension contributions 37.3 37.3 Employers' actual pension contributions 11.0 11.0 Household actual pension contributions 11.5 11.5 Household pension contribution supplements 16.2 16.2 pension scheme service charges -1.4 -1.4 pension benefits 26.0 26.0 Use of income account Final consumption expenditure Adjustment for the change in pension entitlements 11.3 11.3 Saving Changes in liabilities Financial account Net borrowing/lending -11.0 -11.8 25.8 -3.0 0.0 Change in pension entitlements 11.3 11.3 Other financial assets 0.0 363 System of National Accounts It is important that contributions continue to be recorded may be funded from holding gains or that is not actually even in the event of a contributions holiday, the benefit to matched by existing funds. It matches the amount that is the employer being regarded as a change in liabilities unequivocally due to the employee under the prevailing between the pension fund and the employer. This leaves the agreements; the means by which the employer may net worth of both the same as when contributions are not ultimately match this obligation is not relevant for the recorded under a contributions holiday without reducing recording of this as investment income any more than the compensation of employees artificially. means by which interest or dividends are actually financed affect their recording as investment income. The 17.154 Under many defined benefit schemes, there is a qualifying investment income is recorded as payable by the pension period before an employee does in fact become eligible to fund and receivable by households. It is immediately receive a pension in retirement. Despite this qualifying reinvested by the households in the fund and in this guise is period, both contributions and entitlements should be described as pension contribution supplements. recorded from the start of employment adjusted by a factor reflecting the probability that the employee will in fact satisfy the qualifying period. 17.157 In the secondary distribution of income account, social contributions are shown as payable by households and receivable by the pension fund. The total amount of the 17.155 The sum of employers' actual and imputed pension social contributions payable is made up of the actual and contributions is treated as part of compensation of imputed contributions payable by the employers as part of employees. It is recorded as payable by the employer in the compensation of employees (excluding the amount of the generation of income account and receivable by the costs of running the pension scheme), plus actual employee in the allocation of primary income account. contributions by employees plus the contribution supplements just specified. As explained in the discussion 17.156 The increase in the present value of the entitlements of under defined contribution schemes, the accounts show the continuing employees and those who no longer contribute full value of the contributions and contribution supplements but remain eligible for pensions in future (the past service with an offsetting item representing the service charge increase) represents the investment income distributed to payable. The amount actually payable is thus a net the employees. No deduction is made for any amount that contributions figure. Table 17.8:Accounts for pension benefits payable under a defined benefit scheme - uses Uses Pension Other Total Employer fund Households sectors economy Production account Output Generation of income account Employers' actual pension contributions 10.0 10.0 Employers' imputed pension contributions 4.1 4.1 Allocation of primary income account Employers' actual pension contributions Employers' imputed pension contributions Property income 2.2 2.2 Property income payable on pension entitlements 4.0 4.0 Secondary distribution of income account Household total pension contributions 19.0 19.0 Employers' actual pension contributions 10.0 10.0 Employers' imputed pension contributions 4.1 4.1 Household actual pension contributions 1.5 1.5 Household pension contribution supplements 4.0 4.0 Pension scheme service charges -0.6 -0.6 Pension benefits 16.0 16.0 Use of income account Final consumption expenditure 0.6 0.6 Adjustment for the change in pension entitlements 3.0 3.0 Saving (actual) -10.0 -5.3 17.5 -2.2 0.0 Saving (imputed) -4.1 4.1 0.0 Changes in assets Financial account Net borrowing/lending (actual) Net borrowing/lending (imputed) Change in pension entitlements 3.0 3.0 Claim of pension fund on pension manager (current service) 4.1 4.1 Other financial assets -10.0 -2.3 14.5 -2.2 0.0 364 Cross-cutting and other special issues 17.158 Also in the secondary distribution of income account, the 17.161 The same amount that is included in the use of income pension benefits payable to households by the pension fund account as the adjustment for the change in pension are shown. When the benefits are taken in terms of an entitlements is included in the financial account as a claim annuity, it is the annuity payments that are shown here, not by households on the pension fund. (The other part of this the lump sums payable at the time of retirement. (Unless item reflects any change in responsibility for pension the demographics of the retirees changes dramatically, the entitlements recorded as part of capital transfers.)The other two figures will be very similar in any case.) factors affecting the change in the balance sheet entry for the change in pension entitlements are shown in the other 17.159 In the use of income account, there is an entry for the changes in assets accounts and are discussed below in payment of the service provided by the pension fund (equal section 4. to the value of the pension fund's output plus the output of the enterprises operating annuities bought with pension Defined benefit pension schemes operated by other entitlements) payable by households to the pension fund and recorded as final consumption expenditure. than employers 17.160 Also in the use of income account, there is an entry 17.162 It is possible that some other organization, such as a trades showing the increase (or decrease) in pension entitlements union, may operate a defined benefit pension scheme for its caused by the excess of contributions payable less benefits members that is in all respects parallel to an employer's receivable in the secondary distribution of income account. defined benefit pension scheme. Exactly the same This amount is shown as payable to households by the recording is followed as just described except that pension fund. In the case of a defined benefit pension references to the employer should be understood to refer to scheme, the amount is unlikely to be negative unless it is a the scheme organizer and references to the employee scheme for a defunct employer and it is only paying should be understood to refer to the participant in the benefits and not receiving new contributions. scheme. Table 17.8 (cont):Accounts for pension benefits payable under a defined benefit scheme - resources Resources Pension Other Total Employer fund Households sectors economy Production account Output 0.6 0.6 Generation of income account Employers' actual pension contributions Employers' imputed pension contributions Allocation of primary income account Employers' actual pension contributions 10.0 10.0 Employers' imputed pension contributions 4.1 4.1 Property income 2.2 2.2 Property income payable on pension entitlements 4.0 4.0 Secondary distribution of income account Household total pension contributions 19.0 19.0 Employers' actual pension contributions 10.0 10.0 Employers' imputed pension contributions 4.1 4.1 Household actual pension contributions 1.5 1.5 Household pension contribution supplements 4.0 4.0 Pension scheme service charges -0.6 -0.6 Pension benefits 16.0 16.0 Use of income account Final consumption expenditure Adjustment for the change in pension entitlements 3.0 3.0 Saving (actual) Saving (imputed) Changes in liabilities Financial account Net borrowing/lending (actual) -10.0 -5.3 17.5 -2.2 0.0 Net borrowing/lending (imputed) -4.1 4.1 0.0 Change in pension entitlements 3.0 3.0 Claim of pension fund on pension manager (current service) 4.1 4.1 Other financial assets 365 System of National Accounts The relationship between the employer and the employer must provide 14.1. He actually contributes 10 so pension fund the remaining 4.1 is an imputed contribution. The output of 0.6 is shown in the production account; the contributions by the employer are shown as payable by the employer in the 17.163 As noted above, an employer may contract with another generation of income account and receivable by the unit to administer the pension fund and arrange households in the allocation of primary income account. disbursements to the beneficiaries. There are two ways in which this may happen. The operator of the pension fund may simply act as the employer's agent and the 17.169 In the allocation of primary income account, investment responsibility for any shortfall in the fund (or the benefit of income is also shown. The increase in pension entitlement any excess) remains with the employer. In this case the unit coming from past service, due to the unwinding of the handling the day to day running of the pension fund is discount factor because retirement is one year nearer, is 4. called the pension administrator. This is shown as an imputed flow of investment income from the pension fund to households. At the same time, the 17.164 However, it is not uncommon for a single unit to contract pension fund actually earns 2.2 from investment income of with several employers to manage their pension funds as a the funds they manage. At this point, therefore, there is a multiemployer pension fund. The arrangements are such shortfall of 1.8 in the pension fund resources but it is not that the multiemployer pension fund accepts the shown in the current accounts. responsibility for any shortfall in the funds to meet the liabilities in return for the right to keep any excess funds. 17.170 In the secondary distribution of income accounts, the By pooling the risks over a number of employers the payments from households to the pension fund are shown. multiemployer fund expects to balance under- and over- This can be viewed in one of two ways. The sum of the funding so as to emerge with an excess over all the funds contributions paid by households should be equal to the taken as whole in a similar way that an insurance increase in entitlements coming from current service (15) corporation pools risk for many clients. In such a case, the plus that coming from income on past entitlements (4) or unit assuming responsibility for meeting the pension 19 in total. The amounts actually paid are 10 received as the obligations becomes the pension manager in place of the employers' actual contributions, 4.1 as the imputed employer. contributions, 1.5 of the households own contributions, contribution supplements of 4 less the service charge of 17.165 In the case where the employer retains the liability for any 0.6; again 19 in total. In the same account pensions of 16 underfunding or the benefit of any overfunding, a claim on are also shown as payable by the pension fund to (or liability towards) the employer (the pension manager) households. by the pension fund should be recorded for any deficit or surplus. This claim is equal to the difference between the 17.171 In the use of income account, as well as the purchase of the increase in pension entitlements and the sum of the service charge as part of household final consumption contributions and contributions supplements in the period, expenditure, the change in pension entitlement is shown as plus the investment income earned on the entitlements, plus payable by the pension fund to households. In this example, the holding gains made on them, less the pensions payable, the amount of household contributions of 19 is set against less the fee charged by the pension administrator. When the pension benefits of 16. There is thus an increase in pension amount accruing to the pension fund exceeds the increase entitlements of 3 owing to households. in entitlements, there is an amount payable by the pension fund to the employer as pension manager. In this way the net worth of the pension fund remains exactly zero at all 17.172 Households have saving of 17.5 of which 3 is the increase times. in their pension entitlements. This means that they have acquired other financial assets (or reduced liabilities) by 14.5. This figure is the difference between the benefits 17.166 The amount due to the pension manager by the pension received (16) and households' actual contributions of 1.5. fund is where the impact of a contribution holiday shows up since it includes the amount of the employer's contributions that would normally be payable. 17.173 For pension funds, saving is -1.2 but this can be seen as the composite of the actual and imputed elements. In terms of A numerical example actual flows, pension funds receive contributions of 10 from employers routed via households, 1.5 from households and pay out benefits of 16. In addition, they Transactions for a defined benefit schemes receive investment income of 2.2. Their disposable income is thus -2.3. When the change in pension entitlements of 3 17.167 In order to illustrate the recording of transactions connected is taken into account, saving is -5.3. In addition, employers with a defined benefit pension scheme, table 17.8 shows a make an imputed contribution of 4.1. This is routed via numerical example. Figures that are imputed are shown in households but adds 4.1 to the saving of the pension fund bold; those that result from re-routing are shown in italics. and reduces saving of the employer by the same amount. 17.168 Actuarial calculations show that the increase in pension 17.174 In the financial account of the pension fund, the figure of entitlement coming from current service, that is the pension 4.1, which was the imputed contribution, is shown as the "earned" in the year in question is 15. Households (the claim of the pension fund on the employer. There is a claim employees) contribute 1.5. The employer therefore is by households on the pension fund of the change in pension obliged to provide 13.5. In addition the cost of operating entitlements of 3. In addition the pension fund either runs the scheme is estimated at 0.6. In total therefore the down financial assets or increases liabilities by 2.3, the 366 Cross-cutting and other special issues figure corresponding to disposable income excluding the promotion means that the total pension entitlements imputed contribution element from the employer. accrued to date are increased to take account of the new salary level. This is a significant benefit for the individual Defined contribution pension schemes being promoted but what are the consequences for the employer's pension liabilities? 17.175 Table 17.7 shows the similar flows for a defined contribution scheme. The accounts are simpler, compared 17.181 The accounting profession uses two actuarial terms that to the defined benefit case, because there are no imputed bear on this discussion. The accrued benefit obligation contributions. Further, the investment income payable by (ABO) records, as it name implies, only the benefits the pension fund to households reflects only investment actually accrued to date. It represents the amount the income received by the pension fund and does not involve employee could walk away with if he left the firm calculations about increases in entitlement from the tomorrow and may be the basis of assessing a person's net operation of a formula. worth in the case of a divorce settlement, for example. A projected benefit obligation (PBO) is a more prudent measure of what the eventual level of entitlement is likely 17.176 The investment of the entitlements of defined contribution to be. For an individual, the PBO makes assumptions about pension schemes leads to holding gains (and possibly how many future promotions the person is likely to receive losses). These come about through the management of the and calculates his final salary accordingly. Then, if he has assets held by the fund but an amount exactly equal to the in fact only worked 20 out of an expected 40 years, it holding gains and losses should be attributed as an increase halves the final salary and calculates pension entitlement in the pension entitlement of the beneficiaries. The holding for the individual as if this were his current salary. Where gains appear under entries for the relevant assets in the an individual's ABO increases in steps as he is promoted, revaluation account for the pension fund with a matching the PBO increases steadily over time. For the individual, entry for the increase in the liability of the pension fund PBO is always higher than ABO until the moment of towards households. retirement when the ABO catches up with the PBO. Other flows for a defined benefit pension scheme 17.182 It would seem at first sight that the level of pension entitlements for a corporation should be the sum of all the 17.177 At first sight it would seem that there are no entries to be pension entitlements of each of the employees and that made in the other changes in assets accounts for a defined therefore the sum of the PBO estimates would be benefit pension scheme since the two components recorded considerably higher than that of the sum of the ABO as the pension contributions and investment income are estimates and would evolve more smoothly over time. matched exactly to the increase in entitlements. However, However, what is true for the individual is not necessarily because the nature of a defined benefit pension scheme is true for the cohort of employees. Suppose the employer has that the amounts due are determined by a formula, there are five classes of people for whose pensions he is responsible, other factors that may intervene to change the level of four grades of employees and one set of retirees, and for entitlements. These factors include a price escalation simplicity there are the same number of each. Consider the clause, changes in the formula used to determine benefits situation where in a year the retirees die; the most senior set and demographic assumptions about life length. The of employees retire, the next three sets of employees are all special case of the impact of promotions on entitlements is promoted and a new set of employees is recruited at the discussed separately below. lowest level. Every current employee is better off after promotion but the overall liability of the employer has not 17.178 A pension fund invests the funds at its disposal. If they changed. The effect of aggregating ABOs is to smooth the work on a fully funded basis, the investment income should total entitlement and while it will still be lower than the be more than enough to cover any price escalation clause in aggregate PBOs, it will not necessarily be more volatile. the pension agreement. The excess may also be sufficient to Indeed it may be more stable. cover some other adjustments to entitlements. However, a major source of revenue comes from holding gains on 17.183 While the profile of the ABO of an individual will show investments. These were assumed to be sufficient to cover step changes when promotions occur, for a cohort of most or all changes in entitlements. It has become clear that employees, the effect is much smoother. For a cohort of the many schemes were underfunded in the expectation that same age remaining with the corporation for the whole of holding gains would make up this shortfall also. their working lives, the ABO estimates will be considerably lower than PBO estimates in the early years but the rate of 17.179 Given these adjustments are funded in large part by holding increase of the ABOs will be faster than that of the PBOs so gains which appear in the revaluation account, it seems that at the point immediately before retirement, the two sets reasonable to record the contingencies that they are of estimates will be equal. Merging cohorts of employees assumed to cover in the other changes in the volume of with different periods of service with the corporation will assets account except for the price escalation factor which bring the ABO estimates for all employees closer to the should appear in the revaluation account. PBO ones also. The issue of promotions 17.184 As long as the grade structure of the corporation stays the same, ABO and PBO will move roughly in step. If the firm 17.180 Many defined benefit pension schemes use a formula to set expands and takes on many new employees at the lower benefits that involves either the final salary or average grades, the PBO will be increase noticeably faster than the salary as a key determinant. This implies that any ABOs because the PBOs make estimates of how long the 367 System of National Accounts new employees will stay and how far they will be promoted Any version of treating the increase as a form of while the ABOs record simply the pension accrued in their compensation of employees or investment income falls first year. If the firm decides to downsize and reduces the back into the assumption that the aggregate of entitlements number of their managerial staff, this will reduce the is the sum of the individual entitlements but without promotion prospects of the employees and a downward looking at other individual impacts on the aggregates such revision in PBO will be necessary. Because ABOs reflect as when someone leaves and loses pension entitlement simply the "locked-in" pension, this estimate is not because not enough time has been served or when someone affected. dies before retirement age. A simpler and adequate solution is to treat the impact of promotions for the unit as a whole 17.185 The question arises, though, of how to record the impact of as a price change and record the change in the revaluation promotion on the employee if an ABO recording is used. account. Table 17.9:Detailed transactions concerning social insurance Insurance corporation/ Social Table insurance Other Total number Employer fund Households sectors economy Intermediate consumption 1 3 4 17.1 Non-life insurance 1 3 4 Output -13 (Output shown as negative use for compactness) 17.1 Non-life insurance -6 17.2 Life insurance -4 17.5 Other employment-related schemes - funded non-pension benefits -1 17.7 Other employment-related schemes - DC pension benefits -1.4 17.8 Other employment-related schemes - DB pension benefits -0.6 Employers' actual social insurance contributions 181 181 17.3 Social security non-pension benefits 15 15 17.5 Other employment-related schemes - funded non-pension benefits 6 6 17.6 Social security pension benefits 139 139 17.7 Other employment-related schemes - DC pension benefits 11 11 17.8 Other employment-related schemes - DB pension benefits 10 10 Employers' imputed social contributions 13.1 13.1 17.4 Other employment-related schemes - unfunded non-pension benefits 9 9 17.8 Other employment-related schemes - DB pension benefits 4.1 4.1 Household actual contributions 115 115 17.3 Social security non-pension benefits 10 10 17.4 Other employment-related schemes - unfunded non-pension benefits 17.5 Other employment-related schemes - funded non-pension benefits 5 5 17.6 Social security pension benefits 87 87 17.7 Other employment-related schemes - DC pension benefits 11.5 11.5 17.8 Other employment-related schemes - DB pension benefits 1.5 1.5 Investment income 37.2 37.2 17.1 Non-life insurance 6 6 17.2 Life insurance 7 7 17.5 Other employment-related schemes - funded non-pension benefits 4 4 17.7 Other employment-related schemes - DC pension benefits 16.2 16.2 17.8 Other employment-related schemes - DB pension benefits 4 4 Insurance service charges paid by households 6 6 17.1 Non-life insurance 2 2 17.2 Life insurance 4 4 Social insurance scheme service charge 3 3 17.5 Other employment-related schemes - funded non-pension benefits 1 1 17.6 Social security pension benefits 17.7 Other employment-related schemes - DC pension benefits 1.4 1.4 17.8 Other employment-related schemes - DB pension benefits 0.6 0.6 Social insurance benefits 290 290 17.3 Social security non-pension benefits 22 22 17.4 Other employment-related schemes - unfunded non-pension benefits 9 9 17.5 Other employment-related schemes - funded non-pension benefits 7 7 17.6 Social security pension benefits 210 210 17.7 Other employment-related schemes - DC pension benefits 26 26 17.8 Other employment-related schemes - DB pension benefits 16 16 Adjustment for the change in pension entitlements -2 14.3 12.3 17.5 Other employment-related schemes - funded non-pension benefits -2 -2 17.7 Other employment-related schemes - DC pension benefits 11.3 11.3 17.8 Other employment-related schemes - DB pension benefits 3 3 Claim by pension fund on pension manager 4.1 4.1 17.8 Other employment-related schemes - DB pension benefits 4.1 4.1 368 Cross-cutting and other special issues 17.186 If the PBO method of recording entitlements is chosen as than the pension fund, his liability to the fund increases and the preferred valuation, an adjustment in the other changes his use of the cash appears as net borrowing. in volume of assets account is needed only if the structure of the enterprise changes so the chances of promotion change. On the other hand, the regular estimates of the 17.188 If government assumes the responsibility for pension employer's contributions to social insurance schemes provision for the employees of a non-government unit included in compensation of employees will be through an explicit transaction, a pension liability should be systematically higher than those made under an ABO recorded in the balance sheet of government. If the regime because the increase in pension entitlement that government does not receive matching assets in return, the determines the size of the contributions will be based on a difference between the increase in the government's notional salary calculated on a PBO basis rather than the liability and the assets received is shown as a capital actual one. transfer to the non-government employer. There is further discussion of this type of arrangement in chapter 22. 3. Transferring pension entitlements 17.189 Another way in which pension entitlements may be 17.187 One characteristic of the changing environment of pensions transferred between funds is when one corporation takes is the increasing possibility of having "portable pensions". over another. If the pension fund is a separate institutional Until recently it was often the case that a person leaving unit, all that changes is control of the pension fund. If there one employer had his pension frozen at that point and had is no separate institutional unit, assuming the takeover does to start a new pension with the new employer. It is not change the terms of the pension plan for existing becoming more common now for a person moving jobs to participants, the corporation being taken over passes both be able to convert the pension entitlement with the former the pension liabilities and the corresponding assets to the employer to one with the new employer. When this new owner. happens, the pension entitlement of the household concerned is unaffected but there is a transaction between 4. A note on the tables the two pension funds as the new one assumes the liability of the former. In addition there will be a counterpart transaction in some assets to match these liabilities. If the 17.190 For cross-reference with tables in other chapters, table 17.9 new employer is running a scheme that is actually shows the itemized components of transactions pertaining unfunded, he may receive cash from the former employer. to social and other insurance in tables 17.1 to 17.8 If this cash is then used by the employer for purposes other inclusive. K. The special case of government providing pensions via social security 17.191 In recognition of the fact that social security is normally 17.193 In recognition of this dilemma, some flexibility regarding financed on a pay-as-you-go basis, entitlements accruing the recording of pension entitlements of unfunded pension under social security (both pensions and other social schemes sponsored by government for all employees benefits) are not normally shown in the SNA. If all (whether private sector employees or government's own countries had similar benefits provided under social employees) is provided. Given the different institutional security and under private schemes, international arrangements in countries, only some of these pension comparisons would be relatively straightforward. However, entitlements may be recorded within the main sequence of accounts (here referred to as the "core accounts"). In as pointed out at the beginning of this part, this is far from addition, however, a further table is to be presented that being the case and national perceptions of exactly what is provides information disclosing the proportion of pension covered by social security vary considerably. provision covered in the core accounts with some approximate estimates for the remaining schemes. It is a 17.192 There are two problems with simply suggesting that requirement, though, that a set of criteria be provided to explain the distinction between those schemes carried entitlements from social security should be shown in the forward to the core accounts and those recorded only in the SNA. The first is that reliable estimates of the entitlements supplementary table. may not be readily available whereas it is increasingly the case that such estimates exist for private schemes. 17.194 The sort of criteria that might be considered are the Secondly, there is an argument that such estimates are of following: The closer a government employer pension limited usefulness where government has the possibility of scheme is to the prevailing social security scheme, the less changing the basis on which entitlements are determined in likely it is to appear in the core accounts; the less the order to keep the entitlements within the bounds of what is benefits are tailored to the specific characteristics of the budgetarily feasible. However, the consequence of simply individual and the more they are applicable to the accepting that entitlements for private schemes are shown population at large, the less likely it is to appear in the core and for social security are not is that some countries would accounts; the greater the ability of government to alter the include the greater part of pension entitlements in the benefit formula, the less likely it is to appear in the core accounts and some would show almost none. accounts. However, none of these criteria alone is 369 System of National Accounts necessarily decisive in determining whether the scheme is where the entitlements are shown only in the treated in the core accounts or not. supplementary table is to be part of the SNA research agenda. 17.195 By making this supplementary table and annotation a standard requirement for international reporting, analysts 17.196 The supplementary table is shown in table 17.10. As well have the possibility of ensuring that cross country comparisons are not unduly clouded by the institutional as the possibility of including less robust estimates for variations from country to country. Further work on countries with large social security sectors, the possibility refining the criteria for the distinction between the pension will also exist of working back to a narrower coverage of schemes fully recorded in the core accounts and those private pensions for all countries being analysed. Table 17.10:A supplementary table showing the extent of pension schemes included and excluded from the SNA sequence of accounts Liabilities do not appear in the core Liabilities appear in the core national accounts national accounts Non-general government General government General government employee defined benefit Pension entitlements of resident households schemes In the financial corporations sector In the general government sector In the general government sector Social security pension schemes Defined contribution schemes Defined contribution schemes Defined benefit schemes Total pension schemes Row number Total Position / transaction / other flow Column number A B C D E F G H I J Opening balance sheet 1 Pension entitlements Transactions 2 Social contributions relating to pension schemes 2.1 Employer actual social contributions 2.2 Employer imputed social contributions 2.3 Household actual social contributions 2.4 Household social contribution supplements Other (actuarial) accumulation of pension entitlements in 3 social security funds 4 Pension benefits 5 Adjustment to the change in pension entitlements Change in pension entitlements due to transfers of 6 entitlements Changes in entitlements due to negotiated changes in 7 scheme structure Other economic flows 8 Revaluations 9 Other changes in volume Closing balance sheet 10 Pension entitlements Related indicators Output Assets held by pension schemes at end-year Empty cells show where entries appear in the main ("core") accounts. Black cells show where no entry is appropriate. Grey cells show where information is provided in the supplementary table only. Row 2 is the sum of rows 2.1 to 2.4 Row 3 is the analogue of employer's imputed contributions in the case where government has assumed the ultimate responsibility for any shortfall in pension provision Row 5 is the sum of rows 2 and 3 less 4 More information on the components underlying rows 8 and 9 to be shown in a further supplementary table to allow an assessment of the degree of uncertainty in these estimates. 370 Cross-cutting and other special issues 17.197 As noted above, providing detail on defined contribution by convention, as equal to the difference between current schemes is relatively straightforward since full accounts benefits payable and actual contributions payable (by both must be available and no actuarial estimation is involved. employees and employers). In the supplementary table, this Most of these are in the corporations sectors (column A) is replaced by the amount needed to ensure the total but it is possible that some government employees may be contributions, actual and imputed, by both employers and covered by them (column D). All defined contribution employees, covers both the increase in pension entitlements pension schemes should be included in the core accounts. from current service and the costs of operating the scheme. Estimates for all defined benefit pension schemes outside social security should also be included (column B). 17.202 An item calculated on the same basis in respect of social security is shown in row 3 as "other (actuarial) 17.198 Government schemes for their own employees where accumulation of pension entitlements in social security separate accounting information, distinct from social funds". The distinction from employers' imputed social security, is shown in the main accounts appear in columns contributions is deliberate and is intended to emphasize the E and F. Column E shows schemes managed by an probable fragility of these estimates. insurance corporation and column F those managed by government itself. Any government schemes for their own 17.203 Items for household social contribution supplements and employees distinct from social security that do not appear the other changes in entitlements are shown on the same in the main accounts, are shown in column G. The sum of bases as for private schemes. columns E, F and G therefore show the total responsibility of government for pension provision for their own 17.204 Changes in pension entitlements are recorded as employees. (Column F shows that part of all defined transactions in the following cases: benefit schemes of government that are retained within the government accounts as distinct from being moved into separate units or managed for government by another a. If the pension scheme is included in the core accounts, institutional unit. Column H relates to social security and the employer manager agrees a change in the terms schemes. Column C shows the total of all non-government of pension entitlements via negotiation with the schemes and column I the total of all schemes including affected employees, this change should be recorded as a social security. transaction in the core accounts. 17.199 For the most part, the beneficiaries of pension schemes are b. If the pension scheme is not recorded in the core likely to be resident households. In some countries, though, accounts, and the employer manager agrees a change in the number of non-resident households receiving pension the terms of pension entitlements via negotiation with benefits may be significant. In this case, column J should the affected employees, this change should be recorded be added indicating the amount of the total that concerns as a transaction in the supplementary table. non-resident households. c. In the case of social security, if changes in entitlements 17.200 Some of the entries in the rows of columns G and H, are agreed in parliament, this is also recorded as if it is specifically the actual contributions made by both negotiated. employers and employees, appear in the core accounts, even though the entitlements and change in entitlements do 17.205 Changes in pension entitlements that are imposed without not. Other entries in the columns for G and H shown only in negotiation are recorded as other changes in the volume of the supplementary table are shaded in the table and assets explained below. 17.206 The difference in the type of recording is one of principle 17.201 The imputed contribution by employers for those but it is recognized that the distinction between what is government schemes for which entitlements appear in negotiated and what is imposed without negotiation will be column G but not in the core accounts requires special difficult to determine in practice with different situations consideration. In the core accounts, this item is calculated, prevailing in different countries. 371 System of National Accounts Part 3: The treatment of standardized guarantees in the SNA L. Types of guarantees 17.207 A loan guarantee is normally an arrangement whereby one insurance and a similar treatment is adopted for these party, the guarantor, undertakes to a lender that if a guarantees, described as "standardized guarantees". This borrower defaults, the guarantor will make good the loss involves including transactions and balance sheet items the lender would otherwise suffer. Often a fee is payable parallel to those for non-life insurance, including the for the provision of a guarantee though the form of this generation of output and payments of a fee supplement and varies. Sometimes the guarantor will acquire some rights a service fee by those taking out the guarantees. over the defaulting borrower. Similar guarantees may be offered in respect of other financial instruments, including 17.212 The third class of guarantees, described as one-off deposits. This section refers to similar guarantees of all guarantees, consists of those where the loan or the security financial instruments. is so particular that it is not possible for the degree of risk associated with the debt to be calculated with any degree of 17.208 Guarantees have a significant impact on the behaviour of accuracy. In most cases, the granting of a one-off guarantee economic agents, both by influencing their decisions on is considered a contingency and is not recorded as a production, income, investment or saving and by modifying financial asset/liability. (As an exception, one-off the lending and borrowing conditions on financial markets. guarantees granted by governments to corporations in Some borrowers might have no access to loans or be certain well-defined financially distressed situations and willing to make deposits in the absence of guarantees, with a very high likelihood to be called are treated as if while others might not benefit from comparatively low these guarantees are called when the financial distress is interest rates. Guarantees are particularly significant for the recognized.) If a fee is charged, this is recorded as a general government sector and for the public sector as payment for a service at the time of payment. If a call is government activities are often linked to the issuance or made under a guarantee, a capital transfer is recorded from activation of guarantees. the guarantor to the guarantee holder at the time of default or, in cases where the guarantor obtains an effective claim 17.209 Three classes of guarantees are recognized. No special on the guarantee holder, a financial transaction (including treatment is proposed for guarantees in the form of increases in equity participation) is recorded. manufacturers' warrantees or other form of guarantee. (The cost of replacing defective merchandise is an intermediate 17.213 Standardized guarantees are to be distinguished from one- cost of the manufacturer.) off guarantees based on two criteria: 17.210 The first class of guarantees is composed of those a. They are characterized by often repeated transactions guarantees provided by means of a financial derivative, with similar features and pooling of risks; such as a credit default swap. These derivatives are actively traded on financial markets. The derivative is based on the risk of default of a reference instrument and so is not b. Guarantors are able to estimate the average loss based actually linked to an individual loan or bond. Incorporating on available statistics by using a probability-weighted the transactions connected with establishing this sort of concept. financial derivative is discussed in chapter 11. One-off guarantees are, on the contrary, individual, and 17.211 The second class of guarantees, standardized guarantees, is guarantors are not able to make a reliable estimate of the composed of the sorts of guarantees that are issued in large risk of calls. numbers, usually for fairly small amounts, along identical lines. There are three parties involved in these 17.214 Financial derivatives are described in chapter 11. The arrangements, the debtor, the creditor and the guarantor. treatment of standardized guarantees follows. Either the debtor or creditor may contract with the guarantor to repay the creditor if the debtor defaults. The classic examples are export credit guarantees and student 1. Standardized guarantee schemes loan guarantees. Government guarantees of other financial instruments such as loans and some other debt securities in 17.215 Standardized guarantees may be provided by a financial return for a fee are other examples. Here, although it is not institution, including but not confined to insurance possible to establish the likelihood of any one debtor corporations. They may also be provided by government defaulting, it is not only possible but standard practice to units. It is possible but unlikely that non-financial estimate how many out of a batch of similar debts will corporations may provide these sorts of guarantees; it is default. If the guarantor is working on purely commercial most unlikely that they would be provided by any unit to a lines, he will expect all the fees paid, plus the investment non-resident unit. As indicated above, standardized income earned on the fees and any reserves, to cover the guarantee schemes have much in common with non-life expected defaults along with the costs and leave a profit. insurance. In the general case, similar recording is This is exactly the same paradigm as operates for non-life recommended as described below. 372 Cross-cutting and other special issues 17.216 When a unit offers standardized guarantees, it accepts fees b. Net fees are calculated as fees receivable plus fee and incurs liabilities to meet the call on the guarantee. The supplements (equal to the investment income attributed value of the liabilities in the accounts of the guarantor is to the unit paying the fee for the guarantee) less the equal to the present value of the expected calls under value of the services consumed. These net fees are existing guarantees, net of any recoveries the guarantor payable by all sectors of the economy and receivable by expects to receive from the defaulting borrowers. The the sector of the guarantor. liability is entitled provisions for calls under standardized guarantees. c. Calls under standardized guarantee schemes are payable by the guarantor and receivable by the lender 17.217 A guarantee may cover a multiyear period. A fee may be of the debt under guarantee, regardless of whether the payable annually or upfront. In principle the fee should fee was paid by the lender or the borrower. Both net represent charges earned in each year the guarantee holds fees and calls are recorded in the secondary distribution with the liability decreasing as the period gets shorter and of income account. so the same sort of recording should be followed here as for annuities with the fee paid earned as the future liability decreases. In practice, some units operating guarantees may 17.221 In the financial account, an entry shows the difference have data only on a cash basis. This is inaccurate for an between payment of fees for new guarantees and calls made individual guarantee but the nature of the standardized under existing guarantees. guarantee scheme is that there are many guarantees of the same type, though not all for exactly the same time period nor all starting and finishing on the same dates. Unless 2. Guarantees provided by government there is reason to suppose that there is a major change in the nature of the guarantee holders over time, using cash based 17.222 Governments often offer guarantees for specific policy data should not introduce significant error. purposes. Export credit guarantees are one example. The guarantees may be issued by a government unit that can be 17.218 Altogether six sets of transactions need to be recorded in treated as a separate institutional unit. When this is so, the respect of standardized guarantee schemes; two relating to normal rules for the allocation of government units to either the measurement of the production and consumption of the publicly controlled corporations or as part of general guarantee service, three relating to redistribution and one in government apply. If a guarantee unit charges fees that are the financial account. The value of the output of the economically significant (in this case this may be activity, the investment income to be attributed to the equivalent to saying that most of the calls plus the guarantee holder (whether creditor or debtor) and the value administrative costs are covered by the fees charged), then of the service charge are calculated in the manner described this is a market activity. It should be treated as a financial above for non-life insurance with the concepts of fees corporation and transactions should be recorded as replacing premiums and calls under a standardized described above. If the fees cover most but not all the costs, guarantee scheme replacing claims. the recording is still as above. The loss made by the agency offering the guarantees may be covered by government on a regular or intermittent basis but this is not passed on to 17.219 The production and consumption transactions are as those seeking the guarantees as a subsidy. Regular follows: payments are recorded as a subsidy to the agency and intermittent payments, covering cumulated losses, are a. The output is recorded in the production account of the recorded as capital transfers only when such payments are sector or subsector to which the guarantor belongs. made. b. The service may be paid for by either the borrower or 17.223 In general, when a government unit provides standardized the lender of the debt being guaranteed. When non- guarantees without fees or at such low rates that the fees are financial corporations, financial corporations, general significantly less than the calls and administrative costs, the government or non-profit institutions pay fees to obtain unit should be treated as a non-market producer within this sort of guarantee, the fees constitute intermediate general government. However, if government recognizes consumption, recorded in their production account. the probability of having to finance some of the calls under Any fees for such guarantees payable by households the guarantee scheme to the extent of including a provision are part of final consumption expenditure, recorded in in its accounts, a transfer of this size from government to the use of income accounts. the units concerned and a liability of this amount (under provisions for calls under standardized guarantees) should 17.220 The redistributive transactions cover investment income be recorded. attributed to guarantee holders in respect of standardized guarantee schemes, net fees, and calls under standardized guarantee schemes. 3. Balance sheet implications a. Investment income attributed to guarantee holders in 17.224 Conceptually the total value on the balance sheet of the respect of standardized guarantee schemes is recorded instruments under guarantee should be reduced by the as payable by the guarantor. It is recorded as receivable extent of provisions for standardized guarantees which are by the unit paying the fee. Both payables and estimates of the amount of debt that will be in default. In receivables are recorded in the allocation of primary practice, this amount is not likely to be significant income account. compared with the total value of the instrument concerned. 373 System of National Accounts 374 Cross-cutting and other special issues Part 4: The recording of flows associated with financial assets and liabilities M. Introduction 17.225 The objective of this part of chapter 17 is to show, for each that are associated with providing financial services as well category of financial assets and liabilities, how and where as the sort of income and holding gains and losses changes in their values are recorded in the SNA and to associated with holding financial assets and liabilities. show when some part of the transaction relating to a financial instrument is treated not as changing the value of 1. The characteristics of financial institutions the instrument itself but as a measure of the output of financial institutions. Before describing these flows in 17.226 Within the SNA, the term corporations is used to describe detail in the next section, it is helpful first to recall the institutional units providing both financial and non- characteristics of financial institutions, the type of flows financial services. These are divided into two institutional Figure 17.2:Indications of the flows associated with different financial instruments Services appearing in the production Property income appearing in the distribution of Revaluation account primary income account account Investment income Withdrawals attributed to Financial instrument from collective incomes of investment Holding Buy/sell Margin on quasi- fund share gains and margin interest Interest Dividends corporations holders losses Monetary gold and SDRs Gold bullion x Unallocated gold accounts x x SDRs x x x Curency and deposits Currency Domestic Foreign x Transferable deposits In domestic currency x x In foreign currency x x x Inter-bank deposits (x) x Other deposits In domestic currency x x In foreign currency x x x Debt securities x x (x) Loans In domestic currency x x In foreign currency x x x Equity and investment funds Equity Listed shares x x x Unlisted shares x x x Other equity x x Investment fund shares Money market fund shares x x x Other investment fund shares x x x Financial derivatives and employee stock options Financial derivatives x x Employee stock options x Other accounts receivable/payable (x) 375 System of National Accounts sectors; non-financial corporations and financial 17.231 Nor is it only the service charge that may have to be corporations. Financial corporations are distinguished from measured indirectly. Bills are an offer of a fixed sum at non-financial corporations because they play a particular some time in the future and the promise of this payment is role in the economy. Some facilitate means of payments sold at a discount. The increase in value between the between other units thus avoiding the need for barter. Some buying price and the redemption price is treated as interest also provide the means whereby units seeking additional in the SNA. funds to finance capital formation, acquire financial assets or even for consumption can utilize the funding set aside by other units as saving. The equation that investment in 17.232 Nor are the terms in use in the financial markets exactly the capital formation must be equal to saving plus net terms used in the SNA. For example, the money paid by a borrowing from the rest of the world is fundamental to the bank on a deposit is described as interest by the bank but is functioning of the economy, the way financial markets not the amount recorded as interest in the SNA because the work and so to the accounting system itself. amount paid by the bank is assumed to be a compound payment representing interest as understood in the SNA less the service charges levied on the depositor for the costs 17.227 When considering the financial sector alone or in of operating the account. In the SNA, the terms bank connection with other statistics such as monetary and interest and SNA interest are used when it is necessary to financial statistics, it is usual to speak of financial distinguish the two concepts. Unless it is qualified as bank institutions rather than financial corporations. No change in interest, the term interest in the SNA is to be taken as definition or coverage is implied by this change in referring to SNA interest. terminology. When subsectoring the financial sector, as explained in chapter 4, a distinction is made between those financial corporations that are primarily involved in 2. Charging for financial services financial intermediation, which are called financial intermediaries, and other financial institutions. 17.233 As noted above, the way in which financial institutions charge for the services they provide is not always as 17.228 Financial intermediation is the activity of matching the evident as the way in which charges are made for most needs of borrowers with the desires of lenders. It is carried goods and services. Several kinds of financial institutions out by financial institutions preparing alternative sets of do make explicit fees for the services they render. Other conditions under which clients can borrow and lend. These financial institutions may make implicit charges, either conditions allow for variations in the rate of return that may alone or in conjunction with explicit fees. be expected from an investment with, often, higher returns being less certain than lower returns or involving forgoing access to the funds for a longer period. There are now very 17.234 Explicit fees should always be recorded as payable by the many, very diverse ways in which money can be borrowed unit to whom the services are rendered to the institution and lent. The act of financial intermediation is thus one of performing the service. If the services are rendered to a devising financial instruments that encourage those with corporation or to government, the costs will form part of savings to commit to lend to the financial institutions on the intermediate consumption. If they are rendered to conditions inherent in the instruments so that the financial households they will be treated as final consumption unless institutions can then lend the same funds to others as the financial service is performed in relation to an another set of instruments with different conditions. This unincorporated enterprise, including the owning and activity encompasses financial risk management and occupying of a dwelling. Within the SNA, financial liquidity transformation. services are not incorporated into the value of any financial asset even if their incurrence is necessary for the acquisition of the asset. (This is in contrast with the 17.229 All financial intermediation in the SNA is carried out by treatment on non-financial assets where the costs of financial institutions. However, some corporations in the acquiring the asset are included in the value of the asset financial sector are not themselves intermediaries but appearing on the balance sheet.) Nor do explicit fees affect simply provide services auxiliary to financial the value at which transactions in financial assets actually intermediation. For example, they may provide advice to take place in the market. clients about the terms available for specific types of borrowing and lending, such as a mortgage broker or provide certain sorts of financial resources such as a foreign 17.235 Implicit charges for financial services have to be measured exchange bureau that exchanges one currency for another. indirectly. The charges may be simply the difference These are the units described as other financial institutions. between the buying and mid-price and between the mid- price and selling price as in the example of foreign exchange quoted above. (Each service should be calculated 17.230 Financial institutions provide services and charge for them. at the time of the transaction concerned so that holding The ways in which they charge, however, are not always gains and losses occurring between the time of the purchase obvious. When a bank offers "free banking" it only and sale are not treated as services.) Other implicit charges signifies that there are no explicit fees, not that there are no may be combined with other transactions (or other flows) implicit fees. Fees may be charged indirectly by means of on a particular financial instrument. The service charge charging those purchasing a financial asset more than the associated with borrowing and lending is one such example seller of the same asset receives. For example, dealers in where it is combined with interest. As noted in chapter 6 foreign exchange typically buy and sell at different rates; when the output of financial services is discussed, ignoring the differences between those rates and the mid-point the implicit charges for financial services may lead to represent service charges paid by the customers. understating the output of the industry and sector. 376 Cross-cutting and other special issues 3. Investment income associated with financial 4. Holding gains and losses on financial instruments instruments 17.236 Most financial instruments give rise to investment income. 17.237 In the normal course of events, loans and deposits Debt instruments such as Special Drawing Rights (SDRs) denominated in domestic currency do not give rise to on the IMF, loans, most debt securities, deposits and some nominal holding gains though there will always be real unallocated gold accounts where the amount is repaid holding losses for the asset holder in the presence of according to a fixed formula give rise to interest. Equity inflation. Securities denominated in domestic currency and investment fund shares give rise to dividends or other where the income is in the form of coupons only may be distributions from corporate income. As far as possible, subject to holding gains and losses. These occur because there should be no interest arising on other accounts when the interest rate varies, the present value of the future receivable or payable since the amounts outstanding that coupon payments and redemption values change and this is give rise to interest payments should be classified as loans. reflected in the market price. In practice this might not always be possible in which case there will be some amounts of interest shown under this 17.238 For equity and investment fund shares other than money instrument also. Except for other accounts receivable or market fund shares, nominal holding gains are common and payable, only gold bullion, currency, non-interest bearing may be substantial. Indeed, the most frequent reason for deposits, financial derivatives and employee stock options acquiring these instruments is in order to benefit from the never give rise to investment income. holding gains that arise from holding them. N. Recording flows in financial instruments 17.239 As explained above, both service charges and investment indistinguishable from gold bullion or may be of a lower income flows may be combined with the costs of acquiring quality. Physical gold, excluding gold bullion included in and disposing of financial assets and liabilities. This section monetary gold, whether gold bullion or not, can be referred of the chapter, therefore, examines each class of instrument to as commodity gold (since it is traded on commodity in turn to identify what flows should be recorded in each markets). case. Explicit fees are not covered in this section since even if they apply, their value is additional to the value at which 17.242 Gold bullion may be sold by one monetary authority to financial assets change hands. There are thus three types of another in another country. In such a case the exchange is flows of relevance in this section; the implicit fees made by recorded as an exchange of financial assets only. In all financial institutions, different income flows and holding other cases, the gold is reclassified as commodity gold and gains and losses. A summary of the types of flows that thus a valuable held by the monetary authority (and is no relate to each instrument is given in figure 17.3. Implicit longer part of reserves) and is then sold as commodity gold. fees are subdivided between those that appear as a margin The reclassification is recorded in the other changes in the between the buying and selling price and those that volume of assets account as demonetization of gold. If the represent a margin on interest paid and received (FISIM). gold is sold abroad it will feature in exports and imports of All income flows are investment income and these flows the countries concerned. When commodity gold is sold, are divided between interest, dividends, withdrawals from there may be a trade margin attached to it. When a quasi-corporations and investment income attributed to monetary authority acquires monetary gold a reverse path is investment fund shareholders. Only the instruments followed. The gold is acquired initially as commodity gold relating to insurance, pension and standardized guarantee either from a domestic unit or from abroad and is schemes are excluded as the treatment of these schemes is subsequently reclassified to monetary gold as monetization described in detail in other parts of this chapter. in the other changes in the volume of assets account. 1. Monetary gold 17.243 There is no interest earned on gold bullion held as a valuable but it is subject to nominal and real holding gains and losses as the gold price changes. Interest can be 17.240 Monetary gold (including allocated gold accounts) consists payable when one monetary authority lends gold bullion of two subcategories, physical gold bullion and unallocated held as reserves to another monetary authority. gold accounts, both of which are held by the monetary authorities (or other units authorized by them) as part of 17.244 Unallocated gold accounts are treated as foreign currency reserves. Although it may not be possible to publish these deposits unless they are held by the monetary authorities as two subcategories separately for reasons of confidentiality, part of foreign reserves. Unlike gold bullion, unallocated it is important to understand the different considerations gold accounts have counterpart liabilities. Because the that apply to each of them. unallocated gold accounts classified as monetary gold must be held as part of foreign reserves, the counterpart liability 17.241 Gold bullion takes the form of coins, ingots, or bars with a is necessarily held abroad. The counterpart liability will not purity of at least 995 parts per thousand. Gold held as a be treated as part of monetary gold in the counterpart valuable by commercial banks or as inventories by some country. (Assets held abroad as part of foreign reserves are specialized industries, for example jewellers, may be generally not identified as such within the liabilities of the 377 System of National Accounts partner country.) If a monetary authority acquires an FISIM, for its traditional meaning, that is, for financial unallocated gold account to be treated as reserves, it is intermediation associated with loans and deposits held with recorded first as an acquisition of a foreign currency financial intermediaries. deposit and then reclassified to monetary gold as a change of classification in the other changes in the volume of 17.250 Paragraphs 6.163 to 6.169 describe the basic principle of assets account. Removing an unallocated gold account FISIM and explain the need to make the distinction, from reserves is recorded as, first, a change in classification referred to above, between interest as understood by the from monetary gold to a foreign currency deposit and then banks holding deposits and issuing loans and the as a disposal of the deposit. investment income flows recorded in the SNA. One (or possibly more) reference rate(s) should be applied to the 17.245 Unallocated gold accounts attract interest and a service level of loans and deposits to determine the SNA interest charge and are also subject to nominal and real holding flows to be recorded. The difference between these flows gains and losses as the gold price alters. and bank interest are recorded as service charges payable to the banks by the units holding the deposits or loans. This 2. SDRs applies to both resident and non-resident units and to deposits and loans held with resident and non-resident units. For clarity, the term bank interest is used to indicate 17.246 SDRs are allocated to the countries and authorities the apparent interest as quoted by a financial intermediary participating in the SDR Department of the IMF. Countries to their customer; the term SNA interest is used for the must be members of the IMF; other participants include a amount recorded in the SNA as interest, that is the level of number of central banks, intergovernmental monetary loans and deposits multiplied by the reference rate chosen. institutions and development institutions. Participants may For deposits with banks, the service charge is equal to SNA hold more or fewer SDRs than their allocation as a result of interest less bank interest; for loans the service charge is transactions in SDRs between participants. SDRs attract equal to bank interest less SNA interest. At a minimum, it interest but no service charge as interest paid by is probable that different reference rates should be used for participants holding more than their allocation exactly every currency in which non-resident loans and deposits are matches the interest owing to participants holding less than denominated. their allocation. Data on the interest rates payable are available regularly from the IMF. Since the value of the SDR is based on a basket of four key currencies, the value 17.251 No exclusion is made for lending of own funds. Although of SDRs is always subject to nominal and real holding the act of lending, and the charging of SNA interest is not a gains and losses. From time to time, new allocations of productive activity, there is a service charge associated SDRs may be made; when this occurs the allocation is with lending. A person borrowing from a bank is unaware recorded as a transaction. whether the amounts borrowed are of intermediated funds or come from the bank's own funds and no difference in the service charges applied should be made. Similarly, if a 3. Currency person borrows from a money lender, there is a service charge payable. (Often, in fact, the service charge is very 17.247 Notes and coins are the simplest financial asset to record large, reflecting the much higher risk of default faced by since for domestic currency, no service charges, investment the money lender. A noteworthy feature of some income or nominal holding gains and losses are recorded. microfinance schemes is that, because defaults are Under inflation, though, the holder of notes and coins uncommon, the charges are modest.) suffers real holding losses. The cost of producing the physical notes and coins is recorded as government 17.252 It is not always simple to determine whether positions expenditure and not netted against the receipts from issuing between banks should be classified as deposits or loans. In the currency. a complete flow of funds presentation, this should be resolved but in the absence of a flow of funds analysis, 17.248 Foreign currency should be recorded in the national balance inter-bank positions may be shown under currency and sheets converted to a value in domestic currency using the deposits. By convention they are shown under deposits. It exchange rate relevant for the date of the balance sheet. is assumed that the inter-bank rate at which banks borrow This value is subject to nominal and real holding gains and and lend to one another is usually such as to meet the losses as the exchange rate of the foreign currency relative criteria for a reference rate. (In some cases it may be to domestic currency alters. As noted above, there is appropriate to use the inter-bank rate as the reference rate.) usually a service charge associated with acquiring or For this reason, it may often be appropriate to assume that disposing of foreign currency. there is no FISIM associated with inter-bank lending and borrowing within the national economy. 4. Deposits and loans 17.253 The outstanding balance on a credit card or on an account 17.249 In the 1993 SNA, the acronym FISIM (Financial with a retailer is often subject to interest. These outstanding Intermediation Services Indirectly Measured) was used for balances should be classified as loans, not other accounts indirect service charges on deposits and loans, No explicit receivable or payable. FISIM is calculated on them if the mention was made of other indirect charges for financial unit providing the loan is classified as a financial intermediation except in the case of insurance. Although institution. the update recognizes other indirectly measured service charges associated with financial intermediation, it is 17.254 Repurchase agreements are classified as giving rise to convenient to continue to use the familiar expression, deposits or loans depending on whether they are or are not 378 Cross-cutting and other special issues included in the national measure of broad money. They due to holding gains and losses). At first sight, it seems that thus give rise to interest that may have a FISIM component. interest of 16 should be recorded. However, suppose the In addition, they have fees associated with their initiation. mid-price on purchase was 100 and on sale was 120. The correct recording would be to show interest of 20 payable 17.255 There are no nominal holding gains and losses on deposits by the issuer of the security to the holder with a purchase of and loans expressed in domestic currency (whether these services of 4 payable by the holder to the dealer in are held by residents or non-residents). With any inflation securities. Ignoring the bid-ask spread understates interest at all, there will be real holding losses on assets and ignores the services provided by the financial denominated in domestic currency. There may be nominal intermediaries that buy and sell securities. and real holding gains and losses on deposits and loans denominated in other currencies or held as unallocated gold Interest on discounted securities accounts (or similar accounts in other precious metals). 17.261 There are two ways in which the value of a discounted 17.256 Any charges made by a financial institution for operating a security can be determined during its life when the bank account, a fee for cashing a cheque or for withdrawing prevailing interest rate is different from the rate prevailing money from an automatic teller machine are all treated as when the security was initiated. The debtor approach is the explicit fees. perspective of the unit issuing the security and the creditor approach is the perspective of the unit holding the security. 17.257 The special case of non-performing loans and how they The first option, called the debtor approach, is to continue should be treated in the SNA is discussed in chapter 13. to use the rate prevailing on initiation throughout the instrument's life. The alternative, the creditor approach, is 5. Debt securities to use the current rate to estimate the value of interest between any two points in the instrument's life. 17.258 In terms of recording the associated flows, there are three 17.262 Suppose an instrument is offered at 90 with a redemption types of debt securities. The first is where the amount value of 100. If the discount (interest) rate does not change payable at the end of the period for which the security during its life, interest will accrue steadily throughout. exists is the same as the initial amount paid for the security Suppose, though, that the interest rate falls when the but there are associated "coupons" that entitle the holder to instrument has reached a value of 95. Because the payments of interest, at fixed or variable rates, at intervals redemption value is now discounted by a smaller factor, the during the life of the instrument. The second type of value of the security increases, say to 97. Both the creditor security is one where no intermediate payments are made and debtor approach would record interest of 5 in the but the issue price is lower than the redemption price. The period before the interest rate fall. Under the creditor issue price is equal to the redemption price discounted to approach, this increase in value of 2 from 95 to 97 is treated the date of issue at the appropriate rate of interest that could as a holding gain and only the subsequent rise to the be earned on a deposit of similar characteristics. The redemption value of 100 is treated as interest. Thus over the increase in value of the security during its life is treated as whole life of the instrument it has given rise to interest of 8 interest accruing to the holder of the security that is and a holding gain of 2. "reinvested" in the security to increase its value. The third type of security is a hybrid of the two other forms; the initial value is less than the redemption value but there are 17.263 In the SNA, the debtor approach is used. Under this also attached coupons. In certain circumstances, if the approach, the interest accruing in the period before the coupons represent a rate of interest higher than that interest rise is still 5 but so is the interest in the period after prevailing in the market for similar securities at time of the interest rate rise. Adding this level of interest to the issue, the security may be offered at a price higher than the value of 97 when the rise occurred would give a value of redemption price. 102 at the redemption date. Since this value is too high, a holding loss of 2 has to be recorded. Thus over the whole life of the instrument there is interest of 10 with an initial Service charges associated with securities holding gain of 2 (when the interest rate changed) offset by the later holding loss of 2. The holding loss occurs steadily 17.259 For securities, the interest calculated according to the over the period between when the holding gain was coupon or as the increase in value of the security is recorded and the redemption period. The rationale for using recorded in the SNA as such without adjustment for a the debtor approach is that the debtor, the issuer of the service charge. However, there is a service charge security, is not liable to make the payment until the security associated with the acquisition of a security on initiation matures and from his perspective it is appropriate to treat and with the disposal and acquisition of a security at any the total amount of interest as accruing steadily over the life point during its life. These service charges are identified as of the security. being the difference between the buying (bid) and selling (ask or offer) price quoted for each security and the mid- Determining interest flows on bills and bonds price. The bid and offer prices should be those applicable to the individual buyer and seller since these may vary according to the quantity being transacted or other factors. Interest on bills and similar instruments 17.260 Suppose an instrument is bought for 102 and subsequently 17.264 Bills are short-term securities that give the holder (creditor) sold for 118 even though there has been no change in the the unconditional right to receive a stated fixed sum on a rate of interest (and hence of the value of the instrument specified date. They are issued and traded in organized 379 System of National Accounts markets at a discount that depends on current market short- annual rate that is constant over the life of the bond, so that term interest rates and the time to maturity. Most bills the final value F=L(1+r)n. mature after a period ranging from one month to one year. 17.271 The interest rate, r, is given by the following expression 17.265 As the bill approaches maturity, its market value increases r=(F/L)1/n-1 where n is the number of years from the time because there is less discounting applied to it. This increase of issue to maturity. The interest accruing during the course in value, in common with the increase in the value of any asset due to the unwinding of a discount factor, is treated as of year t is then given by rL(1+r)t-1 where t = 1 at the end of income in the SNA. For financial assets, the income is the first year. recorded as interest. 17.272 The interest accruing each year is effectively reinvested in 17.266 Let the price paid for a bill at its time of issue and after the bond by its holder. Thus, counterpart entries equal to excluding the service charge be L; this represents the the value of the accrued interest must be recorded in the amount of funds that the purchaser (creditor) provides to financial account as the acquisition of more bond by the the issuer (debtor) and measures the value of the initial holder (creditor) and as a further issue of more bond by the liability incurred by the issuer. Let the face value of the bill issuer (debtor). be F: this represents the sum including the service charge paid to the holder of the bill (the creditor) when it matures. Other bonds, including deep-discounted bonds The difference, F-L, or discount on the bill, measures the interest payable over the life of the bill. 17.273 Most bonds pay a fixed or variable money income and may also be issued at a discount or, possibly, a premium. In such 17.267 Bills are traded on money markets at values that gradually cases, the interest receivable by the holders of the bonds rise to reflect the interest accruing on the bills as they has two components: approach maturity. The increase in the value of a bill due to the accumulation of accrued interest does not constitute a a. The amount of the money income receivable from holding gain because it is due to an increase in the principal coupon payments each period; plus outstanding and not to a change in the price of the asset. b. The amount of interest accruing each period Interest on bonds and debentures attributable to the difference between the redemption price and the issue price. 17.268 Bonds and debentures are long-term securities that give the holder the unconditional right to: The second component is calculated in the same way as for zero-coupon bonds, as described above. In the case of deep- a. A fixed or contractually determined variable money discounted bonds, most of the interest accruing is income in the form of coupon payments; or attributable to the difference between the redemption price and the issue price. At the other extreme, some bonds offer b. A stated fixed sum on a specified date or dates when an income stream in perpetuity and are never redeemed. the security is redeemed; or Index-linked securities c. Both (a) and (b). Most bonds fall into this category. 17.274 Index-linked securities are financial instruments for which 17.269 When a bond is issued at a discount, the difference between the amounts of the coupon payments (interest) or the the face value, or redemption price, and the issue price principal outstanding or both are linked to a general price constitutes interest that accrues over the life of the bond, in index, a specific price index, the price of a commodity or the same way as for a bill. However, as accounts are an exchange rate index. Different treatments are compiled for time periods that are typically much shorter recommended for the recording of transactions depending than the life of the bond, the interest must be distributed on the type of index used to uprate the level of principal to over those periods. The way in which this may be done is which the interest is linked and on the currency in which explained below. the interest and principal are denominated. Zero-coupon bonds 17.275 The indexation mechanism links the amount to be paid at maturity or coupon payments or both to indicators agreed 17.270 Zero-coupon bonds are long-term securities that are similar by the parties. The values of the indicators are not known in to bills. They do not entitle their holders to any fixed or advance. For debt securities with indexation of the amount variable money income but only to receive a stated fixed to be paid at maturity, they may be known only at the time sum as repayment of principal and accrued interest on a of redemption. As a result, interest flows before redemption specified date or dates. When they are issued they are cannot be determined with certainty. For estimating interest usually sold at a price that is substantially lower than the accruals before the values of the reference indicators are price at which they are redeemed on maturity. Let L equal known, some proxy measures have to be used. In this the issue price and F the redemption price, so F-L is the regard, it is useful to distinguish the following three value of the interest receivable and payable over the life of arrangements: the bond. This interest has to be distributed over the years to its maturity. One possible method is to assume that a. indexation of coupon payments only with no indexation interest at a rate of r is credited at the end of each year at an of amount to be paid at maturity, 380 Cross-cutting and other special issues b. indexation of the amount to be paid at maturity with no 17.279 The first approach works well when a broad-based indexation of coupon payments, and indexation of the amount to be paid at maturity is used (for example a consumer price index) as such indexation is c. indexation of both the amount to be paid at maturity expected to change relatively smoothly over time. and coupon payments. However, the first approach may give counter-intuitive results when the indexation of the amount to be paid at maturity combines motives for both interest income and The principles described below for index-linked debt holding gains (for example, a commodity price, stock securities apply to all index-linked debt instruments. prices, or gold prices). Therefore, when indexation includes a holding gain motive, typically indexation based on a 17.276 When only coupon payments are index-linked, the full single, narrowly defined item, the second approach is amount resulting from indexation is treated as interest preferred, otherwise the first approach should be used for accruing during the period covered by the coupon. It is the measurement of interest accrual. most likely that by the time data are compiled for a reporting period, the date for the coupon payment would 17.280 When both the amount to be paid at maturity and coupon have been passed and hence the value of the index is payments are indexed to a broad-based reference item, known. When the date for the coupon payment has not been interest accruals during an accounting period can be passed, the movement in the index during that part of the calculated by summing two elements: the amount resulting reporting period covered by the coupon can be used to from the indexation of the coupon payment (as described in calculate the interest accrual. paragraph 17.276), that is attributable to the accounting period, and the change in the value of the amount 17.277 When the amount to be paid at maturity is index-linked, the outstanding between the end and beginning of the calculation of interest accruals becomes uncertain because accounting period due to the movement in the relevant the redemption value is unknown; in some cases the index (as described in paragraph 17.277(a)). When both the maturity time may be several years in the future. Two amount to be paid at maturity and coupon payments are approaches can be followed to determine the interest indexed to a narrow index that includes a holding gain accrual in each accounting period. motive, interest accruals for any accounting period can be determined by fixing the yield-to-maturity at issuance as explained in paragraph 17.277(b). a. Interest accruing in an accounting period due to the indexation of the amount to be paid at maturity may be 17.281 Debt instruments with both the amount to be paid at calculated as the change in the value of this amount maturity and coupon payments indexed to foreign currency outstanding between the end and beginning of the are treated as though they are denominated in that foreign accounting period due to the movement in the relevant currency; interest, other economic flows and stock levels index. for these instruments should be calculated using the same principles that apply to foreign currency denominated b. Interest accruals may be determined by fixing the rate instruments. Interest should accrue throughout the period of accrual at the time of issue. Accordingly, interest is using the foreign currency as the currency of denomination the difference between the issue price and the market and converted into the domestic currency using mid-point expectation, at inception, of all payments that the market exchange rates. Similarly, the amount outstanding debtor will have to make; this amount is recorded as should be valued using the foreign currency as the unit of interest accruing over the life of the instrument. This account with the end of period exchange rate used to approach records as income the yield-to-maturity at determine the domestic currency value of the entire debt issuance, which incorporates the results of the instrument (including any accrued interest) in the indexation that are foreseen at the moment the international investment position. Changes in market instrument was created. Any deviation of the values of debt securities due to exchange rate movements underlying index from the originally expected path or interest rate changes are treated as revaluations. leads to holding gains or losses which will not normally cancel out over the life of the instrument. 17.282 As with other securities, the interest accruing as a result of indexation is effectively reinvested in the security and these 17.278 While the first approach (using the movement in the index) additions to the value of the security must be recorded in has the advantage of simplicity, interest includes all the financial accounts of the holder and issuer. changes and fluctuations in the value of the amount to be paid at maturity in each accounting period due to the 6. Equity and investment fund shares movement in the relevant index. If there is a large fluctuation in the index, this approach may yield negative interest in some periods even though market interest rates 17.283 The financial service charges levied on transactions in at the time of issue and current period may be positive. equity and investment fund shares are calculated in the Also, fluctuations behave like holding gains and losses. same away as for debt securities as the difference between The second approach (fixing the rate at the time of issue) the financial intermediary's selling price and the mid-price avoids such problems, but the actual future cash flows may and between the mid-price and the intermediary's buying differ from the initially expected cash flows unless ex ante price. They are treated as explicit fees. market expectations are exactly met. This means that interest for the life of the instrument may not be equal to 17.284 The investment income from corporate equity takes the the difference between the issue price and redemption form of distributed income of corporations. For value. corporations, the distributed income is in the form of 381 System of National Accounts dividends. For quasi-corporations, the investment income is especially options based products, a financial institution withdrawals from income of quasi-corporations. As noted may act as a market maker and sell the products with a in chapter 7, dividends or other withdrawals from corporate margin between the bid and offer price. This margin is income are recorded as investment income at the time the treated as a service charge as with other financial shares start to be quoted ex dividend. A different recording instruments. is made for extraordinarily large dividends that are out of line with recent experience on the amount of income 17.290 The initial value of a forward-type financial derivative is available for distribution to the owners of the corporation. zero but it acquires a value as soon as there is a change in Any excess distribution is to be recorded as a withdrawal of the circumstances that the financial derivative is designed equity (recorded in the financial account) and not as part of to provide financial protection against. At this point, a investment income. Chapter 22 discusses the case of financial asset and matching liability are recognized and exceptional dividends of public corporations. recorded as a transaction in financial derivatives in the financial account. Subsequent changes in value are 17.285 For foreign direct investment enterprises, there will also be recorded in the revaluation account. If the value becomes investment income in the form of reinvested earnings. negative, it becomes a liability for the holder rather than an asset and an asset rather than a liability for the seller. 17.286 For investment funds, the income element comes in the form of investment income disbursements to collective 17.291 At inception, options have a positive value normally equal investment fund shareholders. In the SNA, the full value of to the premium paid to establish them. This is recorded as a the investment income earned is shown as being distributed transaction in financial derivatives in the financial account. to the shareholder in the allocation of primary income Thereafter, any change in value is recorded in the account with reinvestment recorded in the financial revaluation account. Options are always an asset for the account. However, if an investment fund is also a foreign purchaser and a liability for the seller. direct investment enterprise, the reinvested earnings are recorded before the remaining investment income is 17.292 There is no investment income accruing on a financial distributed to investment fund share holders. derivative. 17.287 As noted earlier, there may be considerable holding gains 8. Employee stock options and losses, both nominal and real on equity and investment fund shares. 17.293 As explained in chapter 7, the granting of an employee stock option may form a part of compensation of 17.288 The entries in the financial accounts relating to acquisitions employees. All issues relating to employee stock options of equity conceptually contain two distinct types of are discussed in part 6 of this chapter. transactions. One is the exchange of equity and investment fund shares between institutional units. Because the transactions are valued at mid-price, total acquisitions must 9. Other accounts receivable or payable be equal to total disposals. The net effect, therefore, is to show the change in composition of the holders of shares by institutional sector and with the rest of the world. The 17.294 Other accounts receivable or payable are essentially accrual second type of transactions included in the financial adjustments typified by trade credit and advances. Trade account is the receipt of any reinvestment of earnings and credit refers to the case where goods and services have been the counterpart of the outflow recorded under investment delivered but payment has not yet been received. Advances income payable by corporations. In calculating the refer to payment for work-in-progress for which revaluation element between opening and closing balance prepayment has been made but the products are not yet sheet, care must be taken to exclude the reinvestment of delivered. The means of financing payment, such as the use earnings term. of credit cards, is not included here; the balance on the cards is treated as a loan and payments such as interest or overdue fees are recorded as for loans. 7. Financial derivatives 17.295 Other accounts receivable or payable denominated in 17.289 Arranging a financial derivative may involve a set-up fee domestic currency can have no nominal holding gains and which should be shown as an explicit fee charged by the losses but may have real ones. Any items denominated in financial institution concerned and payable by the holder of foreign currency may have both nominal and real holding the financial derivative. For some financial derivatives, gains and losses. 382 Cross-cutting and other special issues Part 5: Contracts, leases and licences O. Introduction 17.296 Many transactions that take place in the economy and are 17.297 However, there are other contracts and legal agreements recorded in the SNA are specified in terms of a contract variously described as leases and licences (or permits) between two institutional units. The majority of contracts where the terms of the agreement may affect the time of are such that one unit provides a good, service or asset to recording of transactions made under the agreement as well the other unit for an agreed payment at an agreed time as the classification of payments and the ownership of the (possibly immediately after agreeing on the price). Such item subject to the agreement. The purpose of this part of contracts may be written and legally binding or may be the chapter is to provide guidance on how transactions informal or even only implicit. If a unit accepts the estimate made under these more complex arrangements are to be provided by a builder for the cost of specified work, the recorded in the SNA. contract is written and may well be legally binding. If a book is ordered from a bookshop but there is a delay in 17.298 The first item for discussion concerns the different sorts of delivery, there is an informal contract between the book leases recognized in the SNA. The next topic for discussion shop and the customer but it is unlikely to be enforceable is the treatment of permits to use natural resources. This is by either side. Whenever a customer asks how much a of particular importance when it is government that claims given service will cost, whether it is a haircut, the delivery ownership of the resource on behalf of the community at of a heavy product or entry to a cinema, accepting the large but can apply to privately owned resources also. This service at the quoted price is in effect an implicit contract. leads naturally into a discussion of the treatment of assets However, all these contracts are simply agreements about where more than one unit has a claim to ownership, or the the terms under which goods, services and assets are benefits of ownership accrue to more than one unit. provided to the customer along with the legal ownership of the item. The only extent to which these contracts feature in 17.299 Some contracts are not connected with the use of assets. the SNA is that they determine the point at which the The first contracts for discussion are licences (or permits) transaction is to be recorded in the accounts. This is the given to undertake particular activities independently of time at which the ownership of the good, service or asset any assets that may be used in the activity. Here there are changes. For services, this is always when the service is different treatments when the permits are issued by delivered and for goods it may coincide with the time of government and when they are given by other institutional delivery. However, the time of recording is never units. The next point for consideration is when a contract determined by the time when payment is made. Any can constitute an asset in itself, independently of the subject difference between the time of payment and time of change of the contract. Finally, a number of clarifications are made of ownership gives rise to an entry in the financial account concerning the timing and nature of payments made under under other accounts receivable or payable. a contract. P. Leases 17.300 Three types of leases are recognized in the SNA; operating 1. Operating leases leases, financial leases and resource leases. Each of these leases relates to the use of a non-financial asset. 17.301 An operating lease is one where the legal owner is also Fundamental to the distinction between the different sorts the economic owner and accepts the operating risks and of leases is the difference between legal and economic receives the economic benefits from the asset by using it ownership. This distinction is elaborated in chapter 3. The in a productive activity. One indicator of an operating lease legal owner of an asset is the institutional unit entitled in is that it is the responsibility of the legal owner to provide law and sustainable under the law to claim the benefits any necessary repair and maintenance of the asset. Under associated with the asset. By contrast, the economic owner an operating lease the asset remains on the balance sheet of of an asset is entitled to claim the benefits associated with the lessor. the use of the asset in the course of an economic activity by virtue of accepting the associated risks. The legal owner is often the economic owner also. When they are different, the 17.302 The payments made under an operating lease are referred to legal owner has divested itself of the risks in return for as rentals and are recorded as payments for a service. The agreed payments from the economic owner. character of operating leases may most easily be described in relation to equipment since operating leases often concern vehicles, cranes, drills etc. In general, though, any sort of non-financial asset, an intellectual property product or a non-financial asset may be subject to an operating 383 System of National Accounts lease. The service provided by the lessor goes beyond the device of a financial lease avoids this undesirable form of mere provision of the asset. It includes other elements such recording the ownership of the aircraft and the decline in its as convenience and security, which can be important from value while keeping the net worth of both parties correct the user's point of view. In the case of equipment, the throughout the length of the lease. lessor, or owner of the equipment, normally maintains a stock of equipment in good working order that can be hired on demand or at short notice. The lessor must normally be a 17.306 It is common for a financial lease to be for the whole of the specialist in the operation of the equipment, a factor that life of the asset, but this need not necessarily be so. When may be important in the case of highly complicated the lease is for the whole of the life of the asset, the value of equipment, such as computers, where the lessee and his the imputed loan will correspond to the present value of the employees may not have the necessary expertise or payments to be made under the lease agreement. This value facilities to service the equipment properly themselves. The will cover the cost of the asset and include a fee charged by lessor may also undertake to replace the equipment in the the lessor. Payments made regularly to the lessor should be event of a serious or prolonged breakdown. In the case of a shown as a payment of interest, possibly a payment for a building, the lessor is responsible for the structural integrity service and a repayment of capital. If the terms of the of the building, so would be responsible in the case of agreement do not specify how these three items are to be damage due to a natural disaster, for example, and is identified, the repayment of principal should correspond to usually responsible for ensuring that elevators, heating and the decline in the value of the asset (the consumption of ventilation systems function adequately. fixed capital), the interest payment to the return to capital on the asset and the service charge to the difference between the total amount payable and these two elements. 17.303 Operating leasing developed originally to meet the needs of users who require certain types of equipment only intermittently. Many operating leases are still for short 17.307 When the lease is for less than the whole life of the asset, periods though the lessee may renew the rental when the the value of the loan should still be estimated as the value period expires and the same user may hire the same piece of the asset plus the value of the service charges to be made of equipment on several occasions. However, with the under the terms of the lease. At the end of the lease, the evolution of increasingly complicated types of machinery, asset will appear on the balance sheet of the lessee and its especially in the electronics field, the servicing and backup value will be equal to the value of the loan owed to the facilities provided by a lessor are important factors that lessor at that time. At that point the asset could be returned may influence a user to rent. Other factors that may to the lessor to cancel the loan or a new arrangement, persuade users to rent over long periods rather than including the outright purchase of the asset, may be reached purchase are the consequences for the enterprise's balance between the lessor and lessee. Because a financial lease sheet, cash flow or tax liability. requires the lessee to acquire substantively all the risks and rewards associated with the asset, if the lease is for less than the expected life of the asset, the lease usually 2. Financial leases specifies the value to the lessor at the end of the lease or the terms under which the lease can be renewed. Any variation in the price of the asset from the value in the lease 17.304 A financial lease is one where the lessor as legal owner of agreement is borne by the lessee. an asset passes the economic ownership to the lessee who then accepts the operating risks and receives the economic benefits from using the asset in a productive 17.308 Although a financial lease will typically be for several activity. In return, the lessor accepts another package of years, the duration of the lease does not determine whether risks and rewards from the lessee. It is frequently the case the lease is to be regarded as an operating or financial lease. that the lessor, though the legal owner of the asset, never In some cases a large complex such as an airport or even a takes physical delivery of the asset but consents to its building may be leased for short periods, perhaps only one delivery directly to the lessee. One indicator of a financial year at a time, but on condition that the lessee takes all lease is that it is the responsibility of the economic owner to responsibility for the asset, including all maintenance and provide any necessary repair and maintenance of the asset. cover for exceptional damage, for example. Even though Under a financial lease, the legal owner is shown as issuing the lease period is short, and even though the lessor may a loan to the lessee with which the lessee acquires the asset. not be a financial institution, if the lessee must accept all Thereafter the asset is shown on the balance sheet of the the risks associated with the use of the asset in production lessee and not the lessor; the corresponding loan is shown as well as the rewards, the lease is treated as a financial and as an asset of the lessor and a liability of the lessee. not an operating lease and the asset appears on the balance Payments under the financial lease are treated not as rentals sheet of the lessee with a corresponding loan extended from but as the payment of interest and repayment of principal. If the lessor to the lessee. the lessor is a financial institution, part of the payment is also treated as a service charge (FISIM). 17.309 As a consequence, any corporation that specializes in this sort of leasing, even though it may be called a property 17.305 Very often the nature of the asset subject to a financial company or aircraft leasing company, should be treated as a lease may be quite distinct from the assets used by the financial corporation offering loans to the units leasing lessor in his productive activity, for example a commercial assets from them. If the lessor is not a financial corporation, airliner legally owned by a bank but leased to an airline. It the payments are split into repayments of principal and would make no economic sense to show either the aircraft interest only; if the lessor is a financial corporation, the or its consumption of fixed capital in the accounts of the interest is split into SNA interest and a service charge bank or to omit them from the accounts of the airline. The (FISIM). 384 Cross-cutting and other special issues 3. Resource leases 17.311 The classic case of an asset subject to a resource lease is land but natural resources are also generally treated in this 17.310 A resource lease is an agreement whereby the legal owner way. An exception, when a long-term lease of land may be of a natural resource that the SNA treats as having an taken as the sale of the land is described in paragraph infinite life makes it available to a lessee in return for a 17.328. regular payment recorded as property income and described as rent. The resource continues to be recorded on the balance sheet of the lessor even though it is used by the 17.312 Payments due under a resource lease, and only such lessee. By convention, no decline in value of a natural payments, are recorded as rent in the SNA. There is further resource is recorded in the SNA as a transaction similar to discussion of leases on natural resources in the following consumption of fixed capital. section. Q. Licences and permits to use a natural resource 17.313 As noted above, in many countries permits to use natural b. The licence to use the spectrum constitutes an asset resources are generally issued by government since described as a permission to use a natural resource government claims ownership of the resources on behalf of which is a subset of the general asset class of contracts, the community at large. However, the same treatments leases and licences. apply if the resources are privately owned. c. Typically licence payments are neither taxes nor 17.314 There are basically three different sets of conditions that purchases of the spectrum itself. may apply to the use of a natural resource. The owner may permit the resource to be used to extinction. The owner d. Land, mineral deposits and the spectrum are similar may allow the resource to be used for an extended period of types of assets and so are leases and licences based on time in such a way that in effect the user controls the use of the use of those assets. the resource during this time with little if any intervention from the legal owner. The third option is that the owner can e. There is no single, universal and clear-cut criterion to extend or withhold permission to continued use of the asset distinguish between rent and asset sale; a range of from one year to the next. criteria needs considering. 17.315 The first option results in the sale (or possibly an f. Most cases examined point to treating licence payments expropriation) of the asset. The second option leads to the as the purchase of an asset, not rent. creation of an asset for the user, distinct from the resource itself but where the value of the resource and the asset allowing use of it are linked. The third option comes back g. The value of the licence and the value of the spectrum to the treatment of the use as a resource lease. The move symmetrically. difference in treatment between the second and third options was articulated in the context of the case of a h. Further elaboration will be useful in future. mobile phone licence and that recommendation (see SNA News and Notes Volume 14, (United Nations, 2002)) is 17.318 The considerations referred to under conclusion (e) were recapitulated before seeing how each of the three options six in number and are reproduced below. relates to different types of natural resources. a. Costs and benefits assumed by licensee: the more of the 1. The "mobile phone" treatment of licences or risks and benefits associated with the right to use an permits to use a natural resource asset are incurred by the licensee, the more likely the classification of a transaction as the sale of an asset as opposed to rent. Thus, preagreement on the value of 17.316 The case arose in 2000 when the sale of licences to use payments (whether by lump sum or by instalments) radio spectra for third generation mobile phones brought a effectively transfers all economic risks and benefits to flurry of interest from companies wanting to have exclusive the licensee and so point to the sale of an asset. If, on access to the spectra and who in consequence were the other hand, the value of payment is made contingent prepared to bid (often by auction) extremely large sums for on the results from using the licence, risks and benefits the access rights to the spectra. are only partially transferred to the licensee and the situation is more readily characterized as payment of 17.317 Eight conclusions were agreed in respect of the mobile rent. In the case of mobile phone licences, the total phone licences. Allowing for updated terminology, these amount payable has often been pre-agreed. An were: additional indication of the degree to which commercial risks have been passed to the licensee is to a. The spectrum constitutes a natural resource. examine the hypothetical case where a licensee goes 385 System of National Accounts bankrupt. If, in such a case, the licensor reimburses a. The contract is of short-term duration, or renegotiable none of the upfront payment made by the licensee, this at short-term intervals. Such contracts do not provide would constitute a strong case against a the lessee with a benefit when market prices for the characterization of the transaction as rent, as apparently leased asset go up in the way that a fixed, long-term the licensee has incurred all the commercial risks contract would. Such benefits are holding gains that involved. typically accrue to owners of assets. b. Upfront payment or instalment: as with other b. The contract is non-transferable. Non-transferability is indicators, the mode of payment is in itself not a strong but not a sufficient criterion for the treatment conclusive for a characterization as asset or rent of licence payments as rent, because, although it payment. Generally, the means of paying for a licence precludes the lessee from cashing in on holding gains, is a financial issue and as such not a relevant factor in it does not preclude the lessee from reaping comparable determining whether or not it is an asset. However, economic benefits (for example, using the licence in business practice shows that upfront payments of rent their business). for long periods (15-25 years in the case of mobile phone licences) are highly unusual and this favours an c. The contract contains detailed stipulations on how the interpretation as sale of an asset. lessee should make use of the asset. Such stipulations are often seen in cases of rent of land, in which the owner wishes to retain a control over the usage of the c. Length of the licence: licences granted for long periods land. In the case of licences, examples of such suggest a treatment as the sale of an asset, for shorter stipulations would be that the contract states what periods a treatment as payments for rent. The time regions or types of customers should be served, or that frame involved in mobile phone licensing (15-25 years) it sets limits on the prices that the lessee may charge. is considered rather unusual as a period for which to conclude a fixed payment of rent and therefore a further indication favouring an interpretation as sale of an d. The contract includes conditions that give the lessor the asset. unilateral right to terminate the lease without compensation, for instance for underuse of the underlying asset by the lessee. d. Actual or de facto transferability: the possibility to sell the licence is a strong indication of ownership and if e. The contract requires payments over the duration of the transferability exists, this is considered a strong contract, rather than a large upfront payment. condition to characterize the licensing act as the sale of Although this condition is essentially financial in third-party property rights. In practice, mobile phone character and thus cannot be decisive on the type of the licences are often transferable either directly (by the lease, it may indicate a degree of control for the lessor enterprise selling the licence to another enterprise) or to direct the use of the spectrum. The case for a indirectly (through the enterprise being acquired treatment as rent is further supported if the payments through a takeover). are related to the revenue the lessee derives from the licence. e. Cancellation possibility: the stronger the restrictions on the issuer's capacity to cancel the licence at its 17.320 These two sets of considerations can be seen as a more discretion, the stronger the case for treatment as a sale specific parallel to the distinction of economic ownership of an asset. Conversely, when licences can easily be from legal ownership used in distinguishing between an cancelled at the discretion of the issuer, ownership over operating and financial lease as described above. The benefits and risks has not been fully transferred to the conditions for treatment of the payment as the acquisition licensee and the transaction qualifies more readily as of an asset and for treatment as payment of rent are rent. indicative rather than prescriptive. A decision on the appropriate treatment when some of the conditions are not f. Conception in the business world and international met will necessitate consideration of how to record those accounting standards: businesses, in accordance with conditions not met. For example, if on balance the decision international accounting standards, often treat a licence is to treat the payment as rent but a large upfront payment to use the spectrum as an asset. Again, in itself this does was made, this should be treated as a prepayment to be not lead to treatment as an asset in the national recorded on an accrual basis. However, if the recipient is accounts, and there are other areas where companies not willing to consider a refund if the contract is suspended, choose to present figures in their accounts in ways that accrual recording is difficult. This is one reason why are not consistent with the national accounts. But the upfront payments are often indicative of the sale of an asset treatment of the acquisition of mobile phone licences as rather than the payment of rent. capital investment in company accounts provides an added incentive to treat them in a similar way in the 17.321 The application of these principles to the main forms of national accounts. natural resources is described below, beginning with radio spectra. 17.319 Not all these considerations have to be satisfied to characterize the licence as a sale of an asset nor does a 2. Radio spectra simple majority of them being satisfied do so. However, in order to qualify as a rental agreement, at least some of the 17.322 Payment for a mobile phone licence constitutes the sale of following sorts of conditions should hold. an asset, not payment for rent, when the licensee acquires 386 Cross-cutting and other special issues effective economic ownership rights over the use of the should be recorded as capital formation and an acquisition spectrum. To decide whether ownership is effectively of an asset in a manner similar to costs of ownership transferred or not, the six criteria quoted above are to be transfer on purchase and sale of an asset. considered. 4. Timber 17.323 When sale of an asset applies and when the life span of the licence and of the spectrum coincide, the payment for a licence is treated as the sale of the spectrum itself. The 17.329 If a unit is given permission to clear fell an area of natural latter situation applies always when licences are granted forest, or to fell at its discretion without any restriction in indefinitely. perpetuity, the payments made to the owner constitute the sale of an asset. (The sale of forested land may be recorded as the sale of the timber and the land separately, depending 17.324 When sale of an asset applies, and when the life span of the on the intended use of each.) licence is different from the life span of the spectrum, the payment for a licence is treated as the sale of a permit to use a natural resource by the legal owner (licensor) to the 17.330 The option to have a lease permitting felling at the lessee's economic owner (licensee). discretion but subject to the restoration of the land, in an acceptable forested state, at some time in the future is improbable. It is more common for timber felling to be 17.325 When the licence agreement is treated as the sale of an allowed under strict limits with a fee payable per unit asset in its own right, its value is established at the time of volume of timber felled (stumpage). The limits are usually its sale. It declines with the expiration of the period of such that the harvest of timber is sustainable and so the validity to fall to a value of zero at the point of the expiry of payments are recorded as rent in the case of a natural forest. the licence. Symmetrically, the value of the spectrum to the lessor falls when the licence acquires a value and is progressively re-established as the licence expires. This is 17.331 Forests may also be produced assets, in which case the consistent with a potential further sale of the right to use the extraction of timber is treated as the sale of a product. spectrum for another period. This procedure also ensures a neutral effect on the net worth of the overall economy 17.332 Illegal logging across national borders is prevalent in some during the life of the licence. countries. In such cases the quantity of timber extracted should be recorded as uncompensated seizure of a natural 3. Land resource or cultivated asset, as the case may be. 17.326 Land may be sold outright when the legal ownership is 5. Fish transferred from one institutional unit to another. (Land may not be recorded as being sold to a non-resident unit. In 17.333 Natural stocks of fish with an economic value are an asset such cases a notional resident unit is created that holds title and the same considerations apply to them as to other to the land; the non-resident unit then owns the equity of natural resources. It is not realistic to consider that the notional resident unit.) permission would be given to exhaust fish stocks but illegal fishing may either reduce the stock below the point of 17.327 The type of asset most frequently subject to a resource sustainability or exhaust them altogether. In these cases, lease is land. Tenant farmers usually pay regular rent to uncompensated seizure of the stock should be recorded. their landlord. A resource lease on land may be considered as a sale of the land if the lease satisfies most or all of the 17.334 Fishing quotas may be allocated in perpetuity or for same criteria as those listed for payments for a mobile extended periods to particular institutional units, for phone licence to be considered a sale of an asset. When the example, where fishing is an established way of life and land is leased in other circumstances, the payments are there may be little alternative economic employment. In recorded as rent under a resource lease agreement. such circumstances the quotas may be transferable and if so, there may be a well developed market in them. Fishing 17.328 In some jurisdictions, the land under buildings remains in quotas may therefore be considered as permits to use a the legal ownership of a landlord other than the owner of natural resource that are transferable. They are thus assets the buildings. If regular payments are made to the landlord, in the SNA. these are recorded as rent. However, it is sometimes the case that, even though the land legally belongs to another 17.335 An alternative regime is to issue a permit for a strictly unit, the right to occupy it for an extended period is paid for limited period of time, less than a year, to a nominated in a single upfront payment often when the building is institutional unit, often a non-resident. This is a common acquired. As explained in the previous section, this practice in some islands in the South Pacific, for example. suggests recording the payment as the acquisition of the In these cases the revenue from the licences should be asset. In such a case, when the building changes ownership, recorded as rent as under a resource lease. the purchase price includes an element representing the present value of future rent payments. In such a case, the land is recorded in the SNA as if the ownership is 17.336 A licence for recreational fishing has long been considered, transferred along with the building above the land. If, at the by convention, as payment of a tax. This treatment is not end of the land lease, a further payment is liable for changed by the wider considerations for commercial extension of the lease for another long-term period, this fishing. 387 System of National Accounts 6. Water 17.341 When a unit owning a mineral resource cedes all rights over it to another unit, this constitutes the sale of the resource. Like land, mineral resources can only be owned 17.337 A body of water with an economic value can be sold in its by resident units; if necessary a notional resident unit must entirety either as part of the land that surrounds it or as a be established to preserve this convention. separate entity. 17.342 When a unit extracts a mineral resource under an agreement 17.338 As is the case for fish, it is unlikely that economic where the payments made each year are dependent on the ownership would be ceded under a long lease with no amount extracted, the payments (sometimes described as preconditions on the quantity and state in which a similar royalties) are recorded as rent. amount of water should be returned to the owner. However, it is possible that surface water could be leased under a long 17.343 The owner (in many but not all circumstances government) lease for recreational purposes, say. The treatment of such does not have a productive activity associated with the leases should be as for land. extraction and yet the wealth represented by the resource declines as extraction takes place. In effect, the wealth is being liquidated with the rent payments covering both a 17.339 Of increasing concern is the extraction of water from water return to the asset and compensation for the decline in bodies. Regular payments for the extraction of water (as wealth. Although the decline in wealth is caused by the opposed to the delivery of it) should be treated as rent. extractor, even if the resource were shown on the balance sheet of the extractor, the rundown in wealth would not be 7. Mineral resources reflected in the extractor's production account because it is a non-produced asset and thus not subject to consumption of fixed capital. (The SEEA 2003 describes a form of 17.340 Mineral resources differ from land, timber and fish in that satellite account where such a deduction from national although they also constitute a natural resource, there is no income can be made for minerals as well as for other way of using them sustainably. All extraction necessarily natural resources used unsustainably.) For these reasons, reduces the amount of the resource available for the future. simple recording of payments each year from the extractor This consideration necessitates a slightly different set of to the owner as rent and changes in the size and value of the recommendations for how transactions relating to their use resource as other changes in the asset accounts of the legal should be recorded. owner is recommended. R. Sharing assets 17.344 There are two ways in which assets may be shared. The criteria, a separate asset, described as a permit to use a asset may be wholly owned by two or more units, each at natural resource, is established. These assets are part of the different points in time. Alternatively, the risks of and subclass of contracts, leases and licences. They are then benefits from the asset may be shared by two or more units shown on the balance sheet of the licensee. at a single point in time. The two cases require different treatments. 17.347 Sharing the risks and rewards of an asset between different 17.345 Within the SNA, even though the asset may be owned by units at a point in time is unusual. The most common different units at different times, when a balance sheet is occurrence is that a single unit undertakes the activity in drawn up, the whole of the value of the asset is attributed to which the asset is used and that unit shares the returns one unit. For an asset subject to an operating lease, there is among the owners in the form of distributed property no ambiguity. The legal owner is also the economic owner income. However, occasionally it is possible such a single and is the unit that shows the asset on its balance sheet. For unit does not exist and it is not meaningful to try to create it an asset subject to a financial lease, the unit showing the statistically. This is most common when the participating asset on its balance sheet is the economic owner. The value units are resident in different economies, as may be the case of the asset is the present value of the future payments due with an airline, or in the case of some unincorporated joint to the legal owner plus the value of the asset at the end of ventures (UJVs). The terms under which UJVs are the lease as specified in the lease agreement. This is established are diverse but one form allows that all consistent with the views that the value of the asset members share the assets equally. In such cases, the SNA represents the stream of future benefits coming from the records the assets shared between the owners in proportion asset and the economic owner is the unit entitled to receive to their ownership shares. these benefits in return for accepting the risks associated with using the asset in production. For an asset subject to a resource lease, the value is shown on the balance sheet of 17.348 In some joint ventures, one party may contribute an asset as the legal owner. its share of the costs. If this happens, an injection of capital equal to the value of the asset should be recorded followed 17.346 When licences to use natural resources such as radio by the purchase of the asset in question with the ownership spectra, land, timber and fish satisfy the "mobile phone" of the asset then shared by all parties to the arrangement. 388 Cross-cutting and other special issues S. Permits to undertake a specific activity 17.349 In addition to licences and leases to use an asset as An example described in the previous sections, permission may be granted to engage in a particular activity, quite 17.353 Suppose a unit, A, contracts with government to buy a independently of any assets involved in the activity. Thus permit to operate a casino for 3 years at a total cost of 12. permission to extract minerals in return for the payment of He expects to make monopoly profits of 7 per year because rent, for example, is not covered by this type of permit. The the permit excludes many other casinos from operating. permits are not dependent on a qualifying criterion (such as The government may or may not be prepared to make a passing an examination to qualify for permission to drive a refund if A relinquished the permit. A may utilize the car) but are designed to limit the number of individual units permit for the whole of the 3 years for which it is valid or entitled to engage in the activity. Such permits may be he may sell it to unit B at the end of year 1. The recordings issued by government or by private institutional units and under these four possibilities are examined below. different treatments apply to the two cases. Case 1: Government does not offer a refund and A 1. Permits issued by government keeps the permit for 3 years 17.354 At the start of year 1, A pays tax of 12 and has an asset 17.350 When governments restrict the number of cars entitled to worth 21 initially. By the end of the year, the value of the operate as taxis or limit the number of casinos permitted by asset has reduced by 7 as an other volume change, because issuing licences, for example, they are in effect creating one of the three years for which the permit was initially monopoly profits for the approved operators and recovering valid has expired. At this point the asset is contributing 14 some of the profits as the fee. In the SNA these fees are to his net worth. By the end of the second year he writes off recorded as taxes, specifically as other taxes on production. another 7 as an other volume change, leaving a contribution This principle applies to all cases where government issues to net worth of 7. By the end of the third year the asset is licences to limit the number of units operating in a worth zero. particular field where the limit is fixed arbitrarily and is not dependent only on qualifying criteria. Case 2: Government does not offer a refund and A sells the permit to B after one year 17.351 In principle, if the licence is valid for several years, the payment should be recorded on an accrual basis with an 17.355 At the start of year 1, A pays tax of 12 and has an asset other account receivable or payable entry for the amount of worth 21 initially. By the end of the year the value of the the licence fee covering future years. However, if asset has reduced by 7 as an other volume change, because government does not recognize a liability to repay the one of the three years for which the permit was initially licensee in the case of a cancellation, the whole of the fee valid has expired. At this point he values the asset at 14. payable is recorded at the time it is paid. However, B is only prepared to pay 13 for the asset and A accepts this. A therefore reduces the value of the asset by 1 17.352 The incentive to acquire such a licence is that the licensee as a revaluation change. B then acquires the asset and reduces its value by 6.5 in the other change in volume of believes that he will thereby acquire the right to make assets account in each of the two following years. monopoly profits at least equal to the amount he paid for the licence. This stream of future income is treated as an asset if the licensee can realize this by on-selling the asset. Case 3: Government does offer a refund and A keeps The type of asset is described as a permit to undertake a the permit for 3 years specific activity. The value of the asset is determined by the value at which it can be sold or, if no such figure is 17.356 At the start of year 1, A makes a payment of 12 to available, is estimated as the present value of the future government but this is recorded as a payment of tax of 4 stream of monopoly profits. If the payment for the licence during the year and at the end of the year government has is being recorded by government on an accrual basis, the an account payable to A of 8. The value of the permit to A licensee has an asset in his balance sheet under accounts is only the excess of the monopoly profit over the total receivable or payable equal to the value of the future amount that A will have to pay to government. This starts at payments and so the value of the licence itself should cover 9 (the difference between 7 and 4 for three years) but by the simply the excess of the monopoly profits over the cost. If end of year 1 is worth only 6. At the end of the year A's net the licence is on-sold, the new owner assumes the right to worth includes an account receivable from government of 8 receive a refund from the government if the licence is and 6 as the remaining value of the permit. The total is 14 cancelled as well as the right to earn the monopoly profits. as in case 1. During the second year, A's account If the licence was recorded as a single tax payment, the receivable from government is reduced by 4 which is used value of the asset is determined by the value at which it can to pay the tax due in year 2. In that year the value of the be sold or, if no such figure is available, is estimated as the permit also reduced by 3 from 6 to 3. At the end of the year, value of all the future monopoly profits without deduction. A's net worth includes an account payable from The asset first appears in the other changes in the volume of government of 4 and a permit worth 3, total 7 as in case 1. assets account and changes in value, both up and down, are At the end of year 3, both the account payable and the value recorded in the revaluation account. of the permit are reduced to zero. 389 System of National Accounts Case 4: Government does offer a refund and A sells firm to pick up guests. In these sorts of cases, the permits the permit to B after one year are treated as payments for services. In principle the payment should be recorded on an accrual basis throughout the period for which the permit is valid. There is no reason 17.357 At the start of year 1, A makes a payment of 12 to in principle why such permits could not be treated as assets government but this is recorded as a payment of tax of 4 if they were marketable though this may not be a common during the year and at the end of the year government has situation. an account payable to A of 8. The value of the permit to A is only the excess of the monopoly profit over the account payable. This starts at 9 (the difference between 7 and 4 for Non-government permits as assets three years) but by the end of the year is worth only 6. At the end of the year A's net worth includes an account 17.361 A permit issued by a unit other than government to receivable from government of 8 and 6 as the remaining undertake a specific activity may be treated as an asset only value of the permit. The total is 14 as in case 1. As in case when all the following conditions are satisfied: 2, A has to reduce the value of his permit (in this case from 6 to 5) when he appears to sell the asset to B for 13. In fact, a. The activity concerned does not utilize an asset the account payable from government of 8 is transferred to belonging to the permit-issuer; if it does the permission B and the asset is sold for 5. B's net worth is unchanged. to use the asset is treated as an operating lease, a He has paid A 13 but received the account payable of 8 and financial lease or a resource lease; an asset valued at 5 in return. In year 2, the account payable is reduced by 4 and a tax payment of 4 is recorded and the b. The number of permits is limited and so allows the permit declines in value from 5 to 2.5. holder to make monopoly profits when undertaking the activity concerned; Government permits as assets c. The permit holder must be legally and practically able 17.358 A permit issued by government to undertake a specific to sell the permit to a third party. activity may be treated as an asset only when all the following conditions are satisfied: 17.362 Even if all these conditions are satisfied, if in practice the permits are not on-sold, it is not relevant to record the a. The activity concerned does not utilize an asset permits as assets. If any of the conditions is not satisfied, belonging to government; if it does the permission to the payments are recorded as payments for a service. use the asset is treated as an operating lease, a financial lease, a resource lease or possibly the acquisition of an 3. Permits to use natural resources as sinks asset representing permission to use the asset at the discretion of the licensee over an extended period; 17.363 Governments are increasingly turning to the issuing of emission permits as a means of controlling total emissions. b. The permit is not issued subject to a qualifying These permits do not involve the use of a natural asset criterion; such permits are treated as either taxes or (there is no value placed on the atmosphere so it cannot be payments for services; considered to be an economic asset) and are therefore classified as taxes even though the permitted "activity" is c. The number of permits is limited and so allows the one of creating an externality. It is inherent in the concept holder to make monopoly profits when undertaking the that the permits will be tradeable and that there will be an activity concerned; active market in them. The permits therefore constitute assets and should be valued at the market price for which d. The permit holder must be legally and practically able they can be sold. to sell the permit to a third party. 17.364 The case of payments for discharging water may be 17.359 Even if all these conditions are satisfied, if in practice the considered as an example of the different possible ways of permits are not on-sold, it is not relevant to record the treating the payments. permits as assets. If any of the conditions is not satisfied, the payments are treated as taxes without the creation of an 17.365 If a payment to discharge water is a fine intended to inhibit asset in the category of contracts, leases and licences. discharge, it should be treated as a fine. (There may be an account payable as shown in cases 3 and 4 of the example.) 17.366 If a limited number of permits is issued with the intent to restrict discharges, the payment should be treated as a tax if 2. Permits issued by other units the medium into which the water is discharged is not regarded as an asset in the SNA. 17.360 It is less common for units other than government to be able to limit the participation in a given activity. One 17.367 If the discharge medium is an asset and the necessary instance may be when it is either compulsory or desirable conditions are met concerning the terms on which the to belong to a professional association but in this case there discharge is permitted, then the payment for the permit is seldom a limit on numbers participating. Another should be treated in the same way as the payment for a example could be where the owner of property limits the licence to use the radio spectrum for mobile phones. If the numbers of units allowed to operate on his property for charge is linked to remedial action, the payment is a example a hotel with a policy of only allowing one taxi payment for a service unless the amount levied is out of all 390 Cross-cutting and other special issues proportion to the costs involved in subsequent water treatment in which case the payment should be treated as a tax. T. Contracts for future production 17.368 Although human capital is not recognized as an asset in the 17.369 It is possible to imagine that similar contracts may exist for SNA, there are cases where a contract that entitles the the production of goods in future. An examination of the holder to limit the ability of a named individual to work for practice of purchasing the options of future aircraft others may be regarded as an asset. The most prolific and production revealed, however, that in this case there is no lucrative contracts may be for sports players where, for transferable asset and a change of mind on the part of the example, a football club can "sell" a player to another. In potential purchaser or failure to deliver on the part of the fact they are not selling the person, they are selling the supplier is settled by a change in the arrangements between exclusive right to have that person work for them. Similar contracts exist for the rights to publish literary works or the two parties and does not lead to the sale of the option to musical performances. All such contracts are treated as a third party. If an instance arises where the option to assets of the type entitlement to goods and services on an purchase goods is treated in the same way as a contract for exclusive basis within the asset class of contracts, leases a named individual's performance, the same classification and licences. would apply. U. Leases as assets 17.370 As stated at the beginning of this part, contracts underlie an asset of the tenant. The circumstances are that it is both many transactions recorded in the SNA and it is important legally possible and is practicable for the tenant to sublet to understand what the implications are for the time of the apartment to a third party. Because of the difficulty of recording and classification of transactions arising from a identifying when such assets may exist, it is recommended contract. It has been noted that permits or licences to use that in practice these assets be recorded only when there is natural resources may constitute an asset as may permits to evidence that they have been realized. undertake specific activities and contracts for future production. There is one other condition that may lead to a 17.372 It is possible that the encumbered value of the apartment contract being considered as an asset, which is another may be higher than the unencumbered value if rentals have circumstance when the contract is transferable to a third fallen since the lease was agreed. In this case it is the party (that is a unit other than the two specified in the landlord that benefits from the discrepancy between the original contract). contract price and the market price because the value of the apartment in his balance sheet is still the encumbered value. If the tenant wishes to cancel the lease, he may have to pay 17.371 Suppose a lease on an apartment agreed some time ago the landlord the difference between the encumbered value specifies the rental at 100 per month but if the same and the unencumbered value. Only in the exceptional case apartment were to be leased currently it would fetch 120 where the tenant pays a third party to assume the lease at per month. From the lessor's point of view, the apartment is the price specified in the lease, does this payment represent "encumbered" by the existing lease, that is, it carries a realizing an asset of negative value to the tenant. Once the penalty (in this case of 20 per month) because of the lease expires or is cancelled, the value of the apartment existence of the lease. The encumbered value of the returns to its unencumbered value. apartment is based on the present value of future rental payments taking the existence of the lease into account, that is, the future income stream is 100 for as long as the lease 17.373 Assets reflecting such third-party property rights are always lasts and 120 thereafter (ignoring any allowance for transitory. They exist only for the length of the lease and inflation). The unencumbered value of the apartment is a where there is a difference between the encumbered and present value based on an income stream of 120 per month unencumbered values. As each year passes, they reduce in from the current period forward. The value to be entered in value because the period during which the difference exists the landlord's balance sheet is the encumbered value. If he is reduced but may increase if the new rental price wishes to sell the apartment and the existing tenant had the increases. right to remain at the agreed rental, the encumbered value is all the landlord (lessor) could hope to realize. If he wished 17.374 The market price of the rental of an apartment is the price to realize the unencumbered value he would have to pay the actually paid by the existing tenant. If, in this example, the tenant the difference between the unencumbered value and original tenant remains in situ and pays 100 per month, this the encumbered value to be free of the lease. This amount, is the market price despite the fact that a new lease would the encumbrance, can in some circumstances be treated as fetch a rental of 120. Only if the original tenant sublets the 391 System of National Accounts apartment for 120 would the market price be recorded as Marketable operating leases as assets 120. Of this, 100 will be paid to the landlord and 20 to the original tenant. 17.376 A marketable operating lease may be treated as an asset only when the two following conditions are satisfied: 17.375 The example above shows when a marketable operating lease may acquire a value as an asset. Permits to use natural a. The lease specifies a predetermined price for the use of an asset that differs from the price the asset could be resources and contracts for future production may also give leased for at the current time, and rise to these sorts of third-party property rights assets. So may permits to undertake specific activities even though b. The lessee is able legally and practically to realize this the original payment was treated as a tax if payable to price difference by subcontracting the lease to a third government. Financial leases do not give rise to these sorts party. of assets. If the value of the asset being leased increases by more than the payments due under the financial lease, the 17.377 In practice, it is recommended that such assets should be lessee always has the option of selling the asset, repaying recorded only when the lessee does actually exercise his the loan and keeping the difference. right to realize the price difference. V. Other considerations 1. Time-share arrangements owner has a fixed agreement to have some form of accommodation available at a given period for a fixed length of time, it is likely that this represents a prepaid lease 17.378 One way of sharing an asset offering accommodation is by but one that could be sublet occasionally or sold for the rest means of a "time-share" arrangement. The same of the period of the lease as a transferable operating lease. expression, though, may be used for a number of different A participant in a points-based scheme may have only an arrangements. account receivable by way of an asset. 17.379 One arrangement is similar to purchasing a house except 17.382 Where time-share arrangements are significant, the that "ownership" is restricted to a particular period each conditions pertaining to them should be examined in the year but in perpetuity. Exactly the same physical space is light of the general principles described in this section to available to the owner each year. Another arrangement determine how to record the transactions involved and guarantees accommodation at a given time each year but classify the assets. not necessarily in the same physical space. Other arrangements consist of buying "points" in a scheme that the owner can use to purchase accommodation at different 2. Lost deposits locations and times subject to availability. 17.383 Under any form of contract, it is possible that one party 17.380 All time-share arrangements have a unit that is responsible makes a payment and the other does not deliver the goods, for upkeep, maintenance, insurance and so on but there are services or assets promised in the contract. In many cases variations in whether this unit is the ultimate owner of the this gives rise to an account payable or receivable that the complex and the subscribers are lessees or whether the unit first party may reclaim from the second. In some acts as agent for the group of owners or subscribers. circumstances this may not be possible. For example, cheap Similarly there are variations in whether the owner or airline tickets are often offered on a non-refundable basis. subscriber may sell or bequeath his ownership to another The fact that prepayments are non-refundable is part of the unit permanently and whether they can sublet occasionally. business plan of the company concerned. Their output should be measured as the value of sales without reduction 17.381 The issue of whether participation in the time-share scheme for the payments by clients who did not avail themselves of gives rise to an asset will depend on the answers to these the services to which they were entitled. Volume measures sorts of questions. If the owner has a nominated space, of output will depend on the services actually delivered and available in perpetuity, is eligible to act as part of the the impact of the non-refundable deposits will show up as a management committee for the scheme, can sell or price effect. It will also be reflected in the consumption bequeath the allocation at will, then the holding is most expenditure figures of those paying for services they did likely to be an asset of the same type as a house. If the not in the end take delivery of. 392 Cross-cutting and other special issues Part 6: Employee stock options W. Introduction 17.384 A particular form of income in kind is the practice of an derivative and is shown as such in the financial accounts of employer giving an employee the option to buy stocks both parties. It is sometimes possible for these options to be (shares) at some future date. The ESO is similar to a traded or the employer may buy back the options for cash financial derivative and the employee may not exercise the instead of issuing shares. It is possible that multinational option, either because the share price is now lower than the corporations may offer employees in one economy options price at which he can exercise the option or because he has on shares of their parent company in another country. left the employ of that employer and so forfeits his option. The following is a description of how stock options are 4. Recording ESOs in the account of the SNA valued, taking into account the probability that not all the options are exercised. 17.389 An estimate of the value of the ESO should be made at grant date. This amount should be included as part of 1. Terminology compensation of employees spread over the period between the grant date and vesting date, if possible. If this is not 17.385 Typically an employer informs his employees of the possible, the value of the option should be recorded at decision to make a stock option available at a given price vesting date. (the strike price or exercise price) after a certain time under certain conditions (for example, that the employee is still in 17.390 The costs of administering ESOs are borne by the employer the enterprise's employ, or conditional on the performance and are treated as part of intermediate consumption just as of the enterprise). The time of recording of the employee any other administrative functions associated with stock option in the national accounts has to be carefully compensation of employees. specified. The "grant date" is when the option is provided to the employee, the "vesting date" is the earliest date when the option can be exercised, the "exercise date" is when the 17.391 Although the value of the stock option is treated as income, option is actually exercised (or lapses). In some countries there is no investment income associated with ESOs. the permissible length of time between vesting and exercise date is quite long; in others it is very short. 17.392 In the financial account, the acquisition of ESOs by households matches the corresponding part of 2. Valuation compensation of employees with a matching liability of the employer. 17.386 IASB accounting recommendations are that the enterprise derives a fair value for the options at grant date by taking 17.393 In principle, any change in value between the grant date the strike price of the shares at that time multiplied by the and vesting date should be treated as part of compensation number of options expected to be exercisable at vesting of employees while any change in value between vesting date divided by the number of service years expected to be date and exercise date is not treated as compensation of provided until the vesting date. This fair value is applied to employees but as a holding gain or loss. In practice, it is the number of service years provided in each year to derive most unlikely that estimates of the costs of ESOs to the the cost to the firm in the year. The fair value per service employers are revised between grant date and exercise date. year is adjusted if the assumptions about the number of For pragmatic reasons, therefore, the whole of the increase options to be exercised alter. between grant date and exercise date is treated as a holding gain or loss. An increase in value of the share price above the strike price is a holding gain for the employee and a 17.387 In the SNA, if there is neither an observable market price holding loss for the employer and vice versa. nor an estimate made by the corporation in line with the recommendations just given, the valuation of the options may be estimated using a stock options pricing model. 17.394 When an ESO is exercised, the entry in the balance sheet These models aim to capture two effects in the value of the disappears to be replaced by the value of the stocks (shares) option. The first effect is a projection of the amount by acquired. This change in classification takes place via which the market price of the shares in question will exceed transactions in the financial account and not via the other the strike price at the vesting date. The second effect allows changes in the volume of assets account. for the expectation that the price will rise further between the vesting date and exercise date. 5. Variations in the use of ESOs 3. ESOs as a financial asset 17.395 There are two consequences of the treatment of employee stock options to be incorporated into the accounts on the 17.388 Before the option is exercised, the arrangement between the grounds of consistency. One relates to other means of employer and employee has the nature of a financial rewarding employees that are related to shares in the 393 System of National Accounts company. The other relates to the use of stock options to Similarly, if employees receive a benefit relating to the meet expenses other than compensation of employees. change in a company's shares but not shares themselves, this payment should be treated as part of compensation of 17.396 The first consequence is for variations on the basic employees. employee stock option model. A firm may contribute its own shares to the pension fund. This variation is usually called an employee share plan or a stock ownership plan. 17.398 The second consequence is the possibility that the Under the 1993 SNA, these shares would not have been enterprise pays for goods and services by means of stock recognized as claims by households because such funding options as well as offering these as part of the was not "arm's length". With the change to recording compensation package to employees. When this happens, pension entitlements rather than the existing assets to meet the value of the stock option should be estimated if at all them, this objection to recording in the same manner as the possible by the value of goods and services received in IASB recommends disappears and should be followed. exchange. If this is not possible, then similar valuation methods should be used as in the case of employee stock 17.397 Another variation on the use of stock options to reward options. The options should be recorded as a form of trade employees is the offer to employees to purchase shares at credit between the issuers and the supplier of the goods and advantageous rates under an employee share (stock) services in the financial account. Such arrangements are purchase plan. Employees are not obliged to accept the usually referred to as share (stock) appreciation rights. For offer, but if they do the discount in the share value should simplicity within the SNA, the term employee stock be treated as part of compensation of employment. options (ESOs) is used to include stock appreciation rights. 394 Chapter 18: Elaborating and presenting the accounts A. Introduction 18.1 The preceding chapters explain both the accounting system, rather it should be seen as a sign of the degree of concepts of the SNA and the form of the sequence of confidence that the statistician has in both the original accounts. This chapter, and those that follow, describe how estimates and the later revisions. Some of the poorest to build on this information to use the SNA in a way best quality national accounts are those that have remained suited to serve the needs of users and illustrate the unchanged for many years. Aspects associated with interaction of the SNA with other international statistical publishing time series, and the need to revise them, are standards. discussed in section B. 18.2 The present chapter is concerned with a number of issues of 18.4 Chapter 15 describes the theory of the price indices that can particular concern to those responsible for the maintenance be used to deflate some aspects of national accounts from of the national accounts data base and the presentation of current values to estimates in volume terms. Section C the accounts in the most suitable form for different sorts of describes briefly which parts of the accounts it is useful to analysis. In particular it addresses: express in this way. a. how to deal with revisions and discrepancies in the data and the trade-off between timeliness and accuracy, 18.5 Annual series are adequate to identify long-term shifts in the economy but to assess what is happening in the short b. which accounts to present in volume terms, term, higher frequency national accounts fill a key role in between short-term indicators and fully elaborated annual accounts. Discussing such accounts requires a manual in c. the role of data more frequent than annual, itself but an indication of some of the key issues is given in section D. d. regional accounts, and e. what sort of detail might be included in publications. 18.6 Another dimension of the accounts is that of regional accounts, where a region may be either a subdivision of a country or an economic region covering several economies. 18.3 Although no table in previous chapters has illustrated it, the A brief mention of some aspects of regional accounting is prime use of the SNA is in a time series context so that given in section E. users of the accounts can assess how the economy is evolving and developing over time. National accountants, like other statisticians, are regularly under pressure to 18.7 The SNA is meant to be presented flexibly in order to produce estimates of the accounts as quickly as possible. respond most appropriately to local circumstances. Section Inevitably there is a tension between timeliness and F illustrates some ways in which key aspects of the accuracy since more comprehensive and robust data usually accounts might be presented. It is important to stress that take longer to process than short-term indicators. Producing the tables in this section are not intended to be taken as accounts as quickly as possible with the best information strict guidelines but simply as indications of the sorts of available at that time inevitably means that revisions to the details that might be condensed or expanded in different initial estimates will be necessary. The publication of circumstances in order to highlight different aspects of the revisions to series is not a sign of weakness in the statistical economy. B. Time series, revisions and discrepancies 1. Time series movement of economic variables that are of most interest to analysts. The style of tables used in chapters 6 to 13 is 18.8 The tables in this manual are designed to be expository and well suited to time series presentations since the number of therefore feature data only for a single time period. In columns may be extended as necessary to accommodate practice it is time series of the aggregates that explain the increasingly long time series. For example, instead of one 395 System of National Accounts table with one column for each of the five institutional organizations. The papers prepared by the task force are sectors, one for the total economy and one for the rest of the available under the title Guidelines on Revisions Policy and world, it is straightforward to have seven tables, one for Analysis (Organisation for Economic Co-operation and each of the columns but for multiple years. Development and Eurostat, 2008). 18.9 The length of time series shown will depend on a number 3. Discrepancies of factors. For some purposes, in particular for macroeconomic modelling, as long a run as possible may 18.14 Although the SNA ensures there is perfect consistency be interesting and some countries have series going back between the three measures of GDP, this is a conceptual for over fifty years. However, most printed tables show no consistency that in general does not emerge naturally from more than the ten to fifteen most recent years, with earlier data compilations. This is because of the wide disparity of data available only electronically. Usually more attention is data sources that must be called on and the fact that any given to ensuring the data for the recent past are as error in any source will lead to a difference between at least complete and accurate as possible with earlier years two of the GDP measures. In practice it is inevitable that receiving less detailed attention. It is desirable, however, at many such data errors will exist and will become apparent a minimum to provide a link to earlier series so the long- in exercises such as the balancing of supply and use tables. term evolution of the economy can be examined. 18.15 Just as a statistical office must make choices about the 18.10 There may be factors that imply that long time series are trade-off between timeliness and accuracy, choices must mainly of academic interest. For example, the change from also be made about how to deal with discrepancies. command economy to market economy that took place in Resources can be invested in improving data surveys, the eastern Europe in the early 1990s resulted in such a format of the questionnaire, sampling strategies, processing fundamental change in the nature of economic activity that techniques including the treatment of missing data and so time series for a period from the late 1980s to the early on. However, while ultimately desirable, such an approach 1990s are of limited analytical interest. In this case the is costly and long-term. Even with very sophisticated data political changes overshadowed the economic collection methods, discrepancies between different consequences. In all countries, the evolution of the estimates will persist due to differences in coverage, economy over a long period in response to innovations in valuation and lags in recording. In addition, a statistical products, marketing mechanisms and changing import office is also dependent to a greater or lesser extent on patterns means that comparisons over very many years administrative sources of data and may not be able to need to be interpreted carefully. ensure these exactly meet the statistician's needs. 2. Revisions 18.16 Two approaches are open to a statistical office. The first is to be open about the problem and publish a statistical 18.11 One consequence of preparing national accounts on a discrepancy. When this is done, it is usual to attach it to the continuing basis over a number of years is that data sources variant of GDP the office feels is least accurate. The aim is change and improve. Intermittent sources, such as a survey to show users something about the degree of reliability of held only every five years, may become available and the published data. For example, the office may feel that indicate that the earlier assumptions based on projecting the the production estimate of GDP is fairly sound but have previous survey were flawed. In such a case it is not doubts about some of the expenditure components. sufficient to simply replace the data for the most recent period (or even from the date of the new survey forward) 18.17 The alternative is for the office to remove the discrepancy but to ensure that the whole time series is suitably adjusted by examining the data in the light of the many accounting in order to portray the best possible evolution of the series constraints in the SNA, making the best judgement possible in question over as long a period as possible. Failure to do about where the errors are likely to have arisen and so results in inappropriate discontinuities in the series that modifying the data accordingly. The supply and use can be seriously misleading to analysts unaware that the framework, described in chapter 14, is a very powerful tool source of the underlying data has changed. for doing this sort of work. More information on such balancing techniques can be found in manuals on input- 18.12 This need to revise data brings to the fore the conflict output tables such as those prepared by the UN and inherent in statistics between making the data as accurate as Eurostat. possible and making them as timely as possible. Users would like data that are both timely and accurate but there 18.18 In practice, some countries may not be able to compile all are trade-offs between these goals in practice. Each three measures of GDP. Indeed, it happens that sometimes statistical office must make judgements about how to only the production measure is compiled completely and balance these conflicting demands but whatever the only certain components of the expenditure measure are ultimate conclusion, time series that are consistent over available, principally government expenditure, capital time and explanations to enable analysts to appreciate the formation (perhaps with incomplete information on trade-offs the statistical office has to take are essential. changes in inventories), exports and imports of goods only. If, in such a case, an estimate of GDP by expenditure is 18.13 A set of guidelines on best practice for performing and presented where household consumption is derived as a using the results of revisions analysis and in formulating a global balancing item, this estimate will cover not only the revisions policy that effectively supports user needs was true but unknown value of household consumption but will prepared by a task force made up of representatives from also include the net effect of all errors cumulated from all OECD, Eurostat and several member countries of those other parts of the estimates. 396 Elaborating and presenting the accounts 18.19 Any errors in the production measure, missing figures for Discrepancy in net lending or net borrowing imports and exports of services, or the fact that government expenditure has been recorded on a cash rather than on an 18.20 Often, the compilation process for the financial accounts accrual basis, will distort the value of household and balance sheets is sufficiently separate from the rest of consumption. If, then, the figure for gross operating surplus the accounts that the figures for net lending or net borrowing derived from each are different in practice even is derived by subtracting compensation of employees and though they are conceptually the same. A discrepancy may taxes less subsidies on production from this incorrect figure indicate an error in the financial account or at any place in for GDP, the errors will be carried forward to this aggregate the accounts leading up to the balance in the capital also. The lesson for users looking at accounts with no account. An examination of the differences sector by sector statistical discrepancy is to be sure to understand how it may help identify the most likely sources of error. For was eliminated. The lesson for compilers is to study the example, a large discrepancy on household net borrowing may mean that some household income is not recorded; a possibilities of working at more detailed levels to avoid large discrepancy in net lending for non-financial having to make gross assumptions about missing items, corporations may mean that some expenditure on fixed especially one as critical to an assessment of living capital has not been recorded. But each case must be conditions as household consumption. investigated on a case-by-case basis. C. Accounts in volume terms 18.21 A major purpose in constructing accounts covering a longer 18.24 It is useful to consider the expenditure components of GDP period of time is to be able to study the way in which the and the production components of GDP separately first, basic structure of the economy has changed. This can be then to consider the supply and use table and finally the seen by studying the changing composition of capital stock measures. macroeconomic aggregates in current values. To determine growth rates, however, it is necessary to abstract from the 1. The expenditure components of GDP effects of price changes. This is done by constructing accounts in volume terms which enable the user to see the changes from one year to the next that would have resulted 18.25 The measure of GDP easiest to express in volume terms is if there had been no change in prices. Chapter 15 describes that of expenditure. As long as appropriate price indices in detail the theory and practice underlying the construction exist, the estimates of household consumption, capital of price indices and the construction of volume measures. formation, exports and imports can be deflated without That chapter also explains the consequences of deriving much conceptual difficulty. It is desirable to work at as time series in volume terms using chained indices where great a degree of detail as possible using the product detail some impacts of price changes do affect the volume available for each aggregate. Care must be taken, as estimates. explained in chapter 15, to ensure that differences in quality are properly accounted for in the price deflators. This is especially important in the case of capital formation where 18.22 It is only the elements of the goods and services account many items such as computers are subject to rapid and non-financial capital stock for which volume measures technological change and many items are customized, for are derived. In general, flows of property income, transfers example pieces of heavy machinery built to individual and financial transactions are expressed only in nominal specifications. terms. In cases of high inflation, an alternative presentation where even these flows may be adjusted is possible but this is not the norm. 18.26 Price indices for services are more difficult to compile than for goods and this is especially so for non-market services. Because the current values of non-market services are 18.23 As well as expressing the elements of the goods and usually determined as the sum of costs, the obvious services account in volume terms, the whole supply and use approach is to deflate each of these (including calculating tables can be expressed in volume terms. Compiling such a compensation of employees at constant compensation table ensures not only that goods and services balance rates). However, this does not allow for any change in the when expressed in current values but that the prices used quality of services provided and in particular for the impact for their deflation are strictly consistent. Conceptually, a of any productivity changes that may have been achieved. production index should be related to a weighted index of In some cases, direct volume measures should be the input prices, the weights corresponding to the values of considered as described in the Handbook on price and the different input categories. If the prices used to deflate volume measures in national accounts or the handbook output and those used to deflate intermediate consumption Towards measuring the volume of health and education are not consistent, the implicit deflator for value added will and services (Organisation for Economic Co-operation and be implausible. Discovering such implausibility is an Development, 2009). Research work is actively in progress indication that either the current value figures are not well to derive volume estimates of output that take account of balanced, the prices used are inconsistent or inappropriate, changes in the quality as well as the quantity of the services or both. provided. 397 System of National Accounts 2. The production components of GDP final consumption, capital formation and exports. This identity must hold in value terms. If the product in question 18.27 Central to the production measure of GDP is value added, is one where there is an unambiguous measure of quantity, the balancing item in the production account. Statements the identity must also hold in volume terms. If the volume can be found saying that it is not possible to think of a figures are derived by deflating the current values, the balancing item having price and volume dimensions. To identity will only hold with certainty if each use category is date the most common practice is to deflate the values of deflated using a price index that is strictly appropriate to it. output and intermediate consumption independently, industry by industry, and then derive the difference as value 18.30 It is a good practice to compile supply and use tables in added for each industry. (This is known as the double both current values and in volume terms at the same time so deflation method.) Different price indices are necessary for that the consistency of all the input data, including price two reasons. The first is because the goods and services indices, can be investigated together. included in intermediate consumption for any industry are not the same as the output of that industry. The second reason is that intermediate inputs are always measured at 4. Capital stock purchasers' prices whereas output is measured at either basic prices or producers' prices. 18.31 Derivation of estimates of the consumption of fixed capital 18.28 More recently, though, there is increasing interest in trying requires estimates of capital stock excluding the effects of to associate movements in value added, after price effects price changes, even if there is no thought of estimating have been eliminated, with changes in labour and capital capital services or productivity measures. The levels of inputs. A description of the different concepts of capital stock are typically derived by cumulating capital productivity can be found in Measuring Productivity: formation in successive periods and deducting the amount Measurement of Aggregate and Industry-level Productivity that has been exhausted. It clearly makes no sense to Growth (OECD, 2001), hereafter referred to simply as aggregate estimates of capital formation at the prices Measuring Productivity. The manual discusses the question actually paid since the effect of rising prices (even prices of whether the estimates of the costs of capital and labour rising only moderately) will be to overstate the amount of exactly exhaust the estimate of value added coming from "new" capital relative to "old". direct volume estimates, a subject which is taken up in chapter 20 on capital services. 18.32 The preferred technique is to estimate all capital still in stock at the price of a single year and then revalue this to 3. Supply and use tables in volume terms the price prevailing when the balance sheet is to be drawn up, typically the first and last day of the accounting period. 18.29 The rows of a use table show the way in which the total This should be done at the most detailed level practicable. supply of a product is used for intermediate consumption, More on this can also be found in chapter 20. D. Quarterly and other high frequency accounts 18.33 One response to the demand for timely data is to compile 1. Conceptual issues accounts more frequently than annually. In principle, the SNA can be applied to any length of time period but there Time of recording are some special considerations that need to be respected for high frequency as opposed to annual accounts. A frequent choice for high frequency data is for quarterly 18.34 The time of recording principle is the same for quarterly accounts. For greater detail on compiling quarterly national accounts as for annual accounts. The accounts are accounts, see Quarterly National Accounts Manual: to be compiled on an accrual basis and not a cash basis. Concepts, Data Sources and Compilation or the manual While there will always be amounts accrued but not yet Handbook on Quarterly National Accounts (Eurostat, paid or received, the proportion of these amounts, relative 1999). These manuals discuss in detail issues such as using to the total flows in the period, will be larger for a shorter indicators to extrapolate data and benchmarking quarterly period. estimates to annual data. What follows here is simply an indication of some of the key considerations that apply to Definitions involving a year or more quarterly as opposed to annual accounting. Similar considerations apply to other high frequency accounts. 18.35 The qualifying criterion for a fixed asset is that it should be used in production for more than one year. For simplicity and consistency between quarterly and annual accounts, this period is maintained even for quarterly accounts. 18.36 Similarly the distinction between short-term and long-term in the classification of financial assets remains one year. 398 Elaborating and presenting the accounts Seasonality intended to detect. Data values that have been derived by interpolation and projection are also unlikely to have a 18.37 One aspect of quarterly accounts is the effect that arises strong seasonal component so complete accounts with full because patterns of supply and demand may change with seasonal variations may not exist. the season. For example, more electricity may be used in winter to heat buildings than in summer or, conversely, Inventories more may be used in summer to cool them. Many agricultural products are more readily available at one time of year rather than another and thus have lower prices then. 18.42 One possible exception to the general rule that the quality For these reasons, although the quarterly accounts should of annual data is superior to quarterly data concerns the first be compiled using the data as observed, it is desirable measurement of changes in inventories. The level of to calculate quarterly data on a seasonally adjusted basis in inventories at the start and end of the period should be order to study the pattern of evolution of the economy deflated and the change in inventories calculated as the abstracting from seasonal effects. difference. Holding gains (or losses) may occur when goods are held in inventories and the shorter the periods 18.38 Many holidays fall at the same time each year leading to a over which estimates of changes in inventories excluding different number of working days in each quarter. Thus it is holding gains and losses are made, the better those common to calculate series adjusted for the number of estimates will usually be. (A parallel case is that of shares, working days in a period. It is thus desirable to adjust high for example, where holding gains are eliminated by using frequency data for both seasonal and working day effects. data quoted daily or, in some instances, more frequently.) It is simple to think of the situation where the level of inventories is the same at the same date in successive years 2. Data quality (possibly zero) but where there has been considerable movement of goods into and then out of inventory in the 18.39 When compiling quarterly accounts, it is necessary to intervening period. In such a case, the sum of the quarterly compare the availability of quarterly data as compared with (or even shorter period) estimates of changes in inventories annual data. Usually there is more information available is to be preferred to the annual estimates. annually and it is more comprehensive or otherwise better quality than quarterly data. To the extent this is so, the quarterly accounts may be seen as being provisional in 3. Quarterly accounts in volume terms some sense and need to be revised when more reliable annual data become available. Simply benchmarking four 18.43 Just as the goods and services account in annual accounts quarterly observations to the eventual annual figure, can be expressed in volume terms, so can the quarterly though, may give unexpected and implausible changes goods and services account. Although it is recommended from the last revised quarter to the next quarter (a "step") that volume indices be chained, for quarterly accounts it is unless techniques are used that address this problem. Most recommended that volume indices should be chained on commonly used computer programs available to statistical only an annual basis to avoid spurious results that could be offices automatically adjust to ensure that no such step caused by seasonal effects. The techniques are described in results. detail in paragraphs 15.45 to 15.50. 18.40 Although it is usual to ensure that the sum of data for the four quarters is equal to the annual figures for data before 4. Coverage of quarterly accounts adjustment, forcing this agreement on seasonally adjusted data may be difficult and thus ill-advised if the step 18.44 It is possible in principle to compile the whole set of problem just referred to is to be avoided. accounts in the SNA, including balance sheets, on a quarterly basis. The most common sets of quarterly 18.41 Some data values are never available quarterly and accounts, though, are for the goods and services account, quarterly estimates may need to be made by interpolating the income components of value added, government and projecting annual information. The use of expenditure, the balance sheet and changes in balance mathematical techniques for deriving data, however, should sheets for financial assets and liabilities. The quarterly be kept to a minimum since these are unlikely to pick up goods and services account should also be compiled in the fluctuations in the economy that quarterly accounts are volume terms. E. Regional accounts 18.45 Regional accounts are of special importance when there are context, transactions with other regions are recorded as if important disparities between the economic and social they are external transactions. External transactions of the development of the various regions of a country. region have to distinguish between transactions with other regions of the country and transactions with the rest of the 18.46 A full system of accounts at the regional level implies world. treating each region as a different economic entity. In this 399 System of National Accounts 18.47 Three types of institutional units have to be considered in income and financial transactions. Thus the only balancing the context of regional accounts. items of multiregional units that can be determined at the regional level are value added and operating surplus. These a. There are regional units, the centre of predominant difficulties are parallel to those that arise when trying to economic interest of each of which is in one region and construct accounts for industries where different types of most of their activities take place in this region. Among activities are undertaken in separate establishments of the regional units are households, corporations whose same enterprise. establishments are all located in the region, local and state governments, at least part of social security and 18.50 Assigning the transactions of national institutional units by many NPISHs. region raises even more complex issues to the point where the usefulness of attempting to do so may be questioned. While sales of electricity and railway services or b. There are multiregional units, the centre of compensation of employees paid by central government predominant economic interest of each of which is in may be assigned to regions, interest on the public debt more than one region but does not relate to the country payable by central government or national corporations overall. Many corporations and a number of NPISHs cannot be geographically located. Consequently, a are in this situation. reasonable solution is to introduce a kind of national "quasi-region", not allocated as such between the regions c. A small number of units are national units, which and being treated as an extra region. This national "quasi- means that their centres of predominant economic region" may include the head offices of enterprises that interest are not located geographically even in the sense have establishments located in, and assigned to, the of multiregional location. This is usually the case of regions. central government and may be the case for a small number of corporations (probably public), generally in 18.51 These conceptual difficulties partly explain why no country a monopolistic or quasi-monopolistic situation, such as establishes the complete SNA accounts for every region. In the national railway corporation or the national most cases regional accounts are limited to recording electricity corporation. production activities (with conceptual problems arising for locating some of them, such as transportation and 18.48 Assigning transactions of the regional units to a specific communication) by industry and more complete accounts region does not raise any conceptual problem. Assigning for institutional sectors composed of regional units, such as the transactions of multiregional units between various households and local and state government. Establishing regions raises more difficulties. When considering accounts for goods and services and input-output tables by deliveries between units of the same enterprise in different region does not raise insoluble conceptual issues, though it regions, it is necessary to apply the recommendation in involves treating deliveries to and from other regions as paragraph 6.104 about intra-enterprise deliveries. Such exports and imports. However, the practical difficulties of deliveries are recorded only when the receiving unit doing so are very considerable in the absence of a assumes responsibility for making the decisions about the sophisticated system of transport statistics. level of supply and prices at which their output is delivered to the market. When this is not the case, the receiving unit 18.52 It should also be noted that in large countries there may be is regarded as providing only a processing service to the significant variation in prices of the same products across sending unit. different regions. A full investigation of the impact of price variation on regional production and expenditure could 18.49 Further, some of the transactions of multiregional units involve the construction of a type of PPP exercise to be simply cannot be allocated between the different regions in able to estimate the difference in purchasing power in which they operate. This is the case for most property different regions. Table 18.1:High-level SNA/ISIC aggregation (A*10) ISIC Rev. 4 Description sections 1 A Agriculture, forestry and fishing 2 B, C, D and E Manufacturing, mining and quarrying and other industry 2a C of which: manufacturing 3 F Construction 4 G, H and I Wholesale and retail trade, transportation and storage, accommodation and food service activities 5 J Information and communication 6 K Financial and insurance activities 7 L Real estate activities 8 M and N Professional, scientific, technical, administration and support service activities 9 O, P, and Q Public administration, defence, education, human health and social work activities 10 R, S, T and U Other services 400 Elaborating and presenting the accounts 18.53 Nonetheless, regional accounts, even with the limitations system of regional indicators, including value added per mentioned above, are a very useful tool for economic capita, household disposable income and household policy. Partial regional accounts may be inserted in a set of consumption per capita. It is for countries themselves to regional statistical indicators on labour participation, devise their own regional accounts and statistical unemployment, poverty, etc. The greater the contrast indicators, taking into consideration their specific between the regions in a country, the more useful is such a Table 18.2: Industry level headings for a country with a large subsistence economy ISIC, Rev. 4 Description Sections Divisions Groups Monetary A Agriculture, forestry and fishing 01 Crop and animal production, hunting and related service activities Cash crops Food crops 014 Animal production 02 Forestry and logging 03 Fishing and aquaculture B Mining and quarrying C Manufacturing Formal Informal D and E Electricity, gas, steam and air conditioning supply; and Water supply; sewerage, waste management and remediation activities F Construction G Wholesale and retail trade; repair of motor vehicles and motorcycles Formal Informal I Accommodation and food service activities H Transportation and storage 491 Transport via railways 492 Other land transport 511, 512, Air transport, transport via pipeline and warehousing and support 493, 521, activities for transportation 522 53, 60 Postal and courier activities; programming and broadcasting and 61 activities; and telecommunications J to U Other services 84 Public administration and defence; compulsory social security 85 Education 86, 87 Human health and social work activities and 88 68 Real estate activities Miscellaneous Total Monetary Non-Monetary A Agriculture, forestry and fishing 01 Crop and animal production, hunting and related service activities Food crops 014 Animal production 02 Forestry and logging 03 Fishing and aquaculture F Construction 68 Imputed rental of owner-occupied dwellings Other non-monetary activities Total Non-Monetary Total value added at basic prices Taxes less subsidies on products and imports Gross domestic product 401 System of National Accounts circumstances, data systems and resources that might be 18.54 There are two manuals giving more detail on regional devoted to this work. accounts; Regional accounts methods - Gross value-added and gross fixed capital formation by activity Eurostat, 1995) and Regional accounts methods ­ Households Accounts (Eurostat 1996). F. Presentational issues 18.55 Although it is possible, as already noted, to introduce more 1. Production measures of GDP detail into the integrated economic accounts by introducing more columns for subsectors and more rows for 18.57 For the production measure, it is usually appropriate to give disaggregations of transactions, this may quickly result in a some level of industry detail. ISIC, Rev. 4 provides a top- very complicated and unmanageable table. For this reason, level of 21 sections and a second level of 88 divisions. For more detailed analysis of production and transactions in national accounts summary data presentations, a high-level goods and services, financial transactions and detailed aggregation of 10 categories and an intermediate-level balance sheets, as well as analysis by purpose are shown in aggregation of 38 categories have been developed that are other types of tables. Some of these alternatives are suitable for SNA data reporting from a wide range of described in following chapters. This section focuses on the countries. The structure of these two SNA/ISIC presentation of the main macroeconomic aggregates with aggregations, which are denoted as A*10 and A*38, supporting detail. respectively, is described in more detail in ISIC, Rev 4, paragraphs 199 to 212. Table 18.1 shows the high-level (A*10) aggregation of industries. 18.56 It is fundamental to an understanding of the SNA to grasp the three different ways of compiling GDP, from the Key industries production, expenditure and income approaches. However, the definitions in chapter 16 concentrate on the different 18.58 It is quite common in some countries to show very types of flows at the most aggregate level to make the summary data for a range of industries with a breakdown distinction between the three approaches as clear as by agriculture (ISIC section A), industry (ISIC sections B to possible. In practice when presenting the results to users, F of which manufacturing, ISIC section C, is shown some more detail is necessary. The amount and kind of separately) and services (ISIC sections G to U). In countries detail can vary from country to country but there are some where there are a small number of key industries, it may be broad guidelines that tend to be used by international useful to break some of these headings down further and to organizations when producing tables for several countries merge others. For example, it may be useful for an insight at the same time. into the working of the economy to distinguish agriculture Table 18.3: GDP by expenditure GDP: expenditure approach Final consumption expenditure Household final consumption expenditure Possibly include summary detail by product or COICOP Final consumption expenditure of NPISHs Government final consumption expenditure Individual consumption expenditure Collective consumption expenditure of which Actual individual consumption expenditure Gross capital formation Gross fixed capital formation, total Possibly include summary detail according to the asset classification of capital formation Changes in inventories Acquisitions less disposals of valuables External balance of goods and services Exports of goods and services Exports of goods Exports of services Imports of goods and services Imports of goods Imports of services Statistical discrepancy Gross domestic product 402 Elaborating and presenting the accounts undertaken on a commercial scale to produce cash crops for than the reference year. One alternative is to present the export from small-scale informal agricultural activities or volume estimates in index number form. The year that to distinguish the assembly of electronic goods. Equally in previously was the same in level terms becomes 100 for some countries it may be sufficient to merge some service both the aggregates and the components. This procedure groups. However, it is good practice to follow the basic makes changes easier to recognize but users can still ordering adopted by ISIC whatever the level of detail calculate the level figures if desired by applying the base shown. year level values to the volume indicators. However, this alternative is inappropriate for aggregates that can take zero 18.59 In countries with a large subsistence economy, it may be or negative values, such as changes in inventories. A third desirable to show whether the production is monetary or alternative is to show the volume indicators only in terms non-monetary. Table 18.2 shows how the main ISIC of growth rates from either the previous year or from a base industries can be elaborated to make this distinction. year. However, rounding problems suggest this may be an Depending on circumstances, a subset of these headings (or additional form of presentation rather than the only one. possibly with extra disaggregation if appropriate) may be a (See paragraph 15.63 for more on measuring the useful way to present information on the production contributions of chain-linked indices to growth.) activities in a country. 5. Quarterly accounts 2. Expenditure measures of GDP 18.64 As noted in the discussion on quarterly accounts above, 18.60 The most aggregate level of the expenditure measure of quarterly estimates should be presented on both a GDP is household final consumption expenditure, general seasonally adjusted and an unadjusted basis. Often they government final consumption expenditure, gross capital will be presented in current prices and as volume series formation, exports of goods and services and imports of also. goods and services. (Often in such an abbreviated presentation the item for household final consumption 6. Sector accounts expenditure includes that for NPISHs also.) An example of a somewhat more detailed table is shown in table 18.3. The 18.65 The rationale for making institutional sectors such an possibility to include details by product or by COICOP important part of the SNA is the key role that they play in groups is shown in the table. Similarly (though not shown), understanding how economic developments affect one or details of products or COPNI, COFOG groups could be another groups of units in the economy. An account for included under other headings as appropriate. each sector can be examined on its own, much as is suggested in following chapters, but some features of the 3. Income aggregates accounts are only apparent from a presentation where all the sector accounts are available together. For example, an 18.61 There is much less standardization in the presentation of examination of property income flows shows which sectors income measures of GDP. Some presentations concentrate pay interest and which receive it, what proportion of on showing compensation of employees and operating dividends are received by pension funds and whether rent is surplus (and mixed income) by the same industry paid predominantly by households or not. The secondary breakdown as is shown for the output measure of GDP. distribution of income account allows a comparison to be Other presentations give the different components of made between the amount of current taxes on income, compensation of employees (wages and salaries, and wealth, etc. paid by corporations as compared with employers' social contributions), as well as the different households, which sectors pay insurance premiums and types of taxes and subsidies levied on production. As which receive the claims and how important other current already pointed out, income should, properly speaking, be transfers are in the economy. measured net of consumption of fixed capital and thus show the composition of NDP, not GDP. The size of NNI 18.66 The chapters that discuss the interpretation of the sector relative to NDP is also of interest to analysts and should be accounts also consider matters of presentation as do the shown. chapters showing the links with other statistical systems, notably the links to government finance statistics, external 18.62 Again national needs should be taken into account when transactions and monetary and financial statistics. In all determining the presentation of the accounts. In a country cases, though, attention should be paid to presenting the where income in kind or subsistence income is significant, accounts in a manner most useful to the readers of the a breakdown of compensation of employees that includes publication for which a presentation is being designed. This these items should be considered. may well vary from one type of publication to another and flexibility in approach is essential to enable the readers to 4. Accounts in volume terms make best use of the data being presented. 18.63 Accounts in volume terms may be presented in a number of 7. Integrated accumulation accounts ways that are not necessarily mutually exclusive. It is possible to present them in level terms so that for one year 18.67 Chapter 13 explains the articulation of the accumulation (the reference year) the figures in current prices and in accounts for both non-financial and financial assets. The volume terms will be identical. A consequence of this is links between opening and closing balance sheets for non- that if, as recommended in the SNA, volume estimates are financial assets are essential for the derivation of derived by means of chain-linking, then the aggregates may consumption of fixed capital and for measures of capital not be equal to the sum of the components for years other services and productivity as explained in chapter 20. Very 403 System of National Accounts often, though, the basic data on which such estimates are 18.68 For financial assets and liabilities, the situation is made are not published on a regular basis or even at all. somewhat better and indeed in some cases the flow data are Despite their obvious importance, even stocks of residential derived from opening and closing balance sheet data. dwellings are not publicly available for more than a handful Although these data are regularly published, when of countries. available, the tables are not always linked to the regular national accounts publication and so users are not always aware of the essential connection between the financial part of the accounts and the rest. 404 Chapter 19: Population and labour inputs A. Introduction 19.1 Economic activity is essentially human activity and yet the such as multifactor productivity (sometimes called total sequence of accounts does not refer to persons except factor productivity) also require a measure of labour inputs, indirectly. All individuals that make up households (the along with capital inputs, to obtain an overall input measure population) are only identified in so far as they engage in to divide into the GDP volume. consumption expenditure. Those individuals that are employees feature only as the recipients of compensation with no indication about whether there are a few very well 1. International standards on labour force paid employees or many very poorly paid (though in fact statistics there are some of each and many in between). The purpose of this chapter is to show how data for population and labour can be used in conjunction with key entries in the 19.5 Clearly, if a ratio is to be formed between measures of sequence of accounts to show how much the average output and labour input, the concept of labour used must citizen benefits from economic activity and how much the match the coverage of production in the SNA. The relevant average worker contributes to output. An indication of the standards on the labour force are maintained by the first is given by measuring GDP per capita and of the International Labour Organization (ILO). The ILO second by estimating labour productivity. As well as being standards are contained in "resolutions", which are adopted of interest in themselves, these figures are interesting in by sessions of the International Conference of Labour comparison with similar data in different time periods and Statisticians (ICLS). The resolution of 2008 confirms that in different countries. the economically active population is defined in terms of individuals willing to supply labour to undertake an 19.2 This chapter considers total population, labour inputs and activity included in the SNA production boundary. labour productivity only. Chapter 24 considers different types of households. The extension of productivity to include the impact of capital is covered briefly in chapter 19.6 Not everyone who is economically active works for a 20 and more extensively in other publications such as resident institutional unit. It is therefore particularly Measuring Productivity. important that the concept of residence underlying the population estimates be consistent with that for labour force estimates and that the residence of individuals included in 19.3 The SNA requires a definition of population to express employment estimates are consistent with the criterion of GDP and consumption aggregates in per capita terms. In resident institutional unit in the SNA. effect, expressing the volume of GDP (or of household final consumption expenditure) in per capita terms "standardizes" the volumes by adjusting for the size of 2. The structure of the chapter countries based on their populations. Per capita volumes of major aggregates are often used as a measure of the relative standard of living in countries, despite the misgivings of 19.7 The topic of population and the derivations of per capita some social analysts about the adequacy of this measure. figures for aggregates such as GDP are the subject of Even though the per capita volumes of GDP have some section B. Section C starts by describing how the total shortcomings, it is clear there is a strong correlation population can be divided into those in the labour force and between a country's per capita volume of GDP and its those not in the labour force and the adjustments made to standard of living. population totals to allow for residents working abroad and non-residents working in the national economy. It also 19.4 Labour input variables are necessary to examine describes how various categories of the labour force are productivity. Changes in productivity over time are an defined and discusses some boundary issues. important indicator of the efficiency of economic production. Likewise, differences in the level of productivity in a country compared with similar countries 19.8 Section D discusses how simple head counts of employed provide a useful indicator of the relative efficiency of the persons can be improved for use in productivity measures country's production processes. Productivity can be by different means of standardization. The derivation of measured in different ways, with the simplest being labour labour productivity measures is the topic of section E and productivity, typically measured as the volume of GDP per the chapter closes with a brief discussion of data sources in hour worked. More complicated productivity measures, section F. 405 System of National Accounts B. Population 19.9 Annual population estimates derive from less frequent in which the GDP estimates are expressed. However, part population censuses. Censuses usually count the number of of each country's growth in GDP volumes is attributable to people present on a specified night or the number of people changes in population and so it is useful to "standardize" who usually live in a dwelling, even if they are not present percentage growth rates by calculating per capita growth when the census is enumerated. However, a census is often rates. For example, if a country's population is increasing conducted only every five or ten years and sometimes less more rapidly than its GDP volume growth then the per frequently. In years between censuses, updated information capita output is falling. On the other hand, a country with a on the population of a country is provided by drawing on very low growth in GDP volume but with a declining information on births and deaths and on net migration. population will show an increase in per capita output. 19.10 The population of a country is most simply defined as all 19.13 As noted in the introduction, there are some shortcomings those persons who are usually resident in the country. In of per capita figures. Just two examples can be given to this definition, the SNA and BPM6 concept of residence is illustrate this. An economy with larger household sizes may used, that is persons are resident in the country where they have equivalent benefits from proportionately smaller have the strongest links thereby establishing a centre of expenditure on housing and other items covering all predominant economic interest. Generally, the criterion household members than a country with smaller household would be based on their country of residence for one year sizes. Giving the same weight to a small child and an adult or more. In most cases, the concept of residence is in a physically demanding job may also give misleading straightforward, being based on the dwelling a person information on the adequacy of food consumption. occupies on a permanent basis, although there are some borderline cases discussed further in chapter 26. 19.14 Per capita growth rates in real national income or in real actual consumption generally provide a better measure of 19.11 Generally, persons who are resident in a country for one the changes in the average "welfare" of a country's year or more, regardless of their citizenship, should be population than the changes in GDP volumes. GDP is a included in the population measure. An exception is foreign measure of production within a country but the inflows or diplomatic personnel and defence personnel, together with outflows of income from or to the rest of the world can their families, who should be included as part of the have a significant effect on both the level and growth rates population of their home country. The "one-year rule" in real national income per capita. Similarly, the level and means that usual residents who are living abroad for less growth rates in GDP volumes can differ significantly from than one year are included in the population but foreign those in the final consumption of households because of the visitors (for example, holidaymakers) who are in the varying shares across countries of capital formation and net country for less than one year are excluded from the exports within GDP. measured population. Further elaboration on the application on the residence criterion in special cases is given in paragraphs 4.10 to 4.15 2. Absolute levels of GDP per capita 1. Per capita estimates of volume growth 19.15 As described in chapter 15, the International Comparison Program (ICP) makes estimates of absolute levels of GDP 19.12 The growth rate in the volume of GDP is one of the key and GDP per capita across countries in order to try to economic indicators provided by the national accounts. establish a relative level of prosperity. These estimates Such growth rates can be compared directly between involve measures of GDP, purchasing power parities countries because they are expressed in common units (PPPs) and the same population estimates previously (percentage changes) and are not affected by the currency described as being used for volume growth measures. C. Measuring the labour force 19.16 Not all individuals included in the population are engaged of the SNA. The labour force is further divided into those in production. Some are too young, some too old and some who are employed and those who are unemployed. Thus may simply choose not to work. Others may usually work the population of the country can be subdivided into three but be temporarily not working because of illness, lack of categories; employed, unemployed and not in the labour employment or being on holiday, for example. A first step force. A person's status depends on their activity (or lack of in moving from population data to data for employment, is it) during a particular reference period (usually a week). thus to define what is meant by the labour force. 19.17 The labour force consists of those who are actively 19.18 Because the labour force is defined with reference to a prepared to make their labour available during any short period, the number of persons in the labour force at particular reference period for producing goods and any time may be smaller than the economically active services that are included within the production boundary population. For example, seasonal workers may be 406 Population and labour inputs included in the economically active population but not in which employs them, and not in the industry of the the labour force at certain times of year. enterprise for which they actually work. 19.19 The labour force consists of four groups of persons; 19.22 An outworker is a person who agrees to work for a residents who are employees of resident institutional units, particular enterprise or to supply a certain quantity of goods residents who are employees of non-resident institutional and services to a particular enterprise by prior arrangement units, unemployed residents and self-employed persons. (A or contract with that enterprise, but whose place of work is self-employed person is necessarily associated with a not within it. An outworker is treated as an employee if resident household. If such a person provides goods and there is an explicit agreement that the outworker is services abroad, these are recorded as exports.) remunerated on the basis of the work done, that is the Employment in the SNA is defined as all persons, both amount of labour contributed as an input into some process employees and self-employed persons, engaged in some of production. There is further discussion of the productive activity that falls within the production classification of outworkers in paragraphs 7.34 to 7.38. boundary of the SNA and that is undertaken by a resident institutional unit. 19.23 Persons temporarily not at work are also considered as employees provided they have a formal job attachment. 1. Employees This formal attachment should be determined according to one or more of the following criteria: 19.20 Employees are persons who, by agreement, work for a resident institutional unit and receive remuneration for a. the continued receipt of wage or salary; their labour. Their remuneration is recorded in the SNA as compensation of employees. The relationship of employer b. an assurance of return to work following the end of the to employee exists when there is an agreement, which may contingency, or an agreement as to the date of return; be formal or informal, between the employer and a person, normally entered into voluntarily by both parties, whereby c. the elapsed duration of absence from the job which, the person works for the employer in return for wherever relevant, may be that duration for which remuneration in cash or in kind. There is no requirement workers can receive compensation benefits without that the employer should declare the agreement to any obligations to accept other jobs. official authority for the status of employee to apply. Persons included in the above classification are those 19.21 Employees include but are not confined to the following temporarily not at work because of illness or injury, holiday categories: or vacation, strike or lockout, educational or training leave, parental leave, reduction in economic activity, temporary a. persons (manual and non-manual workers, disorganization or suspension of work due to such reasons management personnel, domestic staff, people carrying as bad weather, mechanical or electrical breakdown, or out remunerated productive activity under employment shortage of raw materials or fuels, or other temporary programs) engaged by an employer under a contract of absence with or without leave. For some purposes, it may employment; be useful to distinguish employees temporarily not at work if this is possible. b. civil servants and other government employees whose terms and conditions of employment are laid down by 19.24 Managers of corporations (or quasi-corporations) are public law; treated in the SNA as employees but the ILO classification regards them as self-employed. c. the armed forces, consisting of those who have enlisted for both long and short engagements and also 2. Self-employed persons conscripts (including conscripts working for civil purposes); 19.25 Self-employed persons are persons who are the sole or d. ministers of religion, if they are paid directly by general joint owners of the unincorporated enterprises in which government or a non-profit institution; they work, excluding those unincorporated enterprises that are classified as quasi-corporations. Persons who work in unincorporated enterprises are classed as self- e. owners of corporations and quasi-corporations if they employed persons if they are not in paid employment that work in these enterprises; constitutes their principal source of income; in that latter case, they are classified as employees. They may be f. students who have a formal commitment whereby they temporarily not at work during the reference period for any contribute some of their own labour as an input into an specific reason. The compensation for self-employment is enterprise's process of production in return for included in mixed income because it is not possible to remuneration and (or) education services; observe separately the return to labour from the return to any capital used in the unincorporated enterprise. (For g. disabled workers, provided that the formal or informal some analytical purposes it may be useful to estimate a relationship of employer to employee exists; breakdown. See paragraphs 20.49 to 20.50) h. persons employed by temporary employment agencies, 19.26 Self-employed persons also include the following who are to be included in the industry of the agency categories: 407 System of National Accounts a. contributing family workers working in unincorporated include vacancies when numbers of jobs are used for enterprises; number of employees. The distinction between number of jobs and number of employees is one issue that has to be b. outworkers whose income is a function of the value of carefully addressed in productivity statistics. the outputs from some process of production for which they are responsible, however much or little work was Residence put in; 19.32 Population numbers are dependent on the residence of c. workers engaged in production undertaken entirely for individuals but employees do not have to be resident in the their own final consumption or own capital formation, economy where they work. The results of the activity of either individually or collectively. (An example of the producer units can be compared with employment only if last is communal construction.) the latter includes both the residents and the non-residents who work for resident producer units. Employment mainly 19.27 Contributing family workers are sometimes called unpaid consists of resident employees working for resident workers but there are other unpaid, or voluntary, workers. institutional units and self-employed persons. However, it also includes the following categories where there might be 19.28 In ILO statistics, self-employed persons include those a question about whether they are considered resident or working in enterprises that are legally unincorporated even not: if there is sufficient information available for them to be treated as quasi-corporations in the SNA. In the SNA the a. non-resident border workers (sometimes called frontier remuneration of these people is included in compensation workers), that is, persons who cross the border each day of employees rather than in mixed income. Among others, to work as employees in the economic territory; this may include members of producers' cooperatives. b. non-resident seasonal workers, that is, persons who 3. Unemployment move into the economic territory and stay there for less than one year in order to work in industries which periodically require additional labour; 19.29 To complete the picture of the labour force, it is necessary to mention unemployment because the labour force is divided between employed persons (that is, employees plus c. members of the country's armed forces stationed in the self-employed persons) plus those who are unemployed. rest of the world; An unemployed person is one who is not an employee or self-employed but available for work and actively seeking d. nationals who are on the staff of national scientific work. The concept of unemployed persons is not required bases established outside the geographic territory of the in the national accounts because the unemployed do not country; contribute to production but their numbers are necessary to make the conceptual transition from the employed population to the economically active population. e. nationals who are on the staff of diplomatic missions abroad; 4. Boundary problems f. members of the crews of fishing boats, other ships, aircraft and floating platforms operated by resident Jobs and employees units; 19.30 Individuals may have more than one source of income from g. employees of general government bodies situated employment because they work for more than one outside the geographic territory, for example employer or, in addition to working for one or more embassies; employers, they work on their own account as self- employed. The agreement between an employee and the h. students undertaking employment are included or not employer defines a job and each self-employed person has according to their classification as resident or non- a job. The number of jobs in the economy thus exceeds the resident as explained in chapter 26. number of persons employed to the extent that some employees have more than one job. An individual with more than one job may do these successively as when the 19.33 On the other hand, the following residents, though person works for part of the week in one job and the rest of employees, are excluded from employment in residential the week in another or in parallel as when the person has an institutional units (and hence from measures of evening job as well as a daytime job. In some cases, too, a employment as used in the context of the SNA): single job may be shared by two persons. a. residents who are border workers or seasonal workers, 19.31 Employers may not be aware of, and in any case are not that is, who work as employees in another economic asked to provide information on, secondary jobs territory; undertaken by their employees. When employers supply information on the number of employees, they actually b. nationals who are members of the crews of fishing provide information on the number of jobs they provide. boats, other ships, aircraft and floating platforms Care has to be taken that the number of jobs does not operated by non-resident units; 408 Population and labour inputs c. residents who are employees of foreign government changes. However, NPISHs often have volunteer workers agencies located on the geographic territory of the so the treatment of these deserves special attention. country; 7. Volunteer labour d. the personnel of international civilian organizations located within the geographic territory of the country (including local employees directly recruited); 19.37 A distinction can be made between those who have an agreement to provide labour for token remuneration or only e. members of the armed forces working with income in kind, those for whom there is explicitly no international military organizations located on the remuneration and those where there is apparently no geographic territory of the country; remuneration but the workers benefit directly from the output to which they contribute. In ILO statistics, all three types of worker are included in the economically active f. nationals working in foreign scientific bases population as employees. established in the economic territory. 19.34 Labour force statistics may be based on either household 19.38 In the SNA, the remuneration of those working for token surveys (when all residents should be covered) or from amounts or only income in kind is measured by these costs. establishment surveys (when the focus is on employment in No imputation for an additional element of remuneration is resident institutional units). However, some further included. For example, if doctors or teachers work for only adjustments are required to ensure the coverage of food and lodging, the value of this as income in kind is the employment on an SNA basis is complete: only salary imputed to them. Such instances may arise in religious institutions or in the wake of natural disasters. If the unit employing these staff is responsible for whatever a. conscripted members of the armed forces are generally little remuneration is received, the staff are classed as not included in establishment surveys and may not be employees. captured in household surveys but conscripts are regarded as being employees of general government in the SNA; 19.39 If staff are purely voluntary, with no remuneration at all, not even in kind, but working within a recognized b. resident workers living in an institutional household institutional unit, then these individuals are still regarded as (such as a religious institution or a prison) are generally being employed in SNA terms but there is no entry for not included in either household surveys or compensation of employees (or mixed income) for them. establishment surveys but the workers are included in (Individuals providing services to groups of other SNA employment; individuals, such as coaching a children's football team, without any associated infrastructure are not regarded as employed but rather engaging in a leisure pursuit, however c. resident workers under the age limit defined for worthy their efforts might be.) measurement of the labour force who work for resident institutional units are included in SNA employment. 19.40 If family members contribute to the output of an 5. The non-observed economy unincorporated enterprise, the estimate of mixed income is supposed to include an element of remuneration for them and thus they are all treated as being in the economically 19.35 National accountants are particularly concerned about active population from an SNA point of view. In ILO ensuring that the whole of economic activity within the statistics such workers will not be included in the SNA production boundary is measured comprehensively. economically active population if they are under age. (The This is often referred to as the "exhaustiveness" of the lower limits for working age will depend on national coverage of the national accounts. In practice, it means conditions.) ensuring that the value of production activities that are illegal or hidden (that is, the "underground economy" or the "hidden economy") as well as those that are simply 19.41 By convention, no labour services are attributed to the described as informal is included in the accounts. In services provided by owner-occupied dwellings (see principle, for the SNA, the remuneration of all these paragraphs 24.50 to 24.58). In contrast, if a group of workers should be included in either compensation of individuals agrees to construct a building or structure, for employees or mixed income. Therefore, when looking at example a school or a well, these individuals are regarded comparisons between labour statistics and output, it is as being in the labour force and receive mixed income for important the persons concerned should be included in their efforts. Because it is difficult to value such projects, labour statistics also. unless a direct comparison can be made with a similar building, the value of construction should be based on the costs incurred. Labour is a significant input into 6. Labour in NPISHs construction projects, so its value must be included as part of the total costs using wage rates paid for similar kinds of 19.36 The output of NPISHs is supplied free or at prices that are work on local labour markets (see paragraphs 6.127 and not economically significant so it is valued by the costs of 7.30). This income is then used to acquire the result of their production. One of these costs is compensation of efforts which may subsequently be handed over to a third employees. It is important that these employees be recorded party for maintenance. The latter action is recorded as a in the employment measures used in deriving productivity capital transfer in kind. 409 System of National Accounts D. Standardized measures of labour inputs 19.42 A crude estimate of the labour inputs required for only normal hours or hours usually worked, any paid productivity measures is provided by the numbers of overtime, plus annual and holiday leave entitlements can be persons employed. Using this as a starting point, the labour ascertained. It may be impossible to estimate the deduction input measures can then be adjusted to provide various to be made for the average level of absence from work due degrees of sophistication. Examples in increasing order of to illness from either total hours actually worked or annual being difficult to measure are full-time equivalents, total (full-time) hours actually worked. This error will not affect actual hours worked and quality-adjusted labour inputs full-time equivalent employment if sickness rates in part- based on models. Each of these is discussed in turn below. time jobs are the same as in full-time jobs. 1. Employment measured on a full-time 19.49 If the reference weeks used in the surveys that provide the equivalent basis data are not fully representative, the best available information on variations throughout the year should be used in estimating data for the year as a whole. 19.43 Full-time equivalent employment is the number of full- time equivalent jobs, defined as total hours actually worked by all employed persons divided by the average Defining hours actually worked number of hours actually worked in full-time jobs. 19.50 For the purposes of the SNA, working time is defined as the 19.44 The definition does not necessarily describe how the time spent in undertaking activities that contribute to the concept is estimated. The method sometimes used, of production of goods and services within the SNA simply counting all part-time jobs as half a full-time job, is production boundary. Seven concepts of working time are the crudest possible way of making an estimate. Since the defined in the resolution concerning the measurement of length of a full-time job has changed through time and working time adopted by the 18th ICLS, in December differs between industries, more sophisticated methods are 2008: preferred, such as one that establishes the average proportion and average working time of less than full- a. hours actually worked, week, full-time jobs in each job group separately. 19.45 The SNA does not recommend full-time equivalent b. hours paid for, employment as the preferred measure of labour inputs. However, if the data are good enough to permit an c. normal hours of work, estimation of total hours actually worked, full-time equivalent employment should also appear in association d. contractual hours of work, with the national accounts. One reason is that this facilitates international comparisons with countries which can only e. hours usually worked, estimate full-time equivalent employment. However, with the move by the ILO to recommend recording total hours actually worked as the preferred measure of labour input, f. overtime hours of work and the use of full-time equivalents is likely to be gradually phased out. g. absence from work hours. 19.46 As just noted, the number of full-time equivalent 19.51 The most important measure for the SNA, and the one most employees is based on the number of hours worked, on relevant for use in measuring productivity, is hours actually average, in a full-time job. If the number of hours in a full- worked. This concept covers time job falls because of an increase in annual leave entitlements or public holidays, say, there may be little or no change in full-time equivalents even though the total a. direct hours, the time spent carrying out the tasks and number of hours actually worked has declined. A similar duties of a job in any location regardless of the amount effect may be caused by an increasing incidence of sick of time agreed contractually between employer and leave. The estimate of the number of hours in a full-time employee, job is therefore adjusted for the average amount of sick leave taken in the reference period as well as for annual b. related hours, including time on call, travelling on work leave taken. assignments, training and other tasks itemized in the resolution, 2. Hours worked c. down time, covering periods when a person is available 19.47 Even with such adjustments made to full-time equivalent for work but cannot because of temporary interruptions numbers, the preference is for total hours actually worked of a technical, material or economic nature to be used in productivity estimates. d. resting time such as short periods of rest, for 19.48 In practice, total hours actually worked and annual (full- refreshment, etc. time) hours actually worked may have to be estimated. In many countries, especially for monthly paid employee jobs, 19.52 Hours worked excludes 410 Population and labour inputs a. all types of leave (annual, public holidays, sick leave, 4. Employee labour input at constant parental leave civic duty etc.), compensation b. commuting time when no productive work is done, 19.58 Total hours actually worked and full-time equivalent employment are both physical measures of labour input. c. education other than training, Output too can usually be measured in physical terms, such as tonnes or cubic metres, but this is not done in the national accounts, because the basic value per tonne or d. meal breaks and other longer periods of rest while cubic metre varies so much between products that these travelling on business. physical measures lack general economic significance. But compensation per hour or per full-time year of work varies 19.53 More exhaustive definitions of these criteria can be found enormously too. Physical measures of labour input are only in the ICLS resolution. valid if the mix of different kinds of labour is much the same in the different countries or at the different times examined. 19.54 The truism, for employee jobs, that hours worked equal hours paid less hours paid but not worked, plus hours worked but not paid, is a useful one, since many 19.59 Since output is measured both at current prices and in establishment surveys record hours paid, not hours worked, volume terms, it is natural to do the same with labour inputs so that hours worked have to be estimated for each job as well as with intermediate inputs. However, the group, using whatever information is available about paid remuneration of the self-employed is included in mixed leave, etc. income and cannot be unambiguously identified separately. For this reason, the labour input of employees only is 3. Quality-adjusted labour input shown at constant compensation. 19.55 Using total hours actually worked as the input measure for 19.60 The measurement of employee labour inputs at current calculating labour productivity changes over time prices and in volume terms is symmetrical with the implicitly assumes that each hour worked is of the same measurement of output and subject to the following quality (that is, there are no differences in the qualifications caveats. and skill levels of the labour employed). In other words, each hour worked by a highly skilled person, such as a brain surgeon, is assumed to produce the same quantity and a. Market prices and market compensation are assumed to quality of output as each hour worked by an unskilled measure the relative economic importance of different worker. It is possible to produce a quality-adjusted measure goods, services and jobs; the advantages and of the labour inputs that takes account of changes in the disadvantages of this assumption are the same for mix of workers over time by weighting together indicators inputs as for outputs. of quality for different grades of workers. (The term quality-adjusted is used as being parallel to the idea of quality-adjusted price indices but it could also be seen as an b. Though the volume measure and constant adjustment for the change in the composition of the compensation concepts are defined as revaluations of workers involved.) quantities at base period prices or compensation levels, they can be estimated in practice as the sum, over all groups, of values at current prices or compensation 19.56 The quality indicators used can relate to variables such as levels, each divided by an appropriate wage index. academic qualifications, trade qualifications, experience (typically based on age of the worker), industry of employment and so on. The various indicators are weighted c. These group indices are estimates, calculated for a together using average hourly wages for a worker falling representative sample of jobs or of goods or services, into each category. The premise behind this approach is with weights reflecting the relative importance of each that workers are hired only until their marginal price (that of the subgroups represented by a selected and is, their wages, including on-costs) is less than the marginal specified job, or by a selected and specified good or revenue expected to result from their production. The index service. In other words, a compensation index is formula used can be a fixed-weight (Laspeyres) formula or a more sophisticated formula such as the Tornqvist, which constructed like a price index. takes account of changing weights by using weights from each of the periods in the analysis. 19.61 While the value of employee labour input at constant compensation can be estimated by deflating current values, 19.57 Calculating a quality-adjusted labour input measure using as mentioned above, the data may also permit the direct this approach is very data intensive and only those approach of multiplying the current number of jobs in each countries that have highly developed statistical systems are job group by the base-period average annual compensation likely to have the detailed data required. for jobs in that job group. 411 System of National Accounts E. Estimating labour productivity 1. Labour productivity and MFP 19.68 Increasingly, analysts are interested in measuring productivity on an industry basis as well as for the economy as a whole. Calculating industry employment and 19.62 Volumes of output per hour worked (or per person working time by industry adds an additional degree of employed) are described as measures of labour difficulty to the estimation process. Among other productivity. However, this is a somewhat unsophisticated advantages, using hours worked overcomes the problems measure because changes in this measure can reflect a involved in measuring employment by industry when a number of factors other than just the number of hours of worker has two or more jobs, not in the same industry. labour employed. In particular, increases in the amount of capital used can affect this ratio as can changes in the composition of the labour force over time. 19.69 In particular, the national accounting data come from surveys of establishments while the employment estimates are generally obtained using household surveys. It is often 19.63 Measures of capital productivity, calculated by dividing the difficult to correctly match the data classified by industry volume of output by an index of capital services provided, from these separate sources. Similar difficulties potentially suffer from similar drawbacks since they do not capture the affect regional estimates, with the concept of residence effects of the amount of labour employed and the efficiency having to be applied at a regional level rather than at the and composition of the capital inputs. country level. 19.64 A measure that takes account of the contributions of both 19.70 Labour productivity, including industry productivity, and labour and capital to growth in output is multifactor MFP are all valid measures of an economy's performance. productivity (MFP), which is sometimes referred to as total From a practical viewpoint, it is important to ensure that the factor productivity (TFP). The advantage of using MFP as employment and hours worked underlying these sets of the measure of productivity is that it includes effects not estimates are consistent with each other as well as with included in the labour and capital inputs. This topic is output measures when calculating the productivity discussed further in chapter 20 and in Measuring Capital. estimates. 19.65 The productivity model can be extended to include other factors such as the energy and materials used in production. 3. Data consistency This can be extended to producing productivity estimates at the most detailed level of the input-output tables. An 19.71 Examining the relative productivity performance of example of such work can be found in the EU-KLEMS different industries is of interest to many analysts. In project. EU-KLEMS was initially a statistical and practice, the labour input estimates for the whole economy analytical research project focussing on the analysis of can be estimated either "bottom up" or "top down". In the productivity and growth accounting in the European Union former case, the totals for the economy as a whole will be at the industry level. More information on it can be found completely consistent with the industry estimates because on the project site http://www.euklems.net/. The work is they are summed to derive the total labour estimates. being adopted officially. However, in the case of a top-down approach, a range of different data sources may be used to obtain the 2. Employment estimates for productivity disaggregation by industry. In such cases, it is important to ensure that the sum of the industry estimates is consistent estimation with the national totals. 19.66 As explained in section D, neither the number of 19.72 Classifying employment by industry is not always employees, nor even full-time equivalent employees are straightforward. The main issue is to ensure that the ideal measures for use in productivity studies. Total hours employment estimates for each industry are as consistent as actually worked is preferred by many because it is a possible with the national accounts values and volumes so reasonable compromise between these cruder measures and that the productivity estimates are reliable. One particular data-intensive measures that adjust for differences in the problem that arises is where staff are recruited via an qualifications, skill levels and composition of labour. external recruitment agency. Maintaining consistency with the industry output means that employment should be 19.67 Whichever labour measure is used in calculating classified to the industry of the establishment that legally productivity, it is very important to ensure that the coverage employs the workers. In practice, this will be the of the labour data is consistent with that of the national establishment that pays the employee's wages and any accounts. In other words, the labour inputs must be associated social contributions, which will usually be the estimated within the same production boundary and using employment agency and so the employees will be classified the same criteria for residence that are used in the national to industry class 7491 Labour recruitment and provision of accounts. Typically, the topics that cause most difficulty personnel. The output of this industry includes the revenue are residence (particularly with border workers), defence derived from the activity of hiring out staff to those force and diplomatic personnel (who are commonly not establishments that need the staff; generally, those covered by the labour force surveys often used to provide establishments will be in other industries. The the basic data) and obtaining details of unpaid hours (for establishments using these staff pay the employment example, unpaid overtime) or of some self employment (for agency and then the employment agency pays the staff so example, contributing family workers). the payments by the "using" establishments will be 412 Population and labour inputs recorded as part of intermediate input for the using the volume of GDP or of GDP per capita) or productivity industry. between countries is more complicated because it is necessary to convert the national accounts data to a 19.73 Ideally, for productivity purposes both the output common currency. The best means of doing so is to attributable to these staff and the hours they work would be calculate purchasing power parities (PPPs), which measure recorded in the industry in which they are actually working the rate of currency conversion that would be required to rather than in the industry "Labour recruitment and equalize the prices of a common basket of goods and provision of personnel". However, in practice, it is unlikely services between the countries concerned. In practice, PPPs that the data can be collected to enable the output and hours adjust for differences in price levels between countries as worked to be classified this way. It may be useful for some well as differences in exchange rates (see section E of purposes for the staff hired out by employment agencies to chapter 15). be allocated to the industries that actually use the staff. However, any such allocation should be presented in a supplementary table and not in the main accounts. 19.75 International comparisons of productivity below the level of GDP, such as by industry, are problematical. PPPs are 4. International comparisons calculated using the expenditure-based estimates of GDP so there are no PPPs for the individual industries that 19.74 Productivity growth is often expressed in percentage terms contribute to GDP. Therefore, it is necessary to make an and comparisons across countries made in terms of these assumption that the PPP for a single aggregate such as GDP percentages. Assuming similar methods have been used to is applicable to all industries. Examining the differences in compile the estimates for the countries being compared, the PPPs for the various expenditure components shows and that they have roughly comparable levels of they can vary significantly so this is unlikely to be a very productivity, this sort of comparison is interesting and good assumption. Making robust international comparisons much simpler than the alternative of comparing levels. of productivity at disaggregated levels is thus a very Measuring the relative levels of production (for example, demanding exercise. F. A note on source data 19.76 Broadly speaking, there are three types of data sources for 19.79 Establishment surveys tend to have some shortcomings employment data. These might be used singly or in when used as a source of employment data. In the first combination especially when the periodicity of each place, it is difficult to ensure that the survey frame on differs. The usual caveats that the quality of a survey which they are based is completely up to date because of depends on the sample size, survey design, response rate the lags inherent in the sources used to update the frame and reference period obviously apply to the surveys used (for example, registration of new establishments with the for employment data as for other surveys. So do the steps appropriate authorities). Even if the lags in updating the that need to be taken to allow for non-response and survey frame are consistent, their impact on the misreporting. employment estimates will vary with the peaks and troughs in the business cycle. Secondly, it is often difficult to 19.77 The three data sources are: collect data for self-employed persons, particularly if they are operating an unincorporated establishment. There may a. household surveys, such as a labour force survey; be genuine confusion with enterprises regarding casual workers as providers of services rather than employees. b. establishment surveys; Further, there may be some cases of deliberately underreporting the numbers of employees. c. administrative data (for example, employment associated with a payroll tax). 19.80 Administrative data provide a useful source of employment Population census data may also be available infrequently. data for the national accounts but may need to be used with caution and in connection with other sources. Even when they have reasonably full coverage (for example, 19.78 The employment estimates from a household survey establishment tax data) the data may not be available until typically count the number of people who have jobs and, perhaps, the number of hours they work. If the labour input well after the reference year and provide only a snapshot of measure being used is the number of jobs in the country employment in that year rather than the average for the then the household survey will provide an underestimate to year. A source such as payroll tax data is often affected by the extent that some people work in more than one job, having exemptions for smaller establishments (including unless the survey collects information on multiple job unincorporated enterprises), which reduces the holding. On the other hand, if the household survey collects completeness of the data. In such cases, the coverage of details relating to the hours worked in all the jobs in which establishments is likely to vary by industry because of the each person is employed then it should provide a good concentration of smaller establishments in industries such estimate of employment for the economy as whole. as agriculture, construction and retailing. 413 System of National Accounts 19.81 The problems connected with handling border workers in 19.82 Employed persons who have more than one job during a the national accounts have been described in the section on reference week can only be classified by industry and by residence. As far as data sources are concerned, household status in employment through the application of some essentially arbitrary criterion as to which of their jobs is the surveys are likely to include employed persons in the most important one. On the practical plane, while country in which they are surveyed (that is, their country of household surveys can provide data about either or both of residence) unless the survey contains specific questions to employed persons and jobs, establishment surveys only identify and exclude such workers. provide data about jobs. 414 Chapter 20: Capital services and the national accounts A. Introduction 20.1 This chapter differs in content and style from those 20.4 Assets appear on the balance sheet of their economic owner describing the accounts of the SNA. Its aim is to show how and the changes in value between one balance sheet and the a link can be made between the value of assets used in next have to be identified and included in the appropriate production and the gross operating surplus generated. This account. Changes in the value of assets due to changes in link has been elaborated over a period of about fifty years absolute or relative prices appear in the revaluation in a body of knowledge described as the theory of capital account. Changes due to unexpected events not reflected in services. However, it is only fairly recently that a few transactions appear in the other changes in the volume of statistical offices have incorporated the ideas from the assets account. Every other change in value is treated as a theory into the measurement of stocks of those assets used transaction and must be recorded elsewhere in the SNA. If in production. Because there is evidence that this approach the user of the asset is not the legal owner, two sets of leads to improved measures of capital stock, it is proposed transactions are recorded, those giving rise to payments that, for those offices interested, a table supplementary to between the user and the owner and those that show the the standard accounts could be prepared to display the user receiving the benefits of using the asset. These latter implicit services provided by non-financial assets. The are recorded as internal to the user. If the legal owner of the contribution of labour input to production is recognized in asset is also the user of the asset, only the internal compensation of employees. By also associating estimates transactions are recorded. of capital services with the standard breakdown of value added, the contributions of both labour and capital to 20.5 Assets used in production have to be paid for but the production can be portrayed in a form ready for use in the payment is not deducted from the value of production in the analysis of productivity in a way entirely consistent with period the asset is acquired but is spread over the whole of the accounts of the SNA. the period the asset is in use in production. For fixed assets, this gradual payment for an asset is recorded as consumption of fixed capital, which is the decline in the 20.2 The rest of the introduction gives a very general overview value of the asset due to its use in production. However, of the ideas involved in linking capital services with assets are not just a charge on production, they also national accounts. Section B shows how the measurement contribute to the profitability of an enterprise by being the of capital stock can be aligned with the notion of the source of operating surplus. It has long been commonplace efficiency of an asset as well as its price. This is followed to recognize that operating surplus is the return to capital by section C showing how to identify flows of capital used in production but an articulation of how this surplus is services within existing entries in the accounts. Section D generated and how it relates to the value of an asset and the shows how consideration of the basic link between asset way in which this value changes during a period has not value and contribution to operating surplus can be exploited previously been included in the SNA. As noted, this to determine the appropriate way to account for costs articulation is known as the theory of capital services. This associated with acquiring and disposing of assets and to terminology sits a bit uncomfortably with national place a value on assets where limited market price accountants since the services referred to are not the information is available. Finally, section E discusses a outputs of production in the way that transportation or possible format for a supplementary table. education services, for example, are. Nevertheless, the terminology is well established and should not in itself give 1. The basic ideas of capital services rise to problems as long as it is remembered that capital services are not produced services. Alternatively, capital services can be thought of as simply the term for the way in 20.3 Non-financial assets give rise to benefits either from being which the changes in the value of assets used in production used in production or simply from being held over a period are captured in the production account and the balance of time. This chapter concerns those non-financial assets sheet. that contribute to production and how this contribution is recorded in the accounts. The assets concerned are fixed 20.6 Much of the impetus for identifying the entries associated assets, inventories, natural resources and those contracts. with capital services in the national accounts has come leases and licences used in production. Valuables give rise from those interested in the analytical uses that can be to benefits derived from holding them as stores of value made of the information, especially for productivity rather than using them and so are not covered by this studies. Because much of this work has been undertaken by chapter. researchers, it is perhaps inevitable that the rationale and 415 System of National Accounts reasoning behind the proposals should have been expressed demonstrate the connection between the concepts referred in a rather academic manner, in particular making extensive to in studies referring to capital services and the national use of sometimes rather complex algebra. This chapter accounts approach to the valuation of capital and the takes a different approach. It aims to show that, rather than derivation of stock levels. introducing a new concept into the SNA, capital services can, in theory, be identified within the existing accounts. Further, recognizing this can lead to improvements in the 20.7 The explanation given here is to some extent superficial estimates of consumption of fixed capital, which are since it is intended to give an overview of the concepts and currently required in the production accounts, and of the indicate in general terms why the theory of capital services values of capital stock, which are required in the balance is relevant to national accountants. For a deeper sheets. The derivation of information analytically useful for productivity studies can thus be seen as a by-product of understanding of the subject, reference should be made to improved national accounts compilation practices and not the two OECD manuals on the subject, Measuring Capital an additional exercise. The explanation is done in terms of and Measuring Productivity and some of the practical and highly simplified numerical examples but still aims to theoretical work referenced in those manuals. B. Valuing capital stock 20.8 Estimating the value of capital stock is not a 20.11 The value of the asset in all five years can be derived using straightforward process. Whereas it is possible to measure present value techniques as shown in table 20.1. (For all new capital formation undertaken in a year directly and simplicity, in this and all the following examples, the simply aggregate it, estimating the total value of a stock of values shown are values at the start of the year so that, assets, even of the same basic type, but with differing when discounting, the factor for the whole year is used. characteristics and of different ages, is not simple. In This simplification is made only to facilitate exposition; in theory, if there were perfect second-hand markets for assets practice mid-year figures should be used. It should also be of every specification, these observed prices could be used noted that the figures in the tables are rounded and to revalue each asset at the prices prevailing in a given year, therefore may appear not to add exactly. However, a reader but in practice, this sort of information is very seldom who follows the examples in a spreadsheet will achieve available. Thus measures of capital stock must be derived exactly the figures shown.) indirectly and this is conventionally done by making assumptions about how the price of an asset declines over 20.12 The addition to the value of the asset in year 1 from the time and incorporating this in a model based on the expected earnings of 80 in year 2 is 76, that is 80 divided by perpetual inventory model (PIM). Basically the PIM writes 1.05. (Alternatively, the addition to the value of the asset in down the value of all assets existing at the beginning of the year 1 can be viewed as 80 times a discount factor of year in question by the reduction in their value during the 0.9524, the reciprocal of 1.05) The addition to the value of year, eliminates those assets that reach the end of their the asset in year 2 from earnings in year 3 is 57 (60 divided useful lives in the year and adds the written-down value of by 1.05) and in year 1 is 54 (57 divided by 1.05) and so on. assets acquired during the year. This routine is so well When the value of 100 for the earnings in the first year is established that it is possible to overlook the assumptions it added to 76, the value of the second year's earnings in the rests on but it is an investigation of these assumptions that first year, and to 54, the value of the third year's earnings in reveals the dual benefits of deriving capital service values. the first year and to 35 and 16, representing the value of the earnings in years 4 and 5 in the first year, a value of the 20.9 In the absence of observable prices, the value of an asset asset in year 1 of 282 is derived. When the table is may be determined by the present value of its future complete, the value of the asset in each of the five years is earnings. Economic theory states that in a well functioning seen to be 282, 191, 116, 59 and 20. market (suitably defined) even when prices are observable, this identity will hold also. There are thus two sorts of 20.13 The decline in value of the asset from year to year can be questions that may be posed about the value of an asset; (i) calculated by deducting each succeeding year's value from how much would it fetch if sold, and (ii) how much will it the value of the present year. Thus a series of 91, 74, 57, 39 contribute to production over its useful life. The first of and 20 is derived, a series that sums to 282, the original these is the traditional question asked by national value of the asset. If the decline in value of the asset (91 in accountants; the second is basic to studies of productivity. the first year) is deducted from the contribution to However, these two questions are not independent. production (100 in the first year), the value of income generated in a year results (9 for the first year). To see that this item represents income, consider that the sum of the 1. Knowing the contribution to production elements in the first column for years 2 to 5 together (182) represents the value of the same capital stock existing in 20.10 Suppose an asset will add values of 100, 80, 60, 40 and 20 year 2 but valued in the first year. This value of 182 to production over the next five years. For simplicity increases by 9 to 191 between year 1 and year 2. This assume all products have the same prices and there is no amount satisfies the criterion for income that it is the inflation. Assume, further, that the real rate of interest is amount that the owner of the capital can spend and still be five per cent per annum for all five years. as well off at the end of the period as at the beginning. 416 Capital services and the national accounts Table 20.1:Example of deriving the value of capital of 116 must consist of 18 representing the contribution to stock from knowledge of its contribution to production in year 5 of 20 discounted twice, 38 production representing the value contributed to production in year 4 of 40 discounted once and so by residual the value Discount rate 5% Year 1 Year 2 Year 3 Year 4 Year 5 Sum of 5 years contributed to production in year 3 must be 60. In this way Contribution to asset value all the top, triangular, part of the table can be completed from earnings in : and the values of the amounts of income in a year be Year 1 100 derived just as in table 20.1. Year 2 76 80 Year 3 54 57 60 Year 4 35 36 38 40 3. Age-efficiency and age-price profiles Year 5 16 17 18 19 20 Value in year 282 191 116 59 20 Value index (year on year) 1.00 0.68 0.61 0.51 0.34 20.17 Although tables 20.1 and 20.2 start from different Decline in value 91 74 57 39 20 282 assumptions, exactly the same complete table results even Income 9 6 3 1 0 18 though they are filled in a different order in the two cases. Table 20.1 starts from assumptions about the declining 20.14 Over the five-year period, the value of income is equal to contribution to production and derives stock values and the the difference between the sum of the diagonal elements decline in value each year. Table 20.2 starts from (300) less the amount of the decline in value (282), or to put assumptions about the decline in value of the stock and it another way, there is an identity between the value of derives the contribution to production and the decline in income the asset yields and the discounting inherent in value each year. Both techniques give values of stocks to establishing its current value. include in the balance sheets and figures of consumption of fixed capital. The assumptions made in the two cases must be consistent. In fact it can be shown that every pattern of 2. Knowing the value at any time decline in the contribution of an asset to production (usually called the age-efficiency profile) corresponds to 20.15 Now suppose nothing is known about the contribution of one and only one pattern of decline in prices (usually called the asset to production but the decline in the value of the the age-price profile). asset over the five years, due to ageing, is known. If this is postulated in terms of a value index relative to the 20.18 Given this, it would seem possible to take the information preceding year's value, and the initial value is known to be in a set of PIM assumptions and simply derive the 282, then the entries in table 20.2 can be calculated. By contributions to production from these. While it is possible design, a value series consistent with the figures in table to do this, it is generally held to be preferable to start again 20.1 is assumed. Applying the decline in value of 0.68 to by postulating a set of age-efficiency profiles. The reason the initial value of 282 gives a value of 191 for year 2; for this can be illustrated by table 20.3. applying the value decline of 0.61 to 191 gives 116 for year 3 and so on. (Alternatively a time series of values could be Table 20.3:Table 20.2 with a slightly different pattern postulated and applied to the initial value.) From this the of price decline declines in value of the asset from year to year can be deduced and seen to be identical with those in table 20.1. Discount rate 5% Year 1 Year 2 Year 3 Year 4 Year 5 Sum of 5 years Contribution to asset value Table 20.2:Example of deriving the value of capital from earnings in : Year 1 80 stock from knowledge of its decline in price Year 2 96 101 Discount rate 5% Year 3 75 79 83 Year 1 Year 2 Year 3 Year 4 Year 5 Sum of 5 years Year 4 24 26 27 28 Contribution to asset value Year 5 6 6 6 7 7 from earnings in : Value in year 282 211 116 35 7 Year 1 100 Value index (year on year) 1.00 0.75 0.55 0.30 0.20 Year 2 76 80 Decline in value 70 95 81 28 7 282 Year 3 54 57 60 Income 10 6 2 0 0 18 Year 4 35 36 38 40 Year 5 16 17 18 19 20 Value in year 282 191 116 59 20 20.19 Table 20.3 again starts from a series of relative price Value index (year on year) 1.00 0.68 0.61 0.51 0.34 changes as in table 20.2 but these changes are somewhat Decline in value 91 74 57 39 20 282 Income 9 6 3 1 0 18 different. Instead of a series of 1.00, 0.68, 0.61, 0.51 and 0.34, a series of 1.00, 0.75, 0.55, 0.30 and 0.20 is taken. These changes underestimate the rate of decline in value in 20.16 In general this is as far as the PIM goes. Its twofold purpose the second year and assume a faster rate of decline in later is to calculate asset values for the balance sheet and the years. At first sight they do not seem unreasonable. figures for consumption of fixed capital and these However, the effect on the contribution to production is requirements are satisfied at this point. But it is in fact considerable and the resulting series of 80, 101, 83, 28 and possible to go further. The contribution of the asset to 7 is quite implausible. What sort of asset would be over production in the final year (20) is the same as the final twenty per cent more efficient in its second year than in its year's value. If this is discounted by five per cent, the first and still more efficient in the third year than in the first addition to the value of the asset at the start of year 4 is before declining quickly thereafter? Yet this pattern of determined to be 19. Given the value of the asset at the start flows is still consistent with an initial value of 282, as in of year 4 is 59, there must be a figure of 40 contributed to table 20.2 and with cumulative declines in value adding to production in that year. Extending this, for year 3 the value this amount over five years. 417 System of National Accounts 20.20 These are the reasons why it is argued that making In the case where Vt+1 =f Vt, Vt = a/(1-df). assumptions about efficiency decline is likely to lead to superior results for the value of stocks, their decline in By analogy, if the value of the capital services rendered by value and the income they generate than making the asset in year t=1 is b, Vt+1 = b/(1-df). But since Vt+1 assumptions about the rate of price decline. As a further =fVt, it follows that b must be equal to af. Thus we have the example of why this may also be easier, consider the case of an asset that contributes the same to production, let us case that the shape of the age-price profile and the shape of say 100, for each of five years and then stops dead, like a the age-efficiency profile are exactly the same. light bulb. It is easy to postulate a constant age-efficiency profile but the corresponding age-price profile is much less 20.24 As noted above, there is one and only one age-price profile intuitively obvious and varies according to the discount corresponding to one age-efficiency profile, so it follows factor applied. that the geometrically declining profile is the only profile that is the same for both the decline in price and in efficiency. One consequence is that figures for capital stock 20.21 However, while there are good reasons for using age- adjusted for the decline in value are equal to those for efficiency profiles as the starting point, where actual capital stock adjusted for the decline in efficiency. This information is available on age-price profiles, even partial property adds to the reasons that can be advanced for information, it should be confirmed that the selected age- choosing this profile to determine the value of capital stock. efficiency profile is consistent with the observed age-price movements. 5. Practical considerations 4. The special case of geometrically declining 20.25 As noted at the outset of this section, there are many profiles simplifications built into the examples presented, made in order to facilitate the explanation of the basic theory behind 20.22 A number of patterns can be postulated for either the age- the idea of capital services to those new to the idea. price or age-efficiency profile. These include straight line Measuring Capital should be consulted for a more rigorous depreciation and various non-linear forms discussed in discussion and for considerations such as the rationale for Measuring Capital. One of particular interest is that where choosing one age-price (or age-efficiency) profile rather the price declines geometrically, that is each year the price than another, how to estimate life lengths and retirement (when adjusted for inflation) is a fixed proportion, f, of the patterns of assets and the role of expectations in the year before. Because such a series converges to, but never calculations. actually reaches, zero, it is difficult to portray it in a table such as those shown above but the interesting characteristic 20.26 The manual also discusses the fact that the return to capital can be derived by means of a little very simple algebra. must be sufficient to cover taxes levied on the asset in question, a point that is ignored here also in the name of 20.23 It can be seen from the tables above that the value of an simplification. asset at the start of any year, Vt, is equal to the capital services to be rendered in that year, a, plus a discount 20.27 To be precise, a distinction is made between the interest or factor, d, times the value of the asset at the start of the next discount rate, r, usually assumed to be five per cent in this year, Vt+1. Thus chapter, and the discount factor which is the reciprocal of (1+ r). When r is 5 percent, the discount factor is 95.24 per cent. When the discount factor is 95.0 per cent, the discount Vt = a +d Vt+1. rate is 5.26 per cent. C. Interpreting the flows 20.28 The tables above generate three time series of particular proportion of the next year's capital stock value (that part interest. One is the contribution to production of an asset not used in the current year) is also five per cent, the same over time, one is the decline in the value of the asset and as the discount rate. The alternative terminologies are one is the income generated by the asset. Obviously the illustrated in table 20.4. middle term corresponds to consumption of fixed capital as normally understood in the SNA. The contribution of 1. Capital services and gross operating surplus capital to production is what is called gross operating surplus and so the third time series, income, corresponds fittingly to net operating surplus. However, these flows can 20.29 At this point, the national accountant asks how can gross be described by alternative names also. The diagonal operating surplus be estimated in this way when it is element of the tables, showing the contribution to derived as a balancing item in the generation of income production, is also known as the value of capital services. account? There are two possible answers to this question. The income element is the return to capital. The rate of The first answer is that there is not a complete identity with return on capital is the ratio of income to the value of gross operating surplus but the value of capital services is capital. For tables 20.1 and 20.2, the income flow as a implicitly within it so may be noted as an "of which" item 418 Capital services and the national accounts relative to gross operating surplus. Suppose the discount 2. Prices and volumes rate chosen is the rate that can be obtained on a bank deposit, say. This determines the amount the user of the 20.31 An examination of table 20.1, or indeed any of the others, asset needs to generate as net operating surplus if the asset shows that the value of an asset at a point in time, such as is to be cost effective. If the figures for capital services and the start of a year, can be expressed rather neatly as the sum gross operating surplus are both 100, then the producer has of the capital services rendered in the year plus the made a reasonable choice of asset; it is earning as much for discounted value of the asset at the end of the year. This is him as leaving his money in the bank. If he earns a little the starting point of much of the algebraic elaboration of more than 100, he has done better than leaving the money capital services in the literature, but with one important in the bank. If the national accounts show he has earned difference. Whereas most national accountants tend to 150, say, it may be that the producer has been very lucky think first in terms of current price aggregates and later indeed, perhaps realizing some monopolistic profits. (possibly) a breakdown into a volume aggregate plus a However, it is also possible that there is some sort of asset corresponding price, most descriptions of capital services he is using that has not been identified in calculating capital run in the other direction. They assume a volume and services, one possibility being some form of intangible develop a theory of the corresponding price (the "user asset. Similarly if the value of gross operating surplus is cost"). These could be multiplied together to give a current much lower than the value of capital services estimated, value but much analysis is done using volume or price there may be good reason to question the range and information. valuation of assets assumed to be used in production or the quality of the estimates of gross operating surplus. Thus 20.32 One reason for working this way is that the assumption deriving the value of capital services in this manner is also underlying table 20.1, that the contributions to production a valuable tool for checking data quality. over the life of the asset are known, is not often true in practice. What is known, estimated or simply assumed is an index of how the efficiency changes over time. Equally the 20.30 The alternative to treating capital services as an element of value of the asset assumed known in table 20.2 is only gross operating surplus is to equate gross operating surplus known on an asset-by-asset basis when each is new; all with capital services exactly and to do this by determining a other value figures are estimates for reasons explained rate of return (discount rate) that brings this about. Many above. It is possible to use the identity that the start-of-year traditional analyses of productivity have used this approach value of an asset equals capital services rendered in the and some cross-country comparisons of productivity year plus the discounted end-of-year value, all expressed in depend on this assumption. Other studies, used at the index number form and assuming no inflation, into one that industry level, suggest that the variation in apparent rate of expresses the value of the capital services as dependent on return obtained in this way needs to be used, if at all, with the decline in the value of the asset due to ageing (the very great caution. There is still robust discussion in depreciation element) and the rate of return (the academic circles about the preferred way of determining opportunity cost of money). If the impact of general the rate of return, exogenously as described in the inflation is now taken into account, the price of the capital preceding paragraph or endogenously as described here. services (usually called the user cost) can be expressed as One way of interpreting the difference is to say that using depending on the increase in value of a new asset of the an exogenous rate of return simply confronts the cost of same type, the nominal cost of money and the relative year- on-year decline in value of the asset due to ageing. capital (capital services) with the benefits (gross operating surplus); the endogenous rate of return gives a single figure to be contrasted with the yardstick of a "normal" rate of 20.33 It is also possible then to have different prices for different return. sorts of assets and look at differential movements between asset prices and the movements in the general level of inflation. (Table 20.1 was based on the very restrictive Table 20.4:Capital services and SNA terminology assumptions of there being neither absolute nor relative Discount rate 5% price inflation.) Year 1 Year 2 Year 3 Year 4 Year 5 Sum of 5 years Contribution to asset value Valu from earnings in : e of cap 20.34 Another important consideration passed over in the simple ital Year 1 100 serv Year 2 76 80 ices or gro numeric tables is the following. For balance sheet data, ss o Year 3 54 57 60 per atin g su values at the date the balance sheet is drawn up are needed. Year 4 35 36 38 40 rplu s For estimates of capital services/gross operating surplus as Year 5 16 17 18 19 20 Value in year 282 191 116 59 20 well as for consumption of fixed capital and income flows, Value index (year on year) 1.00 0.68 0.61 0.51 0.34 values at average-year prices are needed. In practice, the Decline in value 91 74 57 39 20 282 Consumption of fixed capital mid-year observations are often assumed to be close Income 9 6 3 1 0 18 approximations to the annual averages but this is not Return to capital or net operating surplus always so, especially in times of significant inflation. 419 System of National Accounts D. Applying the capital service model 20.35 Once a theoretical link between the content of gross 1. Land operating surplus and the capital services embodied in an asset used in production is accepted, there are a number of 20.41 The first and oldest recognized form of non-produced other beneficial implications for the national accounts. capital is land. Land is special in that, under good These include the question of the use of land in production, management, the value is assumed to remain constant from the valuation of natural resources, the separation of mixed year to year except for the effects of inflation in land prices. income into the labour and capital components, the That is to say, there is no depreciation of land and all the measurement of assets with a residual value, the treatment contribution to production can be regarded as income. To of costs of ownership transfer on acquisition, the treatment show how this can be related to the previous examples, of terminal costs, capital maintenance, the valuation of Table 20.5 shows part of a corresponding table for land that work in progress on long-term projects, an alternative contributes 20 to production in perpetuity. A full table approach to estimating the imputed rentals of owner- would have an infinite number of rows and columns. Here occupied dwellings and the separation of the payments only a few are shown and some very simple algebra (with under a financial lease into the element to be regarded as explanation) is used to explain how the totals are reached. the repayment of principle from the element regarded as interest. Each of these will be explained a little further below. 20.42 The value of the first column is the sum of 20, 20 discounted once (the second year's contribution to production discounted once), 20 discounted twice for the 20.36 Before discussing land and natural resources, it is useful to third year and so on if not for ever, at least for very many recall the consequences of an asset being used by a unit not years. With a discount rate of 5 per cent as before, the sum the legal owner of the asset. The important distinction is of this column is 420. To see that this is so, consider a whether the user does or does not assume the risks simple geometric progression. What is required is the sum associated with its use in production. When the user does of a series that can be written as: not assume the risks, the asset is regarded as being subject to an operational lease. In such a case the payment to use Sn=a+ad+ad2+ad3+ad4+ad5+...+adn the asset is a rental and forms part of intermediate consumption. The benefits from using the asset in production accrue to the owner in the operating surplus of where a is the return to the asset in every period and d is the the production account relating to his leasing activity. (See discount factor. (As noted earlier. for a discount rate of 5 paragraphs 17.301 to 17.303.) per cent, the discount factor is 95.24 per cent.) If every term in the equation is multiplied by an extra factor d the result is: 20.37 When the user does assume the risks associated with the use of the asset in production, the benefits from using the dSn= ad+ad2+ad3+ad4+ad5+... +adn+1 asset in production accrue to the user and appear in his operating surplus. This is true of both produced and non- produced assets. The difference between produced and Subtracting the second expression from the first gives: non-produced assets concerns the type of lease existing between the legal owner and the user and the type of Sn (1-d) = a (1-d n+1) property income paid to the legal owner of the asset. If d is less than unity (as it will be in a discounting 20.38 In the case of a produced asset, the user of the asset who framework) and n is very large, that last term becomes assumes all risks associated with the asset becomes the insignificant and the sum of the series, Sn, can be economic owner of the asset. The asset appears on the determined as a/(1-d). In table 20.5, a is 20 and d is 0.9524, balance sheet of the economic owner. If the legal owner is so the sum of the series is 420. different, any payment from the economic owner to the legal owner is recorded as property income payable under a Table 20.5:The case of land financial lease. (See paragraphs 17.304 to 17.309.) Discount rate 5% Year 1 Year 2 Year 3 Year 4 Year 5 . . . Year 10 . . . 20.39 In the case of a non-produced asset, when the user of the Contribution to asset value resource and legal owner differ, the asset remains on the from earnings in : balance sheet of the legal owner but a resource lease Year 1 20 Year 2 19 20 between the legal owner and user obliges the latter to pay Year 3 18 19 20 the former property income in the form of rent. (See Year 4 17 18 19 20 paragraphs 17.310 to 17.312.) Year 10 13 14 14 15 16 . . . . . 20 . . . Year 25 6 7 7 8 8 . . . . . 10 . . . 20.40 For all non-financial assets used in production, the Year 40 3 3 3 3 4 . . .. . 5.. . estimation of the value of the capital services associated Value in year 420 420 420 420 420 420 with the asset allows this to be contrasted with the property Value index (year on year) 1.00 1.00 1.00 1.00 1.00 . . . . 1.00 . . . income payable for its use to determine whether the use of Decline in value 0 0 0 0 0 . . .. .. 0 .. . the asset is cost-effective. Income 20 20 20 20 20 . . . . . 20 . . . 420 Capital services and the national accounts 20.43 However, since each of the columns of the table, though element. Because this residual amount is consistent with one term shorter than the previous one, is also an infinite the idea of maintaining the level of wealth intact, it can be series beginning in exactly the same way, the sum of each regarded as income. Clearly this leads into the area of so- column is also 420. Thus the decline in value of the land called green accounting and the possibility of allowing for from year to year is zero and the whole of the 20 is not just consumption of natural capital as well as consumption of the contribution to production but also income. In national fixed capital in an alternative presentation of national accounts parlance, the gross and net operating surplus are accounts in a satellite account. Indeed, this is the argument both 20 and there is no depreciation. Equally the value of developed at greater length and with applications to the capital service and the return to capital are both 20. specific resources in section D of chapter 7 of the Integrated Environmental and Economic Accounting 2003 20.44 As noted above, it may seem slightly odd to think of a non- (United Nations, European Commission, International produced asset contributing a "service" since in national Monetary Fund, Organisation for Economic Cooperation accounts services are always produced. This is simply a and Development and World Bank, 2003) commonly reflection of the words chosen by economists to describe referred to as the SEEA. the contribution of capital to production without connecting the word "service" to the specific interpretation given to it 3. Mixed income in the SNA. Similarly one may hear compensation of employees described as the cost of labour services. 20.49 When discussing land, above, it was pointed out that the economic rent of the land was the part that was not 20.45 Another term used for capital services is economic rent and otherwise accounted for by intermediate consumption, the this initially seems more applicable in the case of land but cost of hired labour and the capital services rendered by is also a pitfall. In table 20.5, the economic rent of land is fixed assets and the labour cost of the farmer. Very often, it the extent to which the farmer benefits from using the land is difficult to put a value on the labour of a self-employed for agricultural production (20). This rent accrues whether person and so this may be merged with the economic rent the farmer is farming his own land or is a tenant farmer. on land and the capital services rendered by any fixed The amount that the tenant farmer is due to pay his landlord assets used and described as mixed income. In principle, is what the national accounts show as rent under property though, if a separate estimate of the capital services income. In the days when a farmer paid his rent as a share rendered by fixed assets can be made from information of the crop yield, the link was more obvious. What he about the services rendered by similar assets in other parts retained represented enough to cover his costs and the cost of the economy, then mixed income can be split into its of his own (and any hired) labour. In a monetized economy, labour and capital components. the rent payable to the landlord is often agreed a very long time in advance. Comparing the rent earned (as operating 20.50 In practice this has often proved difficult since the residual surplus) with the rent payable as property income shows amount for self-employed income may turn out to be very whether the agreed rent is "fair" or perhaps excessive small or even negative. The most obvious cause of this is relative to the farming income. that the estimates for the capital services are too high. This may be because larger companies are able to make more 2. Valuing natural resources efficient use of capital, for example using a high value piece of equipment continuously rather than intermittently, 20.46 There is an increasing interest in placing a capital value on or because they actually have other, intangible, assets, natural resources but, since these assets are seldom sold on which have not been taken into account. This means the the market, there has been doubt about how to do this. capital services for these unmeasured assets are attributed Looking at the economic rent to be earned by a mineral to those that are recognized but this addition is not deposit or a natural forest, for example, is one way to solve appropriate for the self-employed worker. Thus the the problem. acceptance of the capital services model is unlikely to provide a quick and accurate breakdown of mixed income but it does show the way to probe the data for both large 20.47 Suppose that a mining company knows the size of the and small enterprises to ensure that capital is being deposit being mined, the average rate of extraction and the measured comprehensively and consistently. costs of extraction of one unit. After allowing for all intermediate costs, labour and the cost of fixed assets used, what is left must represent the economic rent of the natural 4. Assets with a residual value resource. By applying this to the expected future extractions, a stream of future income can be estimated and 20.51 Very many assets are used by a single owner until they are from this, using the techniques already described, a figure worn out and worth nothing. However, this is not the case for the value of the stock of the resource at any point in for all assets. Some are disposed of after a few years, time. perhaps because the cost of regular maintenance is deemed by the current owner to be too high relative to the value the 20.48 In fact, the application of the capital service technique goes asset contributes to production. Some airlines, for example, further than this. In the case of a natural forest, if the rate of may wish to use the fact that they keep up-to-date fleets of regrowth is at least equal to the rate of harvest, then the aircraft as part of their advertising appeal. In other cases, value of the forest does not decline and the rate of harvest is for example with construction equipment, the original sustainable. However, in the case of a mineral deposit with owner may simply have no further use for the asset. no natural renewable capability, then it is possible as before to separate the contribution to production into an element 20.52 Table 20.6 shows an example of an asset that is used for showing the decline in value of the deposit and a residual only four years and then disposed of for a value of 300. 421 System of National Accounts Again for simplicity it is assumed that the disposal value corresponding part of table 20.6 giving increased value to after four years is known when the asset is acquired. For the asset in each year until the end of year 4, increased example, the market in used assets may be sufficient to consumption of fixed capital and slightly increased income, ensure that the value at any point is equal to the remaining because the costs of ownership transfer are also viewed as services to be delivered by the asset. Inflation is still the present value of the extra services required to meet the assumed to be zero. costs. 20.53 The top, triangular, part of the table shows the normal 20.55 If the costs of ownership transfer were to be attributed to calculation of the value of the capital services to be the whole life of the asset and not just that part for which rendered in these four years, a value that at the outset is the unit that paid the costs owns the asset, there is a seen to be 1 107. To this the discounted value of the mismatch between the calculated value of the asset and the residual value of 300 must be added. This value is 247, market value demonstrated in the sale at a value of 300. In making the total value of the asset 1 354. As in the case such a case, the data have to be brought back into where an asset is held to exhaustion, the decline in the reconciliation by means of an entry in the other changes in value of the asset including the residual value is lower year the volume of assets account but this means that not all of by year than the decline in the capital services to be the costs incurred by the initial owner are shown as a rendered in these four years because there is an income charge against gross value added and so income is over- element coming from the fact that the remaining value stated. This may be inevitable when assets are sold increases as the time for disposal of the asset gets closer. unexpectedly but in the case of many vehicles and large The total of the decline in the value of the asset, to be mobile construction equipment, the purchaser may well shown as consumption of fixed capital, is 1 054. This take account of the value to be realized on sale after a given value, together with the residual value of 300, is equal to period. When this is so, every effort should be made to take the original value of 1 354. The total income (net operating account not only of the residual value but also factor the surplus) is 121, the sum of the income arising from the use expected life length into the calculations of the amount of in production (68) plus the income arising from the consumption of fixed capital to be attributed to the costs of unwinding of the discount factor on the terminal value (53). ownership transfer so there is no residual value of these costs left on disposal. Table 20.6: An asset with a residual value Discount rate 5% Table 20.7:Example of costs of ownership transfer on Residual the acquisition of the asset in table 20.6 Year 1 Year 2 Year 3 Year 4 value Sum of 4 years Contribution to asset value Discount rate 5% from earnings in : Year 1 Year 2 Year 3 Year 4 Sum of 4 years Year 1 400 Contribution to asset value Year 2 286 300 from earnings in : Year 3 227 238 250 Year 1 10 Year 4 194 204 214 225 Year 2 9 9 Value in year 1 107 742 464 225 0 Year 3 6 7 7 Decline in value 365 278 239 225 1 107 Year 4 5 5 6 6 Income 35 22 11 0 68 Value in year 30 21 13 6 Residual value 247 259 272 286 300 Decline in value 9 8 7 6 30 Income 12 13 14 14 53 Income 1 1 0 0 2 Joint value 1 354 1 001 736 511 300 Residual value 1 384 1 022 749 517 300 Decline in value 352 265 226 211 1 054 Decline in value 361 273 232 217 1 084 Income 48 35 24 14 121 Income 49 36 25 14 123 Table 20.6 illustrates that the cumulative value of the 6. Terminal costs consumption of fixed capital calculated in respect of an asset should be equal to the initial value of the asset, treated 20.56 Table 20.6 considered the case where an asset had a as fixed capital formation, less the value to the owner on residual value at the time the current owner disposed of it. disposal of the asset. This holds whether the asset passes It is also possible to have assets that have significantly into use as a fixed asset by another user, is used for another large costs associated with disposal. Examples include the purpose in the same economy or is exported. decommissioning costs of nuclear power stations or oil rigs or the clean-up costs of landfill sites. The following 5. Costs of ownership transfer on acquisition discussion is not meant to downplay the practical difficulty of estimating terminal costs, simply to demonstrate why in 20.54 The costs of ownership transfer incurred on acquisition of principle the existence of terminal costs should reduce the an asset are treated as fixed capital formation. This value of the asset throughout its life. assertion is equivalent to assuming that the services rendered by the asset must be sufficient to cover both the 20.57 Terminal costs are similar to capital formation in that they costs of the asset and the costs of ownership transfer. Table should be covered by income generated during the time the 20.7 shows an example where costs of 30 are incurred on asset is used in production. If this is not done during the the acquisition of the asset in table 20.6. In order for the asset's life these large costs may be treated as intermediate asset to have exactly the same value as before on disposal, costs at a time when there is no longer any income being 300, the costs of ownership transfer have to be accounted generated from production and so lead to negative value for during the period in which the owner who incurred the added. Alternatively, they are recorded as capital formation costs uses the asset in production. The figures in the but instead of the costs being recovered from value added, triangular part of table 20.7 are added to those in the these costs are simply written off in the other changes in the 422 Capital services and the national accounts volume of assets account. This procedure omits from the 20.62 The value of the capital repairs can be analysed by merging macroeconomic aggregates a legitimate cost to business the value with that of the asset in question and reworking and so overstates gross and net domestic product over a all the calculations of the services to be rendered, the period of years. income generated and the consumption of fixed capital for the asset and the maintenance taken together. However, as table 20.7 shows, it is also possible to leave the calculations 20.58 Table 20.8 shows an example of how terminal costs should for the asset as they were and simply aggregate them with a be recorded. The data in fact correspond to the numbers in separate analysis of the maintenance undertaken as if it table 20.6 for the contribution to production in each year, related to a wholly new asset. but in this case the residual value is negative rather than positive. 8. Work-in-progress for long term projects 20.59 The analysis of the data follows that for table 20.6 exactly. The value of the capital services to be provided by the asset 20.63 Table 20.9 relates to an asset with a final value of 200 that in use is still 1 107. However, since the present value of the is to be constructed over a period of four years. One terminal cost is -247, the total value of the asset is 860. As possibility is that, assuming no inflation, work in progress before, the cumulated value of consumption of fixed of 50 should be recorded in each of the four years. capital, 1 160 is equal to this value less the terminal value However, consistent with the notion of discounting future of -300. Not only is the value of the asset in each year lower income, an alternative view is preferable. Suppose still that than the value of the use in production, in year 4 the value there is a discount rate of five per cent. In each year, the is actually negative. The rationale of this is that although value of the completed asset in each of years 1 to 3 will be the asset will yield services of 225 in that year, the 172.8, 181.4 and 190.5, each of which will cumulate to a impending costs of 300 mean that the owner would not be value of 200 after, respectively, three, two or one years able to sell the asset; he would in fact have to pay another accumulation in value of 5 per cent. Dividing each of these owner to take over the asset since it would then be the by four implies that even if equal amounts of work are put responsibility of the new owner to meet the disposal costs in place in each year, the values to be recorded should be of 300. 43.2, 45.4, 47.6 and 50.0. In addition, though, there will be income arising from a return to the work already put in place. This would give a time series for the work put in Table 20.8:An asset with a terminal cost place and other income of 2.2, 4.5 and 7.1 in each of years two to four giving the value of the partially complete Discount rate 5% structure as 43.2, 90.7, 142.9 and 200.0. These are the Residual Year 1 Year 2 Year 3 Year 4 value Sum of 4 years values that a purchaser of the partially completed structure Contribution to asset value would be willing to pay, given that he would forgo the from earnings in : income from the finished structure for up to three years. Year 1 400 Year 2 286 300 Year 3 227 238 250 Table 20.9:Valuing work-in-progress spanning several Year 4 194 204 214 225 Value in year 1 107 742 464 225 0 years Decline in value 365 278 239 225 1 107 Discount rate 5% Income 35 22 11 0 68 Year 1 Year 2 Year 3 Year 4 Residual value - 247 - 259 - 272 - 286 - 300 Value of final product in each year 172.8 181.4 190.5 200.0 Income - 12 - 13 - 14 - 14 - 53 Joint value 860 483 192 - 61 - 300 Value of construction activity (one quarter of final value) 43.2 45.4 47.6 50.0 Decline in value 377 291 253 239 1 160 Income accruing on work put in place Income 23 9 -3 - 14 15 In year 1 2.2 2.3 2.4 In year 2 2.3 2.4 In year 3 2.4 20.60 Anticipated costs on ownership transfer on disposal of an End year value 43.2 90.7 142.9 200.0 asset, including legal fees, commission, transport and disassembly, etc., should in principle be treated in the same way as terminal costs. 9. Owner-occupied dwellings 20.64 The SNA specifies that an imputed rental on owner- 7. Major repairs and renovations occupied housing should be included in the production boundary and form part of household consumption. In a 20.61 Major repairs and renovations that extend the life of an situation where there is either no rental market in such asset are treated as capital formation and the value of the properties or only a very limited one, this is difficult to repairs and renovations is added to the value of the asset implement. Cross-country comparisons of the results (as in before the work was undertaken. The example of costs of the International Comparison Program) show that the ownership transfer on acquisition of an asset can be applied different techniques used produce highly variable results. directly in this case, excepting only that the costs are Here too, the use of the techniques described in this chapter incurred in a year other than the year of acquisition. The may be helpful. value of the capital repairs is supposed to be equal to the discounted value of the increased services that the asset 20.65 In the example for land, it is possible to deduce a value of will yield, either by increasing the services in each of the 420 for the land that yielded economic rent of 20 every year remaining years of the initial life length, or extending the in perpetuity. While modern houses do not last for ever, if life length, or both. they are assumed to last for, say, fifty years the discount 423 System of National Accounts factor applied over this period gives contributions to the consumption of fixed capital and how much contributes to value of the asset that are negligible at the end and again it net operating surplus can also be used to show how much may be supposed that, if the value of the house is 420, then of the payment to the bank is a repayment of capital and the imputed rental is 20. Given that the market for houses is how much is interest. Both consumption of fixed capital much better established than for rented housing, this may and a repayment of capital feature in the accumulation also provide a source of useful and comparable data for a accounts as changing the value of the stock of assets. The troublesome area of national accounts. However, this contributions to net operating surplus and interest are both method should be used with caution since houses are often income flows and are shown in the current accounts. bought in the expectation of making significant real holding gains. It should also be recognized that the rental 20.68 This duality is especially important when an asset is for a house usually includes land rent. acquired under a financial lease. In this case, table 20.10 can be used to show both the change in value of the asset 10. A financial lease and the change in the loan taken out to pay for it. Cost benefit analyses of the merits of borrowing to acquire 20.66 The process of discounting future income streams to assets also depend on this sort of calculation. Unless the determine present value applies to financial assets as well asset can contribute at least as much to production as the as to non-financial assets. Consider an agreement with a interest due to the lender, it is not a good investment. Even bank to borrow 1 000 over a period of five years at five per if a producer has sufficient funds available to purchase an cent interest. The total amount to be paid to the bank will be asset without borrowing, it makes sense to undertake such 1 100 at a rate of 220 per year. But, as table 20.10 shows, an analysis since the alternative to acquiring the asset is to each year's payment does not consist of repayment of convert the funds to an asset that will either earn income or principal of 200 and interest of 20. Interest is payable on appreciate and yield holding gains. the remaining balance, so is highest in the first year and is zero in the last year. (This is a result of the simplifications Table 20.10: The case of a financial loan used in the chapter. In practice, interest would be charged daily and so even in the last year some interest would be Interest rate 5% payable. However, the way in which the balance between Year 1 Year 2 Year 3 Year 4 Year 5 Sum of 5 years interest and repayment of principal changes over time as Contribution to loan value the loan is repaid holds.) from payments due in : Year 1 220 Year 2 210 220 20.67 The arithmetic behind table 20.10 is indistinguishable from Year 3 200 210 220 Year 4 190 200 210 220 any of the other tables in this chapter demonstrating that the Year 5 181 190 200 210 220 same principles hold for valuing financial assets as for non- Loan value in year 1000 819 629 430 220 financial assets. The same methodology that can be used to Repayment of principal 181 190 200 210 220 1000 Interest 39 30 20 10 0 100 show how much of the contribution to production is E. A supplementary table on capital services 20.69 This section describes a table that could be compiled to c. The general preference for an age-efficiency approach compare data coming from the standard national accounts to determine the value of capital stock should not be tables for the elements of gross value added with those taken to mean that information on age-price decline, derived from applying the theory of capital services to the when such exists, is to be ignored. The solution is to national accounts data on capital stock. Before presenting find an age-efficiency pattern that matches the the table, though, it is appropriate to recall briefly the observed decline in prices. Where such a match can be various simplifying assumptions that underlie the numeric made, this may inform the choice of age-efficiency examples in the earlier part of the chapter, assumptions that declines where no matching price information is would be totally inappropriate in serious estimation of available. capital service flows. The most important are: 20.70 There is a question about the appropriate level of detail to a. Somewhat different figures would emerge if any of the be used for assets. They are very diverse and even products tables were to be calculated for the start of year, end of that appear superficially similar, such as aircraft, may have year or mid-year. Mid-year flows need to be discounted quite different specifications. This is a problem that must by half the annual discount rate to give start of year be resolved whatever means of determining a stock figure figures, for example. for assets is used. The final choice may be a source of inaccuracies, or conversely, may lead to extra resource cost b. The assumption that there is no price inflation, either for little improvement in the results. overall or between different assets, is clearly unrealistic. Changes due to price movements need to be 20.71 The first level of detail that might be examined is given in separately identified and included in the revaluation table 20.11. This assumes that information on value added account. by institutional sector is available. The figures for operating 424 Capital services and the national accounts surplus for non-financial and financial corporations may be consumption of fixed capital and net operating surplus is compared with capital services from fixed assets used by zero (possibly excepting small amounts of operating these sectors adjusted as necessary for natural resources surplus coming from secondary market production). The and inventories. The figures for general government and capital services for household dwellings should match NPISHs in the national accounts data and those for capital operating surplus for households and the figure for capital services data must be equal. This is because by convention services for other household unincorporated enterprises is no return to capital on assets used in non-market production to be compared with the national accounts figure for mixed is included when output is estimated as the sum of costs. income (which should include a labour compensation Consequently gross operating surplus is equal to the element also). Table 20.11:The outline of a possible supplementary table Consumption of National accounts data Total/Gross fixed capital Net Gross value added Compensation of employees Mixed income Operating surplus Non-financial corporations Financial corporations General government NPISHs Households Taxes less subsidies on production Capital services Capital services Decline in value Return to capital Fixed assets Market producers (excluding households) Non-financial corporations Financial corporations Non-market producers General government NPISHs Households Dwellings Other unincorporated enterprises Natural resources Inventories 425 System of National Accounts 426 Chapter 21: Measuring corporate activity A. Introduction 21.1 The purpose of this chapter is to discuss aspects particular 21.5 Section F looks at the consequences of financial distress to corporations in both the financial and non-financial and the implications of remedial action for recording within corporation sectors. It begins in section B by discussing the the SNA. demography of corporations; how they come about, how they disappear and how they merge with one another. The 21.6 The last section, section G, covers a rather different subject consequences of these actions in the SNA are almost all to and looks at the emergence of commercial accounting standards over the last several years and how the process of do with recording the acquisition of the owner's equity in developing new standards can be instrumental in helping to corporations and in some cases reclassification of assets develop new approaches within the SNA. and liabilities between sectors. 1. A note on terminology 21.2 Section C looks at some subsectoring of corporations and how this can be effectively deployed for analysis. 21.7 As explained in section B of chapter 4, the term corporation is used in the SNA to cover a wide variety of legal forms of institutional units. In addition, the expression enterprise is 21.3 Section D considers the relationships between corporations used in connection with production activities. While in the domestic economy and in the rest of the world. Much corporation is normally the term of preference in the SNA, of this section is concerned with aspects of globalization other documents, notably the BD, tend to use enterprise in and the derivation of relevant indicators. preference to corporation. Further, the register of all enterprises or corporations is usually called a business register, even though "business" is not a term commonly 21.4 Section E recalls some of the discussion in chapter 20 and used in national accounts. In this chapter, all three terms are looks further at the contribution of assets to production. used without implying a difference between them. B. The demography of corporations 21.8 Maintaining a list of corporations is similar to maintaining incorporated. (The exact process of incorporation, such as a list of all individuals present in the country in that it is when this may or must happen and how it is effected, will necessary to record new corporations as they come into depend on the company law in effect in the country being and to record those that cease to be. A business concerned.) When this happens, the assets and liabilities register normally serves an administrative function in that were previously indistinguishably part of the keeping track of the existing businesses in the economy but household are separated off and become those of the also serves as the basic sampling frame for surveys directed corporation. In return for giving up control of these assets, at businesses. Thus it is normal for a business register to and responsibility for the liabilities, the household acquires contain information on the activity, size, location, etc. of equity in the new corporation, initially exactly equal in each business and to note when the main activity of a value to the assets and liabilities transferred to the corporation changes from one type of activity to another. In corporation. Once an enterprise is incorporated, the owning addition a business register may also include information household no longer has a claim on the assets and has no on the links one corporation may have to other resident and responsibility for the liabilities but instead owns the equity non-resident corporations. in the corporation. 1. The creation of corporations 21.10 An individual may simply decide to set up a business, set up a legal entity and begin operations. Initially, there may 21.9 Corporations can come into being in a number of ways. be no assets of the entity and no liabilities but as these One is when what was previously an unincorporated accrue they belong to the corporation and the owner's enterprise within the household sector becomes equity changes correspondingly. On a larger scale, there 427 System of National Accounts may be an agreement between a number of units, one or may choose simply to make it an unlisted corporation but more of whom propose a business plan and one or more of still one with the limited liability that comes with whom agree to finance the operation. A formal agreement incorporation. results in which the split of the rewards from the corporation's activity is determined and also the division of 21.16 A third way in which a corporation may disappear is the responsibilities. The assets of the new corporation are through it being merged with another corporation, though a recorded as being acquired by it and an amount of owner's merger does not automatically imply the merged equity in the corporation incurred as a liability towards the corporation disappears. This too is discussed below under parties supplying the finance is also recorded. mergers and acquisitions. 21.11 It is not necessary for the corporation to issue shares for the 3. Nationalization and privatization agreement on the share of the profit arising from the activities of the corporation to be binding. Cooperatives 21.17 The government may decide to take ownership of a and limited liability partnerships are two examples of units corporation for a number of reasons, either because it is felt the SNA treats as corporations where the way in which it is in the public interest for government to control the profits are shared between the owners is clear even though corporation, in response to financial distress or for other there are formally no shares. political motivations. When this happens the ownership of the corporation passes to the government, that is the 21.12 Corporations may also come into being at the initiative of government acquires the equity in the corporation, but the government, an NPISH or a unit in another economy. In assets of the corporation remain on its balance sheet unless addition, a corporation may come into existence by the the government decides to nationalize the corporation and splitting of a previously existing corporation. This disband it at the same time. Often but not always, possibility is discussed below under mergers and government may make a payment to the previous owners of acquisitions. the corporation but this may not necessarily correspond to their view of a fair price. Unless the corporation is 2. The dissolution of corporations dissolved, the process of nationalization leads to a change in the ownership of the corporation from private units to the government but the assets and other liabilities of the 21.13 Similarly there are several ways in which corporations may corporation continue to be owned by the corporation. go out of existence. The first is when an entity is wound up Owners' equity in the corporation is recorded as a after having been declared bankrupt. (The exact process transaction in the financial account. There is also a varies from country to country. In some countries a reclassification of the assets and liabilities of a corporation declaration of bankruptcy means the corporation must stop being nationalized from the national private subsector to trading immediately and the process of winding up its the public subsector recorded in the other change in the affairs begins. In other countries, there may be a time lag volume of assets account. while the corporation has an opportunity to continue trading while it tries to recover its position and only if this fails is it wound up.) When a corporation is wound up, the 21.18 The government may also decide to privatize a corporation receiver (the unit responsible for administering the it currently controls. When this happens the most usual liquidation of the corporation) sells all of its assets and mechanism is that its shares are offered to the public either distributes the proceeds amongst those having a claim on for sale or, in some cases, without charge or perhaps at a the corporation in a legally predetermined order. The price lower than the market would bear. When shares are shareholders are always the last to be allocated any offered free or at a reduced price, a capital transfer from proceeds. In the case where the corporation is bankrupt it is government to the eventual shareholders needs to be quite common that the shareholders receive nothing. Only recorded in the accounts as well as the acquisition of in very exceptional circumstances will the shareholders shares. As with nationalization, only the equity in the have any responsibility to provide funds towards settling corporation changes hands, not its assets and other other liabilities of the corporation. liabilities, and the change in ownership of the equity is recorded as a transaction in the financial account. The ownership of the assets and liabilities remains with the 21.14 A corporation may be wound up voluntarily by its owners. corporation but they are reclassified from the public to When this happens the assets are sold and the proceeds are national private subsector in the other changes in the divided amongst the owners according to the shares each volume of assets account. has in the corporation. If the corporation is one that had issued shares, it can only be wound up if a clear majority of shareholders agree or if a clear majority of the shares are 21.19 There is more discussion on nationalization and first acquired by a sufficiently small number of units who privatization in chapter 22. can reach agreement to wind up the corporation. 4. Mergers and acquisitions 21.15 The acquisition of all shares of a corporation need not be a preliminary to the corporation ceasing to exist; it may 21.20 The process of corporations merging and de-merging is of simply continue with a smaller number of shareholders or interest within an economy but especially interesting when even as a private unlisted corporation. The advantage of the merger (or de-merger) involves units in different remaining incorporated is that there is a limit to the liability economies. Foreign direct investment can hardly be of the owners to meet any shortfall on the corporation's discussed without considering the subject of mergers and balance sheet. Thus even when an individual or group of acquisitions. Some of the expressions commonly used in individuals wants to control the whole of a corporation they this field are listed below. The descriptions come from the 428 Measuring corporate activity BD but similar concepts appear also in the BPM6. (A belonging to the same sector of activity) may also result revised version of the BD was released in 2008. It is in a hostile takeover. consistent with both the SNA and BPM6.) Elaborating recommendations for the recording of mergers and acquisitions within the SNA is part of the research agenda. b. A reverse takeover refers to an operation where the target corporation is bigger than the acquiring corporation. 21.21 A merger refers to the combination of two or more corporations to share resources in order to achieve common 21.23 A divestment (de-merger) refers to the selling of the parts objectives. A merger implies that, as a result of the of the corporation due to various reasons: operation, only one entity will survive and frequently occurs following an acquisition (described below). There are several types of merger possible. a. A subsidiary or part of the corporation may no longer be performing well in comparison to its competitors; a. A statutory merger relates to the business combination where the merged (or target) corporation will cease to b. A subsidiary or a part may be performing well but may exist. The acquiring corporation will assume the assets not be well positioned within the industry to remain and liabilities of the merged corporations. In most competitive and meet long-term objectives; cases, the owners of merged corporations remain joint owners of the combined corporation. c. Strategic priorities of the corporation to remain competitive may change over time and lead to divestments; b. A subsidiary merger relates to an operation where the acquired corporation becomes a subsidiary of the parent corporation. In a reverse subsidiary merger, a d. Loss of managerial control or ineffective management; subsidiary of the acquiring corporation will be merged into the target corporation. e. Too much diversification may create difficulties and thus lead the parent corporations to reduce the c. Consolidation is a type of merger which refers to a diversification of its activities; business combination whereby two or more corporations join to form an entirely new corporation. f. The parent corporation may have financial difficulties All corporations involved in the merger cease to exist and may need to raise cash; and their shareholders become shareholders of the new corporation. The terms consolidation and merger are frequently used interchangeably. However, the g. Divestments may be realized as a defence against a distinction between the two is usually in reference to hostile takeover. the size of the combining corporations. Consolidation relates to an operation where the combining 21.24 Corporate divestments can be conducted in different ways: corporations have similar sizes while merger generally implies significant differences. a. A corporate sell-off is the sale of a subsidiary to buyers that are other corporations in most cases. d. A reverse merger is a deal where the acquiring corporation ceases to exist and merges into the target corporation. If a corporation is eager to get public b. A corporate spin-off occurs when the divested part of a listing in a short period of time, it can buy a corporation corporation is floated on the stock exchange. The newly with listed shares and merge into it in order to become a floated corporation is separately valued on the stock new corporation with tradeable shares. exchange and is an independent corporation. The shares in the newly listed corporation are distributed to the shareholders of the parent corporations who thereafter e. A merger of equals is a type of merger where the own shares in two corporations rather than one. corporations involved are of similar size. c. An equity carve out is similar to a corporate spin-off 21.22 An acquisition is a transaction between two parties based but the parent retains the majority control. This form on terms established by the market where each corporation has the advantage of raising cash for the divestor. acts in its own interest. The acquiring corporation achieves control of the target corporation. The target corporation d. Management buy-outs and buy-ins occur when the becomes either an associate or a subsidiary or part of a buyer is the manager or a group of managers of the subsidiary of the acquiring corporation. corporation that is being sold off. a. A takeover is a form of acquisition where the acquiring 21.25 In all these cases, transactions in the equity of the two corporation is much larger than the target corporation. corporations involved need to be recorded in the financial The term is sometimes used to designate hostile account and, possibly, a change of classification by sector transactions. However, mergers of equals (in size or in the other changes in the volume of assets account. 429 System of National Accounts C. Subsectors 21.26 The subsectoring of the corporations sectors is discussed in 21.28 In identifying publicly controlled corporations, there is a chapter 4. It is proposed that there should be a three-way question about how to provide long time series if there has split of corporations between those that are national private been a significant change in the number and type of corporations, those that are controlled by the government corporations subject to public control during the period. It and those that are foreign controlled. Within each of these it is usual to provide a time series that includes only those is desirable to identify market non-profit institutions corporations that were subject to public control at each period in question. Because interest usually focuses on how (NPIs). much of the corporate sector was controlled by the government, and how this has changed over time, this gives 21.27 The reason for identifying NPIs is twofold. In the first an appropriate picture. However, if the intent is to explore place, in order to have a comprehensive picture of NPIs, as the behaviour of the same group of corporations over time a supplementary table may be prepared that takes the current described in chapter 23, it is necessary to be able to identify definition of publicly controlled corporations and uses this those market NPIs that are assigned to the corporations set of corporations over the time period considered sector. Identifying them separately may be unexpected to regardless of whether or not they were publicly controlled some users, since there is often a misconception that all for the whole of that period. NPIs are non-market and fall in the NPISH sector. The other reason for identifying NPIs separately is that for some 21.29 Identifying foreign controlled corporations is key to analyses it may be desirable to analyse corporations looking at the interaction between the domestic economy excluding the NPIs if it is felt that their economic and the rest of the world. Exploring this in greater detail is behaviour is significantly different. the subject of the following section. D. Relations between corporations in different economies 21.30 Deregulation of markets, technological innovations and c. Associated income flows between enterprises that are cheaper communication tools have allowed investors to related through a direct investment relationship, and diversify their participation in competitive markets overseas. In consequence, a significant increase in cross- d. Other changes in the value of assets, especially border financial movements including direct investment revaluation terms. has become a key factor in international economic integration, more generally referred to as globalization. 21.34 Direct investment is a category of cross-border investment associated with a resident in one economy (the direct 21.31 Regular analysis of direct investment trends and investor) having control or a significant degree of influence developments is an integral part of most macroeconomic on the management of an enterprise (the direct investment and cross-border financial analysis. It is of prime enterprise) that is resident in another economy. importance to policy analysts to identify the source and destination of these investments. Several indicators based 21.35 Direct investment may also allow the direct investor to gain on direct investment statistics facilitate the measurement of access to the economy of the direct investment enterprise the extent and impact of globalization. which it might otherwise be unable to do. The objectives of direct investors are different from those of portfolio 1. Foreign direct investment investors who do not have significant influence on the management of the enterprise. 21.32 Foreign direct investment (FDI) is a key feature of the 21.36 Direct investment enterprises are corporations which may balance of payments and it is useful to review some of the either be subsidiaries in which over 50 per cent of the basic concepts associated with this. Further details can be voting power is held, or associates in which between 10 per found in both BPM6 and the BD. In the context of FDI, the cent and 50 per cent of the voting power is held or they may term enterprise tends to be used rather than corporation, but be quasi-corporations, such as branches, which are as noted in the introduction, no difference of meaning is effectively 100 per cent owned by their respective parents. intended. Enterprises that have no direct investment influence upon one another (that is the 10 per cent voting power criterion is 21.33 Direct investment statistics embody four distinct statistical not met) but are directly or indirectly influenced in the accounts: ownership hierarchy by the same enterprise (which must be a direct investor in at least one of them) are described as fellow enterprises. a. Investment positions, 21.37 Direct investment relationships are identified according to b. Financial transactions, the criteria of the Framework for Direct Investment 430 Measuring corporate activity Relationships (FDIR, described in the BD), including both 21.43 FDI has a key role to play in development, especially in direct and indirect relationships, through a chain of emerging countries. In order to explore how much of global ownership. Suppose that corporation A controls FDI reaches these countries, and where it originates, a corporation B and B controls C then A in effect has control supplementary analysis is useful. Such an analysis over C also. identifies the country where the pass through funds originate by identifying the first unit other than a pass 2. FDI and globalization through fund in the host or investing economy (in the outward or inward chain) as appropriate. 21.38 Direct investment positions show an important class of investment made abroad and received from abroad, divided 4. Ultimate investing country between equity and debt, at a given reference point in time. FDI positions as a percentage of GDP give one indication 21.44 Presentations of FDI according to the BD show the country of the extent of globalization at that time. These structural of the immediate counterparty and the industry of the indicators demonstrate the interdependence of economies. immediate counterparty for outward FDI. For inward FDI, it is possible to determine not only the immediate 21.39 Financial transactions show the net inward and outward counterparty but also the ultimate investor. The ultimate investments with assets (acquisitions less disposals or investor for this purpose is the enterprise that has control redemptions) and liabilities (incurrence less discharges) over the investment decision to have an FDI position in the presented separately by instrument in any given period. direct investment enterprise. As such the ultimate investor FDI financial transactions expressed as a percentage of controls the immediate direct investor. It is identified by GDP provide one indicator of the changes over that period proceeding up the immediate direct investors ownership in the degree of globalization of an economy. This indicator chain through the controlling links (ownership of more than provides early information on the relative attractiveness of 50 per cent of the voting power) until an enterprise is economies (both domestic and foreign) for new reached that is not controlled by another enterprise. If there investments after allowing for the withdrawal of is no enterprise that controls the immediate direct investor, investments or disinvestment during the same time period. then the direct investor is effectively the ultimate investor in the direct investment enterprise. 21.40 Direct investment income provides information on the earnings of direct investors and of the direct investment 21.45 The country in which the ultimate investor is resident is the enterprises. Direct investment earnings arise (i) from ultimate investing country in the direct investment distributed earnings as well as undistributed earnings which enterprise. It is possible that the ultimate investor is a are treated as reinvestment of earnings in that enterprise resident of the same economy as the direct investment and (ii) from interest on inter-company loans, trade credit enterprise. (A controls B controls C. A and C are resident in and other forms of debt. FDI income flows as a percentage the same economy but B is resident in another.) of GDP provide information on the relative importance of the earnings of direct investment in both the reporting 21.46 In order to transform the usual presentation by country to economy and abroad. the supplementary ultimate investing country presentation, the entire FDI position that is attributed to the country of 3. The role of "pass through funds" residence of the immediate direct investor is allocated to the ultimate investing country. When there is more than one immediate direct investor in a direct investment enterprise, 21.41 "Pass through funds" or "funds in transit" are funds that the entire inward FDI position of each immediate direct pass through an enterprise resident in one economy to an investor is reallocated to the respective ultimate investing affiliate in another economy, so that the funds do not stay in country based on the ultimate controlling parent of each of the economy of the affiliate. These funds are often the immediate direct investors. This method ensures that associated with direct investment. Such flows have little the levels of direct investment into a country according to impact on the economy they pass through. While special the standard presentation and according to the purpose entities, holding companies and financial supplementary presentation are the same. institutions that serve other non-financial affiliates are particularly associated with funds in transit, other enterprises may also have pass through funds in direct 5. Multinational enterprises investment flows. 21.47 As well as information relating to foreign direct investment 21.42 Pass through funds are included in direct investment in where only a 10 per cent voting power is required to standard presentations because they are an integral part of a identify a foreign direct investor, there is interest in direct investor's financial transactions and positions with analysing the activities of multinational enterprises (MNEs) affiliated enterprises. (An exception is made for positions where more than 50 per cent of the voting power is held. in debt instruments between related financial institutions.) Thus the MNEs correspond to foreign controlled Excluding these funds from direct investment would distort enterprises in the sense of subsectors in the SNA. (There is and substantially understate direct investment financial a small distinction between the BD and BPM6 and the SNA flows and positions at aggregate levels. Further, inclusion on the question of control. For the BD and in the BPM6, the of these data in direct investment promotes symmetry and 50 per cent of voting power rule is applied rigidly but the consistency among economies. However, for the SNA is more flexible. See chapter 4.) economies through which the funds pass, it is useful to identify inflows and outflows not intended for use locally 21.48 In addition to statistics on the activities of MNEs, statistics by the entity concerned. are also available for the wider group of corporations with 431 System of National Accounts links in other economies, not just those where there is 21.50 However, if A and B both belong to the same group of majority ownership, called foreign affiliates. These corporations, then it may be the case that there is a transfer statistics are known as Foreign AffiliaTes Statistics of the risks and rewards of the items on their dispatch from (FATS), and are described in Recommendations Manual on A to B. The question is whether a realistic price is entered the Production of Foreign AffiliaTes Statistics (FATS) for the items in the trade figures for both A (and X) and B (Eurostat, 2007) and elaborated in Measuring Globalisation: Handbook on Economic Globalisation (and Y) as the items move internationally. When A and B Statistics (Organisation for Economic Co-operation and are related, a practice known as "transfer pricing" is Development, 2005). Work is continuing to ensure the sometimes used. Suppose the tax regime in Y is more consistency of the various sets of statistics cited in these liberal than that in X. It may then be the case that A and other publications on globalization. artificially lowers the price of the items dispatched to B in order to minimize profits in X while B records a higher 6. Outsourcing profit subject to the lower tax regime in Y. In principle, international accounting standards and the balance of 21.49 There are two ways in which a corporation A in economy X payments recommendations indicate that items transferring may have another corporation B in economy Y assemble across borders should be valued at "arm's length" prices, parts for it. Although the effect appears similar, the that is to say prices that would prevail if there were no consequences for recording in the accounts are quite relationship between the two corporations involved. different. Suppose that A and B are unrelated enterprises, Making such an adjustment is not easy but it is in the and B contracts to do work for A in return for a fee. (This case is described elsewhere, for example in chapter 28.) In interests of tax authorities, customs officials and the this case there is no recorded transfer of the items from A to statistician to see whether appropriate adjustments can be B (or X to Y). Only the agreed fee is recorded as a made if the sums involved are significant and adjustments transaction between the two economies. can be made with sufficient reliability. E. The contribution of assets to production 21.51 Chapter 20 discusses the role of capital services in the balance sheet of the enterprise. However, assets that are production and the calculation of multifactor productivity leased under an operating lease agreement are excluded. (MFP). The assets to be considered in calculating This may mean two enterprises undertaking similar productivity are those fixed assets that are both owned and activities using similar assets may show different used by the enterprise plus any natural resources and other productivity figures because one uses assets it owns and the non-produced assets including contracts, leases and other assets that it leases. An area for supplementary licences and possibly marketing assets they both own and analysis is to consider compiling information on assets use in production. Assets that are not legally owned by the according to the using rather than the owning industry and enterprise but are subject to a financial lease are included in to look at the implications for operating surplus and the calculations in the same way that they are recorded on productivity of the use of leased rather than owned assets. F. The consequences of financial distress 21.52 Signs that a non-financial corporation is suffering financial instance where government steps in and offers either to take distress include the level of profits that it has been over the corporation, in effect nationalizing it, or may offer generating recently and possibly the level of dividends it is a major capital injection in return for a degree of control, able to offer. It is also probable that it suffers a cash flow possibly full control, of the corporation. The recording of problem and is unable to meet its liabilities on a timely nationalization and capital injections by government as basis. Competitors may take the opportunity to launch a well as of the steps that may be taken under a bailout are takeover bid. However, if no takeover bid is offered the discussed in chapter 22. question here is how the corporation may survive at all. 21.55 Another possibility is that the government offers a 21.53 In a similar way, a financial corporation may suffer guarantee to the creditors of the corporation in distress. The financial distress because it has difficulty in raising finance activation of a one-off guarantee is treated in the same way and is unable to service its liabilities. Again this is a as a debt assumption. The original debt is liquidated and a circumstance in which a competitor may launch a takeover new debt is created between the guarantor and the creditor. bid but this may not always be forthcoming. In most instances, the guarantor is deemed to make a capital transfer to the original debtor, unless the guarantor 21.54 If the corporation, whether financial or non-financial, is acquires an effective claim on the creditor, in which case it deemed to be of national importance this may be an leads to the recognition of a financial asset (a liability of the 432 Measuring corporate activity debtor). The recording of guarantees including those The SNA recommends that memorandum items be offered by government is discussed in part 3 of chapter 17. compiled for the accounts showing the nominal and market value of bad loans and the implications for interest flows, the amount of interest accruing on the nominal value, the 1. Bad debts amount of interest outstanding from previous periods and the amount relating to the current period that is unpaid. The 21.56 All corporations, but especially financial corporations, may proposed memorandum items are discussed in paragraphs suffer from bad debts and this phenomenon may be 13.67 to 13.68. particularly acute when other aspects of the economy also exert financial pressure on the corporation. Within the 21.58 Elaborating the accounting for assets where the market SNA, loans are always recorded as the amount that is due to value suddenly diverges from past trend values and the be repaid to the creditor. In cases where the debtor has a whole question of when it might be appropriate to define bad credit rating this may overstate the market value of the and use "fair values" is one item on the research agenda as loan. This is seldom done on a loan by loan basis but is explained in annex 4. In addition, circumstances emerging regularly done for classes of loans. from the credit crisis that emerged in 2008 will continue to be monitored to see if other memorandum items or other 21.57 The SNA identifies a subset of bad debts as non- steps should be recommended. performing loans. As explained in paragraph 13.66, these are loans whose payments of interest or principal are past 2. Concessional lending and debt rescheduling due by 90 days or more or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, 21.59 There is detailed discussion of government's role in but there are other good reasons (such as a debtor filing for concessional lending and debt rescheduling in section D of bankruptcy) to doubt that payments will be made in full. chapter 22. G. Links to commercial accounting 21.60 In recent years, the International Accounting Standards 21.63 Since it is inevitable that national accounting information Board (IASB) has become increasingly important as the for large companies in particular must be drawn from data standard setter for commercial accounting. The IASB compiled according to the international accounting promulgates International Financial Reporting Standards standards, it would be advantageous for the national (IFRS) and at present more than 100 countries are involved accounts community to take a greater interest in the three in this process of harmonization. Many large companies, stages of developing international accounting standards and contribute their points of view. especially multinationals, already apply these international accounting standards. 21.64 For multinational enterprises, the standard accounts may be available only for the group as a whole where relationships 21.61 The principles underlying the IFRS are in most cases between enterprises in different countries have been entirely consistent with the principles of the SNA. In consolidated. In this case, national accountants would need particular, it is worth noting that the introduction to the to consult other sources for the required non-consolidated standards explains that economic substance should take data. precedence over legal form. The IFRS, like the SNA, pays attention not only to the conceptually preferred approach 21.65 Two particular areas where the IFRS adopts approaches but also practical possibilities. somewhat different from the SNA are in the area of the recognition of holding gains and losses as income and in the recording of provisions and contingent liabilities. 21.62 The process of developing a new standard is a threefold Further examination of the IASB position could be helpful one. In the first step, a document discussing the arguments in refining the SNA treatment of these issues, if not by for and against a new standard is proposed and it is released accepting the IASB position entirely, at least by showing a with an invitation to comment. Once the comments are reconciliation between their position and that of the SNA. received and analysed, if it is decided to proceed, an exposure draft is prepared and posted for global comment. 21.66 In addition to the IASB that sets standards for private Only if the exposure draft receives substantial favourable corporations, the International Public Sector Accounting comment is a formal standard developed. At each stage, the Standards Board (IPSASB) performs a similar function for documentation available discusses the background to the government bodies. There is reference to the IPSASB in standard as well as its formal wording. chapter 22. 433 System of National Accounts 434 Chapter 22: The general government and public sectors A. Introduction 22.1 A major strength of the SNA is the ability to compile the economy that would not be covered otherwise by means accounts for whole sectors, individual units, or some of subsidized prices. As a result, the public corporation intermediate levels and to aggregate the accounts in may operate with a reduced profit or at a loss. different ways. Disaggregating the economy into various sectors and subsectors makes it possible to observe and 22.6 In order to analyse the full impact of government on the analyse the interactions between the different parts of the economy, therefore, it is useful to form a sector consisting economy for purposes of policymaking. Particular interest of all the units of general government and all public is given to the general government sector, as defined in corporations. This composite sector is referred to as the chapter 4 and the public sector, as defined in this chapter. public sector. Many of the concepts in this chapter have been described in a number of previous chapters. This chapter aims to bring 22.7 For the general government and the public sectors, in these together, give some more elaboration on how they addition to the usual sequence of accounts of the SNA, the might be put into practice and gives a link to other systems accounts can be presented in a manner that is more suitable of economic statistics particularly aimed at government for government finance analysts and policymakers. The such as the GFSM2001, the ESA95 Manual on Government latter increasingly use aggregates and balancing items Debt and Deficit (Eurostat, 2002a) and the External Debt defined in terms of the concepts, definitions, classifications Guide. and accounting rules of the SNA so that these aggregates can be related to other macroeconomic variables and 22.2 The powers, motivation and functions of government are compared with the same items in other countries. Some of different from those of other sectors. Governments use their these items, such as saving and net lending or borrowing, powers to pass laws affecting the behaviour of other are already available in the sequence of accounts. Other economic units. They are able to redistribute income and items, such as total revenue, total expense and total outlays, wealth largely by means of taxes and social benefits. The the tax burden, the net operating balance and total debt, do accounts for the general government sector show how not appear as such in the SNA. Aggregates and balancing goods and services provided to the community as a whole items of this nature can be used to assess the use of or to individual households are financed mainly by revenue resources to produce individual and collective services, the raised. The range of goods and services government need to collect taxes and other revenues, the ability of provides and the prices charged are based on political and government to borrow and repay debt and the sustainability social considerations rather than on profit-maximization. of the desired level of government operations. 22.3 Fiscal operations are carried out by the government and 22.8 The present chapter gives an overview of this so-called financed through the budget under the usual budgetary public finance or government finance presentation of the procedures. However, some operations originated by accounts. In order to derive this presentation, the government units may require the intervention of entities transactions in the SNA current and capital accounts are which are not ruled by the legal government framework, rearranged to derive aggregates and balancing items of including public corporations. These actions may be specific interest to the general government and public described as quasi-fiscal activities. sectors. For example, a combination of taxes, user fees and grants from other governments can be aggregated to form 22.4 Operations related to privatization and restructuring public total revenue, as the amount available from operations to corporations, securitization of assets using the intervention fund government services. of special purpose entities, including those abroad, may be described in this way. Though such operations are not 22.9 Section B summarizes the identification of government reported in the budget and might escape the usual control units and other units controlled by government units and procedures, they may have a significant impact on explains how those units are grouped into sectors in the government revenue and expenditure. SNA. 22.5 As well as providing services directly, governments often 22.10 Section C describes the presentation of government finance fulfil their public policy objectives through public statistics. corporations (for example, railways, airlines, public utilities and public financial corporations). A public 22.11 Section D addresses a number of accounting issues that are corporation may be required to provide services to areas of unique to, or exceptionally important for, government. 435 System of National Accounts 22.12 Finally, section E shows how information about the public accounting data can be transposed correctly into the sector may be prepared in a manner roughly parallel to the framework of the SNA. Such guidance is especially government finance statistics presentation described in important when the government financial accounts are section D. compiled on a cash basis and must be converted to an accrual basis to comply with the accounting basis of the 1. Data sources SNA. 22.13 In practice, macroeconomic accounts can seldom be built 2. Consolidation up by simply aggregating the relevant microdata. Government is an exception in that the statistics for government units and public corporations are often derived 22.14 As a rule, the entries in the SNA are not consolidated. directly from the microdata in government financial Consolidation involves the elimination of those accounting databases. As a result, compilers of statistics for transactions or debtor/creditor relationships that occur the government units and public corporations usually draw between two transactors belonging to the same institutional more heavily on accounting information than the results of sector or subsector. As stated in chapter 3, however, statistical enquiries. In particular, the development in recent consolidation may be relevant for the general government years of International Public Sector Accounting Standards sector. For example, information on debt owed by by the International Public Sector Accounting Standards government units to units outside the general government Board of the International Federation of Accountants has sector may be more relevant than gross figures that include increased the need for clear guidance on the compilation of debt owed to other government units. Guidance on government finance statistics so that the detailed consolidation is provided in Section C. B. Defining the general government and public sectors 22.15 General government units include some NPIs and public received as transfers from other government units and it enterprises not treated as corporations. The public sector must have the authority to disburse some, or all, of such includes general government and public corporations. To funds in the pursuit of its policy objectives. It must also identify which NPIs are included in general government, be able to borrow funds on its own account. conditions for control by government must be identified. To determine which enterprises are treated as public b. Government units typically make three different kinds corporations and which as part of general government, it is of final outlays: necessary to specify conditions for control by government and the concept of economically significant prices. · The first group consists of actual or imputed expenditures on the free provision to the community of 22.16 In order to identify the units falling in both the general government sector and the public sector, it is helpful to collective services such as public administration, begin by restating the definition of government units given defence, law enforcement, public health, etc. that are in paragraphs 4.117 to 4.118). The discussion on what is organized collectively by government and financed out meant by control by government and economically of general taxation or other income. significant prices follows. · The second group consists of expenditures on the 1. Government units provision of goods or services free, or at prices that are not economically significant, to individual households. 22.17 Government units are unique kinds of legal entities These expenditures are deliberately incurred and established by political processes that have legislative, financed out of taxation or other income by government judicial or executive authority over other institutional in the pursuit of its social or political objectives, even units within a given area. Viewed as institutional units, the though individuals could be charged according to their principal functions of government are to assume usage. responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes, to redistribute · The third group consists of transfers paid to other income and wealth by means of transfers, and to engage in institutional units, mostly households, in order to non-market production. In general terms: redistribute income or wealth. a. A government unit usually has the authority to raise 22.18 Within a single economy when there are different levels of funds by collecting taxes or compulsory transfers from government at central, state or local levels, there may be other institutional units. A government unit must have many separate government units. Social security funds also funds of its own either raised by taxing other units or constitute government units. 436 The general government and public sectors 22.19 In all countries, there is an institutional unit of the general maintenance of standards in fields such as health, safety, government sector important in terms of size and power, in the environment and education are areas in which NPIs particular the power to exercise control over many other may be more effective than government agencies. units. This unit is often referred to as national government and the unit covered by the main budget account. It is a 22.23 The case of units engaged in financial activities needs single unit of the central government that encompasses the special consideration. As described in paragraph 4.67, a fundamental activities of the national executive, legislative unit set up by government with functions similar to a and judiciary powers. Its revenues as well as its expenses captive financial institution is treated as an integral part of and expenditures are normally regulated and controlled by general government and not as a separate unit if it has no a Ministry of Finance or its functional equivalent by means powers to act independently, is restricted in the number of of a general budget approved by the legislature. Most of the transactions it can engage in, does not carry the risks and ministries, departments, agencies, boards, commissions, rewards associated with the assets and liabilities it holds judicial authorities, legislative bodies and other entities that and is resident in the same economy. If the unit is non- make up this central government unit are not separate resident, it is treated as a separate unit but the transactions it institutional units but are part of this primary central undertakes as quasi-fiscal operations are reflected in government unit. This is because they generally do not transactions between that unit and the government. In have the authority to own assets, incur liabilities, or engage particular, if the non-resident unit borrows abroad, it is in transactions in their own right. If there are state or local regarded as lending the same amount to government and on governments then it is likely that each of these the same terms. governments will also have a primary government unit that includes the principal executive, legislative and judicial 22.24 At the same time, the general budget of any government powers. level might control market producers satisfying the criteria to be a quasi-corporation as defined below. These units 22.20 In addition, there may be government entities with a should not be classified in the general government sector, separate legal identity and substantial autonomy, including but in the non-financial or financial corporations sector, as discretion over the volume and composition of their appropriate. As public units, they are, however, part of the expenses and outlays and a direct source of revenue, such public sector. as earmarked taxes. (The terms expense, outlay and revenue are commonly used in the presentation of government accounts. Their definitions and relationship to 2. NPIs controlled by government SNA concepts are covered in section C.) Such entities are often established to carry out specific functions, such as 22.25 The criteria for deciding whether an NPI is controlled by road construction or the non-market production of health or government or not is described in paragraph 4.92. They are education services. These entities should be treated as summarized here for convenience. separate government units if they maintain full sets of accounts, own goods or assets in their own right, engage in 22.26 Control of an NPI is defined as the ability to determine the non-market activities for which they are held accountable at general policy or programme of the NPI. All NPIs allocated law and are able to incur liabilities and enter into contracts to the general government sector should retain their identity in their own right. Such units are often referred to as as NPIs in statistical records, to facilitate analysis of the extrabudgetary units because they have separate budgets complete set of NPIs. To determine if an NPI is controlled and any transfers from the main budget account are by the government, the following five indicators of control supplemented by their own sources of revenue. Budgets should be considered: vary widely among countries and various terms are often used to describe these units. These units are classified in the a. The appointment of officers; general government sector to the extent that they are non- market producers and are controlled by another government unit. b. Other provisions of the enabling instrument; 22.21 A social security fund is a particular kind of government c. Contractual agreements; unit that is devoted to the operation of one or more social security schemes. A social security fund must satisfy the d. Degree of financing by government; and general requirements of an institutional unit. That is, it must be separately organized from the other activities of e. Risk exposure. government units, hold its assets and liabilities separately and engage in financial transactions on its own account. A single indicator could be sufficient to establish control in some cases but sometimes a number of separate indicators 22.22 As noted earlier, NPIs that are non-market producers and may collectively indicate control. A decision based on the are controlled by a government are also units of the general totality of all indicators will necessarily be judgmental in government sector. Although they may legally be nature but the judgements should be consistent for similar established to be independent from government, they are cases. considered to be carrying out government policies and are effectively part of government. Governments may choose to use non-profit institutions rather than government 3. Corporations controlled by government agencies to carry out certain government policies because NPIs may be seen as not subject to political pressures. For 22.27 To be classified as a public corporation, a corporation must example, research and development and the setting and not only be controlled by another public unit, but it also 437 System of National Accounts must be a market producer. Control is defined as the ability 22.30 Because economic circumstances vary considerably, it may to determine the general policy or program of an be desirable to accept different thresholds to achieve institutional unit. Government is in a position to exercise consistent economic measurement over time, between units control over many kinds of units: miscellaneous and across countries. In principle, the distinction between extrabudgetary agencies, non-profit institutions and market and non-market should be made on a case-by-case corporations (non-financial or financial). The criteria for basis. control of a corporation are described in paragraphs 4.77 to 4.80. The key factors to be considered are 22.31 It can be presumed that prices are economically significant when the producers are private corporations. When there is a. Ownership of the majority of the voting interest; public control, however, the unit's prices may be modified for public policy purposes. This may cause difficulties in determining whether the prices are economically b. Control of the board or other governing body; significant. Public corporations are often established to provide goods that the market would not produce in the c. Control of the appointment and removal of key desired quantities or at the desired prices. Even when the personnel; sales of such corporations may cover a large portion of their costs, one can expect that they respond to market d. Control of key committees of the entity; forces quite differently than would private corporations. e. Golden shares and options; 22.32 It is likely that corporations receiving substantial government financial support, or that enjoy other risk reducing factors such as government guarantees, will act f. Regulation and control; differently from corporations without such advantages because their budget constraints are softer. A non-market g. Control by a dominant customer; and producer is a producer that faces a very soft budget constraint so that the producer is not likely to respond to changes in the economic conditions in the same way as h. Control attached to borrowing from the government. market producers. Although a single indicator could be sufficient to establish control in some cases, in others a number of separate Suppliers of goods and services to government indicators may collectively indicate control. A decision based on the totality of all indicators must necessarily be 22.33 The question arises whether units supplying goods and judgmental in nature, but the judgements should be services to government should be treated as market or non- consistent for similar cases. market producers. The essential question is whether the unit provides the goods and services in competition with private producers and the choice of supplier is based on 4. Economically significant prices price. This is true whether the supplier is the only supplier and whether the government is the only customer of the 22.28 To be considered as a market producer, a unit must provide supplier. all or most of its output to others at prices that are economically significant. Economically significant prices Definition of sales and costs are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy. These prices normally result 22.34 In order to assess whether a producer is a market producer, when: it is necessary to carry out a comparison between the receipts from sales and the production costs of the products. Sales are measured before any taxes applicable to the a. The producer has an incentive to adjust supply either products are added. Sales exclude all payments received with the goal of making a profit in the long run or, at from government unless they would be granted to any a minimum, covering capital and other costs; and producer undertaking the same activity. Own account production is not considered as part of sales in this context. b. Consumers have the freedom to purchase or not purchase and make the choice on the basis of the 22.35 Production costs are the sum of intermediate consumption, prices charged. compensation of employees, consumption of fixed capital and [other] taxes on production. Further, if the unit is to be 22.29 These conditions usually mean that prices are economically treated as a market producer, a return to capital is included significant if sales cover the majority of the producer's in production costs. Subsidies on production are not costs and consumers are free to choose whether to buy and deducted. how much to buy on the basis of the prices charged. Although there is no prescriptive numerical relationship between the value of output (excluding both taxes and 5. A decision tree for public units subsidies on products) and the production costs, one would normally expect the value of goods and services sold (the 22.36 Figure 22.1 shows the relationship between the general sales) to average at least half of the production costs over a government sector, the public sector and the other main sustained multiyear period. sectors of the domestic economy. 438 The general government and public sectors 22.37 As explained in paragraph 4.117, government units are government; in some cases more levels of government must established by political processes and have legislative, be accommodated within the three level structure. The judicial or executive authority over other institutional units other method of subsectoring is to exclude social security within a given territory. These units belong to the general funds from each level of government and have a separate government sector and so to the public sector also. In order subsector for social security funds covering all levels of to determine which other institutional units belong to the government. The choice of classification used will depend general government sector and which to the public sector, on whether social security funds are independent of the the decision tree described in figure 4.1 should be followed, level of government where they operate or not. using the following sequential questions: 22.40 Greater detail on subsectoring general government is given a. Is the entity of interest an institutional unit? If it is not, in section F of chapter 4. but is resident, then it is treated as part of the unit that controls it. If it is not an institutional unit but is non- resident it is treated as a quasi-corporation in the 7. Subsectors of the public sector economy in which it is resident. 22.41 It is possible to construct subsectors of the public sector to b. Is the unit a market or non-market producer according meet analytical demands. Two methods of subsectoring the to the criteria given immediately above? public sector may be considered. In the first, the public sector could be divided into the general government sector c. Is the unit controlled by government or another public as one subsector and the aggregate of all public corporation? corporations as a second subsector. The public corporations might be further divided into non-financial public 22.38 The answers to the last two questions lead to allocations to corporations, financial public corporations other than the sectors as follows: central bank, and the central bank. a. If the unit is a market producer and not controlled by 22.42 Secondly, the public sector could be divided by level of government it is a part of neither the general government in the same way as the general government government sector nor the public sector. sector is. In this case, the subsectors would be the central government public sector, the state government public b. If the unit is a market producer and controlled by sector and the local government public sector. Each of government or another public corporation, it is not part these subsectors would consist of the corresponding of general government but is part of the public sector. subsector of the general government sector plus all public corporations controlled by a unit of that level of c. If the unit is a non-market producer and controlled by government. If a unit is controlled in part by a unit at one government, it is part of the general government sector level of government and in part by a unit in another part of and the public sector. government, an allocation must be made to one or the other level of government depending on factors such as the degree of control exercised by each of the controlling units. d. If the unit is a non-market producer but not controlled Social security funds could form a separate subsector or by government, it is treated as an NPISH. It is a part of could be combined with each level of government. It neither the general government sector nor the public should be noted that if there is a separate fund to meet sector. government employee pensions, this fund should be excluded from social security funds. 6. Subsectors of the general government sector 8. Borderline cases 22.39 As described in chapter 4, the general government sector may be subsectored in either of two ways. One method is to 22.43 Specific guidance on when certain entities created by have up to three subsectors; one for central government, government units are to be included in the public sector or one for state government and one for local government not is needed. The entities concerned include quasi- with social security included at any level where relevant. In corporations, restructuring agencies, special purpose some cases there may be only one or two levels of general entities, joint ventures and supranational authorities. Figure 22.1:The public sector and its relation to institutional sectors Non-financial Financial General NPISHs Households corporations corporations government Public Public Public Private Private Private Private 439 System of National Accounts Quasi-corporations c. A unit that takes on low risk because it acts with strong public financial support and legally or effectively on behalf of the government is likely to be included within 22.44 Quasi-corporations are unincorporated enterprises that general government. function as if they were corporations. Quasi-corporations are treated in the SNA as if they were corporations: that is, as institutional units separate from the units to which they 22.48 Restructuring agencies may operate in a number of ways. legally belong. Thus, quasi-corporations owned by The following are two frequently-observed examples. government units are grouped with corporations in the non- financial or financial corporate sectors. 22.49 A restructuring agency may undertake the reorganization of the public sector and the indirect management of privatization. Two cases may be considered: 22.45 The intent behind the concept of a quasi-corporation is to separate from their owners those unincorporated enterprises that are sufficiently self-contained and independent of their a. The restructuring unit is a genuine holding company owners that they behave in the same way as corporations. If controlling and managing a group of subsidiaries and they function like corporations, they must keep complete only a minor part of its activity is dedicated to sets of accounts. Indeed, the existence or possibility to channelling funds from one subsidiary to another on construct a complete set of accounts, including balance behalf of the government and for public policy sheets, for the enterprise is a necessary condition for it to be purposes. The unit is classified as a corporation and the treated as a separate institutional unit, otherwise it would transactions made on behalf of the government should not be feasible from an accounting point of view to be rerouted through the general government. distinguish the quasi-corporation from its owner. b. The restructuring unit, whatever its legal status, acts as a direct agent of the government and is not a market 22.46 In order to be treated as a quasi-corporation the government producer. Its main function is to redistribute national must allow the management of the enterprise considerable income and wealth, channelling funds from one unit to discretion not only with respect to the management of the the other. The restructuring unit should be classified in production process but also the use of funds. Government the general government sector. quasi-corporations must be able to maintain their own working balances and business credit and be able to finance some or all of their capital formation out of their own 22.50 Another example of a restructuring agency is one mainly saving, financial assets or borrowing. The ability to concerned with impaired assets, mainly in a context of a distinguish flows of income and capital between quasi- banking or other financial crisis. Such a restructuring corporations and government implies that, in practice, their agency must be analysed according to the degree of risk it operating and financing activities must be separable from assumes, considering the degree of financing of the government revenue or finance statistics, despite the fact government. Again, two cases may be considered: that they are not separate legal entities. The net operating surplus of a government owned quasi-corporation is not a a. The restructuring agency borrows on the market at its component of government revenue and the accounts for own risk to acquire financial or non-financial assets government record only the flows of income and capital that it actively manages. In this case the unit should be between the quasi-corporation and government. classified as an institution in the financial corporations sector. The case of restructuring agencies b. The restructuring agency deliberately purchases assets at above market prices with direct or indirect financial 22.47 Some public units are involved in the restructuring of support from the government. It is primarily engaged in corporations, either non-financial or financial. These the redistribution of national income (and wealth), does corporations may or may not be controlled by government. not act independently of government or place itself at Restructuring agencies may be long-standing public units risk and therefore should be classified in the general or agencies created for this special purpose. Government government sector. may fund the restructuring in various ways, either directly, through capital injections (capital transfer, loan or Special purpose entities acquisition of equity) or indirectly, through granting guarantees. Units such as restructuring agencies have little output so the usual criterion of whether the output is market 22.51 Government units are always considered resident because, or non-market in determining when the unit is part of by definition, the economic territory of a country consists general government is not sufficient. Instead the following of the geographic territory administered by a government, propositions should be considered: as well as some territorial enclaves in the rest of the world, used by the government for diplomatic, military, scientific, or other purposes, normally with the formal agreement of a. A unit that serves only government is more likely to be the government of the country in which they are physically included in general government than one that deals located. These enclaves are part of the general government with other units also. sector. b. A unit that sells financial assets at other than market 22.52 Some governments may set up special purpose entities values is more likely to be in the general government (SPEs) for financial convenience, the SPE being involved sector than not. in fiscal or quasi-fiscal activities (including securitization 440 The general government and public sectors of assets, borrowing, etc.). Resident SPEs that function in 22.57 The principal question to be considered here is whether the only a passive manner relative to general government and effective economic control of the joint venture establishes a that carry out fiscal activities are not regarded as separate public or a private unit. If a joint venture operates as a non- institutional units in the SNA and are treated as part of market producer, it must be the case that government is in general government regardless of their legal status. If they effective control and it is classified as part of general act independently, acquire assets and incur liabilities on government. their own behalf, accepting the associated risk, they are treated as separate institutional units and are classified to 22.58 If the joint venture is a market producer, it is treated as a sector and industry according to their principal activity. public or private corporation according to whether it is or is not controlled by a government unit, using the same 22.53 Non-resident SPEs are always classified as separate indicators as described above. Normally, the percentage of institutional units in the economy where they are ownership will be sufficient to determine control. If the established. When such entities are created, care must be public and private units own an equal percentage of the taken to reflect faithfully the fiscal activities of the joint venture, the other indicators of control must be government. All flows and stock positions between the considered. general government and the non-resident SPE should be recorded when they occur in the accounts for general government and the rest of the world. 22.59 Public units can also enter into joint operating arrangements that do not involve establishing separate institutional units. In this case, there are no units requiring 22.54 A government may create a non-resident SPE to undertake classification, but care must be taken to ensure that the government borrowing or incur government outlays proper ownership of assets is recorded and any sharing abroad. Even if there are no actual economic flows arrangements of revenues and expenses are made in recorded between the government and the SPE related to accordance with the provisions of the governing contract. these fiscal activities, transactions should be imputed in the For example, two units may agree to be responsible for accounts of both the government and the rest of the world different stages of a joint production process or one unit to reflect the fiscal activities of the government undertaken may own an asset or a complex of related assets but both by the SPE, including borrowing. The special case of units agree to share revenues and expenses. securitization units is discussed in section D. Joint ventures Supranational authorities 22.55 Many public units enter into arrangements with private 22.60 Some countries may be part of an institutional agreement entities or other public units to undertake a variety of that involves monetary transfers from the member countries activities jointly. The activities could result in market or to the associated supranational authority and vice versa. non-market output. Joint operations can be structured The supranational authority also engages in non-market broadly as one of three types: jointly controlled units, production. In the national accounts of the member referred to here as joint ventures; jointly controlled countries, the supranational authorities are non-resident operations; and jointly controlled assets. institutional units that are part of the rest of the world and may be classified in a specific subsector of the rest of the 22.56 A joint venture involves the establishment of a world. corporation, partnership or other institutional unit in which each party legally has joint control over the 22.61 Because the supranational authority is fulfilling the activities of the unit. The units operate in the same way as functions of a level of government, it is possible to other units except that a legal arrangement between the construct a set of accounts for the authority as if it were a parties establishes joint control over the unit. As an resident unit of the member country even though it remains institutional unit, the joint venture may enter into contracts non-resident. Such an additional account may provide a in its own name and raise finance for its own purposes. A useful supplement for the analysis of the economic joint venture maintains its own accounting records. activities of the member countries. C. The government finance presentation of statistics 1. Introduction a very brief overview of the way in which government accounts are presented in, for example, the GFSM2001, which should be consulted for further explanation and 22.62 The sequence of accounts for all institutional units and discussion. sectors is described in chapters 6 to 13. For the general government sector and, in some cases, the public sector, 22.63 Basically the government finance presentation consists of experience has shown that an alternative presentation, transactions that increase net worth leading to an aggregate usually known as a government finance presentation or called revenue and transactions that decrease net worth public finance presentation, of the stocks and flows is better leading to the aggregate called expense. In addition there suited to certain analytical requirements. This section gives are two main balancing items, net operating balance and net 441 System of National Accounts lending or net borrowing. Additional accounts can be subsidies, normally amount to much less and are reported shown for other economic flows and balance sheets. separately. Property income may or may not be an important source of revenue, but in either case it relates 22.64 The following section provides general information about directly to the same category as in the allocation of primary the concepts involved in government finance. income account. 2. Revenue 3. Expense 22.65 A revenue transaction is one that increases net worth. In the 22.70 An expense transaction is one that decreases net worth. In government finance presentation of the accounts, the the government finance presentation of the accounts, the concept of revenue is defined to include all resources concept of expense is defined to include all uses incurred acquired by government as recorded in the SNA current by government as recorded in the SNA current accounts accounts and capital transfers receivable recorded in the and capital transfers payable as recorded in the capital capital account. Specifically, revenue can be determined as account. Specifically, expense can be determined as follows: follows: Revenue Expense equals Taxes, equals Production expenses (compensation of employees, intermediate consumption and consumption of fixed plus Social contributions, capital), plus Other current revenue, plus Interest payable, plus Capital transfers receivable. plus Grants, 22.66 Government revenue is usually dominated by compulsory plus Social benefits, levies in the form of taxes and social contributions. For some levels of government, grants (transfers from other plus Other current expenses, government units and international organizations) are a major source of revenue. Other general categories of plus Capital transfers payable. revenue include property income, sales of goods and services and miscellaneous transfers other than grants. 22.71 The government finance presentation as in GFSM2001, for example, differs from the sequence of accounts in a number 22.67 Estimating taxes and social contributions can be quite of ways. The absence of a production account in the difficult. The problems involved and the recommended government finance presentation makes it impossible to solutions are described in section D. Taxes are recorded in show both the cost structure of own account production and several of the accounts in the sequence of accounts. An its final use. Thus, for instance, the salaries of employees advantage of the government finance presentation is that all engaged in own account capital formation are directly taxes can be presented as one category of revenue, with classified as acquisitions of capital formation and not as subclassifications according to the basis on which the tax compensation of employees. Conversely, the salaries of was levied. In particular, both current and capital taxes can employees that produce social benefits in kind are recorded be shown under a single heading. as compensation of employees and not again as (part of) expense on social benefits in kind. The government finance 22.68 Other current revenue covers property income, sales of presentation uses some labels and definitions that differ goods and services, fines, penalties and forfeits, voluntary from those in the sequence of accounts and also introduces transfers other than grants and miscellaneous and various simplifications. For example, outlays on FISIM and unidentified revenue. The distribution of goods and insurance services are not distinguished from interest and services that are not sold at all or sold for prices that are not net insurance premiums respectively. economically significant does not accord with the general notion of revenue as a transaction that increases net worth. 22.72 Governments typically produce many services and some As a result, only actual sales of goods and services or goods goods and then distribute them free or at prices that are not and services produced by government but provided as economically significant. In the SNA, the cost of these compensation of employees in kind are included in goods and services is recorded as a use when they are revenue. (The goods and services provided as produced and again as a social benefit or final consumption compensation in kind are treated as revenue because they expenditure when they are distributed. To reduce offset expenditure.) unnecessary duplication, these costs are recorded only as production expenses in the government finance 22.69 Transfers from one government unit to another, often from presentation. the central or a state government to a lower level of government, can be quite important sources of government 22.73 In principle, retirement benefits paid to government revenue. The government finance presentation allows all of employees are considered the liquidation of a liability these receipts to be collected into a separate category of rather than a payment of a current expense. However, in revenue, usually labelled grants. Other transfers, including practice social benefits as reported in government accounts 442 The general government and public sectors may include retirement benefits paid to government less Outlays. employees. If these transactions in pension liabilities are to be excluded, the contributions must also be excluded from 22.77 Net lending or net borrowing is also the balancing item of revenue and the item adjustment for changes in pension the financial account, although in practice a statistical entitlements excluded from expense. discrepancy could appear as a result of using different sources and of possible errors and omissions. 4. Outlays 7. Consolidation 22.74 The purchase of a non-financial asset is not an expense because it has no net effect on net worth since it represents 22.78 For analytical purposes, there is often interest in the the exchange of one type of asset for another or the relationship between net lending or net borrowing and the incurrence of a liability matched by the acquisition of an change in government liabilities. Attention to government asset. It is however included in a total called outlays (or liabilities usually centres on the amount owed to non- sometimes expenditure). Outlays are defined as follows: government units. There may be a substantial amount of liabilities incurred by one government unit and held by a Outlays second government unit. The government finance presentation consolidates all flows and stocks within each equals Expense, subsector and sector, and thus all asset and liability positions between units belonging to the same grouping are eliminated. This procedure still allows the separate plus Acquisitions less disposals of non-financial assets. identification of the debt of the general government sector, the central government subsector and the public sector, The net acquisition of non-financial assets is the sum of the which are analytically useful. gross capital formation and acquisitions less disposals of non-produced non-financial assets. 22.79 Consolidation is a method of presenting statistics for a set of units as if they constituted a single unit. It involves 5. Net operating balance eliminating transactions and reciprocal stock positions among the units that are being consolidated. Consolidation 22.75 The net operating balance is defined as revenue less may be undertaken for any group of units, but it is expense. It is the balance of all transactions that affect net particularly useful to consolidate the units within the worth. It is equivalent to the changes in net worth due to general government sector and its subsectors. For example, saving and capital transfers in the SNA sequence of assessing the overall impact of government operations on accounts. It provides a measure of the sustainability of the total economy or the sustainability of government government policies as it represents the resources acquired operations is more effective when the transactions between or consumed by the government's current operations. different levels of government are eliminated and only Specifically: those transactions that are with other sectors or non- residents remain. Consolidation is of particular relevance for transactions such as property income (in particular Net operating balance interest), current and capital transfers and transactions in financial assets and liabilities. For example, the equals Revenue, consolidated figures on the ratio of revenue or expense to GDP are more useful for some purposes than the less Expense. unconsolidated figures. 6. Net lending or net borrowing 22.80 In the SNA, consolidation is discouraged. Even in the government finance presentation, where consolidation is often useful, it takes place only within a single account 22.76 Net lending or net borrowing can be calculated as the net where the matching revenue and expense entries appear. operating balance less the net acquisition of non-financial For this reason, consolidation adjustments do not affect assets or total revenue less total outlays. It represents the balancing items. For example, a grant (or transfer) from a amount the government has available to lend or must central government to a local government unit is borrow to finance its non-financial operations. Specifically: consolidated by eliminating the expense from central government and the revenue from the local government, Net lending or net borrowing thus leaving the net operating balance of the general government sector unchanged. equals Net operating balance, 22.81 Conceptually, the nature of consolidation is to eliminate all less Acquisitions less disposals of non-financial assets. flows among the consolidated units, but practicality should be kept in mind. For example, it may be argued that transactions in the production account, such as output and or, alternatively: intermediate consumption of goods and services, should not be consolidated. The decision about the level of detail Net lending or net borrowing employed in consolidation should be based on the policy usefulness of the consolidated data and the relative equals Revenue, importance of the various types of transactions or stocks. 443 System of National Accounts 22.82 Within a government finance presentation, the major case for the second government unit. However, taxes on transactions considered for consolidation, in probable order gross payroll and labour force that are not treated as social of importance, are: contributions should be consolidated when they are significant and can be identified. a. Current and capital transfers, such as central government grants to lower levels of government; 22.84 Practical difficulties always arise with consolidation. For example, when a transaction to be consolidated is identified b. Transactions in financial assets and liabilities, such as in the records of one unit, the corresponding transaction loans to other governments for policy purposes, should appear in the accounts of the counterparty, but it acquisitions of government securities by social security may not be recorded there, it may be recorded in a different units and debt forgiveness; period, it may be recorded at a different value, or it may be classified as a different type of transaction. Such errors in c. Interest revenue and expense on intergovernmental the strict application of a quadruple accounting system may holdings of financial assets and liabilities; exist in relation to any transaction but become apparent when consolidation is attempted. d. Acquisitions and disposals of non-financial assets, including intergovernmental transactions in land, 22.85 Even if transactions between the subsectors of government buildings and equipment; are being consolidated when presenting the accounts for general government as a whole, they should not be e. Taxes paid by one government unit or entity to another; eliminated for the accounts of each subsector considered separately. f. Purchases and sales of goods and services between government units. 8. Classification of the functions of government 22.83 Two types of transactions that appear to take place between 22.86 A classification of transactions on outlays using the two government units are never consolidated because they Classification of Functions of Government (COFOG) is are re-routed in the SNA to other units. The first is that all integral to the government finance presentation. This employer social contributions, whether paid to social classification shows the purpose for which outlays are security or to government pension funds, are treated as undertaken. These purposes may differ significantly from being paid to the employee as part of compensation and the administrative arrangements of governments. For then paid by the employee to the fund. The second is that example, an administrative unit responsible for health all taxes withheld by government units from the services may undertake some activities with an educational compensation of their employees, such as pay-as-you-earn purpose, such as training of medical professionals. A cross (PAYE) taxes, and paid to other governments should be classification of the transactions of government by both treated as being paid directly by the employees. The economic nature and according to functions, as shown for government employer is simply the collecting agent in this example in GFSM2001, is encouraged. D. Accounting issues particular to the general government and public sectors 22.87 The accounting rules of the SNA apply to general 1. Clarification of the recording of taxes government and public sectors in the same way that they apply to all other sectors of the economy. However, due to the particular nature of the activities of government units, Government issued permits some additional guidance is useful to assist with the treatment of selected transactions. These topics are grouped 22.88 Taxes are compulsory unrequited payments, in cash or in under four headings: kind, made by institutional units to the general government exercising its sovereign powers or to a supranational authority. They usually constitute the major part of a. Clarification of the recording of taxes; government revenue, up to 90 per cent in some countries. Taxes are described as unrequited because, in most cases, b. Interaction with non-resident government-type the government provides nothing commensurate in authorities (including taxes paid to another authority); exchange to the individual unit making the payment. However, there are cases where the government does provide something to the individual unit in return for a c. Issues related to debt; payment in the form of the direct granting of a permit or authorization. In this case, the payment is part of a d. Interaction with the corporations sectors. mandatory process that ensures proper recognition of ownership or that activities are performed under the strict authorization by the law. The borderline between when A separate section for each of these headings follows. such payments are to be treated as a tax and when as the 444 The general government and public sectors sale of a service or as the sale of an asset by the government 22.92 For the government, recording revenue and claims when requires additional guidance. the underlying event occurs is particularly difficult since government recordings are often on a cash basis. This is 22.89 As noted in chapters 7 and 8 when discussing the difference especially the case for taxes. Further, when accrued taxes between a tax and a fee for a service, the borderline is not are calculated from assessments of taxes due, there may be always clear-cut in practice. The following a risk of over- or understatement of tax revenue. Since tax recommendations apply. revenue is a crucial government finance aggregate, such an error must be avoided. a. The payment is recorded as a tax when a licence or a permit is automatically granted by the government as a 22.93 As explained in chapter 3, the period of time between the mandatory condition to perform an activity or acquire moment a tax or any distributive transaction is recorded as an asset and when the government unit performs little accruing in the non-financial accounts and the moment the or no work other than a minimum control of the legal payment is actually made is bridged by recording an capacity of the acquirer to receive the permit (for account receivable or payable in the financial account. In instance, to confirm the applicant has not been cases where a prepayment covering two or more accounting convicted of a crime). The payment of the fee in such a periods is made to government, an account payable is case is not commensurate with the control function that recorded in the financial account of government for the the government exercises. amounts due in future periods. In effect this is a financial advance made to government by the payee. It is a liability of the government and an asset of the payee. This liability b. The payment is recorded as the purchase of a service is extinguished as the amounts fall due in future periods. when, for instance, issuing the licence or permit implies a proper regulatory function of the government by exercising control on the activity, checking the 22.94 The amount of taxes recorded as accruing recognizes that competence or qualifications of the persons concerned, some taxes that may be due in principle are in practice etc. In such a case, the payment is taken to be unlikely to be collected. The alternative means of making proportion to the costs of producing the service for all the necessary adjustments are described in paragraphs 8.58 or any of the entities benefiting from the services and is to 8.59. borne by those benefiting. Only if the payment is out of proportion to the costs of producing the services, is it Tax credits treated as a tax. 22.95 Tax relief can take the form of a tax allowance, an 22.90 Chapter 17 discusses the case of licences issued by exemption, a deduction or a tax credit. Tax allowances, government in strictly limited numbers. exemptions and deductions are subtracted from the tax base before the tax liability is computed. A tax credit is an a. If the licence is not one to use a natural resource that amount subtracted directly from the tax liability due by the qualifies as an asset and which the government controls beneficiary household or corporation after the liability has on behalf of the community, then the payment for the been computed. Tax credits can sometimes be payable, in licence is a tax. Notwithstanding, if the licence is the sense that any amount of the credit that exceeds the tax legally and practically transferable to a third party, it liability is paid to the beneficiary. In contrast, some tax may still be classified as an asset in the category of credits are non-payable (sometimes called wastable) and contracts, leases and licences. are limited to the size of the tax liability. b. When the licence is to make use of a natural resource 22.96 In Revenue Statistics and GFSM2001, a tax relief that is that qualifies as an asset and which the government embedded in the tax system is recorded as reducing the tax controls on behalf of the community, payments for the liability of the taxpayer and therefore as reducing licence are treated either as the acquisition of an asset government tax revenue. This is the case for tax in the category of contracts, leases or licences or as the allowances, exemptions and deductions, since they enter payment of rent. The conditions that need to be directly into the calculation of the tax liability. This is also considered in deciding between the acquisition of an the case for non-payable tax credits as their value to the asset and the payment of rent are described in detail in taxpayer is limited to the size of their tax liability. For part 5 of chapter 17. payable tax credits, only the excess over the corresponding liability, which corresponds to an outlay by government, is shown as an expense. Permission to use a produced asset owned by government is treated as an operating or financial lease as appropriate. 22.97 In contrast, in the SNA, the total amounts due as payable tax credits should be considered as expense and recorded as Accrual recording of taxes such at their total amount. In consequence, tax revenue should be recorded without any deduction for payable tax 22.91 Like all transactions in the system, government transactions credits. should be recorded on an accrual basis. This is true on both the revenue side (for example, taxes and social 22.98 Treating payable tax credits in this way has no impact on contributions) and the expense side (for example, interest the net borrowing or net lending of the general government, charges). Unless both parties to a transaction record their but has an impact on both the tax burden and the ratios of view of the transaction at the same point in time, the public expense or expenditure to GDP. Because of the need accounts do not balance. to explain differences in presentation between different 445 System of National Accounts statistical systems, however, in the SNA the amounts of International membership dues payable tax credits that are offset against tax liabilities should also be shown. 22.100 In a few cases, membership dues and subscription fees payable to international organizations may not be treated as 2. Transactions with other national, transfers but as payments for a service, recorded on an international and supranational accrual basis. Exceptionally, and when there is a possibility organizations even if unlikely, of repayment of the full amount, the payment may represent the acquisition of a financial asset. 22.99 Transactions may occur between government units and either international or supranational organizations, International assistance regarded as non-resident units. Even when government acts as the unit channelling funds to or from the non-resident 22.101 International assistance sometimes takes the form of unit, the transactions are recorded as taking place directly making goods, such as food and clothing or emergency with the non-resident unit. Six cases may be considered: equipment available following a natural disaster. In addition to the goods or services themselves, all costs a. Taxes: Some taxes on products, such as import duties, identifiable with the delivery of the goods or services such excises and value added taxes, might be payable to a as transportation to the foreign country, delivery within that supranational organization because they are considered country, the compensation of government employees of the to be levied directly by the supranational organization. donating country to prepare the shipments or oversee their delivery, insurance and so forth should be included in the b. Subsidies: Any subsidies paid by a supranational value of the transfer to the extent that these costs are met by organization directly to a resident producer are the donor. recorded as payable by the supranational organization rather than a resident government unit. 22.102 The prices of the goods or services in the receiving country might be quite different from the prices in the donor c. Current international cooperation: This consists of country. As a general principle, the value of the donation to current transfers in cash or in kind between the the recipient should be regarded as equal to the cost of governments of different countries or between providing the assistance to the recipient. It follows that the governments and international organizations and prices of the donor country should be used as a basis for the includes specifically: calculation of the value of the donation. · Transfers between governments that are used by the 22.103 When the goods and services and associated delivery recipients to finance current expenditures, including charges are donated by government, NPISHs or households, the items are negative final consumption emergency aid after natural disasters; they include matching a transfer in kind. If the items are provided by transfers in kind in the form of food, clothing, blankets, corporations, they are recorded as a transfer in cash medicines, etc.; followed by a purchase of the goods by the recipient. In both cases the items involved are included in exports of the · Annual or other regular contributions paid by member donor country and imports of the recipient country. governments to international organizations (excluding taxes payable to supranational organizations); 3. Debt and related operations · Payments by governments or international Debt organizations to other governments to cover the salaries of those technical assistance staff who are resident in the country in which they are working and are 22.104 Debt is a commonly used concept, defined as a specific subset of liabilities identified according to the types of employed by the host government. financial instruments included or excluded. Generally, debt is defined as all liabilities that require payment or payments d. Miscellaneous current transfers: These consist of of interest or principal by the debtor to the creditor at a date payments to international or supranational authorities or dates in the future. Consequently, all debt instruments that are regarded as being compulsory but are not taxes. are liabilities, but some liabilities such as shares, equity and financial derivatives are not debt. However, due to specific e. Capital transfers: These include investment grants and legal, institutional or practical arrangements some other other capital transfers, including the counterpart definitions of debt may also exist. It is therefore useful in transaction of debt cancellation as a capital transfer all cases to clearly identify the definition of debt according payable and the counterpart of debt assumption as a to the instruments included. capital transfer receivable. 22.105 Debt operations are often used by government as a means f. Financial transactions: Some financial transactions, of providing economic aid to other units. The general usually loans, may be recorded when granted by principle for any cancellation or assumption of debt of one international organizations (for example, the World unit by another unit made by mutual agreement is to Bank and the International Monetary Fund) or granted consider that there is a voluntary transfer of wealth between to other governments. the two units. This means that the counterpart transaction of 446 The general government and public sectors the liability assumed or of the claim cancelled is a capital 22.110 Under both arrangements, the debt instrument that is being transfer. rescheduled is considered to be extinguished and replaced by a new debt instrument with the new terms and conditions. If there is a difference in value between the Debt reorganization extinguished debt instrument and the new debt instrument, part is a type of debt forgiveness by government and a 22.106 There are four main types of debt reorganization: capital transfer is necessary to account for the difference. a. Debt forgiveness. A reduction in the amount of, or the 22.111 Debt rescheduling is a bilateral arrangement between the extinguishing of, a debt obligation by the creditor via a debtor and the creditor that constitutes a formal deferment contractual arrangement with the debtor. of debt-service payments and the application of new and generally extended maturities. The new terms normally include one or more of the following elements: extending b. Debt rescheduling or re-financing. A change in the repayment periods, reductions in the contracted interest terms and conditions of the amount owed, which may rate, adding or extending grace periods for the repayment result or not in a reduction in burden in present value of principal, fixing the exchange rate at favourable levels terms. for foreign currency debt, and rescheduling the payment of arrears, if any. c. Debt conversion. The creditor exchanges the debt claim for something of economic value, other than another 22.112 The treatment for debt rescheduling is that the existing debt claim, on the same debtor. This includes debt-for- contract is extinguished and a new contract created. The equity swaps and debt prepayment among other applicable existing debt is recorded as being repaid and a arrangements. new debt instrument (or instruments) of the same type and with the same creditor is created with the new terms and d. Debt assumption and debt payments on behalf of others conditions. when a third party is also involved. 22.113 The transaction is recorded at the time both parties record the change in terms in their books, and is valued at the Debt forgiveness (or debt cancellation) value of the new debt. 22.107 Debt forgiveness is defined as the voluntary cancellation of 22.114 Debt refinancing involves the replacement of an existing all or part of a debt obligation within a contractual debt instrument or instruments, including any arrears, with arrangement between a creditor and a debtor. Debt a new debt instrument or instruments. It can involve the forgiveness is distinguished from debt write-off by the exchange of the same type of debt instrument (loan for a agreement between the parties and the intention to convey a loan), or different types of debt instruments (loan for a benefit, rather than unilateral recognition by the creditor bond). For instance, the public sector may convert various that the amount is unlikely to be collected. Debt forgiven export credit debts into a single loan. Also, debt refinancing may include all or part of the principal outstanding, can be said to have taken place when a debtor exchanges inclusive of any accrued interest arrears (interest that fell existing bonds for new bonds through exchange offers due in the past) and any other interest costs that have given by its creditor (rather than a change in terms and accrued. Debt forgiveness does not arise from the conditions). cancellation of future interest payments that have not yet fallen due and have not yet accrued. 22.115 The treatment of debt refinancing transactions is similar to debt rescheduling to the extent that the debt being 22.108 Debt forgiveness is recorded as a capital transfer received refinanced is extinguished and replaced with a new by the debtor from the creditor at the time specified in the financial instrument or instruments. However, unlike in agreement that the debt forgiveness takes effect with a rescheduling, the old debt is extinguished at the value of the repayment of the debtor's liability in the financial account new debt instrument except for non-marketable debt owed. and a matching receipt by the creditor. In the balance sheet, The balance sheet reflects the transactions extinguishing the debtor's liability and creditor's asset are reduced by the the old debt instrument and the creation of the new debt amount of debt that is forgiven. Valuation of the amount of instrument along with any valuation change recorded in the the debt forgiven is at market prices for flows and stocks, revaluation account. except for loans where the nominal value is used. Debt conversion Debt rescheduling and refinancing 22.116 A debt-for-equity swap occurs when a creditor agrees to 22.109 Debt rescheduling (or refinancing) is an agreement to alter replace a debt owed to it by an equity security. For the terms and conditions for servicing an existing debt, example, the government may agree with a public usually on more favourable terms for the debtor. Debt enterprise to accept an increase in its equity stake in the rescheduling involves rearrangements on the same type of public enterprises instead of making a loan. If there is a instrument, with the same principal value and the same difference in value between the extinguished debt creditor as with the old debt. Refinancing entails a different instrument and the new equity instrument, it is a type of debt instrument, generally at a different value and may be debt forgiveness by government and a capital transfer is with a creditor different than that from the old debt. necessary to account for the difference. 447 System of National Accounts Debt assumption balance sheet of second unit as long as this unit is recognized as an institutional unit in the SNA. Often the 22.117 Debt assumption occurs when one unit assumes unit to which the paired assets and liabilities may be moved responsibility for another unit's outstanding liability to a is an SPE. The conditions under which an SPE is creditor. When a government assumes a debt, in most considered to be an institutional unit are described in instances the counterpart transaction of the new paragraphs 4.55 to 4.67. If the SPE is purely passive it is government liability is a capital transfer in favour of the not considered to be an institutional unit and the assets and defaulting debtor. However, if the government acquires an liabilities concerned do not move off-balance sheet. effective legal claim against the defaulting unit and there is a realistic probability that the claim will be paid, the 22.123 Debt issued on concessional terms. There is no precise government may record, as the counterpart transaction of definition of concessional loans, but it is generally accepted its new liability, the acquisition of a financial asset equal to that they occur when units lend to other units and the the present value of the amount expected to be received. If contractual interest rate is intentionally set below the this amount is equal to the liability assumed, no further market interest rate that would otherwise apply. The degree entries are required. If the amount expected to be recovered of concessionality can be enhanced with grace periods, is less than the liability assumed, the government records a frequencies of payments and a maturity period favourable capital transfer for the difference between the liability to the debtor. Since the terms of a concessional loan are incurred and any asset acquired. Similarly, if a government more favourable to the debtor than market conditions has its debt assumed by another government, then it records would otherwise permit, concessional loans effectively a capital transfer receivable, a new debt to the assuming include a transfer from the creditor to the debtor. government unit, or a combination of the two. 22.124 Loans with concessional interest rates to a foreign 22.118 Debt assumption frequently occurs when a government government could be seen as providing a current transfer guarantees a debt of another unit and the guarantee is called equal to the difference between the actual interest and the (or activated). The treatment of the guarantee itself is market equivalent interest. If such a transfer were described below. recognized, it would usually be recorded as current international cooperation, and the interest recorded would 22.119 Debt payments on behalf of others are similar to debt be adjusted by the same amount. However, the means of assumptions, but the unit making the payments does not incorporating the impact within the SNA and international assume the entire debt. The transactions recorded are accounts have not been fully developed, although various similar to those described under debt forgiveness. alternatives have been advanced. Accordingly, until the appropriate treatment of concessional debt is agreed, information on concessional debt should be provided in Other issues related to debt re-organization supplementary tables. 22.120 Debt write-offs refer to unilateral reductions by a creditor in 22.125 Further details on the recording of debt operations can be the amount owed to it, usually when a creditor concludes found in GFSM2001, the Manual on Government Debt and that a debt obligation has no value or a reduced value Deficit, the External Debt Guide and Appendix 2 of BPM6. because part or all of the debt is not going to be paid. Frequently the debtor is bankrupt or has disappeared. An other change in the volume of assets is used to record the Government guarantees write-off. Unlike the cases of debt assumption and debt forgiveness, no capital transfer is recorded and therefore 22.126 Three types of guarantees are recognized in the SNA, there is no impact on net lending or borrowing of standardized guarantees, guarantees that meet the definition government. of a financial derivative and one-off guarantees. The recording of standardized guarantees (for government and 22.121 Debt arrears occur when a debtor misses an interest or other units offering such guarantees) is described in part 3 principal payment. The debt instrument will not normally of chapter 17. change, but knowing the amount of debts in arrears can provide important information. When feasible and 22.127 Guarantees that meet the definition of financial derivatives important, therefore, each category of debt should be are those that are actively traded on financial markets, such divided into those instruments that are in arrears and those as credit default swaps. The derivative is based on the risk not in arrears. of default of a reference instrument and so is not actually linked to an individual loan or bond. They have no effect on 22.122 Debt defeasance allows a debtor (whose debts are in the the net lending or borrowing of government. form generally of debt securities and loans) to remove certain liabilities from the balance sheet by pairing 22.128 One-off guarantees exist where the conditions of the loan irrevocably assets of equal value to the liabilities. or the security are so particular that it is not possible for the Defeasance may be carried out either by placing the paired degree of risk associated with the loan to be calculated with assets and liabilities in a trust account within the any degree of accuracy. In most cases, the granting of a institutional unit concerned, or by transferring the paired one-off guarantee is considered a contingency and is not assets and liabilities to another institutional unit. In the recorded as a liability for the guarantor. Payments under a former case, there are no transactions with respect to one-off guarantee are recorded when the call on the defeasance and the assets and liabilities should not be guarantee is made or when the fact that such a call will be excluded from the balance sheet of the unit. In the latter made is very well established. As an exception, one-off case, the assets and liabilities in question are moved to the guarantees granted by governments to corporations in 448 The general government and public sectors certain financially distressed situations and with a very high sufficient amount of the future income to repay the likelihood to be called are treated as if these guarantees borrowing in full. If more income is earned than is needed were called at inception. A particular case in point is a to repay the borrowing, the excess is retained by the bailout by government, which is discussed below. government. Because receipts of future income are uncertain, "rights" to considerably more income than is necessary to repay the borrowing of the securitization unit 22.129 The activation of a one-off guarantee is treated in the same are usually used as collateral. The amount received by the way as a debt assumption. The original debt is liquidated government as the originator is treated as borrowing, and a new debt is created between the guarantor and the usually in the form of a loan. creditor. In most instances, the guarantor is deemed to make a capital transfer to the original debtor, unless the guarantor acquires an effective claim on the creditor, in Government assumption of pension liabilities which case it leads to the recognition of a financial asset (a liability of the debtor). 22.134 On occasion, large one-off transactions may occur between a government and another unit, usually a public 22.130 The activation of a guarantee may or may not require corporation, linked to pension reforms or to privatization of repayment of debt at once. The accrual principle for time of public corporations. The goal may be to make a public recording requires that the total amount of debt assumed is corporation competitive and financially more attractive by recorded at the time the guarantee is activated and the debt removing existing pension liabilities from the balance sheet assumed. Repayments of principal by the guarantor (the of the public corporation. This goal is achieved by the new debtor) and interest accruals on the assumed debt are government assuming the liability in question in exchange recorded as these flows occur. for a cash payment of the same value. If the cash payment is not equal in value to the liability incurred, a capital Securitization transfer is recorded for the difference. 22.131 Securitization occurs when a unit, named the originator, 4. Relations of general government with conveys the ownership rights over financial or non- corporations financial assets or the right to receive specific future flows, to another unit, named the securitization unit. In return, the Earnings from equity investment securitization unit pays an amount to the originator from its own source of financing. The securitization unit is often an SPE. The securitization unit obtains its own financing by 22.135 A government unit has a close relationship with any public issuing securities using the assets or rights to future flows corporation or quasi-corporation that it controls. Despite transferred by the originator as collateral. Government this close relationship, flows related to the equity units have made widespread use of this source of finance. investment between a government unit and its controlled corporation are treated in the same way as flows between any corporation and its owners. An equity investment is the 22.132 The first case involving government to be considered is action by economic agents of placing funds at the disposal when the securitization comprises the sale (or the transfer) of corporations. The amounts invested, described as equity of an asset. (In the SNA, a stream of future tax receipts is capital, are part of the own funds of the corporation and the not recognized as a government asset that could be used for corporation has a large degree of freedom in the way in securitization.) The key question for how to record the which they are used. In return, the owners receive shares or transaction properly is to determine whether the transfer of some other form of equity securities. These financial assets the asset is a sale of an existing asset to the securitization represent property rights on corporations and quasi- unit or a way to borrow using possible future flows of corporations and entitle the holders to: revenues as collateral. In order to be treated as a sale, the asset must already appear in the balance sheet of the government and there must be a full change of ownership a. A share of any dividends (or withdrawals of income to the securitization unit as evidenced by the transfer of the from quasi-corporations) paid at the discretion of the risks and rewards linked to the asset. The following factors corporation but not to a fixed and predetermined must also be considered: income, and a. To be recorded as a sale, the purchase price must be b. A share in the net assets of the corporation in the event equal to the current market price. of its liquidation. b. If the government, as the originator, guarantees Dividends versus withdrawal of equity repayment of any debt related to the asset incurred by the securitization unit, it is unlikely that all of the risks 22.136 It is important to distinguish between the return of the associated with the asset have been transferred. equity investment by the corporation to its owner and the payment of income in the form of dividends. Only regular 22.133 The second case involving government is the securitization distributions from the entrepreneurial income are recorded of future revenue flows. In the SNA, a stream of future as property income either as dividends or withdrawals of incomes is not recognized as an asset. In most of these income from quasi-corporations. Large and irregular cases, it is not the rights to the income that are used as payments, based on accumulated reserves or sale of assets collateral, but the obligation of the government to use a are recorded as a withdrawal of equity. 449 System of National Accounts Disposal of assets 22.140 Privatization may be organized in more complicated institutional arrangements. For instance, some or all of the non-financial assets of a public corporation may be sold by 22.137 The sale of non-financial assets owned by public a public holding company, or other public agency, corporations, such as buildings and land, does not by itself controlled by a government and all or part of the proceeds constitute privatization and is recorded in the capital paid to the government. In such cases, the public account of the corporations sector as disposals of fixed corporation will record the disposal of non-financial assets assets or other non-financial assets. However, if the public in the capital account, while the payment to the government corporation sells assets and then surrenders the proceeds of of the proceeds from the sale is recorded as a withdrawal of such a sale to general government, this is recorded as a equity. withdrawal of government's equity in the corporation. A withdrawal of equity is also recorded if the public corporation disposes of a financial asset and surrenders the 22.141 The case where the privatization is arranged via a proceeds to government. restructuring agency is discussed in paragraphs 22.47 to 22.50. Acquisition of equity, capital transfers and subsidies Nationalization 22.138 Subsidies are current transfers, usually made on a regular basis, from government to corporations designed to 22.142 Nationalization is a process whereby government takes influence their levels of production, the prices at which control of specific assets or an entire corporation, usually their outputs are sold or the remuneration of the by acquiring the majority or the whole stake in the corporations. Payments to public corporations on a large corporation. The recording of flows differs according to the and irregular basis (often called "capital injections" in the way the government takes control. media) are not subsidies. They are treated as either a capital transfer or the acquisition of equity: a. Appropriation or confiscation: the change in ownership of assets is not the result of a transaction made by a. Payments to cover cumulated losses arising as a result mutual agreement. There is no payment to the owners of public policy purposes should be recorded as a (or the compensation is not commensurate with the fair capital transfer. value of the assets). The difference between the market value of the assets acquired and any compensation b. A payment made in a commercial or competitive provided is recorded as an uncompensated seizure in context may be treated as an acquisition of equity. This the other changes in the volume of assets account. should be limited to cases where the government is acting similarly to a private shareholder in that it has a b. Purchase of shares: the government buys all or some of valid expectation of a cash return in the form of future the shares in the corporation at a price that is the market property income. In this case, the corporation will price or very close to it. There is usually a legal context probably issue new shares to the government and enjoy for the transaction which ensures that it is made by a large degree of freedom over how the funds provided mutual agreement, even though the former owner may are used. have little choice whether or not to accept the offer, or to negotiate the price. The purchase of shares is a Treating the payments as the acquisition of equity depends financial transaction recorded in the financial account. on evidence of the corporation's profitability and its ability to pay dividends in future. Bailouts Privatization 22.143 A bailout is a term meaning a rescue from financial 22.139 Privatization is usually understood to consist of the sale of distress. It is often used when a government unit provides shares or other equity held by government in a public either short-term financial assistance to a corporation to corporation to other units. Often these other units are help it survive a period of financial difficulty or a more outside the public sector but they need not be; for example, permanent injection of financial resources to help a public corporation may buy shares in a unit newly recapitalize the corporation. A bailout may in effect separated from government. Such sales are purely financial constitute another means of nationalization if the transactions, recorded in the financial account of the SNA. government acquires control of the corporation it is bailing The assets owned by the public corporation continue to out. Bailouts of financial institutions are particularly belong to the corporation; it is the ownership of the noteworthy. Bailouts are likely to involve highly publicized corporation itself, as represented by the ownership of the one-time transactions involving large amounts and are equity in it, that changes hands. In effect, the government's therefore easy to identify. claim on the public corporation reduces because government exchanges shares or equity in the public 22.144 Intervention of general government may take various corporation for cash or other financial assets. The cost of forms. For instance: any financial services that government must purchase to achieve the sale are treated as an expense that should be recorded as intermediate consumption by general a. A government might provide equity financing on government in the SNA. exceptionally favourable terms. 450 The general government and public sectors b. A government might purchase assets from the for this specific task, it is classified in the general enterprise to be assisted for prices greater than their government sector. true market value. Restructuring, mergers and reclassifications c. A government might create a special purpose entity or other type of public body to finance or to manage the sales of assets or liabilities of the enterprise to be 22.147 When a public corporation is restructured, financial assets assisted. and liabilities may appear or disappear reflecting new financial relationships. These changes are recorded as changes in sector classification and structure in the other 22.145 In most of these cases, the assistance provided by changes in the volume of assets account. An example of government to the unit suffering financial distress is such a restructuring is when a corporation is split into two recorded as a capital transfer. In determining the magnitude or more institutional units and new financial assets and of the capital transfers, the following points need to be liabilities are created. taken into account. 22.148 The purchase of shares and other equity of a corporation as a. If the government buys assets from the enterprise to be part of a merger, on the other hand, is to be recorded as a assisted, the amount paid will normally be more than financial transaction between the purchasing corporation the true market price of the assets. The purchase of and the previous owner. assets other than loans should be recorded at the actual market price and a capital transfer should be recorded for the difference between the market price and the 22.149 Any change in the classification of assets and liabilities not total amount paid. related to restructuring or changes in sector classification is recorded as a change in the classification of assets or liabilities in the other changes in the volume of assets b. Governments often buy loans from financial account. institutions during a bailout. Unless a loan becomes tradeable and is traded with established market value, it is always recorded in the SNA at nominal value. Only Transactions with the central bank if a market for the loans develops and the loans are regularly traded there are they reclassified as securities and recorded at market value. 22.150 It is appropriate to begin by recalling the definition of the central bank and associated explanations from chapter 4. The central bank is the national financial institution that c. When a government buys a loan at nominal value when exercises control over key aspects of the financial system. the fair value is much less, no capital transfer for the In general, the following financial institutions are classified difference in value is recorded. However, if there is in this subsector: reliable information that some loans are irrecoverable, their value is reduced to zero as an other volume change in the balance sheet of the corporation and a a. The national central bank, including where it is part of capital transfer should be recorded from government to a system of central banks; and the corporation for their former nominal value. If there is some possibility that some part of the loan may be b. Currency boards or independent currency authorities recoverable in the future, the loans are reclassified (at that issue national currency that is fully backed by their zero value) from the balance sheet of the foreign exchange reserves. corporation to that of the government at the time the capital transfer is recorded. If the value of the loans subsequently increases, this is shown as a revaluation c. Central monetary agencies of essentially public origin item in the government's balance sheet. (for example, agencies managing foreign exchange or issuing bank notes and coin) that keep a complete set of accounts but are not classified as part of central d. As part of a bailout, government may extend the range government. Supervisory authorities that are separate of guarantees it is prepared to offer. These guarantees institutional units are not included with the central bank should be recorded as described above in paragraphs but are included with financial auxiliaries. 22.126 to 22.130 according to whether this is a one-off guarantee or part of a standardized guarantee scheme. As long as the central bank is a separate institutional unit, it is always allocated to the financial corporations sector even 22.146 If a public institutional unit is created by government if it is primarily a non-market producer. simply to assume management of the bailout, the unit should be classified in the general government sector. If the new unit has other functions and the bailout is a temporary 22.151 While the bank may be legally independent of government, task, its classification as a government unit or a public it is charged with carrying out government policy under the corporation is made following the general rules as legislation establishing it. The central bank is always described in the section above on restructuring agencies. treated as being controlled by government and is included Units that purchase financial assets from distressed in the financial corporations sector as a public corporation. financial corporations with the objective of selling them in It is the single exception to the rule that a unit whose output an orderly manner cannot be considered financial is primarily non-market is not to be classified as a intermediaries. If the unit has been created by government corporation. 451 System of National Accounts 22.152 Two types of payments by the central bank to the to the government, either for use as an input to its own government require clarification: production (for example, motor vehicle maintenance services) or for distribution to the public without payment a. Payments made on a regular basis, usually in the form (for example, education services), in which case the of dividends, based on the current activity of the central government will make periodic payments during the bank (such as managing foreign exchange reserves). contract period. The private enterprise expects to recover These payments are recorded as dividends so long as its costs and earn an adequate rate of return on its they are not abnormally higher than the sum of net investment from those payments. Alternatively, the private interest and net commissions receivable by the bank. enterprise may sell the services to the public (for example, Amounts in excess of this sum are to be recorded as a a toll road), with the price regulated by the government but withdrawal of equity. set at a level that the private enterprise expects will allow it to recover its costs and earn an adequate rate of return on its investment. At the end of the contract period, the b. Exceptional payments following sales or revaluation of government may gain legal and economic ownership of the reserve assets. These payments should be recorded as a assets, possibly without payment. There can be many withdrawal of equity. The rationale is that these assets variations in PPP contracts regarding the disposition of the are being managed as the economic property of the assets at the end of the contract, the required operation and nation and not of the bank itself. Their valuation affects maintenance of the assets during the contract, the price, the equity liability of the central bank and the equity quality and volume of services produced and so forth. assets of the government. Holding gains on the reserve assets (assets of the central bank) have a counterpart in the equity liability of the central bank and the equity 22.157 The private enterprise is responsible for acquiring the fixed assets of the central government. assets, although the acquisition is often aided by the backing of the government. The contract may require, 22.153 The measurement of output of the central bank is described however, that the assets meet the design, quality and in paragraphs 6.151to 6.156. As part of government policy, capacity specified by the government, be used in the the central bank may pay interest on deposits at artificially manner specified by the government to produce the high or low rates. The treatment of interest payments in this services required by the contract and be maintained in case is described in paragraphs 7.122 to 7.126 accordance with standards specified by the government. Furthermore, the assets typically have service lives much longer than the contract period so that the government will Public-private partnerships control the assets, bear the risks and receive the rewards for a major portion of the assets' service lives. Thus, it 22.154 Public-private partnerships are long-term contracts between frequently is not obvious whether the private enterprise or two units, whereby one unit acquires or builds an asset or the government controls the assets over their service lives set of assets, operates it for period and then hands the asset or will bear the majority of the risks and reap the majority over to a second unit. Such arrangements are usually of the rewards. between a private enterprise and government but other combinations are possible, with a public corporation as 22.158 As with leases, the economic owner of the assets related to either party or a private NPI as the second party. These a PPP is determined by assessing which unit bears the schemes are described variously as Public-Private majority of the risks and which unit is expected to receive a Partnerships (PPPs), Private Finance Initiatives (PFIs), majority of the rewards of the assets. The factors that need Build, Own, Operate, Transfer schemes (BOOTs) and so to be considered in making this assessment can be broadly on. The basic principles of all are the same and are treated divided into two groups, those associated with acquiring the same way in the SNA. the asset and those associated with using it in production. Some of the risks associated with acquiring the asset are: 22.155 Governments engage in PPPs for a variety of reasons, including the hope that private management may lead to a. The degree to which the government controls the more efficient production and that access to a broader range design, quality, size and maintenance of the assets; of financial sources can be obtained. In the contract period the PPP contractor has the economic ownership. Once the b. Construction risk, which includes the possibility of contract period is over, the government has both economic additional costs resulting from late delivery, not and legal ownership. It is not easy to establish which unit is meeting specifications or building codes and the legal owner of an asset during the contract period or environmental and other risks requiring payments to how the implicit transactions when its economic ownership third parties. changes should be recorded. There may be an advance agreement on the timing of the transfer of economic ownership part way through the service lives of the assets, Some of the risks associated with using the asset in under agreed terms that do not reflect market prices of the production are: assets. In consequence, some actual transactions may have to be partitioned to reveal their true economic character. a. Supply risk, which covers the degree to which the government is able to control the services produced, the 22.156 PPPs vary greatly. A general description that includes the units to which the services are provided and the prices most common arrangement is as follows. A private of the services produced; enterprise agrees to acquire a complex of fixed assets and then to use those assets together with other production b. Demand risk, which includes the possibility that the inputs to produce services. Those services may be delivered demand for the services, either from government or 452 The general government and public sectors from the public at large in the case of a paying service One general approach is for the government gradually to is higher or lower than expected; build up a financial claim and the private unit gradually to accrue a corresponding liability such that the value of both c. Residual value and obsolescence risk, which includes is expected to be equal to the residual value of the assets at the risk that the value of the asset will differ from any the end of the contract period. Implementing this approach price agreed for the transfer of the asset to government requires existing monetary transactions to be rearranged or at the end of the contract period; new transactions to be constructed using assumptions about expected asset values and interest rates. d. Availability risk, which includes the possibility of additional costs or the incurrence of penalties because 22.162 An alternative approach is to record the change of legal and the volume and/or quality of the services do not meet economic ownership as a capital transfer. The capital the standards specified in the contract. transfer approach does not reflect the underlying economic reality as well, but data limitations, uncertainty about the 22.159 The relative importance of each factor is likely to vary with expected residual value of the assets and contract each PPP. It is not possible to state prescriptive rules that provisions allowing various options to be exercised by will be applicable to every situation in a satisfactory way. either party could make recording a capital transfer The provisions of each PPP must be evaluated in order to acceptable on pragmatic grounds. decide which unit is the legal owner. 22.163 If the government is assessed as being the legal owner 22.160 Likewise, the complexity and variety of PPP contracts during the contract period but does not make any explicit preclude the enumeration of detailed rules governing the payment at the beginning of the contract, a transaction must transactions to be recorded concerning the control and use be imputed to cover the acquisition. The most common of the assets. Instead, all of the facts and circumstances of suggestion is that the acquisition be made via an imputed each contract should be considered and then an accounting financial lease because of the similarity with actual treatment should be selected that best brings out the financial leases. The implementation of that choice, underlying economic relationships. There are, however, a however, depends on the specific contract provisions, how few common difficulties. they are interpreted and possibly other factors. For example, a loan could be imputed and actual government 22.161 If the private enterprise is assessed as being the legal owner payments to the private unit, if they exist, could be during the contract period and if, as usual, the government partitioned so that a portion of each payment represents obtains legal and economic ownership at the end of the repayment of the loan. If there are no actual government contract without an explicit payment, a transaction must be payments, then non-monetary transactions could be recorded for the government's acquisition of the assets. constructed for the loan payments. E. The public sector presentation of statistics 22.164 As described in section B, the public sector includes all 22.167 Not all flows need to be consolidated for the public sector. resident institutional units controlled directly or indirectly Because the public sector is a mixture of market and non- by resident government units. In other words, the public market producers, most components of revenue and sector consists of all units of the general government sector expense will have limited economic meaning for the public plus all resident public corporations. sector. Elements of the financial account and the balance sheet are the most likely candidates to be consolidated. 22.165 Statistics for the public sector can be presented both within the sequence of accounts for institutional units and sectors 22.168 The same balancing items as stressed for the general or within the same government finance framework as government sector are likely to be important for the public described in section C of this chapter, depending on the use sector. The public sector net operating balance (or saving in to be made of the statistics. the sequence of accounts) will indicate trends in net worth resulting from the public sector's current operations. This is particularly useful if there are public corporations operating 22.166 With either method of presentation, it is useful to show at significant losses. both subsectors of the public sector and the entire public sector, with the total public sector statistics shown both unconsolidated and consolidated. For example, one column 22.169 Net lending or net borrowing for the total public sector is might have the statistics for the general government sector, known as the public sector borrowing requirement. Net a second column for the aggregate of all public lending indicates the net financing supplied to either the corporations and a third column would have the rest of the economy or the rest of the world; net borrowing unconsolidated totals for the entire public sector. indicates net financing obtained by the public sector from Depending on the flows involved, a fourth column could either the rest of the economy or the rest of the world. show the amounts to be eliminated by consolidation and a fifth column could show the consolidated totals for the 22.170 The balance sheet provides information of net worth, entire public sector. determined as the value of total assets less total liabilities, 453 System of National Accounts and financial net worth, determined as the difference sector's influence on the financial system and because it is between the value of total financial assets and the total often difficult to value government-unique non-financial liabilities. The latter is often cited because of the public assets. 454 Chapter 23: Non-profit institutions A. Introduction 1. Non-profit institutions in the SNA unit separate from government because it has independent control of its budget (even if much or all of the funding 23.1 Non-profit institutions (NPIs) play a somewhat unusual comes from government) but it is allocated to the general role in the SNA. Like corporations, some NPIs produce government institutional sector. Such institutions provide goods and services for sale with the intention to cover individual and collective services. An example is a research costs, that is to say as market production. In common with institute controlled by government. other market producers, they cannot undertake final consumption. Like government units, some NPIs are non- 23.6 Other NPIs exist to provide goods and services to market producers and make their output available free or at households either in return for a fee or free. When fees are prices that are not economically significant to individual charged, these may or may not cover a large proportion of households or the community at large. Some of these non- the NPI's costs and therefore may or may not be deemed to market NPIs are controlled by government and included in be economically significant prices. When the fees charged the general government sector but those that are not are are regarded as being economically significant, the NPIs grouped in their own sector, the non-profit institutions concerned are treated as providing market services and are serving households (NPISHs). allocated to the corporations sectors. Otherwise the NPIs fall into the institutional sector of NPISHs. 23.2 Most NPIs are separately identified institutional units. That is, they are capable in their own right of owning assets, 23.7 Thus it is possible to categorize NPIs as follows: incurring liabilities and engaging in economic activities and in transactions with other entities. It follows that a complete set of accounts for the unit, including a balance sheet of a. those providing services to corporations whose output assets and liabilities, exists or could be constructed if is sold to the corporations concerned and treated as required. In some countries, especially developing intermediate consumption; countries, an NPI may be an informal entity whose existence is recognized by society but does not have any b. those that are controlled by government and provide legal status. individual or collective services on a non-market basis; 23.3 The distinguishing feature that identifies an NPI is that its c. those providing goods and services to households, status does not permit it to be a source of income, profit or divided between: other financial gain for the units that establish, control or finance it. An NPI may make a profit, it may be exempt from taxes, it may have a charitable purpose but none of · those that provide goods and services to individual these are determining characteristics. The only essential households at economically significant prices; criterion for a unit to be treated as an NPI is that it may not be a source of income, profit or financial gain to its owners. · those providing services to individual households free or at prices that are not economically significant; 23.4 All NPIs produce goods and services, most often services, intended for consumption by households or by corporations. Some NPIs produce services for corporations · those that provide collective services free or at prices typically charging fees (sometimes described as that are not economically significant. subscriptions) intended to cover costs. They are often set up as associations that provide services exclusively to 23.8 Those NPIs that fall under the first bullet point in category members. The level of fees charged, the price of (c) are allocated to the corporations sectors and expenditure membership, typically satisfies the SNA criteria of on their output is treated as final consumption expenditure economically significant prices. For this reason these NPIs by households. Those that fall under the second bullet point are allocated to the corporations sectors. An example of an under (c) are allocated to the NPISH sector and their output NPI serving corporations is a trade association. is treated as actual final consumption of households delivered as social transfers in kind. Those that fall under 23.5 An NPI may be controlled by government in that the third bullet point under (c) are allocated to the NPISH government may appoint its officers and determine the sector but their output remains as actual final consumption objectives of the institution. It is treated as an institutional of NPISHs. 455 System of National Accounts 23.9 There are thus a number of sectors where NPIs appear in different from those of other units in the corporations and the SNA; in both the financial and non-financial government sectors. Specifically: corporations sectors, in the general government sector and in the separate sector of NPISHs. Subsectors of the first a. They are not permitted to distribute profits; three sectors are established to contain NPIs only. Those NPIs in the corporations sectors may be further subdivided to show those that are foreign controlled, those that are b. They may produce public goods as well as private publicly controlled and those that are subject to national goods; private control. The NPIs in the general government sector may be subdivided by level of government; central, state c. They may receive as much or more from current and local government. NPISHs may be divided between transfers as they receive from selling their output; those that are foreign controlled and those subject to national private control. d. They may depend on volunteer labour as well as paid labour; 2. The accounting rules for NPIs in the SNA e. Because they cannot pay dividends, they cannot attract 23.10 The output of NPIs is valued in the same way as for all equity capital in competition with corporations; institutional units. If the unit is a non-market producer, output is valued at the sum of costs, including consumption f. They may be eligible for special tax advantages in of fixed capital but excluding a return to capital. If the unit many countries; is a market producer, output is measured by sales adjusted for changes in inventories and any production for own capital formation. For some NPIs that cover a large g. They typically have special legal provisions covering proportion but not all their costs from sales, this will leave the governance, reporting requirements, political the unit with negative operating surplus. This is covered by participation and so on; donations (current transfers). h. Although they provide public goods and services, they 3. A satellite account for NPIs do not have the same powers or restrictions as government in deciding what these goods and services 23.11 For some time, there has been growing interest in studying should be and how they should be allocated. the contribution to the economy of institutions such as NPIs because they are seen to constitute a significant presence of 23.12 Arising out of this interest, a satellite account for NPIs has growing economic and policy interest. Such institutions are been developed as described in the Handbook on Non- variously referred to as "non-profit", "voluntary", "civil Profit Institutions in the System of National Accounts society" or "non-governmental" organizations and (United Nations, 2003). Sections B and C describe the collectively as the "third", "voluntary", "non-profit" or essential features of this satellite account. Section D "independent" sector. Such institutions attract interest discusses some other aspects of NPIs that it may be because their operating characteristics are somewhat desirable to explore in addition to the satellite account. B. The units included in the NPI satellite account 23.13 The starting point for the satellite account is to identify the 23.15 The first of these is the concept of the "social economy" units of interest. As will be seen, the units chosen coincide which depicts non-governmental institutions with a social largely (but not quite entirely) with the units described as or collective purpose. Typically mutual societies, NPIs in the SNA. One way of approaching a satellite cooperatives and associations would be included. account, therefore, would be to consider compiling the complete sequence of accounts for a sector made up of the subsectors of NPIs in the non-financial corporations sector, 23.16 The second concept is of "public benefit" organizations. the financial corporations sector, the general government This typically covers a narrower range of institutions that sector and NPISHs. However, because many of those serve a broad public purpose and excludes institutions that interested in accounts for NPIs only do not come from an serve only their own members. SNA background, the handbook starts by identifying characteristics of the units of interest. 23.17 In between these two is the concept of the non-profit sector on the lines initially pioneered by the Johns Hopkins 1. Determining characteristics of units for the Comparative Non-Profit Sector Project. In this project a satellite account definition of the non-profit units was elaborated along structural-operational lines. The requirements for inclusion are the following: 23.14 Various alternative concepts have been put forward around which a satellite account for non-profit institutions could be formulated. a. organizations should exist as identifiable institutions; 456 Non-profit institutions b. They should be institutionally separate from j. Unions, business and professional associations that government; promote and safeguard labour, business or professional interests; c. They do not distribute profits; k. Religious congregations, such as parishes, synagogues, d. They are self-governing, that is to say they are not mosques, temples and shrines, which promote religious subject to control from other units; beliefs and administer religious services and rituals. However, an official state church incorporated into the state administration, particularly one supported by e. Membership of the unit is neither obligatory nor obligatory taxes, would not meet the "institutionally automatic but involves some degree of voluntary separate from government" criterion and thus would be participation. excluded from the set of NPIs in the satellite account. It should be noted that religious congregations are 23.18 The main exclusions from the set of NPIs recognized in the different from religiously affiliated service agencies in SNA are those NPIs allocated to the general government such fields as health, education and social services. sector because, although they are institutionally separate Similarly, service organizations related to a state from government, they are controlled by government units. church might still be considered to be within the non- There are a small number of informal, usually temporary, profit sector, as long as they are separate institutional NPIs that may be excluded also. These are discussed in units and meet all the definitional criteria. section D. Both market and non-market units should be included in 2. Examples of units included each of these categories, so long as the institution concerned is an NPI (and not just an NPISH). 23.19 The following are illustrative examples of the kinds of entities that are likely to be found within the "non-profit 3. Borderline cases sector" for the purposes of the NPI satellite account: 23.20 Certain other types of organizations are likely to occupy a a. Non-profit service providers, such as hospitals, higher grey area between the non-profit sector and either the education institutions, day-care centres, schools, social corporations or government sectors. Some of those entities service providers and environmental groups; will properly belong within the non-profit sector for purposes of the NPI satellite account, while others will not. b. Non-governmental organizations promoting economic The following guidelines may be helpful for making those development or poverty reduction in less developed decisions. (Obviously, these guidelines will have to be areas; applied to types of organizations and not on an organization-by-organization basis, but the decision rules can still be instructive.) The guidelines given here are those c. Arts and culture organizations, including museums, of the handbook, slightly modified in the light of performing arts centres, orchestras, ensembles and experience with implementing the accounts. It is proposed historical or literary societies; that the modifications included here will be incorporated into the next edition of the handbook. d. Sports clubs involved in amateur sport, training, physical fitness and competitions; 23.21 Cooperatives are organizations formed freely by individuals to pursue the economic interests of their e. Advocacy groups that work to promote civil and other members. The basic principles of cooperatives include: rights, or advocate the social and political interests of general or special constituencies; a. democratic control, that is, one person, one vote; f. Foundations, that is, entities that have at their disposal b. shared identity, that is members are both owners and assets or an endowment and, using the income customers; and generated by those assets, either make grants to other organizations or carry out their own projects and c. orientation to provide services to members "at cost". programs; As with other institutional units, if the articles of g. Community-based or grass-roots associations that are association of a cooperative prevent it from distributing its member-based and offer services to or advocate for profit, then it will be treated as an NPI; if it can distribute members of a particular neighbourhood, community or its profit to its members, it is not an NPI (in either the SNA village; or the satellite account). h. Political parties that support the placing of particular 23.22 Mutual societies include such organizations as mutual candidates into political office; savings banks, savings and loan associations, mutual insurance companies, sickness and burial funds. Mutual i. Social clubs, including touring clubs and country clubs, societies, like cooperatives, are organized by individuals that provide services and recreational opportunities to seeking to improve their economic situation through individual members and communities; collective activity. They differ from cooperatives, however, 457 System of National Accounts in that they are mechanisms for sharing risk, either personal clearly self-governing and not part of the government's or property, through periodic contributions to a common administrative system. Educational institutions that are fund. Normally the depositors in mutual societies formally NPIs will have their own self-perpetuating boards that can control their operations. determine all facets of organizational operations, without approval by government officials, and that can cease their operations without the approval of government authorities. 23.23 Because mutual societies operate in the commercial sphere, Public educational institutions will have boards selected in they fall in the financial corporations sector. Only if their significant part by government officials or agencies and articles of association prevent them from distributing lack the power to cease operations without an act of the profits to their owners are they treated as NPIs in the SNA government. (but still within the financial corporations sector) and included within the NPI sector for the satellite account. 23.28 Hospitals, like educational institutions, can also be either NPIs, public institutions or for-profit corporations. The 23.24 Self-help groups are similar to both cooperatives and same rules that apply to educational institutions also apply mutual societies in that individuals join to accomplish goals to hospitals. of mutual support that would be unattainable on an individual level. They differ from both, however, in that they are not principally engaged in commercial activities. 23.29 Indigenous or territorial groups, such as "band councils" in As a general rule, self-help groups should be treated as Canada (a form of First Nation government) and peasant or membership organizations and included within the non- native communities in Peru, are organized around either profit sector. cultural or ethnic groupings or a particular geographic area, mainly with the purpose of improving the welfare of their 23.25 Social ventures are enterprises organized for the purpose of members. The difficulty arises when such groups employing and training disadvantaged individuals essentially operate as local governments, often making and (handicapped, long-term unemployed, etc.) who would enforcing their own laws. When that is the case, the groups otherwise not find employment. The enterprise is do not meet the "institutionally separate from government" considered an NPI unless it generates and distributes its criterion and fall outside the boundaries of the NPI satellite surplus to owners or stockholders. account. 23.26 Quasi-non-governmental organizations, which are found in 4. Classification of NPIs many European countries and elsewhere, are designed to function at arm's length from government departments, 23.30 NPIs can be classified according to the activity they thus avoiding direct political control. To the extent that undertake or the purpose for which they are envisaged. In they are truly self-governing entities, they are appropriately terms of activity, the normal classification to be used would considered part of the non-profit sector, even if they be ISIC. Because the detail available in ISIC, Rev. 3 for exercise the limited authority delegated to them by many of the social services covered by NPI was not government agencies. sufficient, an elaboration of the basic ISIC codes was developed for use in conjunction with the NPI satellite 23.27 Universities, like other institutions, can be either NPIs, account. This classification is known as the International public institutions or for-profit corporations. Classification of Non-Profit Organizations (ICNPO). Differentiating NPIs from public institutions is especially Similarly some elaboration of the classification of NPIs by difficult since both may receive significant amounts of purpose (COPNI) was developed. In ISIC, Rev. 4, however, government support, either directly or indirectly, and since an alternative aggregation for data reporting for non-profit even public institutions may have a significant degree of institutions is given in part four, section D. The twelve autonomy. The key, therefore, is whether the institution is main headings of interest are shown in table 23.1. Table 23.1:ICNPO groups Group 1. Culture and recreation 2. Education and research 3. Health 4. Social services 5. Environment 6 Development and housing 7. Law, advocacy and politics 8. Philanthropic intermediaries and voluntarism promotion 9. International 10. Religion 11. Business and professional associations, unions 12. Not elsewhere classified 458 Non-profit institutions C. Accounts for non-profit institutions in the satellite account 23.31 The first set of accounts prepared in the satellite account value is placed on this, it may exceed the value of monetary corresponds exactly to those in the SNA sequence of donations to some NPIs. In the satellite account, it is accounts. Indeed this can be seen as a simple aggregation recommended that the value of voluntary labour is across the subsectors for NPIs in the corporations sectors estimated on the basis of the remuneration rates of plus NPISHs. NPIs in the general government sector are employees undertaking similar work and not at the excluded from the satellite account as noted above. opportunity cost of the volunteers. 23.32 The second version of the accounts is to consider those 23.35 Work is proceeding on the measurement of volunteer NPIs that provide services at economically significant labour in the context of a satellite account. A draft Manual prices but where the sales of their output bring in revenue on the Measurement of Volunteer Work (International that is significant but less than the whole of their costs. Two Labour Organization, forthcoming) was presented to the possible scenarios exist. The first is that the enterprise ICLS in December 2008. undertakes different types of activities, some on a market basis and some on a non-market basis but with the market 23.36 The cost of the volunteer labour is treated as both part of basis activities predominating. Although the two types of compensation of employees and as a transfer back from activity cannot be allocated to separate institutional units, these employees to the NPI where they work. The value of separate establishments for each can be distinguished. In the output of the NPI, and the amount treated as social principle, the production account of the establishments transfers in kind, is increased over the amount in the second undertaking market activities should be compiled as normal version of the accounts by the estimated value of the but the production account for the non-market volunteer labour. establishments should be based on the sum of costs. The value of this output should be treated as distributed to households as social transfers in kind and added to 23.37 The satellite account includes other tables apart from the household actual final consumption. sequence of accounts. One of these is to show details of revenue received with a breakdown by sector of origin and 23.33 The second possibility is that only one sort of activity is type of transaction. In particular, it is recommended to undertaken but the sales cover a large part of the costs with distinguish revenue coming from government split between the balance being made up of donations. The donations are sales and grants, and that coming from the rest of the treated in the SNA as current transfers (any donations domestic economy split between private sales and current designated for capital purposes being treated as capital transfers (donations). Where possible both sales and transfers). The satellite account treats these donations as transfers should be separated into those coming from the analogous to subsidies and so measures the value of the domestic economy and from the rest of the world. output as the total sum of costs. In this case, the excess of output measured in this way over the proceeds from sales is 23.38 Another table includes information in physical units such treated as non-market output, social transfers in kind and as the number of employees, number of volunteers, number part of actual consumption of households. of entities and number of members of the organization. In addition some information is given on the financial account 23.34 The third variant on the accounts builds on the second and the assets held by the NPI. version of the accounts by also including an estimate of the value of volunteer labour used in the NPIs. Volunteer 23.39 Fully annotated descriptions of the tables are included in labour constitutes a significant input to many NPIs. If a the handbook on the satellite account. D. Other SNA considerations concerning NPIs 1. NPISHs and government Quick response actions that do not lead to long-term involvement in the country being assisted will be regarded 23.40 In some countries, NPISHs take responsibility for the as non-resident with the production being recorded in the provision of specific services to households that the home countries of the units giving assistance and the government does not see as part of its role to provide. In assistance itself being shown as imports of goods and others, especially developing countries, NPISHs may services funded by transfers. If the assistance extends provide services government would like to provide but beyond one year, the unit providing the assistance will be simply does not have sufficient resources to do so. This regarded as resident and a unit in the NPISH sector of the becomes very clear following a natural disaster when country receiving the assistance. In circumstances where NPISHs may be very active in relief work. international relief is important, it may be helpful to identify NPISHs subject to foreign control separately from 23.41 Whether the unit undertaking the work is resident or not other NPISHs and to identify donations from abroad for all will depend on the normal rules concerning residence. NPISHs. 459 System of National Accounts 2. Informal and temporary NPISHs recorded in the SNA. Such costs as they incur should be recorded as paid by the units to which the costs are 23.42 Quite frequently, a number of households may get together eventually allocated. to pool resources of knowledge and volunteer labour to serve their local community. This could include teaching in 23.46 In the case of microfinance, the unit providing the service is informal schools, offering medical assistance or the most likely to be either a corporation or an unincorporated construction of roads, a well, a school building, etc. When enterprise. Even though the owner of the enterprise may not only services are provided on the basis of volunteer labour, keep the profits but uses them to generate new loans, this no value for the output of the activity is recorded in the does not automatically make the unit an NPI. The definition SNA. of an NPI is not that the owners choose not to withdraw profits but that they are not legally entitled to do so. 23.43 When physical structures result, the activity is included in the production boundary. The value of the output is 23.47 In practice it may be difficult to compile information on estimated by comparison with similar products elsewhere informal NPISHs unless the results are sufficiently in the economy or, when it has to be estimated at the sum of important to come to general attention. costs, an estimate is made for the implicit value of the labour input. This labour input is treated as gross mixed income accruing to households who then are assumed to 3. The output of NPISHs "purchase" the product. In fact they may then transfer the product to another unit, often government, for maintenance. However, the recommendation in the SNA, as described in 23.48 NPISHs produce goods and services, but typically services, paragraph 4.168, is that such organizations should be that are provided to individual households free or at prices treated as informal partnerships rather than as NPISHs. that are not economically significant. However it is possible conceptually for an NPISH to provide collective 23.44 If a group of households cooperates to produce goods for services. An example may be a well-financed institution sale, even if the objective is still to be able to pay for work that engages in research and development but makes its on a communal asset, this is not treated as a non-profit results freely available. Such an institution is engaged in institution but as an unincorporated enterprise in the non-market production but, because it is not controlled by household sector. government, it falls in the NPISH sector. The value of its output is treated as final consumption expenditure and actual final consumption by the NPISH itself. 23.45 Many small groups of individuals or households may exist as a practical means of allocating shared costs. These may be as simple as a "coffee club" at the workplace or may be 23.49 The services provided by non-profit institutions serving a more formal arrangement whereby the costs of common households are not only very similar to those provided by services provided to all tenants in a block of flats are shared government. They present much the same difficulties of equitably. Such groups are practical rather than economic. measuring their output and of selecting suitable price They are not treated as NPIs and their activities are not indices for deflating output to volume terms. 460 Chapter 24: The households sector A. Introduction 24.1 The economy functions because people want goods and 1. Unincorporated enterprises services and are prepared to work to obtain them. At the most basic level there is subsistence activity where people 24.6 All households undertake final consumption and all to a work to grow food to eat. Any sort of development gives greater or lesser extent undertake accumulation but a opportunities to earn money by working for others and household does not necessarily undertake production. To using it to buy goods and services different from those the extent possible, the production activities within one's labour has created. households are treated as quasi-corporations, included in one of the corporations sectors and separated from the rest of the household. However, as explained in paragraphs 24.2 In addition society recognizes that some individuals cannot 4.155 to 4.157 a quasi-corporation can only be created participate in the economy in this way and so makes when a full set of accounts, including balance sheet entries transfers available to the young, the old and the sick, for and information about withdrawals of income from the example. Often these transfers are undertaken by quasi-corporation, is available. Very frequently, and government which redistributes income on behalf of the especially so in the case of a professional working alone, community at large. In addition, transfers may be made by there may be complete information available on the non-profit institutions or by extended family members, or production activities but it may not be possible to separate others, based on traditional and cultural norms. Some out other income flows, transfers and financial transactions individuals do not spend all their income but use some to relating to the production activity from those for the acquire wealth. household in general. In this case as well as in ones where even the information on the production activity is incomplete, an unincorporated enterprise remains as part of 24.3 Lastly there is income arising from the ownership of the household. wealth. At its simplest, wealth is due to the accumulation of income earned in earlier periods (possibly generations 24.7 Even when a quasi-corporation can be created and removed earlier). Wealth gives rise to income because others wish to from the rest of the household accounts, the household may make use of it and pay to do so. In the SNA such payments still include an unincorporated enterprise relating to other are called property income. Like income, wealth may be activity. For example, within a given household one person transferred from one owner to another. may be able to separate off the activities repairing vehicles but another may not be able to separate the activities providing food for sale from the rest of the household 24.4 The SNA gives a clear and full accounting of all income activities. Moreover, many households without any other accruing to households in the period itemized by type of production activities will contain unincorporated income. It also accounts clearly for how this income is enterprises providing housing services from owner- spent on goods and services, transferred to others or used to occupied dwellings and from employing domestic staff. acquire more wealth. However, while the sequence of accounts ensures that the accounts of all households are 24.8 Just as there may be production undertaken within the balanced it does not show how this balance is achieved for households sector, there may be people providing labour to subsets of households. these unincorporated enterprises. Members of the household who work in the unincorporated enterprise are called self-employed and their remuneration is termed 24.5 This chapter is about how to use information from the SNA mixed income rather than compensation of employees. on the households sector in conjunction with other data Individuals who are not members of the household who are sources to investigate the behaviour of households in employed in an unincorporated enterprise are employees. It greater detail. The focus here is on how income is used, is possible but not always likely that the enterprise pays for how the patterns of income and use vary across subsectors social security for these people. It is possible but even less and about the links between income and wealth at a likely that the household may offer other social insurance detailed level. Such a focus is of both analytical and policy benefits to their employees. interest. It is a quite different view of economic behaviour from the predominant view of the SNA which is how 24.9 There is further discussion about employment within income is generated. households in chapters 19 and 25. 461 System of National Accounts 2. The problems associated with subsectoring at least the primary source, for the data to feed into the households SNA. Data for households comes from household income and expenditure surveys but these surveys are based on smaller samples, may be less frequent than 24.10 The difficulty in disaggregating the households sector establishment surveys and the data from them may be arises for a number of reasons. difficult to reconcile with the totals for income and expenditure that emerge from the accounting a. The first is that income is earned by individuals but constraints in the SNA. consumption is undertaken by households. 3. Structure of the chapter b. The second is that it is difficult to find a basis for subsectoring households such that the households in each subsector behave in a similar fashion to one 24.11 The households sector may be viewed in a number of another. Even if their income patterns are broadly different ways depending on whether the interest is similar, their expenditure patterns may differ according primarily on what sort of production households undertake, to the number and age of the members of the what sort of income they earn or what patterns of households. Grouping by the latter may give no consumption are portrayed. Given these different similarity in the level of income. perspectives, it is not easy to come up with a single definitive set of subsectors for households. The conceptual c. The third reason concerns the source of data on and practical reasons for the difficulties are reviewed in household income and expenditure. Typically, section B. A review of possible subsectors is given in information on corporations comes from establishment section C. The next three sections (D, E and F) in turn look surveys and information on government comes from at households as producers, households as consumers and administrative sources. These sources are fairly household income. The last section, section G looks at comprehensive and are in large part the only source, or household wealth and associated income flows. B. Household composition and sectoring 1. Definition of a household. employees have no claim upon the collective resources of their employers' households and the accommodation and food they consume are not included with their employers' 24.12 It is useful to begin by recalling the definition of the consumption. They should therefore be treated as household given in paragraphs 4.149 to 4.157. A household belonging to separate households from their employers. is defined as a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and 24.15 Persons living permanently in an institution, or who may be services collectively, mainly housing and food. In general, expected to reside in an institution for a very long, or each member of a household should have some claim upon indefinite, period of time are treated as belonging to a the collective resources of the household. At least some single institutional household when they have little or no decisions affecting consumption or other economic autonomy of action or decision in economic matters. Some activities must be taken for the household as a whole. examples of persons belonging to institutional households are the following: 24.13 Households often coincide with families, but members of the same household do not necessarily have to belong to the a. Members of religious orders living in monasteries, same family so long as there is some sharing of resources convents or similar institutions; and consumption. Households may be of any size and take a wide variety of different forms in different societies or b. Long-term patients in hospitals, including mental cultures depending on tradition, religion, education, hospitals; climate, geography, history and other socio-economic factors. The definition of a household that is adopted by survey statisticians familiar with the socio-economic c. Prisoners serving long sentences; conditions within a given country is likely to approximate closely to the concept of a household as defined in the d. Old persons living permanently in retirement homes. SNA, although survey statisticians may add more precise, or operational, criteria within a particular country. 24.16 On the other hand, persons who enter hospitals, clinics, convalescent homes, religious retreats, or similar 24.14 Domestic staff who live on the same premises as their institutions for short periods, who attend residential employer do not form part of their employer's household schools, colleges or universities, or who serve short prison even though they may be provided with accommodation sentences should be treated as members of the individual and meals as remuneration in kind. Paid domestic households to which they normally belong. 462 The households sector 2. Residence household surveys may sometimes reveal errors in industry data or vice versa it is more problematical to take 24.17 All households are resident in the economy but of information from household surveys on, say, expenditure increasing interest is the phenomenon of a person abroad, patterns of one group of households and suppose all other often but not necessarily a family member, who remits members of the group behave in the same way. For this significant amounts to the family in the domestic economy. reason a household income and expenditure survey is often (The same phenomenon also exists within a country, reported as a freestanding exercise and integration with the between urban and rural areas, for example.) The aspect of national accounts totals is not as frequently part of people moving abroad in response to better employment compiling the full set of national accounts as is the case prospects may be seen as another facet of globalization and with establishment surveys. In order to explore why this one that deserves to be monitored. may be so, it is useful to look briefly at some of the problems experienced with household surveys. 3. Determining subsectors 4. Household surveys 24.18 As noted in the introduction, the difficulty in disaggregating the households sector arises for a number of 24.22 Any attempt to disaggregate the households sector is likely reasons. The first is that income is earned by individuals to be dependent on a household income and expenditure but consumption is undertaken by households. While all survey. The conventions adopted by survey statisticians households contain all individuals, it is very difficult to and those of national accountants are not always the same. associate particular income recipients with particular A household expenditure survey for example may not household groups. It is possible to have one table showing include estimates of imputed rental of owner-occupied the types of income earned and the types of individuals dwellings or own account production. It may measure receiving them. It is also possible to have a table of types of income after tax and measure expenditure on a cash and not households and the pattern of household consumption of on an accrual basis. Various publications have been each. Only in the highly stylized situation of one income prepared to examine such differences and make earner only per household (and only one source of income) recommendations on how to reconcile survey data with can the type of income be matched with the type of national accounts requirements. Particularly relevant is the household and even then only if households are categorized Final Report and Recommendations of the Expert Group according to the type of income. The problem could be on Household Income Statistics (Canberra group, 2001) compared to that of the supply and use tables but whereas it and Household Income and Expenditure (International is possible to establish which industries make which Labour Organization, 2003). products, there is no natural relationship between individuals as income recipients and the household to 24.23 A major problem with household surveys is that it is very which they belong when households are grouped by any common for respondents to underestimate or underreport criterion other than main income source. their income. This may be deliberate or may simply be a lack of understanding of what should be included or simple 24.19 The problem of trying to link income flows from the SNA forgetfulness. with a desirable set of household characteristics is one of the most difficult aspects of building a social accounting 24.24 Similarly some items of consumption are regularly matrix. Very often it is necessary to revert to modelling to underreported, most notably expenditure on alcohol and reconcile income related to individuals to consumption tobacco. On the other hand, consumption of some items is related to households. over-reported. For example, if a survey asks for expenditure on durables based on the recall of the 24.20 The second problem is related to the homogeneity of respondent of what has been spent over the last two or three households. Various criteria may be used to disaggregate years, people often underestimate how long it is since the sector (discussed in section C) but whatever criterion is purchases were made and will report more expenditure in used it is difficult to assert that the behaviour of the sample this period than has actually been the case. This is typical of the whole. This is a difficulty not normally phenomenon does not only apply to very large items of encountered in industrial classifications and surveys. For expenditure; it is reported that household surveys have example, if a survey covers 50 per cent of firms in a given suggested that the purchase of toothbrushes, for example, is industry it is probably reasonable to suppose that the many times higher than in the sales reported by shops. pattern of expenditure is typical of the whole. If an enterprise doubles its turnover, the level of intermediate 24.25 The problem of non-response is a concern in household consumption will probably approximately double but its surveys since it is quite likely that some of the households composition may not alter significantly. Such assumptions that refuse to respond have income and expenditure are very suspect in the case of household groups. This is patterns that are different from respondents. For example another area where it may be difficult to use a social people with incomes arising from illegal activities may be accounting matrix for analysis without having further very reluctant to supply information and may choose not to recourse to modelling, this time to determine how groups of participate in the survey. Similarly it is common for households react to different stimuli. households at the very top and very bottom of the distribution to be omitted from the survey either by design 24.21 The information for the corporations sectors derives from or on the grounds of practicality. surveys. The household aggregates of income and expenditure are known from the accounting identities in the 24.26 Household surveys may be designed to investigate sequence of accounts. While it is true that information from particular phenomena that are not necessarily the primary 463 System of National Accounts interest for national accounts. For example, they may be along the lines desirable within the national accounts. It is restricted to low income earners in urban areas. While this important to realize that a desired pattern of subsectoring information is highly valuable and useful it is not sufficient should be determined before the survey is undertaken to to produce aggregate figures for national accounts. ensure the desired characteristics will be adequately Sometimes even if the coverage is more comprehensive, represented in the survey sample. the sample size may not be such as to allow disaggregation C. Subsectoring households 1. The production perspective households share is that they do not have an unincorporated enterprise. Thus while subsectoring households according to production is useful in some circumstances it has its 24.27 A first consideration is to investigate the possibility of limitations in terms of identifying the role of different types subsectoring households according to their involvement in of households in the economy. production. This may be done following the pattern shown in chapter 25 to identify informal and other production activity undertaken by households. 2. The consumption perspective 24.28 The first division is to separate institutional households and 24.32 It is widely observed that as household income rises so the those households that do encompass an unincorporated pattern of consumption changes. The proportion of enterprise from those that do not. Thereafter it is expenditure devoted to food and other necessities declines straightforward to identify those households whose only as more income is available and is devoted to more luxury productive activity is connected with the owner occupation goods. Thus one approach to disaggregating households of houses or the employment of domestic staff. The according to consumption patterns is in fact to disaggregate households that are left may be further divided between by level of income, assuming this captures the difference in those that employ staff to work in their unincorporated consumption patterns. Studies showing consumption enterprises and those that do not. As described in the patterns according to income deciles are quite common and chapter on the informal sector, when proceeding along give interesting information about how patterns of these lines it is sometimes desirable to identify the type of consumption change as the overall level of income activity of an unincorporated enterprise, in particular increases. identifying agricultural activity separately from other types of activity. 24.33 The question arises of how household consumption patterns 24.29 Within the SNA, all household enterprises that can be may relate to incomes of individuals. There is no obvious treated as quasi-corporations because they have complete way to identify how recipients of income fall into one or sets of accounts showing their ownership of assets other income decile when these deciles are calculated on a (separately from those of the household to which they household basis. Households with a high income may result belong) and the withdrawal of income to their owners are from one very well-paid worker or from a number of classified in one of the corporations sectors. The number of middle income earners. Further, although the production household enterprises that can be treated as quasi- account shows total compensation of employees and it may corporations, and thus removed from the households sector, be possible to compare this to the total number of varies considerably from country to country depending on employees, this gives no information about the distribution the availability of accounting information and the resources of income across the labour force in the enterprise. available to identify such enterprises and treat them as quasi-corporations. 24.34 Not all income comes from compensation of employees and the effect on total household consumption of other 24.30 Although it is possible to identify households that only sources of income is equally uncertain. have owner-occupied housing as their unincorporated enterprise, in many cases other unincorporated enterprises 24.35 Using the level of household income as a proxy for will undertake owner occupation of their houses as well. consumption patterns has some significant problems. One While from a production point of view it is possible to possible disaggregation of households where consumption separate the different types of production activities, for the patterns might be significantly different would be institutional unit as a whole it is not possible to make this according to whether the household includes children and, separation. where it does not, whether the household is relatively young (and may be setting up home for the first time) or 24.31 In most countries, many households do not have relatively old (where expenditure on consumer durables unincorporated enterprises, so when subsectoring is done may be lower than for other groups). However, here again according to production undertaken by households, those there is no easy way to link the source of the income with without unincorporated enterprises are grouped together in the type of the household in which the income recipient a single subsector. The only common factor these resides. 464 The households sector 3. The income perspective 4. Using a reference person 24.36 A more promising approach to subsectoring appears to 24.40 Other methods of subsectoring usually require a reference come from considering not the level of income but the type person to be identified for each household. The reference of income. As proposed in chapter 4, the following scheme person is not necessarily the person that other members of might be considered. the household regard as the "head of the household", as the reference person should be decided on grounds of 24.37 Households may be grouped into subsectors according to economic importance rather than age or seniority. The the nature of their largest source of income. For this reference person should normally be the person with the purpose, the following types of household income need to largest income although the reference person could also be be distinguished: the person who makes the major decisions with regard to the consumption of the household. a. Income accruing to the owners of household unincorporated enterprises with paid employees 24.41 Once a reference person has been identified, it is possible to (employers' mixed income); group households into subsectors on the basis of the reference person's characteristics. For example, subsectors b. Incomes accruing to the owners of household may be defined according to: unincorporated enterprises without paid employees (own-account workers mixed income); a. Occupation of the reference person; c. Compensation of employees; b. Industry, if any, in which the reference person works; d. Property and transfer incomes. c. Educational attainment of the reference person; 24.38 Households are allocated to subsectors according to which of the four categories of income listed above is the largest d. Qualifications or skills possessed by the reference for the household as a whole, even if it does not always person. account for more than half of total household income. When more than one income of a given category is received within the same household, for example, because 5. The consequences of demographic change more than one member of the household earns compensation of employees or because more than one property or transfer income is received, the classification 24.42 A growing policy interest in some countries is the effect of should be based on the total household income within each demographic change on household well-being and the category. The four subsectors are described as follows: response required by government. For example, in an ageing population, there may be less demand for educational services and more for health services. a. Employers; 24.43 Another concern is whether pension provision is sufficient b. Own-account workers; to ensure that individuals have an adequate level of income in retirement without looking to government for income c. Employees; support. A focus on such issues might suggest subsectoring households according to whether the main income earner is in work, of working age but not in work or in retirement. d. Recipients of property and transfer incomes. Again, categorization according to the main income earner will give different results from categorizing income as a 24.39 The fourth subsector, households for which property and whole. transfer incomes make up the largest source of income, constitutes a heterogeneous group and it is recommended that it should be divided into three further subsectors when 6. Other considerations possible. These subsectors are defined as follows: 24.44 It is possible to consider subsectoring households on quite · Recipients of property incomes; different grounds. Examples include the number of persons in the household, the region where the household is located, the qualifications or education level of the head of the · Recipients of pensions; household, the industry where the head of the household works, whether the household owns property or other assets · Recipients of other transfer incomes. and so on. 465 System of National Accounts D. Households as producers 1. Households and the informal sector necessary to calculate the cost of construction and estimate how long the building is usable without major renovation. 24.45 In all countries, there are some production activities undertaken by households. Many of these may be described 24.51 All dwellings require regular maintenance. The production as informal and, as described in chapter 25, measuring the account for an owner-occupied dwelling treats as extent of the informal sector and how this changes as the intermediate consumption only the goods and services economy develops gives particular insight into the necessary to undertake the sort of repairs that are typically extension of the market economy beyond formal the responsibility of the landlord in the case of rented enterprises. buildings. These may include payment to specialists in the building trade, for example plumbers or painters, and the 24.46 The difficulty of separating the productive activity of a cost of these specialists will include their compensation of household from the rest of the institutional unit has been employees. However when work is undertaken by the discussed in a number of places in earlier chapters, owner himself only the cost of the materials is included in particularly in chapter 4, and is referred to above in intermediate consumption with no estimate made for the discussion about the subsectors for households. This value of the owner's time spent on repairs. In consequence, section therefore discusses only some aspects of those there is no compensation of employees appearing in the productive activities that inevitably remain within the production account for owner-occupied dwellings. (This households sector. may be seen to be a pragmatic convention. If labour costs were to be imputed to the owner undertaking repairs, this would be recorded as income accruing to the household but 2. Agriculture the income from the rental on the house would be reduced by an exactly offsetting amount.) 24.47 In some countries, subsistence agriculture, or indeed the results of any agricultural production which are used 24.52 The whole of the imputed rental less actual costs (including entirely by those responsible for the production, is a very costs other than those relating to repairs) incurred is treated significant part of household consumption and by extension as operating surplus of the owner. The accounts for the of GDP. In countries where much of the staple food is owner of the building show the whole of the value of the grown for own consumption, and it is seasonal, it is imputed rental as output, any costs incurred as intermediate necessary to consider whether some part of the increase in consumption and the difference as gross operating surplus the value of the crop due to storage is part of production. which is paid to the household in its capacity as the owner There are details of how this may be done in the annex to of the unincorporated enterprise. In the use of income chapter 6. account, the full value of the rental is shown as consumption of the imputed rental of owner-occupied 24.48 It should be recalled that the purchaser's price for dwellings. agricultural products used for own consumption does not mean the price at the nearest local market which would 24.53 When major repairs are undertaken, these are treated as include transportation costs. The market price is the price gross fixed capital formation but the same conventions that somebody would pay for the crops where they are apply concerning the recording of compensation of grown. This is frequently called the farm-gate price. employees. 24.49 In principle, all fruit and vegetables grown for their own 24.54 Some houses are owned by households but leased out by use by households with small allotments or large gardens them. In this case the rental paid by the tenant is the value should be included within the production boundary, even in of the output of the rental service. The production account developed countries. In practice it is unlikely to be worth for the earning household shows intermediate consumption the effort of making estimates unless the amounts involved charged against this output to derive the operating surplus are significantly large. of the activity, which is treated as income to the owning household. In some cases the whole of the intermediate 3. Housing consumption may be a service charge paid to a rental agency. It is conceivable that occasionally the service paid 24.50 In almost all economies, a large number of households live to the rental agency may exceed the rental income so that in dwellings that they own. The size of the rental market the rental activity produces a loss. For example, if a house may be very small and may be confined to some areas, for stands empty for a time, there may still be a fee payable to example urban areas, which makes it difficult to use market the rental agency. The earning household will often regard rentals as a means of estimating the services provided by all this as acceptable because one reason for owning a house to owner-occupied dwellings. In chapter 20, it is explained rent is because it is hoped a holding gain will be made on that in principle the rent on a capital asset can be calculated owning the house over a long period. by applying a discount factor to the stock of capital at the beginning of a period, so if the value of the house is known, 24.55 By convention, all the value added arising from leasing a figure for the services provided can be estimated. dwellings is treated as operating surplus, not mixed However, this approach also is problematic in those income. circumstances where there are no data on the stock of capital or where there is uncertainty on the rate of return to 24.56 Some houses will be owned as second homes either in the be estimated. For simple rural dwellings, it may be same economy or abroad. The same principles apply as in 466 The households sector the case of imputed rental of owner-occupied dwellings and 4. Domestic staff rental services activities that come from renting out a house. If the house is in another country, it is treated as belonging to a notional resident unit in that country. The 24.59 Services provided by paid domestic staff are valued at the legal owner then has a financial claim on the notional cost of the compensation of employees paid to those staff resident unit. The notional resident unit therefore appears to but including any income in kind such as free be a direct investment enterprise wholly owned by a non- accommodation or free meals as well as any social resident. However, the only asset of the unit is the value of insurance contributions that may be paid on behalf of the the property and the whole of the operating surplus from staff. By convention the production account for paid renting out the house is treated as being withdrawn from domestic services consists only of this compensation of the notional unit and remitted to the owner so there are no employees. All of the products used in the performance of retained earnings remaining to be treated as reinvested domestic services, such as cleaning materials and tools earnings. used, are treated as final consumption expenditure of the household. 24.57 To the extent that the house abroad is used by nationals of the economy where the legal owner is resident, the rentals 24.60 Individuals who provide paid domestic services must be should be treated as exports of services from the foreign members of another household. Payments to children for country and imports of services to the domestic economy. performing tasks in the house are not treated as the However, the operating surplus of the notional unit is provision of paid domestic services but simply as if the remitted to the owner and appears as a property income payment were a transfer within the household. On the other outflow from the foreign country and inflow to the hand payments to a child for babysitting a neighbour's domestic economy, offsetting the flows of rental services children should in principle be treated as domestic services (at least in part). but these may be too small and difficult to measure. 24.61 In practice, some countries may include full-time domestic 24.58 When a house is financed by a mortgage, in principle employees as members of the households, in which case a FISIM charges relating to interest payments on the loan transfer within the households is recorded, even though should be treated as part of the intermediate consumption transfers within an institutional unit are not normally of the production activity associated with renting the recorded. This in turn means there is an element of double property (either for use by the owner or by a tenant). counting for the household concerned with a payment to However, it may be difficult to identify FISIM related only the domestic staff and the expenditure by those staff both to interest on the mortgage and in some cases a loan using being included in the household's consumption the property as collateral may not be used to secure the expenditure. property for the purpose of having a dwelling available. In practice, if FISIM is not treated as part of the intermediate consumption of the rental activity, the operating surplus 24.62 In chapter 29 there is discussion of the possibility of from the rental activity will be higher than otherwise but extending the production boundary within the context of a the consumption expenditure of the household will be satellite account to include all domestic services, including higher by the same amount. those that are not performed in return for payment. E. Households as consumers 1. Consumption goods and services provided 24.64 In principle, transfers in kind between households should in kind be recorded in the SNA. However, if there are no subsectors of the households sector, such transfers will not appear in the accounts when they occur between resident 24.63 Chapter 9 describes the different concepts of consumption households. On the other hand transfers in kind between expenditure, actual consumption and the use of resident and non-resident households may be quite significant and should be captured through information on consumption goods and services. Within the SNA, only the remittances in the balance of payments data. Practical first two are measured and the difference between them is considerations are described in International Transactions accounted for by social transfers in kind provided by in Remittances: Guide for Compilers and Users government and NPISHs to households. In principle it (International Monetary Fund, 2008b) ) might be interesting to be able to distinguish social transfers in kind provided to children (for example most 24.65 When there is a significant amount of consumption education), to the elderly (particularly health care) or represented by own account production, income in kind, perhaps on a regional basis. However, there are barter or transfers in kind it would be useful to itemize the considerable difficulties in working at this level of detail distinction between consumption expenditure by and so it is probable that such extra detail could be households in kind from consumption purchased in the provided only in the context of a satellite account. market place. 467 System of National Accounts 2. Expenditure by tourists 3. Consumption expenditure by type of product 24.66 Most data sources for household consumption from the 24.67 Most household surveys itemize consumption according to supply side are not able to distinguish whether purchases the purposes it is intended to serve: food, housing, etc. This are made by resident households or by non-resident type of breakdown is the one used in the Classification Of households. Equally, the same sources will not reveal Individual COnsumption by Purpose (COICOP). For purchases made abroad by resident households. These two inclusion in the supply and use table, and indeed for other items are often of a sufficiently significant size that it is analyses, it is useful to prepare a table showing the cross important that they be estimated both for the impact on the classification of consumption by purpose and by type of balance of payments and in order to ensure that the supply product. This is useful not only in terms of providing the and use table can be adequately balanced. Further information for the supply and use tables but also in consideration of expenditure by tourists is discussed in examining the information used to compile consumer price chapter 29 in the context of a tourism satellite account. indices, which in turn are used to deflate consumption expenditure. If the data permit, it may also be useful to look at the composition of consumption expenditure by type of household with a view to calculating consumer price indices for different groups of households, for example for the elderly or for those with young children. F. Household income 24.68 It is a well-established phenomenon in all countries that fixed capital should be separated between that due to income is distributed unevenly and in a very skewed owner-occupied dwellings and that relating to other assets manner. Very many people have income significantly of unincorporated enterprises. below the average or median income and very few people have extremely large incomes. A poverty line is sometimes 24.70 The standard accounts contain information on transfers in quoted as half the median income but an income of twice the form of taxes paid and social insurance contributions the median does not imply great wealth; the wealthiest and benefits split between pensions and other benefits. In individuals in an economy may have incomes many times some countries it is especially relevant to show personal larger than the average or median income. remittances from abroad to demonstrate the impact on the domestic economy of those with strong ties to economies 24.69 The reason that the sequence of accounts is important is abroad. For countries with a large migrant population it that it gives a picture of how income is distributed and may be similarly useful to identify the corresponding redistributed either compulsorily via taxes and benefits or outflows and their destination. voluntarily via transfers or because of ownership of financial or other assets (property income). In order to examine whether the process of distribution and 24.71 Within property income it is useful to distinguish those redistribution of income significantly changes the overall flows that place resources at the disposal of the recipients distribution of income in the economy it is necessary to be from those where the receipts are already precommitted as able to show the flows between different groups of saving, for example, pension entitlements, property income households. As noted in the introduction, it is difficult to on life insurance and interest that derives from the increase allocate income from one particular source to one in the value of bonds. It should be noted that it is household group rather than another. This is not particularly useful to identify the withdrawal of income straightforward and not a standard part of the SNA. from quasi-corporations if there are many household However, it is straightforward to provide more information enterprises treated as quasi-corporations. to analysts on the type of household income than the total contained in the standard sequence of accounts. As far as 24.72 It may be useful to identify and show separately income in value added is concerned, it may be possible to distinguish kind of all types, such as wages and salaries in kind and compensation of employees paid by individual industries or transfers in kind, and then derive a total excluding both perhaps according to level of education or by region. Mixed these and the precommitted saving which might be called income can similarly be distinguished. Consumption of discretionary income. G. Household wealth and associated income flows 1. Household balance sheets houses and accumulated pension entitlements. Where they exist, claims on enterprises may also be significant. 24.73 For many households, their main assets are their land, Investment in financial assets outside pension funds may 468 The households sector also be important in some countries. However, set against 24.79 By treating pension schemes as social insurance schemes, the assets must be the liabilities of the households, pension benefits are shown as current transfers, and thus including the loans involved in mortgages and other income, rather than as a run-down of saving. If a pension financial liabilities and, for example, credit card or other scheme is not treated in this way, though, there is still debt. income accruing to the pension beneficiary in the form of the property income payable on the pension entitlements. 24.74 For households including an unincorporated enterprise For a defined benefit scheme, this property income other than owner-occupied dwellings, there may be other represents the unwinding of the discount factor on future fixed assets recorded on the balance sheet but these tend to be small relative to housing. entitlements. The decrease in the entitlements is equal to the difference between the benefits payable and this property income, similar to the position for an annuity 2. Family trusts explained at the end of part 1 of chapter 17. 24.75 Family trusts are owned by households, though some trusts 24.80 To the extent that the value of the pension as a form of may be owned by a number of households collectively wealth is based on the net present value of future income possibly including non-resident households. Trusts may be flows, pension receipts can be partitioned into the rundown set up to protect wealth until a beneficiary comes of age or meets another criterion, they may be set up to preserve of savings and income accruing. In cases where there are no family estates and so on. The SNA recommends that trusts pension entitlements, a household with a significant level should be treated as quasi-corporations and included in the of financial assets is still likely to receive significant financial corporations sector as captive financial property income, though the mix of property income and institutions. However the trusts must have liabilities to the holding gains and losses will depend on the investment beneficiaries sufficient to reduce their net worth to zero. In strategy of the household concerned. compiling the balance sheet for the households sector, the value of the assets corresponding to the liabilities due to resident households must be included. Where family trusts 24.81 For a household where one or more of the members is are important and when household wealth is the subject of building a pension, significant income will accrue each interest, it may be useful to introduce a supplementary heading under other equity owned by households to show year but this is not accessible to the household to spend. It the value of trusts separately from the equity of other quasi- must be accumulated to fund future pension entitlements corporations such as partnerships. and thus shows as an increase in wealth. 3. The distribution of wealth 24.82 It is possible to construct an asset account for pension entitlements showing the start of year level of entitlements, increments due to work done in the year, increases due to 24.76 Increasing interest is being shown in conducting surveys of household wealth along lines similar to surveys of the fact that retirement has become a year nearer (the household income and expenditure. Again the interest is to unwinding of a discount factor) and other changes such as look at a disaggregation of the households sector to an allowance for inflation, less decreases due to pension discover the composition of household wealth and its payments or other changes that reduce entitlements. relation to household income. 5. Consumer durables 24.77 In general the distribution of wealth is even more strongly skewed than income. A family where the main earners are in mid career may have a comfortable level of income and 24.83 Within the SNA, consumer durables are not treated as a occupy their own house but still have a considerable form of wealth but as a form of expenditure. However, mortgage and may not yet have built up significant pension there may be considerable interest in having a reserves. memorandum item in the balance sheets to show the worth of consumer durables. The acquisition of durables may well 4. Pension considerations be cyclical and there is interest in a satellite account that would replace the purchase of consumer durables as current 24.78 There is a question about whether the rundown of wealth expenditure by figures for the flow of services provided post retirement should be recorded as income or as dis- from the same items treated as fixed capital. This is saving. discussed further in chapter 29. 469 System of National Accounts 470 Chapter 25: Informal aspects of the economy A. Introduction 25.1 No economy is completely regulated and captured perfectly size of the three segments in figure 25.1 will vary from by statistical enquiries. Steps have to be taken, therefore, to country to country. attempt to cover unregulated activity and survey imperfections as special exercises. There are two 25.5 Efforts to cover the NOE ensure that all enterprises are approaches that, although they share a lot of common covered in statistical estimates even if not covered by ground, are directed towards two rather different goals. The statistical enquiries. Some of the supplementary estimates first is to ensure that all activities including those that may may well relate to those activities of household be described as "hidden" or "underground" are unincorporated enterprises considered to be informal (in encompassed in measures of total activity. The second is to this chapter called informal enterprises) but some will define what is meant by the subset of economic units that relate to large enterprises, not regarded as informal. In can be considered "informal" and to measure this. addition, the NOE aims to cover misreporting in large enterprises, whether this is inadvertent or deliberate. The 25.2 The rationale for the first activity is obvious; to have a view NOE thus covers some activity by informal enterprises but of the economy as a whole that is as complete as possible also information for some formal enterprises. and as comparable over time and across countries as possible. The part of the economy difficult to measure has 25.6 Within the informal sector, some information may be become known as the Non-Observed Economy (NOE) and captured statistically. Consider a household that lets rooms several publications have been dedicated to measuring it, to visitors for one or several nights. The activity cannot be notably the handbook Measuring the Non-Observed treated as a quasi-corporation because it is impossible to Economy (Organisation for Economic Co-operation and make a clear separation of costs from regular household Development, International Monetary Fund, International costs and to partition that fraction of the house treated as an Labour Organisation and CIS STAT (2002). As the asset associated with the letting of rooms from its main techniques in the handbook make clear, a specific measure function as a family home. However, the value of the of the NOE is not important in itself. Attention focuses on letting activity may be captured in a survey directed at ensuring that the measurement of total activity is complete tourism activities, for example. or "exhaustive". 25.7 Other examples might be considered. Street traders or 25.3 The second alternative recognizes the analytical taxidrivers may be both not observed and informal. A importance, especially in developing countries, of being vehicle repair shop with 5-10 employees may be formal but able to measure that part of the economy that reflects the too small to be covered by statistical enquiries and efforts of people without formal jobs to engage in some therefore not observed. Teaching assistants may be form of monetary economic activity. This part of the informal but observed. The situation is complicated by the economy has become known as the informal sector. It is by estimating the size of the informal sector that it becomes Figure 25.1:The non-observed economy possible to assess how far the benefits of development and the informal sector reach, for example, people living on the street or in shanty towns. Those supporting the second approach do not deny Observed, the importance of the comprehensive measure of the Not observed, not informal inform al economy but for them this is not sufficient. Despite the difficulty of doing so, attempts must be made to identify and measure an informal sector. 25.4 There is a large overlap between both concerns. However, while the NOE and the informal sector overlap, neither is a complete subset of the other. This can be seen in figure 25.1. The solid circle represents the non-observed economy and the dotted circle the informal sector. Thus the overlap consists of activities that are not observed and undertaken informally but there are some activities that are not observed but are not undertaken informally and some that Not observed and informal are undertaken informally but are observed. The relative 471 System of National Accounts fact that street traders, taxi drivers, vehicle repair shops and 2. Structure of the chapter teaching assistants may be formal in some countries and informal in others, just as they may be observed in some 25.11 Section B looks at the characteristics of production units to and not in others. try to identify the characteristics significant for the non- observed economy, the informal sector or both. 25.8 It should be noted that all countries have both non-observed parts of their economies and informal enterprises though 25.12 In the context of compiling national accounts, much the scale of each and the policy interest in identifying the attention focuses on the non-observed economy. This topic latter may vary. is addressed briefly in section C. 25.13 The International Labour Organization (ILO), in adopting a 1. The policy interest in measuring activity resolution of the International Conference of Labour undertaken by informal enterprises Statisticians (ICLS), has been instrumental in establishing a concept of an informal sector to identify a set of production units within the SNA households sector that are particularly 25.9 Production in the informal economy appears in different relevant for policy analysis and formulation, especially in ways in different countries. When the motivation is a pure many developing countries and countries in transition. This survival strategy or a desire for flexible work arrangements, work addresses the question of how the market economy is it is likely to be encouraged. However, when the motivation penetrating areas outside the formal parts of the economy. is to avoid taxes and regulations, or to engage in illegal This topic is addressed in sections D and E. activities, efforts are likely to be made to curtail these. Most kinds of production activities may be undertaken by 25.14 The ILO work is pragmatic in realizing that it is very an informal unit. These units may operate without a fixed difficult to establish a definition of the informal sector that location, or in homes, small shops or workshops. The is strictly comparable across countries given the difference activities covered range from street vending, shoe shining in the structure of micro and small enterprises, the national and other activities that require little or no capital and skills legislation covering registration of enterprises and the to activities that involve a certain amount of investment or labour laws. An Expert Group on Informal Sector Statistics level of expertise such as tailoring, car repair and (known as the Delhi Group) was set up in 1997 to address, professional services. Many informal enterprises are among other issues, both the conceptual and operational operated by an individual working alone, as a self- aspects of the ILO definition. Work of the Delhi Group is employed entrepreneur (own-account worker), or with the reported in section F. help of unpaid family members, while other informal unincorporated enterprises may engage paid workers. 25.15 Section G discusses the borderline of units that might be regarded as informal but in practice are not recorded in the 25.10 The size and significance of production undertaken by households sector, as well as some activities in the informal enterprises depends on the social structures, households sector that are not regarded as informal. It goes national and local economic regulations, and enforcement on to indicate how data matching the concepts of the efforts of a given country. The level of policy interest informal sector may be derived from the SNA accounts. varies from country to country depending on the type of activity and magnitude of it. The size, registration and other 25.16 Section H complements this by discussing some characteristics of the production units involved are key approaches relating to collecting data on activities variables in determining whether to encourage or undertaken by informal enterprises and on informal discourage certain modes of production or enlarge the employment. scope of the formal economy by recognizing units operating below previous thresholds. Specific social 25.17 The interest in the informal sector has led to the production support and assistance programmes may be designed and of a number of handbooks and studies of current practices. monitored to see how far they support goals such as It is impossible to report these in depth in this chapter but increased production, job creation and security, poverty section I gives a brief description of some of these and reduction and the empowerment of women. indicates where they may be consulted. B. Characteristics of units acting informally 25.18 As noted in the introduction, it is not straightforward to Although different commentators place more emphasis on define what is meant by the adjective "informal". Is the some criteria and some on others, there is broad agreement description one of the nature of activities, the way in which that no single criterion on its own is sufficient to determine they are carried out, or the way in which they are captured what is meant by informal; several criteria must be considered. in statistical enquiries? In order to try to formulate a precise delineation of what is the subject of interest, a number of potential characteristics can be listed of what characteristics 25.19 Two questions need to be kept in mind when considering the word "informal" might be intended to convey. each possible criterion: 472 Informal aspects of the economy a. is this really central to the definition of activity considerably from country to country and also from undertaken by a unit considered to be an informal industry to industry within a country. Often small-scale enterprise, and enterprises are excluded because the statistical office considers the cost of collecting information from such units is too expensive considering the proportion of output they b. is it the basis for reaching a definition that will yield account for and the potential for inaccuracies in the internationally comparable results? reported data. However, there may be a "grossing up" procedure to allow for the non-coverage of the smaller 25.20 Registration. One interpretation of what is informal is units. In such a case, the production activities of these units whatever is not registered with some arm of government. are likely to appear attributed to the corporations sectors The problems with this criterion are obvious. Different even though strict conformity with SNA guidelines would countries have different practices on registration. Some place these in the households sector. may insist that all activities, however small and casual, should be registered; others may be more pragmatic and require activities to be registered only when their turnover 25.24 Borderline of activity. In chapter 6 there is discussion of the exceeds a given amount or when the number of employees production boundary of the SNA. As noted there, some exceeds a given number. Further, whatever the official activities that are economic in nature are excluded from the requirements for registration, the degree of compliance production boundary, specifically services produced by with the requirements will vary according to the extent to households for their own consumption other than the which they are enforced in practice. A definition of the services provided by owner-occupied housing and services informal sector based on registration is therefore not going provided by paid domestic staff. While there is interest in to give international comparability or, possibly, measuring these activities for some forms of analysis, there comparability over time within a country if the is agreement that in measuring activity undertaken by requirements for registration or degree of compliance with informal enterprises the boundary of production in the SNA the requirements vary. should be taken as appropriate. However, the services from owner-occupied dwellings are excluded. 25.21 Legal incorporation. Closely related to the characteristic of registration is one of legal incorporation. It is the case that 25.25 Illegal activity. Chapter 6 makes clear that, in principle, the all legally incorporated enterprises are treated in the SNA fact that an activity may be illegal is not a reason to exclude as falling into one of the corporations sectors but these it from the production boundary. In some countries, the sectors also include quasi-corporations. A quasi- difficulties of capturing illegal activities may mean that corporation is defined in the SNA as a unit where either a they are either not well covered or deliberately ignored on full set of accounts, including the balance sheet, is available pragmatic grounds. However, for some countries ignoring or can be drawn up. In this way some units that the owners the production of drugs, for instance, would seriously choose not to incorporate (in many cases quite legitimately) underestimate the overall level of economic activity. In are treated in the SNA as if they are incorporated but general, as discussed further in section C, some illegal having a full set of accounts is a fairly stringent activity may be included in the SNA, if only indirectly, and requirement. Some units may have very detailed so complete exclusion is impracticable in any case. information about their production activities but not about other accounts. Thus they cannot be treated as quasi- corporations and excluded from the households sector 25.26 Location. Some analysts may be interested mainly in the despite appearing to be "formal" in terms of the nature of development of informal enterprises in urban areas, their activity. Examples where this may happen include particularly in so-called shanty towns on the outskirts of doctors, lawyers, engineering consultants and many other large conurbations. While the policy implications of such professions. In addition to the statistical restriction on an approach can be appreciated, the role of the informal treating production activities as if they are undertaken by economy in areas outside the main urban areas is also incorporated units, laws requiring or permitting important and for international comparability, and for incorporation vary from country to country thus limiting comparison over time when internal migration is international comparability. significant, restricting coverage by location is undesirable. 25.22 Size. Faced with this variation of statistical and 25.27 The terms of employment. Some employees have terms of administrative practices, one possibility for identifying employment that entitle them to various benefits in addition informal enterprises might be to rely simply on the size of to their wages and salaries. These benefits typically include the enterprise, defined either in terms of turnover or paid annual and sick leave and pension entitlement. Even number of employees. The problem with turnover is again production units offering such terms to some of their the potential variability across countries and over time. workers may also employ people on less generous terms Using a maximum number of employees to identify informal enterprises would result in some units with full offering no benefits beyond wages and salaries. People who accounts, and thus allocated to the corporations sectors, work on their own account (the self-employed) may do so being identified as informal and some units in the to provide some supplementary income, may do so because households sector without a full set of accounts as formal. they are unable to obtain a job with benefits or may simply choose to do so for a number of reasons, including the flexibility of choosing what they do, for whom and for how 25.23 Covered by statistical surveys. The coverage of statistical long. Many of the latter may work under terms that offer surveys, particularly establishment surveys, varies not employment as such but a service contract. 473 System of National Accounts C. The non-observed economy 25.28 At the time the 1993 revision of the SNA started, it was of statistical enquiries. The process of assembling a set of assumed that identifying an informal sector was mainly a national accounts, especially when the supply and use problem for developing countries. However, even by the framework is used, already casts light on missing time that revision was complete, it was obvious that the information and helps improve the estimates overall. problem affected all economies, whatever their state of Consider the case of some types of illegal activities. development. Within the EU, the need to ensure strict Because avoiding taxes is illegal and tax collection may be comparability of coverage of the national accounts among pursued more vigorously than statistical reporting, a member states led to a series of initiatives to ensure the prostitute may report her (or his) earnings more or less accounts were "exhaustive" (that is, fully comprehensive). accurately but describe her activity as modelling, acting or Also in the early 1990s as countries in Central and Eastern any number of other ways. Similarly, while smugglers of Europe made the transition to market economies, the need cigarettes may not report their activities, the fact that to cover activities outside the scope of previous reporting households purchase the cigarettes may be much better methods, whether undertaken within formal units or in documented and thus implicitly the illegal imports are informal enterprises, became pressing. captured in the accounts. 25.29 The extent of economic activity missing from statistical 25.33 It has been argued that a completely balanced set of supply data collections and from administrative sources became and use tables is unlikely to omit any significant activity. known as the "non-observed economy". In some countries, While it is possible that something may be omitted, if the the emphasis has been placed not on identifying the non- tables are to balance, there must be exactly matching observed economy as such but simply ensuring that the omissions in other aspects of the accounts, which is not accounts are fully comprehensive ("exhaustive"), but it is very likely. However, while the act of balancing the tables easiest to describe factors affecting exhaustiveness through may in effect estimate some non-observed activity, it may the notion of the non-observed economy. not be sufficient to capture all of it. 25.30 As explained in the introduction, the non-observed 25.34 It should be noted that, again as pointed out in the economy overlaps with, but is not the same as, the informal introduction, concern about the non-observed economy sector. As well as attempting to cover activities slipping does not lead to a separable measure of it. The example of under the net of statistical collection (sometimes called the using the balancing of supply and use tables as a means of "underground" or "hidden" economy), attention was paid ensuring exhaustiveness is an illustration of why this may to ensuring that reported information was both complete not be possible. and accurate. 25.35 Measures of the non-observed economy will overlap with 25.31 As noted in chapter 6, the fact that some activities are activities undertaken informally but not exactly match illegal in themselves or may be carried out illegally does them. Elements not observed will include estimates for not exclude them from the production boundary. Exercises informal enterprises not covered in statistical enquiries and to measure the non-observed economy should also, in corrections to some measures of informal enterprises that principle, cover such illegal activity. How far this is are captured in statistical enquiries. However, estimates for pursued in practice will depend on assessments of the informal enterprises that are covered in statistical enquiries importance of illegal activities, how it might be done and and are judged to be accurate will be excluded. the resources available. Nevertheless, many of the techniques used to estimate aspects of the non-observed economy, as described in the 25.32 Trying to assess the additions to be made to the national manual Measurement of the Non-Observed Economy: a accounts for the non-observed economy is not just a Handbook are useful for measuring the informal enterprises question of examining the comprehensiveness and accuracy also. D. The informal sector as defined by the ILO 1. The ILO concept of the informal sector or services with the primary objective of generating employment and incomes to the persons concerned. 25.36 A major focus of this chapter is to present a concept of an These units typically operate at a low level of "informal sector" as a subset of household unincorporated organization, with little or no division between labour enterprises. This is the characterization of the informal and capital as factors of production and on a small sector in the resolution of the 15th ICLS on statistics of scale. Labour relations - where they exist - are based employment in the informal sector, which described in mostly on casual employment, kinship or personal and detail the definitions used by the ILO, as follows: social relations rather than contractual arrangements with formal guarantees. (1) The informal sector may be broadly characterized as consisting of units engaged in the production of goods 474 Informal aspects of the economy (2) Production units of the informal sector have the being units treated as formal, because of the numbers of characteristic features of household enterprises. The employees or registration, the third part being referred to fixed and other assets used do not belong to the simply as households. (A note on the different uses of terms production units as such but to their owners. The units such as sector and households follows at the end of this as such cannot engage in transactions or enter into section.) contracts with other units, nor incur liabilities, on their own behalf. The owners have to raise the necessary 25.40 The subset of household enterprises treated as belonging to finance at their own risk and are personally liable, the informal sector have economic objectives, behaviour and a form of organization that sets them apart from other without limit, for any debts or obligations incurred in unincorporated enterprises. Specifically, the informal the production process. Expenditure for production is sector is defined according to the types of production the often indistinguishable from household expenditure. enterprise undertakes, still maintaining the production Similarly, capital goods such as buildings or vehicles boundary of the SNA and not extending it to include own- may be used indistinguishably for business and use household services, for example. household purposes. Exclusion of units producing purely for own final 25.37 Although the expression "informal sector" is used in the use context of the ILO work, the word sector is used with a different meaning from the SNA sense of a grouping of institutional units. The ILO work focuses only on 25.41 The first restriction is that at least some of the production production activities and does not include the consumption must be sold or bartered. Thus some household enterprises and accumulation activities of the unit. that the SNA treats as producing "for own final use" because most of their production is so used are included but those that produce exclusively for own final use are 2. Defining the sector excluded. It follows that the activity of dwelling services produced purely for owner-occupation is thus excluded 25.38 In the SNA, household enterprises do not constitute from the informal sector. separate legal entities independently of the household members who own them. Fixed capital used in production Exclusion of units with formal characteristics may also be used for other purposes, for example the premises where the activity is carried out may also be the 25.42 In addition, the coverage of the informal sector is restricted family home or a vehicle may be used to transport items produced within the household as well as for normal by using additional criteria of numbers of employees or registration. The minimum number of employees chosen is household transport. The items do not belong to the left to the country to decide based on national enterprise as such but to the household members. As a result, it may be impossible to compile a complete set of circumstances. Only those not registered under specific forms of national legislation (such as commercial laws, tax accounts for the household productive activities including and social security laws and regulatory laws) should be the assets, both financial and non-financial, attributable to those activities. It is for this reason, the lack of complete treated as informal. accounts, that the production activity remains within the households sector as an unincorporated enterprise rather Two categories of informal enterprises than being treated as a quasi-corporation in one of the corporations sectors. 25.43 The exclusion of units from the informal sector varies from country to country, depending on the conditions for 25.39 The ILO concept of the informal sector takes household registration or the minimum number of employees chosen unincorporated enterprises and further subdivides them into to determine which units are treated as formal. However, three; one part forming the informal sector, a second part the ILO concept of the informal sector is always a subset of Figure 25.2:Identifying units in the ILO informal sector Non-financial General and financial Households NPISHs government corporations Institutional Informal sector enterprises households, Households households with no containing an (a) without employees unincorporated unincorporated "informal own-account enterprises, enterprise that is enterprises" households only registered or has (b) with employees undertaking more than a "enterprises of informal production for own given number of employers" final use (including employees owner occupation of dwellings) 475 System of National Accounts household unincorporated enterprises operating within the 3. Clarifying the use of familiar terminology production boundary of the SNA. Sector 25.44 These units are divided into the following two subsets: 25.47 The term "sector" in the expression "informal sector" does a. Unincorporated enterprises without employees. The not have the same basis as the usual use of the word sector ILO term for such units is "informal own-account throughout the SNA. In the SNA, sectors are made up of enterprises", complete institutional units; in the context of the informal sector only the productive activities are concerned. Thus, for example and importantly, households having no b. Unincorporated enterprises with employees. The ILO productive activity are simply not considered in the steps to term for such units is "enterprises of informal identify those unincorporated enterprises operated by employers". households that are to be included in the informal sector. 25.45 With these additional criteria, the production unit in the Enterprise informal sector is defined as a household enterprise with at least some production for sale or barter for which one or more of the criteria of a limited size of employment, the 25.48 In the SNA, a corporation represents a single enterprise but non-registration of the enterprise or its employees are met. each such enterprise may consist of a number of The delineation of this set of units in terms of the SNA establishments. A key difference between an enterprise and sectors is shown in figure 25.2. an establishment is that a full set of accounts must exist, or could be constructed, for an enterprise but for an establishment a much more restricted set of data is Exclusions on grounds of activity available, typically only information relating to production, number of employees and the capital formation associated with the activity. 25.46 Apart from defining the informal sector, the 15th ICLS recommended the following additional considerations about the scope of the informal sector and its statistical 25.49 Within a household many different production activities treatment. may take place. For none of these individually nor for the total of all activities that cannot be treated as quasi- corporations does a complete set of accounts exist. The a. In principle, all goods and services producing activities SNA usage of "unincorporated enterprise" is taken to mean are within scope. These might be presented according the totality of all unincorporated activity undertaken by a to the alternative aggregation recommended for the household even though in a supply and use table, for analysis of the activities of the informal sector in ISIC example, this may be partitioned by types of activity and be Rev. 4. This alternative presentation takes into account grouped with establishments of corporations undertaking that some economic activities such as public the same activity. administration and defence (ISIC 84) are undertaken by units in general government and so cannot qualify as 25.50 The use of unincorporated enterprise in the ILO description informal sector activities. However, the ICLS of the informal sector does not correspond to the totality of recommends that: unincorporated activity of a household but to each activity separately. In SNA terms, the unincorporated enterprise is · agricultural activities (ISIC section A) are measured broken down into a number of unincorporated separately from other economic activities to ensure establishments, some of which may be included in the international comparability and to facilitate the informal sector and some excluded, even for the same household. Further, the ILO identifies individual members selection and application of appropriate statistical data of a household as owning each establishment/enterprise and collection tools and sample design. (Units undertaking capable of employing workers. In the SNA, it is the only subsistence activity are already excluded as they household collectively that is responsible for all activity do not sell any of their output.) and for employing workers. · activities of households as employers of domestic Subsectoring production personnel (ISIC 97) with households being producers for own final use are outside the scope of the informal 25.51 The SNA subdivides production into market production, sector. production for own final use and non-market production. Non-market production is not at issue here, since it is never b. Geographical coverage includes both urban and rural undertaken by households. However, to meet the ILO areas even if preference may be given initially to guidelines it is necessary to subdivide producers for own informal enterprises operating in urban areas. final use into those where some of the production is for sale or barter and those where the production is exclusively for own final use. In the case of unincorporated enterprises c. Outworkers are included if the units for which they where only some of the production is sold or bartered, all of work as self-employed persons or as employees are the production of the unit of those goods and services is included in the informal sector. still included in production by the informal sector. 476 Informal aspects of the economy Formal sector, informal sector and households rest that are not treated as informal but are left simply in a group called households. 25.52 The SNA does not use the expression formal sector but it is not difficult to conceive of all units in the corporations 25.53 The ILO meaning of households is thus quite different from sectors, general government and NPISHs as being part of a that of the SNA since the SNA includes all the units formal sector as far as production is concerned. Quasi- corporations are included because they are included in the included under ILO guidelines as informal, plus those units corporations sectors. However, this is not the same as with unincorporated enterprises treated as formal, plus saying that any unit that is not informal is formal, since those unincorporated enterprises excluded because they households with unincorporated enterprises not included in produce exclusively for own final use, plus those the informal sector are divided between those that are households with no unincorporated enterprises plus treated as formal (because of size or registration) and the institutional households. E. Informal employment 1. Informal employment 25.58 Formal enterprises provide informal jobs only as employees or contributing family workers. Informal 25.54 Increasingly it has been realized that production alone is enterprises may offer any of the five types of informal jobs not the only aspect of the economy where a distinction and also formal jobs. Households (in the ILO sense) between formal and informal is informative, it is also provide informal jobs as own-account workers, employees relevant for employment. and family workers. Some domestic staff may have formal jobs. 25.55 The ILO defines formal wage employment as employment under terms that bring associated benefits such as paid Figure 25.3:Informal employment and leave and pension entitlement. The ILO regards all other employment in the informal sector forms of employment, including self-employment, as informal. Formal jobs Informal jobs 25.56 As noted in section B, it is possible for formal units to have Formal enterprises informal employees and it is also possible (though less likely) that units that are classed as informal may have Informal enterprises terms of employment for some of their workers that make them formal employees. The extent of informal Other household employment can be seen in the shaded part of figure 25.3. unincorporated enterprises 25.57 As explained in chapter 19, there is a distinction between a job and an employee, one employee being capable of holding several jobs. There are five categories of jobs considered by the ILO. These are: 2. Employment in the informal sector a. own-account workers (the self-employed in SNA terms), 25.59 As well as informal employment in total, it is useful to identify the extent of employment in informal enterprises. b. heads of unincorporated enterprises with employees, This excludes informal jobs in formal units, excludes any treated as employers, informal jobs in other household unincorporated enterprises and includes formal jobs in informal enterprises. The ICLS defines the population employed in the informal sector as c. unpaid family workers contributing labour to the comprising all persons who, during a given reference unincorporated enterprise, period, were employed in at least one informal sector unit, irrespective of their status in employment and whether it d. employees, was their main or a secondary job. The coverage of employment in the informal sector is indicated by the e. members of producers' cooperatives. heavy border in figure 25.3. 477 System of National Accounts F. Work of the Delhi Group 25.60 In 1997 an expert group on informal sector statistics was e. Countries that include agricultural activities should set up by the United Nations Statistical Commission as a provide figures separately for agricultural and non- "city group" and is known as the Delhi Group. One of its agricultural activities. objectives was to try to identify internationally comparable data for the informal sector or, at least, a common subset of it. f. Countries should include persons engaged in professional or technical activities if they meet the criteria of the informal sector definition. 25.61 The third meeting of the Delhi Group in 1999 proposed a subset of the informal sector that could be defined uniformly across countries, though this subset presently g. Countries should include paid domestic services unless covers only a relatively small part of the informal sector. these are provided by employees of the household These recommendations are as follows: where the services are rendered. a. All countries should use the criteria of legal organization (unincorporated enterprises), of type of h. Countries should follow paragraph 18 of the Resolution accounts (no complete set of accounts) and of product adopted by the 15th ICLS regarding the treatment of destination (at least some market output). outworkers/home-workers. Countries should provide figures separately for outworkers/home-workers included in the informal sector. b. Specification of the employment size limit of the enterprise in the national definition of the informal sector is left to the country's discretion. For i. Countries covering urban as well as rural areas should international reporting, however, countries should provide figures separately for both urban and rural provide figures separately for enterprises with less than areas. five employees. In the case of multiple-establishment enterprises, the size limit should apply to the largest establishment. j. Countries using household surveys or mixed surveys should make an effort to cover not only persons whose main job is in the informal sector, but also those whose c. Countries using the employment size criterion should main job is in another sector and who have a secondary provide disaggregated figures for enterprises that are activity in the informal sector. not registered, as well as for enterprises that are registered. 25.62 Subsequent work of the Delhi Group examined many d. Countries using the criterion of non-registration should studies on national practices in the collection of data on the provide disaggregated figures for enterprises with less informal sector to lead up to the provision of a manual on than five employees as well as for enterprises with five the informal sector and informal employment to be and more employees. published by the ILO. G. Deriving data on activities of informal enterprises from the SNA accounts 25.63 In trying to identify activities undertaken by informal b. Households with no production activity (that is do not enterprises within the national accounts, three steps are include an unincorporated enterprise); necessary. The first is to identify those unincorporated enterprises within the whole of the SNA households sector that are candidates to be included. The second is to consider c. Households whose only activity is the production of national practices in establishing the households sector to services from owner-occupied dwellings, the see if any adjustment to the first step is necessary. The third production of services by employing domestic staff, or step is to provide a breakdown by type of activity so that both. common exclusions according to type of activity can be made. 25.65 The remaining households all contain some production activity. However, it will include both market production 1. Candidate households and production for own final use. The ILO guidelines on that part of household activity to be regarded as informal include a concept of market production that does not 25.64 The households sector includes some institutional units that conform to the SNA category. The ILO treats an enterprise should be excluded at the outset. These are: as a market producer if any of the output is sold whereas the SNA requires that most or all of the output be sold. To a. Institutional households such as prisons, religious overcome this difference, it is recommended that a three- orders and retirement homes; way split of production be made: 478 Informal aspects of the economy a. market production according to the SNA criterion this is not national practice, a further adjustment is whereby most or all output is sold, necessary to remove them. b. output for own final use where some is sold, and 25.69 The SNA also recommends that small enterprises without complete sets of accounts should be included in the c. output exclusively for own final use. households sector as unincorporated enterprises. Some countries, however, prepare production estimates by type of The sum of the first two categories then accords with the activity for inclusion in a supply and use framework ILO guidelines for inclusion in the informal sector as without regard to whether a full set of accounts exists. By market producers though only the first is so regarded in default, all may be included in the corporations sectors with SNA terms. little production remaining in the households sector apart from the imputed services of owner-occupied dwellings and the services provided by paid domestic staff. It is 25.66 The ILO also distinguishes households between those that therefore recommended that estimates for unregistered do not have workers employed on a continuous basis and enterprises with less than five employees be extracted from those that do, as follows: the figures for the corporations sector to set alongside the figures from the households sector. Similarly any a. Unincorporated enterprises without employees on a enterprises that are unincorporated but registered should be continuing basis, separately identified. b. Unincorporated enterprises with employees on a 25.70 Figure 25.4 demonstrates how the potential units for continuing basis. treatment according to the ILO definition of the informal sector relate to the institutional sectors of the SNA. The This categorization is combined with the preceding one as light shading under corporations indicates that in principle indicated in figure 25.4. any enterprise that is not registered and has fewer than a given number of employees should be identified if it has 2. Adjustments for national practices been included in corporations. In practice, it may not be possible to separate those that are registered from those that are not. 25.67 Although the SNA recommends separating NPISHs into a sector separate from households, not all countries do this. If they are not already separated from households, they 3. Disaggregation by type of activity should be removed at this stage. 25.71 The third step is to disaggregate the production activities 25.68 Production units that are not formally incorporated but from households, grouped as suggested above, and those have complete accounts should be treated as quasi- extracted from the corporations sectors for small-scale corporations and excluded from the households sector. If activities according to the type of activity concerned. Figure 25.4:Identifying units for the ILO informal sector from within the SNA institutional sectors General Non-financial and financial Households NPISHs government corporations Institutional households, households with no Those that Those that Those that unincorporated are are are enterprises, registered registered unregistered Unincorporated enterprise with households or with or with Self-employed (informal own- or with fewer employees (enterprises of informal only greater than greater than account enterprise) than a given employers) undertaking a given a given number of production for number of number of employees own final use employees employees (including owner- occupation of dwellings) Market Producers for own Market Producers for own final producers final use producers use Selling Selling Not selling Selling Selling Not selling most or all some any most or all some any production production production production production production 479 System of National Accounts Because the separation is initially in terms of units and not a. Production activities, there will still be some services from owner- occupied dwellings included and these should be · of which for own use eliminated. If a cross-classification by activity and type of unit is available, a choice can be made about whether to include or exclude an activity where the output is b. Intermediate consumption exclusively for own use even when another activity by the same unit includes sales outside the households. c. Value added 25.72 Some further exclusions may also be made, for example d. Compensation of employees (for unincorporated services provided by paid domestic staff and agricultural enterprises with employees only) production. e. Gross mixed income 25.73 The problem remains about how to treat individuals such as the doctors and other professionals discussed earlier where f. Consumption of fixed capital information about their production is available but not a full set of accounts. They thus still represent unincorporated enterprises and are not excluded from the g. Net mixed income. informal sector by reason of registration or number of employees but are not usually thought of as characteristic 25.77 Further information may also be useful if available. For of part of the informal sector. example, a breakdown of production by type of activity and, possibly, the proportion of the total production in the 25.74 The Delhi group recognizes that such individuals will be industry produced by informal enterprises. part of the informal sector. However, if it is desired either to identify them as a subset or even to exclude them 25.78 In countries where some small units that might be entirely from the informal sector, it is possible that some considered part of the informal sector are covered by rules of thumb may be conceived to do so. For example establishment surveys and included in the corporations depending on the type of activity, the rates of pay or the sector, there may be units of interest in the lightly shaded duration of the task, but objections to any of these are easy cell in table 25.4. If this is so, and if separate estimates for to formulate and implementation would be extremely them can be identified, it would be useful to show these difficult. alongside the entries for those units clearly within the households sector. 4. Presenting the data on the informal sector and informal employment Employment 25.75 The information relating to activities undertaken informally 25.79 Information on the number of jobs should be presented extends only as far as the production and generation of showing: income account. It is not possible to go farther in the sequence of accounts because of the impossibility of identifying which other income flows, consumption and a. Employment in the informal sector capital formation relate only to the activity in question rather than to the household to which they belong as a full · Formal jobs institutional unit. Thus the informal sector, as explained previously, is not strictly a sector in the SNA sense and so · Informal jobs the figures for it cannot be presented in terms of the full sequence of accounts. However, it is recommended that where possible two supplementary tables should be b. Informal employment outside the informal sector prepared, one covering production and the generation of income and one covering employment. · In the formal sector Production · In other household unincorporated enterprises. 25.76 It is suggested that the following type of information be 25.80 If possible, information on the hours worked in each of provided for each of the shaded areas in table 25.4: these categories would be useful. H. Approaches to measuring activities undertaken in the informal economy 25.81 It is neither possible nor appropriate to give detailed accountants to be aware of some of the options that may be information in the SNA on survey methodology and available to help in collecting data on production in questionnaire design. However, it is useful for national informal enterprises. More detailed discussion is available 480 Informal aspects of the economy in, for example, the manual on Measuring the Non- after an economic or establishment census because the Observed Economy. sampling frame may not include information, or not up-to- date information on household enterprises. 25.82 The choice of the appropriate method for measuring the informal sector depends upon how adequately established 25.86 Even when an establishment survey is used to measure data collection methods cover the activities of interest. household production units including those of the informal Three main measurement approaches are considered here. sector, it should be noted that production units without a The choice between them will depend upon what fixed location or with unrecognizable business premises are information is missing from existing collections, the easily omitted in the collection. In addition, double organization of statistical systems, the resources available counting of household production may occur if the and user needs. collections for different types of economic activity are undertaken at different times rather than simultaneously in 1. Household surveys an integrated design. For example, the manufacturing activity of a household producing goods in a small workshop or at home may be included in one collection 25.83 A household survey (or labour force survey) may provide a round while the retail sales activity undertaken by the same means to collect information on production by household family of those produced goods is measured in another enterprises that are not included in the sampling frames round. used for establishment surveys. It may also be possible to collect data on informal sector employment in household or labour force surveys. Questions seeking this sort of 3. Mixed household-enterprise surveys information could be addressed to everyone in the sampled households during the reference period of the survey, 25.87 One type of mixed household-enterprise survey is designed irrespective of their status in employment and in respect of with enterprise modules attached to existing labour force or their main and secondary jobs since in many countries a other household surveys. Such a survey could cover all large number of informal sector activities are undertaken as household entrepreneurs of the sampled households secondary jobs. Special questions may be required to including informal entrepreneurs (including units operating identify unpaid work in small family enterprises, activities without fixed premises such as mobile units) and their undertaken by women and children, activities undertaken activities, irrespective of the size of the enterprises, the away from home, undeclared activities and informal sector kind of activity and the type of workplace used and of businesses conducted as secondary jobs. The success of whether the activities are undertaken as main or secondary such an approach is dependent on the survey sample jobs. including representative geographical areas where household activities take place and informal sector workers live. 25.88 Another type of survey, described as a modified mixed household-enterprise survey, is described in International Recommendations on Industrial Statistics, (United Nations, 25.84 It should be borne in mind, though, that although 2008.) employees, contributing family workers and proxy respondents may be engaged in household and informal enterprises, they may have limited knowledge of the 25.89 When a mixed household-enterprise survey is used as the operations of the enterprises in question and may not be preferred method, attention should be paid to the question able to respond to such questions. of whether the sample adequately reflects the geographical distribution of economic activities of household production. It is also necessary to consider how enterprises 2. Establishment surveys with production units in more than one location are handled and how duplication of coverage for enterprises that are 25.85 In most cases, an establishment survey can be used to operated under partnerships may be avoided if the same measure activity undertaken by an informal enterprise only enterprise is reported by each of its partners who may when a household establishment survey is carried out just belong to different households. I. Guidelines, studies and handbooks on the informal economy 25.90 Since the publication of the 1993 SNA, significant advances · The proceedings and papers of the meetings of the in methodology have taken place in fields related to the Delhi Group on Informal Sector Statistics, beginning in informal economy. Also, countries have gained extensive 1997, contain the results of extensive conceptual and experience in collecting and working with data on the analytical work, including country practices in the area informal sector. These developments, which are of the informal sector. Various papers of the Expert highlighted below, suggest that there is a body of work to Group on Informal Sector Statistics (Delhi Group), are be taken into account in updating the treatment of the can be accessed at http://www.mospi.nic.in/ informal sector in the SNA. mospi_informal_sector.htm. 481 System of National Accounts · The handbook Household Accounting: Experience in non-observed economy as well as elaborating on the Concepts and Compilation, Volume 1: Households methods used. The results of the two surveys are Accounts (United Nations, 2000), the product of a 1997 summarized in two editions of Non-observed Economy expert group, contains papers on various aspects of the in National Accounts - Survey of Country Practices treatment and measurement of the informal sector. The (United Nations Economic Commission for Europe, chapter "The informal sector as part of the households 2003 and 2008, respectively). sector" is of particular interest. · There are many ILO documents that elaborate the · The results of the work started by Eurostat in the mid- concepts of informal sector and informal employment. 1990s and carried out through its Task Force for These include the Resolution concerning Statistics of Accuracy Assessment of Basic Data in European Union Employment in the Informal Sector, (International member countries and the related pilot tests conducted Labour Office, 1993) adopted by the 15th ICLS and in candidate countries revealed the extent of Guidelines Concerning a Statistical Definition of exhaustiveness adjustments and their implications for Informal Employment (International Labour Office, the value of the GDP. 2003) adopted by the 17th ICLS. Other useful information can be found in ILO Compendium of · Research on statistical methods for improving the Official Statistics on Employment in the Informal exhaustiveness of measures of economic production Sector (Hussmanns and du Jeu, 2002), Women and Men lead to the preparation of the handbook Measuring the in the Informal Economy: A Statistical Picture. Non-Observed Economy - a Handbook. The (International Labour Office, 2002), Measuring the handbook's chapter on informal sector production Informal Economy: From Employment in the Informal provides a core definition, clarifies the distinctions Sector to Informal Employment. (Hussmanns, 2004), between informal sector production and concepts with Measurement of Informal Employment: Recent which it is often confused, and outlines the main International Standards, (Hussmanns, 2005) methods for measurement. · The UNECE published a Guidebook to Statistics of the · Over the decade, a number of workshops with a focus Hidden Economy (United Nations Economic on the informal sector were held, organized singly or Commission for Europe, 1992) and has since carried jointly by United Nations Statistics Division, the out three surveys of country practices and published the regional commissions, ILO, and others. The most results. The first was in respect of 1991 and covered recent of these were the OECD/UNESCAP/ADB nine countries. The results were published as an Workshop on Assessing and Improving Statistical Inventory of National Practices in Estimating Hidden Quality: Measuring the Non-observed Economy, held and Informal Activities for National Accounts in 1993. in Bangkok in May 2004 and the Workshop on The second survey was in respect of 2001/2 and Household Surveys and the Measurement of the Labour covered 29 countries. The third survey was carried out Force with focus on the Informal Economy held for for 2005/6 and 45 countries responded. Both the second Southern African Development Community countries and third surveys asked for estimates of the size of the in Maseru, Lesotho in April 2008. 482 Chapter 26: The rest of the world accounts and links to the balance of payments A. Introduction 26.1 This chapter is about the relationship between the rest of 26.6 Although balancing items are not calculated in the SNA for the world sector in the SNA and the international accounts the rest of the world account for each individual account, as described in BPM6. It shows that the two manuals use two balancing items relevant to the current accounts are the same macroeconomic framework, with the international important. The first is the external balance on goods and accounts providing additional detail on aspects of particular services, which is the difference between imports and relevance in international transactions or positions. exports. The second is the current external balance which is the sum of all resources coming from the rest of the world 1. The rest of the world account in the SNA less all uses going to the rest of the world, including imports and exports. The current external balance thus shows how far residents call on saving by non-residents. 26.2 In the SNA, transactions between a resident unit and the rest of the world are recorded as if the units in the rest of the world were another sector of the economy. The Accumulation accounts production and generation of income accounts relate only to transactions within the national economy but flows in all 26.7 In the rest of the world capital account, there is no entry for other accounts potentially have an entry for the rest of the fixed capital formation, as noted above. It is possible for a world. These entries are necessary to balance each row of transaction to be recorded for a natural resource, for a the sequence of accounts but they do not enter the contract, lease or licence or for goodwill and marketing aggregate balancing items. For example, the difference assets. By their nature, though, and given that land is between GDP and GNI derives from transactions for both almost always acquired by a resident unit, such entries will uses and resources recorded in the allocation of primary not be common. On the other hand, capital transfers to and income account where the counter-party is a unit in the rest from the rest of the world may be quite important. of the world. If the counter-party entries for the rest of the world were also included, there would be no difference 26.8 The financial account and balance sheets detailing between the balancing items. transactions in, and stocks of, financial assets and liabilities where one party is non-resident are viewed as a particularly Current accounts important part of the rest of the world accounts. Indeed, in BPM6 more text is devoted to these items than to the items 26.3 Because the rest of the world account is shown in this way, in the current accounts. flows to the rest of the world are shown as a use by the rest of the world and flows from the rest of the world as 26.9 In addition, there are possible entries for other changes in resources. For example, exports are shown as uses of the the volume of assets and liabilities and revaluation items rest of the world and imports as resources from the rest of for both, relevant to the rest of the world account. the world. Entries for imports and exports form part of the goods and services account in the SNA sequence of accounts. 2. The international accounts in BPM6 26.4 As well as entries for imports, exports and the items 26.10 In the description of the rest of the world accounts above, it appearing in the allocation of primary income account, was noted that exports, for example, are treated as a use by there are potential transactions with the rest of the world to the rest of the world and imports as a resource from the rest be recorded for all entries in the secondary distribution of of the world. As its name implies, the rest of the world income account and for the adjustment item for the net account is drawn up from the perspective of the rest of the change in pension liabilities appearing in the use of income world. BPM6 looks at the same stocks and flows from the account. point of view of the domestic economy. Thus the BPM6 entries are the mirror image of the SNA entries relating to 26.5 There are no entries for the rest of the world account for the rest of the world. intermediate or final consumption (or for fixed capital formation) because the use made of the goods and services 26.11 Further, in the context of BPM6, stock levels are usually in another economy is not relevant for the national referred to as positions and the balance sheet accounts for economy; only the total amount exported is. all financial assets and liabilities where one party to the 483 System of National Accounts arrangement is non-resident is called the international respectively. Note, though, that what appear as assets in the investment position. rest of the world account appear as liabilities in the international accounts and vice versa. 26.12 The international accounts for an economy summarize the economic relationships between residents of that economy 3. The structure of the chapter and the rest of the world. They comprise: a. the balance of payments, which summarizes 26.13 Section B of the chapter discusses the accounting rules of transactions between residents and non-residents the international accounts. These are consistent with the during a specific time period; SNA accounting rules and agreement has been reached on when the SNA and when BPM6 takes the lead in defining b. the international investment position (IIP), which the rules to be applied in both contexts. Residence is a case shows at a point in time the value of: financial assets of in point where the SNA follows BPM6. residents of an economy that are claims on non- residents or are gold bullion held as reserve assets; and 26.14 The structure of the international accounts and their relation the liabilities of residents of an economy to non- to similar SNA accounts is the subject of section C. residents; and c. the other changes in financial assets and liabilities 26.15 A feature of the financial accounts and IIP of the account, a statement that shows other flows, such as international accounts is the introduction of functional valuation changes, which reconcile the balance of categories that describe the main purpose of financial payments and IIP for a specific period by showing investment abroad. This is the subject of section D. changes due to economic events other than transactions between residents and non-residents. 26.16 Section E touches on some considerations of particular importance to the international accounts; global These accounts correspond to the transactions, balance imbalances, exceptional financing, debt reorganization, sheets and other changes in assets accounts in the SNA, currency unions and currency conversions. B. Accounting principles 1. Comparison with SNA accounting principles prepare consolidated data for a currency or economic union from the data of individual member countries. In effect, all 26.17 Although the SNA works with a quadruple-entry this work is built on the fact that balance of payments accounting system, the balance of payments has only a statistics effectively become a quadruple-entry system double-entry system. When a transaction is undertaken when used at the bilateral or global level. between two resident units, four entries are necessary, for example two showing the exchange of a good and two the Valuation exchange of a means of payment. However, when a resident unit carries out a transaction with a non-resident 26.19 Valuation principles are the same in the SNA and the unit, national compilers are unable to verify independently international accounts. In both cases, market values are the counterpart entries in the rest of the world. As a result, used, with nominal values used for some positions in although in principle the balance of payments is balanced, instruments where market prices are not observable. In the in practice, there may be an imbalance due to shortcomings international accounts, the valuation of exports and imports in source data and compilation so that there is a mismatch of goods is a special case where a uniform valuation point between financial transactions and their counterparts within is used, namely the value at the customs frontier of the the domestic economy. This imbalance, a usual feature of exporting economy, that is, the FOB-type valuation (free on published balance of payments data, is labelled net errors board). This treatment brings about consistent valuation and omissions. The balance of payments manuals have between exporter and importer and provides for a traditionally discussed this item, to emphasize that it should consistent basis for measurement in circumstances where be published explicitly, rather than included the parties may have a wide range of different contractual indistinguishably in other items and that it should be used arrangements, from "ex-works" at one extreme (where the to indicate possible sources of mismeasurement. importer is responsible for arranging all transport and insurance) to "delivered duty paid" at the other (where the 26.18 However, there has been increasing interest in estimates exporter is responsible for arranging all transport, insurance that are derived from counterpart reporting that has better and any import duties). In international transactions, there coverage, valuation, etc. As well, there has been much may be motivations for under- or over-invoicing in order to work done on reconciling data from the view of both evade taxes or exchange controls, so BPM6 provides parties (for example, exports of one country, with the guidance on how to develop market-equivalent prices when counterpart imports recorded by the partner country) and these cases are identified, and how to make the necessary global totals. Counterparty data are also necessary to adjustments needed to other items affected. There is further 484 The rest of the world accounts and links to the balance of payments discussion on the recording of imports and exports in regions, or the world as a whole may be used, as they may chapters 14 and 28. also be a focus for macroeconomic policy or analysis. Time of recording and change of ownership 26.26 An economic territory includes the land area including islands, airspace, territorial waters and territorial enclaves in the rest of the world (such as embassies, consulates, 26.20 Time of recording and ownership principles are the same in military bases, scientific stations, information or the SNA and the international accounts. In practice, the immigration offices, that have immunity from the laws of change of economic ownership of goods is often taken to the host territory) physically located in other territories. be when the goods are recorded in customs data. To the Economic territory has the dimensions of physical location extent that there are differences between customs data and as well as legal jurisdiction, so that corporations created actual changes in ownership, such as for items with large under the law of that jurisdiction are part of that economy. values or goods sent on consignment (that is, dispatched The economic territory also includes special zones, such as before they are sold), adjustments are made. free trade zones and offshore financial centres. These are under the control of the government so are part of the 26.21 There are no longer any exceptions to the recording basis of economy, even though different regulatory and tax regimes the change of economic ownership. However, there is a may apply. (However, it may also be useful to show different presentation in the case of merchanting; that is, separate data for such zones.) The territory excludes where an owner buys and resells goods in the same international organizations and enclaves of other condition without the goods passing through the territory of governments that are physically located in the territory. the owner. In that case, the acquisition of the goods is identified as a change of ownership, but shown as a negative export rather than an import on acquisition of the Institutional units goods and as a positive export on disposal. If the goods are acquired in one period and not disposed of until a 26.27 The concept of an institutional unit is the same in the SNA subsequent period, they will appear in changes in and BPM6. Because of the focus on the national economy, inventories of the merchant even though these inventories there are some special treatments of units in cross-border are held abroad. A consequence of this change in treatment situations. As discussed below, in some cases, legal entities is that in the international accounts, merchanting now are combined into a single institutional unit if they are appears as transactions in goods where previously it was resident in the same economy, but are not combined if they recorded as a transaction in services. are resident in different economies. Similarly, a single legal entity may be split when it has substantial operations in two 26.22 The principle of recording imports and exports when or more economies. As a result of these treatments, the change of ownership takes place applies also to items such residence of the resulting units concerned becomes more as high-value capital goods where change of ownership is clear-cut and the concept of the economic territory is recorded as work is put in place. (See paragraphs 10.53 and strengthened. 10.55.) 26.28 As discussed in chapter 4, resident artificial subsidiaries Netting and special purpose entities (SPEs) are combined with their owners into single legal entities. However, a legal entity that is resident in one jurisdiction is never combined with a 26.23 The same rules on netting are applied in BPM6 as in the legal entity resident in another. As a result, SPEs and other SNA. In general, netting is not advised except in the special similar corporate structures owned by non-residents are case of recording transactions in financial assets and considered to be resident of their territory of incorporation, liabilities. However, only acquisitions and disposals of the even though most or all of their owners and most or all of same type of asset (or incurrence and redemption of the their assets are in another economy. same type of liability) are netted. There is no netting of assets against liabilities, even of the same sort of instrument 26.29 Similarly, members of a household must all be resident in and no netting across different sorts of instruments. Greater the same economy. If a person resides in a different detail about netting in respect of financial instruments economy from the other members of a household, that appears in chapter 3 of BPM6, paragraphs 3.109 to 3.121. person is not regarded as a member of that household, even though they may share income and expenses, or hold assets 2. Units together. 26.24 The international accounts and the SNA are built on the Branches same definitions of institutional units and residence. Because the international accounts focus on economic 26.30 A branch is an unincorporated enterprise that belongs to a relationships between residents and non-residents, more non-resident unit, known as the parent. It is resident and elaboration of borderline cases is provided in BPM6. treated as a quasi-corporation. The identification of branches as separate institutional units requires indications Economic territory of substantial operations that can be separated from the rest of the entity. A branch is recognized in the following cases: 26.25 The most commonly used concept of economic territory is the area under the effective economic control of a single a. Either a complete set of accounts, including a balance government. However, currency or economic unions, sheet, exists for the branch, or it is possible and 485 System of National Accounts meaningful, from both an economic and legal expenses for a project are shown as being incurred by a viewpoint, to compile these accounts if required. The quasi-corporation, and are part of direct investment flows availability of separate records indicates that an actual into that unit rather than sales of licences to non-residents, unit exists and makes it practical to prepare statistics. or exports of services, respectively, to the head office. In addition, one or both of the following factors tend to be Notional resident units present: 26.33 When land located in a territory is owned by a non-resident b. The branch undertakes or intends to undertake entity, a notional unit that can be treated as resident is production on a significant scale which is based in a identified for statistical purposes as being the owner of the territory other than that of its head office for one year or land. This notional resident unit is a kind of quasi- more: corporation. The notional resident unit treatment is also applied to associated buildings, structures and other · if the production process involves physical presence, improvements on that land, leases of land for long periods, then the operations should be physically located in that and ownership of natural resources other than land. As a territory; result of this treatment, the non-resident is owner of the notional resident unit, rather than owning the land directly, so there is an equity liability to the non-resident, but the · if the production does not involve physical presence, land and other natural resources are always assets of the such as some cases of banking, insurance, other economy in which they are located. The notional resident financial services, ownership of patents, merchanting unit usually supplies services to its owner, for example and "virtual manufacturing", the operations should be accommodation in the case of vacation homes. recognized as being in the territory by virtue of the registration or legal domicile of those operations in that 26.34 In general, if a non-resident unit has a long-term lease on an territory. immovable asset such as a building, this is associated with it undertaking production in the economy where it is c. The branch is recognized as being subject to the income located. If for any reason there is no associated production tax system, if any, of the economy in which it is located activity, a notional resident unit is also created to cover even if it may have a tax-exempt status. such a lease. 26.31 The identification of branches has implications for the Multiterritory enterprises statistical reporting of both the parent and branch. The operations of the branch should be excluded from the 26.35 A few enterprises operate as a seamless operation over institutional unit of its head office and the delineation of more than one economic territory, typically for cross- parent and branch should be made consistently in both of border activities such as airlines, shipping lines, the affected economies. A branch may be identified for hydroelectric schemes on border rivers, pipelines, bridges, construction projects or mobile operations such as tunnels and undersea cables. If possible, separate branches transport, fishing or consulting. However, if the operations should be identified, but if the entity is run as a single are not substantial enough to identify a branch, they are operation with no separate accounts or decision-making for treated as an export of goods or services from the head each territory that it operates in, it is not possible to office. delineate branches. In such cases, because of the central focus on data for each national economy, it is necessary to 26.32 In some cases, preliminary operations related to a future split the operations between economies. The operations direct investment project prior to incorporation are should be prorated according to an appropriate enterprise- sufficient evidence of establishing residence that a quasi- specific indicator of the proportions of operations in each corporation is established. For example, licences and legal territory. The prorating treatment may also be adopted for Table 26.1:Selected effects of a household's residence status on the statistics of the host economy Economic flow or position Resident (for example, long-term guest worker) Non-resident (for example, short-term guest worker) Compensation of employees received from enterprises Resident-to-resident compensation of employees Resident-to-non-resident compensation of employees in the reporting economy Personal expenditure in the reporting economy Resident-to-resident transaction Exports of services, mainly travel Non-resident-to-non-resident transfer (There is often some international financial transaction of the Transfers to relatives in home economy Resident-to-non-resident current or capital transfers short-term worker returning funds from his host to his home economy, for example via a bank in the host economy) A resident institutional unit's financial claims on or Resident-to-resident financial claim International financial claim liabilities to the household Non-financial asset and direct investment liability of a Land and buildings owned in host economy Non-financial asset notional resident unit Land and buildings owned in home economy Direct investment asset in notional resident unit Not in balance sheet of host economy 486 The rest of the world accounts and links to the balance of payments enterprises in zones subject to joint administration by two may exceed a year. However, students become or more governments. residents of the territory in which they are studying when they develop an intention to continue their 3. Residence presence in the territory of study after the completion of the studies. Members of the same household who are accompanying dependents of students are also 26.36 The residence of each institutional unit is the economic considered to be residents of the same economy as the territory with which it has the strongest connection, student. expressed as its centre of predominant economic interest. An institutional unit is resident in an economic territory when there exists, within the economic territory, some b. Patients. People who go abroad for the purpose of location, dwelling, place of production, or other premises medical treatment maintain their predominant centre of on which or from which the unit engages and intends to interest in the territory in which they were resident continue engaging, either indefinitely or over a finite but prior to the treatment, even in the rare cases where long period of time, in economic activities and transactions complex treatments take a year or more. As with on a significant scale. The location need not be fixed so students, accompanying dependents are treated in the long as it remains within the economic territory. Actual or same way. intended location for one year or more is used as an operational definition. While the choice of one year as a c. Crew of ships etc. Crew of ships, aircraft, oil rigs, space specific period is somewhat arbitrary, it is adopted to avoid stations or other similar equipment that operate outside uncertainty and facilitate international consistency. Most a territory or across several territories are treated as units have strong connections to only one economy but being resident in the territory of their home base. The with globalization, a growing number have strong links to home base is determined by where they spend most of two or more economies. their time when not undertaking their duties. This location may not be the same as that of the operator of Residence of households the mobile equipment. 26.37 A household is resident in the economic territory in which d. Diplomats, military personnel, etc. National diplomats, household members maintain or intend to maintain a military personnel and other civil servants employed dwelling or succession of dwellings treated and used by abroad in government enclaves and their households members of the household as their principal dwelling. If are considered to be residents of the economic territory there is uncertainty about which dwelling is the principal of the employing government. However, other dwelling, it is identified from the length of time spent there, employees, such as locally recruited staff and rather than other factors such as cost, size, or length of international organization staff are resident in the tenure. Being present for one year or more in a territory or location of their principal dwelling. intending to do so is sufficient to qualify as having a principal dwelling there. The implications of the residence e. Cross-border workers. There is no special treatment for of a household for the recording of its flows and stocks are these workers. The residence of the persons concerned summarized in table 26.1. is based on the principal dwelling, rather than the territory of employment, so employees who cross 26.38 In addition to the general principles, additional guidance in borders to undertake a job still have their residence determining the residence of households is given in the determined from their principal dwelling. following specific cases: f. Refugees. No special treatment is adopted for refugees, a. Students. People who go abroad for full-time study so their residence will change from their home territory generally continue to be resident in the territory in if they stay or intend to stay in another economy for a which they were resident prior to studying abroad. This year or more, regardless of their legal status or intention treatment is adopted even though their course of study to return. Table 26.2:Selected effects of the residence status of an enterprise on the statistics of the host economy Resident enterprise (for example, major long-term Non-resident enterprise (for example, minor short-term Economic flow or position construction project) construction project) Sales by enterprise to residents Resident-to-resident transaction Imports of goods and services Purchases by enterprise from residents Resident-to-resident transaction Exports of goods and services Compensation of employees payable to Resident-to-resident compensation of employees Non-resident-to-resident compensation of employees residents of host economy Compensation of employees payable to Resident-to-non-resident compensation of employees Not a transaction of host economy residents of home economy Net operating surplus Dividends payable or reinvested earnings Not a transaction of host economy Injections of funds by owners Direct investment liabilities of the reporting economy Not a transaction of host economy A resident institutional unit's financial claims on Resident-to-resident financial claims International financial claims or liabilities to the enterprise 487 System of National Accounts g. Highly mobile individuals. Some individuals have close under whose laws the enterprise is incorporated or connections with two or more economies. In cases of registered. The incorporation and registration represent a no principal dwelling, or two or more principal substantial degree of connection to the economy, associated dwellings in different economies, the residence is with jurisdiction over the enterprise's existence and determined on the basis of the territory in which the operations. In contrast, other connections such as predominant amount of time is spent in the year. While ownership, location of assets, or location of its managers or these individuals need to be classified as residents of a administrators may be less clear-cut. single economy for statistical purposes, additional information may be needed in recognition of strong ties 26.42 In some rare cases, laws allow enterprises to change their to another economy. economy of residence, such as within an economic union. In such cases, as for households, a change of residence 26.39 When households change their economy of residence, there means that their assets and liabilities change their status are changes to the status of the assets they own and through other changes in volumes. More commonly, what liabilities they owe. These changes are recorded as is called "corporate migration" involves the conveyance of reclassifications through the other changes in volume assets and liabilities from a corporation in one economy to account. Because of the treatment of having a notional a related entity in another economy recorded as a resident unit for ownership of land by non-residents, new transaction rather than a change of residence of the entity. notional units may be identified or old ones converted to ownership of the assets as a result of changes in residence of the owners. Residence of other entities Residence of enterprises 26.43 General government includes territorial enclaves, such as embassies, consulates, military bases and other enclaves of foreign governments. However, an entity created by a 26.40 An enterprise is resident in an economic territory when the government under the laws of another jurisdiction is an enterprise is engaged in a significant amount of production enterprise resident in the host jurisdiction and not part of of goods or services from a location in the territory. the general government sector in either economy. Taxation and other legal requirements tend to result in the use of a separate legal entity for operations in each legal jurisdiction. In addition, a separate institutional unit is 26.44 International organizations are resident in an economic identified for statistical purposes where a single legal entity territory of their own and not of the economy in which they has substantial operations in two or more territories (for are physically located. An international organization that example, for branches, land ownership and multiterritory operates military forces or acts as the interim enterprises, as noted above). As a result of splitting such administration in a territory remains an international legal entities, the residence of each of the subsequently organization and is non-resident in that territory, even if it identified enterprises is usually clear. The implications of undertakes general government functions there. In cases the residence of an enterprise for the recording of its flows where these organizations are significant, it may be and stocks are summarized in table 26.2. desirable to identify them separately. Some international organizations cover a group of economies in a particular 26.41 In some cases, the physical location of an enterprise is not region, such as with economic or currency unions. If sufficient to identify its residence because the enterprise statistics are prepared for that region as a whole, these has little or no physical presence, for example its regional organizations are residents of the region as a administration is entirely contracted out to other entities. whole, even though they are not residents of any member Banking, insurance, investment funds, securitization economy. vehicles and some special purpose entities may operate in this way. Many trusts, corporations, or foundations that 26.45 A non-profit institution serving households (NPISH) has a hold private wealth also have little or no physical presence. centre of economic interest in the economy where the Similarly, with virtual manufacturing, all the physical institution is legally created or otherwise officially processes are outsourced to other units. In the absence of recognized. When an NPISH is engaged in charity or relief any significant physical dimension to an enterprise, its work on an international scale, the foreign operations may residence is determined according to the economic territory be sufficiently substantial to be recognized as branches. C. A comparison between the international accounts and the SNA rest of the world accounts 26.46 Like the SNA, the international accounts cover accounts for and the secondary income account. The primary income current transactions, accumulation accounts and balance account corresponds to the allocation of primary income sheets. The transaction accounts are collectively called the accounts in the SNA, the secondary income account to the balance of payments. An overview of the international secondary distribution of income account in the SNA. The accounts presentation (using the SNA numerical example) income accounts in BPM6 do not use distribution and is given in tables 26.3. The three current accounts are the redistribution in their titles, since they do not show goods and services account, the primary income account distribution and redistribution from one party to another, 488 The rest of the world accounts and links to the balance of payments but just show the income from the point of view of one 26.48 Table 26.3 also shows the restricted form of the capital party. Because there is no account corresponding to use of account in the international accounts and the financial income in the international accounts, the adjustment for the account using the functional classification of financial change in pension entitlements term appears as a single transactions rather than the instrument classification used in item after the secondary income account. (Cross-border the SNA. Because the functional classification is a pensions are currently minor for most economies.) grouping of instruments, the two forms of presentation are strictly consistent. The functional classification is described below in section D. (The explanation of the shaded cell for 26.47 There are no exact parallels in the international accounts for reserves liabilities is explained in section D also.) the production account, the generation of income account and use of income account because the international accounts do not describe production, consumption (or 1. Goods and services account capital formation). Products imported and exported are treated as simple transactions in all cases; whether the 26.49 The goods and services account consists only of imports products will eventually be used for intermediate and exports of goods and services because these are the consumption, final consumption, capital formation, or will only transactions in goods and services with a cross-border be re-exported is unknown in the context of the dimension. Goods and services are recorded when there is a international transaction. The use made of products is change of economic ownership from a unit in one economy entirely domestic in nature. to a unit in another country. Although there is usually a Table 26.3:Overview of the balance of payments Credits Debits Balance Current accounts Goods and services account Goods 462 392 Services 78 107 Goods and services 540 499 41 Primary income account Compensation of employees 6 2 Interest 13 21 Distributed income of corporations 17 17 Reinvested earnings 14 0 Primary income account 50 40 10 Goods, services and primary income 590 539 51 Secondary income account Current taxes on income, wealth, etc. 1 0 Net non-life insurance premiums 2 11 Non-life insurance claims 12 3 Current international transfers 1 31 Miscellaneous current transfers 1 10 Secondary income 17 55 -38 Current account balance 13 Capital account Acquisition or disposals of non-produced assets 0 0 Capital transfers 1 4 Capital account balance -3 Net lending (+) or net borrowing (-) 10 Financial account (by functional category) Direct investment 8 11 Portfolio investment 18 14 Financial derivatives (other than reserves) and ESOs 3 0 Other investment 20 22 Reserve assets 8 Total changes in assets or liabilities 57 47 Net lending (+) or net borrowing (-) 10 Net errors and omissions 0 489 System of National Accounts physical movement of goods when there is a change of economic ownership) that are exported with no substantial ownership, this is not necessarily the case. In the case of transformation from the state in which they were previously merchanting, goods may change ownership and not change imported. Because re-exported goods are not produced in location until they are resold to a third party. the economy concerned, they have less connection to the economy than other exports. Economies that are major 26.50 Goods that change location from one economy to another trans-shipment points and locations of wholesalers often but do not change economic ownership do not appear in have large values of re-exports. Re-exports increase the imports and exports. Thus goods sent abroad for figures for both imports and exports and when re-exporting processing, or returned after processing, do not appear as is significant the proportions of imports and exports to imports and exports of goods; only the fee agreed for economic aggregates are increased also. It is therefore processing appears as a service. useful to show re-exports separately. Goods that have been imported and are waiting to be re-exported are recorded in inventories of the resident economic owner. 26.51 The balance of payments gives emphasis to the distinction between goods and services. This distinction reflects policy interests, in that there are separate international treaties 26.55 Goods are presented at an aggregate level in the balance of covering goods and services. It also reflects data issues, in payments. More detailed commodity breakdowns can be that data on goods are usually obtained from customs obtained from IMTS data. sources, while data on services are usually obtained from payments records or surveys. 26.56 Detail is produced for the following 12 standard components of services: 26.52 The main source of data for goods is international merchandise trade statistics. International standards are a. Manufacturing services on physical inputs owned by given in International Merchandise Trade Statistics: others; Concepts and Definitions (IMTS) (United Nations, 1998). BPM6 identifies some sources of difference that may occur b. Maintenance and repair services n.i.e.; in some or all countries. It also recommends a standard reconciliation table to assist users in understanding these differences. One major source of difference is that the c. Transport; standards for IMTS use a CIF-type (cost, insurance and freight) valuation for imports, while the balance of d. Travel; payments use a uniform FOB valuation for both exports and imports. It is therefore necessary to exclude freight and e. Construction; insurance costs incurred between the customs frontier of the exporter and the customs frontier of the importer. Because of variations between the FOB-type valuation and f. Insurance and pension services; actual contractual arrangements, some freight and insurance costs need to be rerouted. g. Financial services; 26.53 The change of ownership basis used for the balance of h. Charges for the use of intellectual property n.i.e.; payments means that goods entries will have a time of reporting consistent with the corresponding financial flows. i. Telecommunications, computer and information In BPM6, there are no longer exceptions to the change of services; ownership principle. In contrast, IMTS follow the timing of customs processing. While this timing is often an acceptable approximation, adjustments may be needed in j. Other business services; some cases, such as goods sent on consignment. In the case of goods sent abroad for processing with no change of k. Personal, cultural and recreational services; and ownership, the values of goods movements are included in IMTS, but changes in ownership are the primary l. Government goods and services n.i.e. presentation in the balance of payments. (However, the values of goods movements are recommended as supplementary items to understand the nature of these 26.57 Three of the standard components are transactor-based arrangements.) Further details of the recording of these items, that is, they relate to the acquirer or provider, rather processing arrangements are given in chapter 21. Other than the product itself. These categories are travel, adjustments to IMTS may be needed to bring estimates into construction and government goods and services n.i.e. line with the change of economic ownership of goods, either generally or because of the particular coverage of a. Travel covers all goods or services acquired by non- each country. Possible examples include merchanting, non- residents during visits whether for own use or to give monetary gold, goods entering or leaving the territory away. Travel includes goods, local transport, illegally, goods procured in ports by carriers, and goods accommodation, meals and other services. moving physically but where there has been no change of ownership. b. Construction covers both the total value of the product delivered by the contractor and any goods and services 26.54 Re-exports are foreign goods (goods produced in other sourced locally by the contractor that are not recorded economies and previously imported with a change of in imports and exports of goods. 490 The rest of the world accounts and links to the balance of payments c. Government goods and services n.i.e. cover a range of proportion corresponds to the direct investor's holding in items that cannot be allocated to more specific the enterprise. headings. 26.63 Retained earnings are equal to the net operating surplus of Besides the three transactor-based items, the remaining the enterprise plus all property income earned less all components are product-based, built from the more detailed property income payable (before calculating reinvested classes of the CPC 2. Additional standards for services earnings) plus current transfers receivable less current trade are shown in the Manual on Statistics of International transfers payable and less the item for the adjustment for Trade in Services (MSITS) (United Nations, European the change in pension entitlements. Reinvested earnings Commission, International Monetary Fund, Organisation accrued from any immediate subsidiaries are included in for Economic Co-operation and Development, United the property income receivable by the direct investment Nations Conference on Trade and Development and the enterprise. World Trade Organization, 2002), which is fully harmonized with the international accounts. 26.64 Reinvested earnings may be negative, for example where the enterprise makes a loss or where dividends are 2. The primary income account distributed from holding gains, or in a quarter when an annual dividend is paid. However, if the dividends are disproportionately large relative to recent levels of 26.58 The entries in the primary income account are concerned dividends and earnings, the excess should be recorded as a with compensation of employees and property income, withdrawal of owner's equity from the corporation as exactly as in the allocation of primary income account in explained in paragraph 7.131. the SNA. Payments of taxes on production by residents and receipts of subsidies by residents from the domestic government are recorded in the generation of income 26.65 For a direct investment enterprise that is 100 per cent account, an account that does not form part of the balance owned by a non-resident, reinvested earnings are equal to of payments. Any payments of taxes on production payable retained earnings and the saving of the enterprise is exactly by a resident to another government as well as any subsidy zero. receivable by a resident from another government are recorded in the primary income account of the balance of 3. Secondary income account payments. The matching entries for the domestic government are shown in the SNA in the allocation of primary income account and for foreign governments in the 26.66 The entries in the secondary income account are current rest of the world column of that account and in the primary transfers. The range of entries corresponds exactly to those income account of the balance of payments. in the secondary distribution of income account in the SNA. Several of these are particularly important in the international accounts, especially current international 26.59 Rent may arise in cross-border situations, but rarely, because all land is deemed to be owned by residents, if cooperation and remittances sent to their home countries by individuals working abroad. necessary by creating a notional resident unit. An example where rent may be recorded in the international accounts may be short-term fishing rights in territorial waters 26.67 Cross-border personal transfers are household-to- provided to foreign fishing fleets. It is common in the household transfers and are of interest because they are an international accounts to use the term investment income important source of international funding for some meaning property income excluding rent. Investment countries that provide large numbers of long-term workers income therefore reflects income arising from the abroad. Personal transfers include remittances by long-term ownership of financial assets and the disaggregation of workers, that is, those who have changed their economy of investment income matches that of financial assets and residence. liabilities so that rates of return can be calculated. 26.68 Other workers, such as border and seasonal workers do not 26.60 In BPM6, interest flows are measured on exactly the same change their economy of residence from the home basis as in the SNA with FISIM separated and treated as an economy. Instead of transfers, the international transactions import or export of financial services. of these workers include compensation of employees, taxes and travel costs. A supplementary presentation of personal remittances brings together personal transfers with these Income of direct investment enterprises related items. Personal remittances include personal transfers, compensation of employees less taxes and travel, 26.61 The role of direct investment enterprises is particularly and capital transfers between households. For further important and reflected in both the flows and positions in details, see Appendix 5 Remittances in BPM6. the international accounts. There is extended discussion on the identification and role of direct investment enterprises 26.69 Insurance flows, especially flows relating to reinsurance, in section D. can be important internationally. These flows are recorded in the same way as in the SNA, both as regards the 26.62 As explained in paragraphs 7.136 to 7.139, in the case of a separation of a financial service charge and the treatment of direct investment enterprise, it is assumed that a proportion direct insurance and reinsurance flows separately and not of the enterprise's retained earnings is distributed to the on a consolidated basis. Detailed information on this direct investor as a form of investment income. The separation is given in part 1 of chapter 17. 491 System of National Accounts 4. Balancing items in the current accounts of instruments used for providing or acquiring funding, not the international accounts just lending and borrowing. Conceptually, it has the same value as the national accounts item for the total economy, and the same as the national accounts item for the rest of 26.70 The structure of the balancing items in the balance of the world but with the sign reversed. payments is somewhat different from that in the SNA, in that each account has its own balancing item and another that carries down to the next account. To illustrate, the 6. The financial account and IIP primary income account has its own balancing item (balance on primary income) and a cumulative balance 26.73 The financial account of the balance of payments and the (balance on goods, services and primary income). The IIP are of particular importance because they provide an external balance on primary income corresponds to balance understanding of international financing as well as of of primary incomes and is the item feeding into GNI. The international liquidity and vulnerability. The integrated IIP current external balance corresponds to saving by the rest statement, including the IIP and associated financial and of the world relative to the domestic economy. The other changes accounts, is shown in Table 26.5. The balancing items in the BPM6 structure of accounts are primary classification is based on functional categories, shown in table 16.3, reproduced here for convenience as with additional data on instruments and institutional table 26.4. sectors. 5. The capital account 26.74 The functional categories, described in section D, convey more information about the motivation and relationship between the parties, which are of particular interest to 26.71 The elements of the capital account subject to international international economic analysis. Data by functional transactions are more restricted than those covered in the category are further subdivided by instrument and SNA. The entries in the capital account cover acquisitions institutional sector, which makes it possible to link them to and disposals of non-produced non-financial assets and the corresponding SNA and monetary and financial capital transfers. There are no transactions recorded as statistics items. The institutional sector classification is the capital formation of produced assets because, as explained same as in the SNA, although it is usually abbreviated (to earlier, the ultimate use of exports is not a concern for the five sectors in the standard components). In addition, a national economy. supplementary subsector is used for monetary authorities, which is a functional subsector linked to reserve assets. It 26.72 Like the SNA, net lending or net borrowing is the balancing covers the central bank and any parts of general item for the sum of the current and capital accounts and for government or financial corporations other than the central the financial account. As in the SNA, it covers all bank that hold reserve assets, so is relevant for countries Table 26.4: Balancing items in the international accounts in relation to the SNA sequence of accounts Uses Resources Rest of the Rest of the world world Transactions and balancing items Goods and services account Imports of goods and services 499 540 Exports of goods and services - 41 External balance of goods and services Primary income account 6 Compensation of employees 2 Taxes on production and imports Subsidies 44 Property income 38 - 10 External balance of primary income - 51 External balance of goods, services and primary income Secondary income account 17 Current transfers 55 38 External balance of secondary income Adjustment for the changes in pension entitlements - 13 Current external balance Capital account Acquisitions less disposals of non-produced assets Capital transfers, receivable 4 Capital transfers, payable -1 3 External capital account balance - 10 Net lending (+) / net borrowing (­) 492 The rest of the world accounts and links to the balance of payments where some or all reserves are held outside the central 26.77 The same level of detail is used for investment income and bank. the IIP. As a result, average rates of return can be calculated. Rates of return can be compared over time and 26.75 The part of the balance sheets covered in the international for different instruments and maturities. For example, the accounts is called the IIP. The terminology highlights the trends in return on direct investment can be analysed, or the specific components of the national balance sheet which are return can be compared with other instruments. included. The IIP covers only financial assets and liabilities because, to be included in the IIP, there must be a cross- border element. In the case of financial claims, the cross- 7. The other changes in assets accounts border element arises when one party is a resident and the other party is a non-resident. In addition, while gold bullion is an asset that has no counterpart liability, it is included in 26.78 International assets and liabilities may be subject to all the the IIP when held as a reserve asset, because of its role as a possible types of other changes in the volume of assets and means of international payments. However, non-financial liabilities and to revaluation changes. assets are excluded as they do not have a counterpart liability or other international aspect. 26.79 Because instruments are often denominated in foreign 26.76 The balancing item on the IIP is the net IIP. The net IIP currencies and analysis of the effect of exchange rate plus non-financial assets in the national balance sheet equal movements is particularly important, there is a breakdown national net worth, because resident-to-resident financial of revaluations into exchange rate changes and other claims net to zero in the national balance sheet. factors. D. International accounts functional categories 26.80 The international accounts functional categories are the c. financial derivatives (other than reserves) and primary classification used for each of investment income, employee stock options; financial transactions and positions in the international accounts. The following five categories are identified: d. other investment; and a. direct investment; e. reserve assets. 26.81 Detailed definitions are given later in this section. The b. portfolio investment; functional categories are built on the classification of Table 26.5:Overview of Integrated International Investment Position Statement Other Transactions Opening changes in Closing (Financial Revaluation position the volume of position account) assets Assets (by functional category) Direct investment 78 8 0 1 87 Portfolio investment 190 18 0 2 210 Financial derivatives (other than reserves) and ESOs 7 3 0 0 10 Other investment 166 20 0 0 186 Reserve assets 833 8 0 12 853 Total 1 274 57 0 15 1 346 Liabilities (by functional category) Direct investment 210 11 0 2 223 Portfolio investment 300 14 0 5 319 Financial derivatives (other than reserves) and ESOs 0 0 0 0 0 Other investment 295 22 0 0 317 Total 805 47 0 7 859 Net IIP 469 10 0 8 487 493 System of National Accounts financial instruments discussed in chapters 11 and 13, but investment differs from other investment in that it provides with an additional dimension that takes into account some a direct way to access financial markets, and so can provide aspects of the relationship between the parties and the liquidity and flexibility. motivation for investment. As a result, the different categories exhibit different patterns of behaviour. For 26.82 Reserve assets include a range of instruments that are example, there is a different type of relationship between shown under other categories when not owned by monetary the parties for direct investors compared to portfolio authorities or other units authorized by the monetary investors holding equity. Direct investment is related to authorities and sometimes even when held by monetary control or a significant degree of influence, and tends to be authorities. However, as reserve assets they are identified associated with a lasting relationship although it may be as being available to meet international payments financing short-term. In addition to financial resources, direct needs and undertake market intervention to influence the investors often supply additional factors such as know- exchange rate. how, technology, management and marketing. As well, related companies are more likely to trade with and lend to each other. In contrast, portfolio investors typically have a 26.83 The instrument classification alone does not fully reflect smaller role in the decision-making of the enterprise, with these behavioural differences. For example, a loan can potentially important implications for future flows, and for appear under direct investment or other investment, but the the volatility of the price and volume of positions. Portfolio different nature of the relationship between the parties Table 26.6: Link between Financial Assets Classification and Functional Categories Functional categories (other than reserves) Financial derivatives Portfolio investment Direct investment Other investment Reserve assets SNA /MFSM Financial Assets and Liabilities Classification and ESOs Monetary gold X Special drawing rights X*1 X*1 Currency and deposits: Currency X X Interbank positions X X Other transferable deposits X X X Other deposits X X X Debt securities X X X Loans X X X Equity and investment fund shares: Equity: Listed shares X X X Unlisted shares X X x Other equity X X Investment fund shares/units: Money market fund shares/units x X X Other investment fund shares/units x X x X Insurance, pension and standardized guarantee schemes: Non-life insurance technical reserves x X Life insurance and annuity entitlements x X Pension entitlements X Claims of pension funds on pension managers X X Entitlements to non-pension benefits X Provisions for calls under standardized guarantees X X Financial derivatives and employee stock options: Financial derivatives X X Employee stock options X Other accounts receivable/payable: Trade credit and advances X X Other accounts receivable/payable X X Footnote 1: SDR assets are reserve assets; SDR liabilities are other investment; X shows applicable functional categories; x shows cases that are considered to be relatively uncommon. 494 The rest of the world accounts and links to the balance of payments means that the risks and motivations behind the transaction but still subject to a significant degree of influence. The tend to differ. A direct investment loan is more likely to be SNA's foreign-controlled enterprises are limited to inward provided and generally involves less vulnerability on the direct investment, while the international accounts are also part of the borrowing economy because of the relationship concerned with outward direct investment. Reinvested between the parties. Table 26.6 shows the relationship earnings on foreign direct investment in the SNA have the between instruments and functional categories. same scope as in the balance of payments (although "foreign" is not used because it is redundant in the context 1. Direct investment of the international accounts). 26.84 Direct investment is a category of cross-border investment 26.90 In addition to the statistics on the international financial associated with a resident in one economy having control flows associated with direct investment, information on or a significant degree of influence on the management of foreign-controlled enterprises is provided through statistics an enterprise that is resident in another economy. As well on the Activities of Multinational Enterprises (AMNE as the equity that gives rise to control or influence, direct statistics) and the closely related Foreign AffiliaTes investment also includes associated debt (except debt Statistics (FATS). These cover items such as exports, between affiliated financial intermediaries). imports, domestic sales and domestic purchases of goods and services. They therefore provide a wider picture of the operations of multinational enterprises. Additional 26.85 Control is determined to exist if the direct investor owns information is available in Recommendations Manual on more than 50 per cent of the voting power in the direct the Production of Foreign AffiliaTes Statistics, the investment enterprise. Such an enterprise is called a Handbook on Economic Globalisation Indicators and subsidiary. A significant degree of influence is determined MSITS. to exist if the direct investor owns from 10 to 50 percent of the voting power in the direct investment enterprise. Such an enterprise is called an associate. In order to achieve 2. Portfolio investment bilateral consistency and avoid subjective decisions about actual control or influence, these operational definitions 26.91 Portfolio investment is defined as cross-border should be used in all cases. transactions and positions involving debt or equity securities, other than those included in direct investment 26.86 As well as immediate direct investment relationships, there or reserve assets. Securities are instruments designed for may be indirect direct investment relationships, as a result convenient negotiability between parties, such as shares, of a chain of ownership. In addition, fellow enterprises may bonds, notes and money market instruments. The be an important part of direct investment. (Fellow negotiability of securities is a way of facilitating trading, enterprises are enterprises that have less than ten per cent allowing them to be held by different parties during their equity in each other but which are under the control or lives. Negotiability allows investors to diversify their influence of the same investor who is a foreign direct portfolios and to withdraw their investment readily. investor in at least one of the fellows.) Reverse investment arises when direct investment enterprises invest in their 26.92 Portfolio investment typically depends on organized own direct investors but have less than ten per cent of the financial markets and associated bodies such as dealers, voting power in the direct investor. exchanges and regulators. In contrast, the parties to direct and other investment instruments usually deal directly with 26.87 Direct investment includes debt between the parties as well each other. The negotiability of portfolio investment as equity except in the case of debt positions between transactions makes them a convenient and flexible related financial institutions. Such debt between related investment channel, but also may be associated with companies may be called inter-company lending. One of volatility. the features of a group of direct investment enterprises is that its members are more likely to extend loans and trade 3. Financial derivatives (other than reserves) credit to each other than are unrelated enterprises. and employee stock options 26.88 Because of the relationship of control or influence, the direct investor's share of retained earnings of a subsidiary 26.93 The definition of the functional category financial or associate is imputed as first being paid out as an income derivatives (other than reserves) and employee stock flow and then reinvested as a financial transaction. The options largely coincides with the corresponding financial income item is called reinvested earnings; the instrument class, discussed in chapters 11 and 13. The corresponding equal entry in the financial account is called difference in coverage between the functional category and reinvestment of earnings. Reinvested earnings are defined the financial instrument is that financial derivatives as the direct investor's share in the retained earnings of the associated with reserve asset management are excluded enterprise, and so are consistent with the corresponding from the functional category and included in reserve assets. SNA items. A consequence is that there will be no saving This category is identified separately because it relates to by an enterprise that is 100 per cent foreign owned, because risk transfer, rather than supply of funds or other resources. all saving will be attributed to its direct investor. 4. Other investment 26.89 Those direct investment enterprises that are controlled by non-residents correspond to the SNA subsectors of foreign- 26.94 Other investment is a residual category that includes controlled enterprises. However direct investment positions and transactions other than those included in enterprises include those not subject to control from abroad direct investment, portfolio investment, financial 495 System of National Accounts derivatives and employee stock options and reserve assets. notions of "control" and "availability for use" by the It includes the remainder of the following financial monetary authorities. instruments: 26.96 In general, only external claims actually owned by the a. other equity; monetary authorities can be classified as reserve assets. Nonetheless, ownership is not the only condition that b. currency and deposits; confers control. In cases where institutional units (other than the monetary authorities) in the reporting economy c. loans (including use of IMF credit and loans from the hold legal title to external foreign currency assets and are IMF); permitted to do so only on terms specified by the monetary authorities or only with their express approval, such assets d. non-life insurance technical reserves, life insurance and can be considered reserve assets. This is because such annuities entitlements, pension entitlements and assets are under the direct and effective control of the provisions for calls under standardized guarantees; monetary authorities. e. trade credit and advances; 26.97 Reserve assets must be readily available in the most unconditional form. A reserve asset is liquid in that the f. other accounts receivable/payable; and asset can be bought, sold and liquidated for foreign currency (cash) with minimum cost and time, and without g. SDR allocations (SDR holdings are included in reserve unduly affecting the value of the asset. This concept refers assets). to both non-marketable assets, such as demand deposits, and marketable assets, such as securities where there are 5. Reserve assets ready and willing sellers and buyers. In order to be readily available to the authorities to meet balance of payments financing needs and other related purposes under adverse 26.95 Reserve assets are those external assets that are readily circumstances, reserve assets generally should be of high available to and controlled by monetary authorities for quality. meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate and for other related purposes (such as 26.98 Reserve assets are limited to assets, but a memorandum maintaining confidence in the currency and the economy, item is provided for reserve-related liabilities that are and serving as a basis for foreign borrowing). Reserve included in other functional categories, mainly portfolio assets must be denominated and settled in foreign and other investment. (This is why the liabilities cell for currency. Underlying the concept of reserve assets are the reserves in table 26.3 is shaded.) E. Special international accounts considerations 1. Global imbalances 26.101 Exceptional financing is presented in the "analytic" presentation of the balance of payments, as published in the Balance of Payments Statistics Yearbook (International 26.99 In recent years, the IMF has done extensive work on global Monetary Fund, annual). In this presentation, entries statistical imbalances. By summing data for all economies, relating to reserves, IMF credit and exceptional financing global totals can be derived. (Although as a functional are presented "below-the-line" while all the other entries, category, reserve assets have no counterpart liability, the which will require funding, are shown above-the-line. This constituent instruments can be allocated to their counterpart presentation facilitates analysis of the monetary authorities' liabilities for an exercise of the type described here.) The international liquidity. extent of actual inconsistency has been used to identify systematic biases that can indicate reporting problems, for example, that services credits have higher coverage than 26.102 There is more discussion on exceptional financing in services debits. appendix 1 of BPM6. 2. Exceptional financing 3. Debt instruments 26.100 Exceptional financing brings together financial 26.103 It is useful to group the different types of debt instruments, arrangements made by the authorities to meet balance of because debt instruments have particular implications for payments needs. Exceptional financing therefore identifies international liquidity and risk. Debt instruments are those transactions according to their motivation. In addition, the instruments that require the payment of principal or interest incurrence of arrears is included in exceptional financing. or both at some point(s) in the future. Debt instruments Although it is not a transaction, it is an action the monetary comprise special drawing rights, currency and deposits, authorities may take to manage their payments debt securities, loans, insurance technical reserves and requirements. provision for calls under standardized guarantees, and other 496 The rest of the world accounts and links to the balance of payments accounts receivable/payable. Financial derivatives are not 26.108 Debt repudiation, write-offs and write-downs of debt on a debt instruments, but an overdue obligation on a financial unilateral basis are not treated as transactions in either the derivative contract is classified as an account payable and SNA or BPM6 and so are not considered part of debt thus is included as a debt instrument. reorganization. 26.104 Debt instruments can be contrasted with equity and 5. Regional arrangements, including currency investment shares in the nature of the liability and risk. unions While equity gives a residual claim on the assets of the entity, a debt instrument involves an obligation to pay an 26.109 Regional arrangements include: amount of principal or interest or both usually according to a predefined formula, which means that the creditor has a more limited risk exposure. In contrast, the return on equity a. monetary and currency unions, which provide for a is largely dependent on the economic performance of the single monetary policy across an area. Some of the issuer, so the holders bear more of the risk. Additional same issues apply when one economy unilaterally information is provided in the External Debt Guide. adopts the currency of another economy, such as with "dollarization"; 26.105 Debt instrument flows and positions are shown divided between long-term and short-term. Primarily, this split is b. economic unions, which harmonize certain economic according to their original maturity, that is, the period from policies to foster greater economic integration; and issue until contractually scheduled final payment. In addition, because of the international accounts concern c. customs unions, which have common tariff and other with international liquidity issues, liability data can also be trade policies with non-member economies. prepared on the basis of remaining maturity, that is, the period from the reference date until contractually scheduled BPM6 gives detailed guidance on the treatments of these final payment, on a supplementary basis. arrangements. Among the issues that are dealt with are the production of consolidated data for a union as a whole, the 4. Debt reorganization treatment of regional organizations, including the central bank, treatment of bank notes in a currency union, and revenue-sharing arrangements in a customs union. 26.106 Debt reorganization (also referred as debt restructuring) is defined as arrangements involving both the creditor and the debtor (and sometimes third parties) that alter the 6. Currency conversion, including multiple terms established for servicing an existing debt. exchange rates Governments are often involved in debt reorganization, as a debtor, or a creditor or a guarantor, but debt reorganization 26.110 Exchange rates must be considered carefully when can also involve the private sector, such as through debt measuring international transactions and positions, as exchanges. Debt reorganization involves a range of changes can distort measurement. Flows denominated in a different types of transactions as well as valuation and foreign currency are converted to their value in the timing issues. domestic currency at the rate prevailing when the flows take place, and positions are converted at the rate prevailing 26.107 The four main types of debt reorganization are: on the balance sheet date. The midpoint between the buying and selling rates should be used at the time of transaction a. Debt forgiveness; a reduction in the amount of, or the (for transactions) and at the close of business on the extinguishing of, a debt obligation by the creditor via a reference date for positions. The difference between contractual arrangement with the debtor; buying/selling prices and midpoint prices represents a service charge and should be recorded as such. b. Debt rescheduling or refinancing; a change in the terms and conditions of the amount owed, which may or may 26.111 In principle, the actual exchange rate applicable to each not result in a reduction in burden in present value transaction should be used for currency conversion. The terms; use of a daily average exchange rate for daily transactions usually provides a very good approximation. If daily rates cannot be applied, average rates for the shortest period c. Debt conversion; the creditor exchanges the debt claim should be used. Some transactions occur on a continuous for something of economic value, other than another basis, such as the accrual of interest, over a period of time. debt claim on the same debtor, such as debt-for-equity For such flows, therefore, an average exchange rate for the swaps, debt-for-real-estate swaps, debt-for- period in which the flows occur should be used for development swaps, debt-for-nature swaps, and for currency conversion. debt prepayments, debt-for-cash; and 26.112 Under a multiple exchange rate regime, two or more d. Debt assumption and debt payments on behalf of others exchange rates are applicable to different categories of when a third party is also involved. transactions; the rates favour some categories and discourage others. Such rates incorporate elements similar Debt forgiveness across economies often involves to taxes or subsidies. Because the multiple rates influence government and there is further guidance on the treatments the values and the undertaking of transactions expressed in of these arrangements in chapter 22, BPM6 and specialized domestic currency, net proceeds implicitly accruing to manuals such as the External Debt Guide. authorities as a result of these transactions are calculated as 497 System of National Accounts implicit taxes or subsidies. The amount of the implicit tax converted using the exchange rate applicable in that or subsidy for each transaction can be calculated as the market. If there are multiple official rates and a parallel difference between the value of the transaction in domestic rate, the official rates and the parallel rate should be treated currency at the actual exchange rate applicable and the as distinct markets in any calculation of a unitary rate. value of the transaction at a unitary rate that is calculated as Transactions effected at the parallel rate usually should be a weighted average of all official rates used for external separately converted at that rate. However, in some transactions. For conversion of positions of external instances, parallel markets may be considered effectively financial assets and liabilities in a multiple rate system, the actual exchange rate applicable to specific assets or integrated with the official exchange rate regime. Such is liabilities at the beginning or end of the accounting period the case when most or all transactions in the parallel market is used. are sanctioned by the authorities or when the authorities actively intervene in the market to affect the parallel rate, or 26.113 Parallel (unofficial) or black market rates cannot be ignored do both. In this instance, the calculation of the unitary rate in the context of a multiple rate regime and can be treated should include both the official and parallel market rates. If in different ways. For instance, if there is one official rate only limited transactions in the parallel market are and a parallel market rate, the two should be handled sanctioned by the authorities, the parallel rate should not be separately. Transactions in parallel markets should be included in the calculation of a unitary rate. 498 Chapter 27: Links to monetary statistics and the flow of funds A. Introduction 27.1 Chapter 11 describes the financial account of the sequence 1. Monetary statistics of accounts of the SNA. It shows transactions in each category of financial assets and liabilities for each of the institutional sectors of the national economy and of the rest 27.5 Monetary statistics cover the stocks and flows of the assets and liabilities of financial corporations, both within an of the world. economy and between units in the economy and units in the rest of the world. However, a more aggregate level of 27.2 As explained when describing the principle of quadruple subsectoring is used than in the SNA. Financial corporations are divided into two subsectors only at the accounting in both chapter 11 and chapter 4, each highest level, depository corporations and the other transaction leads to two pairs of entries in the SNA financial corporations subsector. The former is then further accounts. For many transactions, one pair is recorded in subsectored into the central bank subsector and the other one of the non-financial accounts and one pair in the depository corporations subsector. More information on financial account. For others, which are concerned with monetary statistics is given in section B. changing the composition of a portfolio of financial assets and liabilities, both pairs of entries are recorded in the 2. Financial statistics financial account. It is for this reason that only by including the financial account in the sequence of accounts is the full articulation of the accounting system achieved. 27.6 Financial statistics extend the range of monetary statistics to include the stocks and flows of financial assets and liabilities between all sectors of the economy and between 27.3 However, the information in the financial account is of the sectors of the economy and the rest of the world. analytical and policy interest in its own right and represents an important part of monetary and financial statistics. These statistics are used to monitor the state of the money 27.7 The basic accounting rules, concepts of residence, time of recording and the classification of financial assets and and other capital markets in particular and as an indicator liabilities are consistent between the SNA, BPM6 and of the state of the economy in general. For the latter, the MFSM. The MFSM uses a more aggregate level of link to the rest of the SNA accounts is usually implicit sectoring than the SNA but one that is strictly consistent rather than explicit. with it. 27.4 The purpose of this chapter is to give an introduction to the 27.8 Some further aspects of financial statistics building on the sorts of analyses involved in monetary and financial classifications used in the financial account are discussed in statistics more generally and to show how the data in the section C. sequence of accounts can be linked to these other presentations. Further detail on monetary and financial 3. Flow of Funds statistics can be found in the MFSM and its companion Compilation Guide (International Monetary Fund (IMF) 2008), the Manual on Sources and Methods for the 27.9 The flow of funds is a three dimensional presentation of Compilation of ESA 95 Financial Accounts (Eurostat, financial statistics where both parties to a transaction as 2002b), the Monetary Financial Institutions and Market well as the nature of the financial instrument being transacted are elaborated. A similar three dimensional Statistic Manual (European Central Bank, 2007) and in presentation is also presented in respect of the stocks of Financial Production, Flows and Stocks in the SNA. financial assets and liabilities where the creditor and debtor (United Nations and the European Central Bank, of each instrument are shown. The flow of funds is forthcoming). discussed in section D. 499 System of National Accounts A. Monetary statistics 1. Defining depository corporations the other financial corporations subsector, can be established. 27.10 Money is very important as a financial variable, but the wide range of ways in which money is defined in different 2. Presentation of monetary statistics countries precludes a simple definition within the SNA. 27.15 Monetary statistics are presented for all financial 27.11 The composition of broad money and other monetary corporations, with the following disaggregation: aggregates varies widely among countries and encompasses many classes of deposits and certain categories of short- a. Depository corporations subsector, term securities, particularly negotiable certificates of deposit. In addition, many countries compile a range of money measures, as well as broader liquidity measures. · Central bank subsector, Even within a single country, innovation, deregulation or technical progress may cause definitions of broad money to · Other depository corporations subsector, shift over time in response to changes in financial instruments and the organization of money markets. b. Other financial corporations subsector. 27.12 In the MFSM, a country-specific concept of broad money as nationally defined is used. Although the specific 27.16 The instrument classification is the standard one from the financial account, as shown in table 27.2, with possibly components of broad money may vary across countries, in some further breakdown according to whether the all cases the nationally defined concept is used to identify instrument is denominated in local currency or foreign those financial corporations that issue liabilities included in currency. broad money. Such corporations are described as depository corporations. 27.17 For each instrument, a set of entries equivalent to an asset account is shown, that is: 27.13 The set of nine subsectors of the financial corporations sector described in chapter 4 and listed in table 27.1 is such a. Opening stock, that it should be possible to identify depository corporations as just defined as a combination of two or more of these subsectors. At a minimum, the group will b. Transactions, include the central bank and deposit-taking institutions. In some countries money market funds may also be included c. Valuation changes, because they are considered to be part of broad money. d. Other changes in volume, 27.14 Once depository corporations are identified, the three subsectors used for monetary statistics, the central bank subsector, the other depository corporations subsector and e. Closing stock. Table 27.1: Subsectors of the financial corporations sector 1. Central Bank 2. Deposit-taking corporations except the Central Bank 3. Money market funds (MMF) 4. Non-MMF investment funds 5. Other financial intermediaries except insurance corporations and pension funds 6. Financial auxiliaries 7. Captive financial institutions and money lenders 8. Insurance corporations (IC) 9. Pension funds (PF) 500 Links to monetary statistics and the flow of funds B. Financial statistics 27.18 As noted in the introduction, financial statistics extend the financial statistics is similar to that used for monetary range of monetary statistics to include the stocks and flows statistics except that all sectors are covered. In addition, of financial assets and liabilities between all sectors of the disaggregation of the financial sector into subsectors is economy and between the sectors of the economy and the common. As indicated, though, the sectors outside the rest of the world. Financial statistics include the financial financial corporations sector may be aggregated. It is usual account, balance sheets, other changes in assets account to show general government separately and also the rest of and the capital account to the extent that net borrowing or the world. If it is of particular interest, public non-financial net lending is taken from there. The format used for corporations may also be shown as a separate sector. Table 27.2: The classification of financial assets and liabilities Monetary gold and special drawing rights (SDRs) Monetary gold Special drawing rights Currency and deposits Currency Transferable deposits Interbank positions Other transferable deposits Other deposits Debt securities* Short-term Long-term Loans Short-term Long-term Equity and investment fund shares** Equity Listed shares Unlisted shares Other equity Investment fund shares/units* Money market fund shares/units Other investment fund shares/units Insurance, pension and standardized guarantee schemes Non-life insurance technical reserves Life insurance and annuity entitlements Pension entitlements Claims by pension funds on pension managers Provisions for calls under standardized guarantees Financial derivatives and employee stock options Financial derivatives Options Forwards*** Employee stock options Other accounts receivable / payable Trade credit and advances Other Memorandum item: Foreign direct investment Equity Loans Debt securities Trade Credit Other * The listed/unlisted split is relevant for debt securities and investment funds also. ** Reinvested earnings can exist under any of these. *** Credit default swaps to cover for guarantees are included within this item. 501 System of National Accounts 27.19 The classification of financial assets, shown in table 27.2, is classification as one year or less, while long-term is defined based primarily on two kinds of criteria: the liquidity of the as more than one year. To monitor possible liquidity risks, asset and the legal characteristics that describe the form of it may also be helpful to distinguish those long-term the underlying creditor/debtor relationship. The concept of instruments with a remaining maturity of one year or less. liquidity embraces other more specific characteristics such (Remaining maturity is the period from the reference date as negotiability, transferability, marketability or until contractually scheduled final payment.) convertibility. These characteristics play a major role in determining the categories, although they are not separately 27.21 The classification does not contain functional categories, identified in a systematic way. The classification is such as direct investment, portfolio investment, and designed to facilitate the analysis of transactions of international reserves, which are basic classification criteria institutional units and is a framework for assessing the for the balance of payments financial account. In view of sources and uses of financing and degree of liquidity for the importance of these categories, the classification does these units. provide for memorandum items for financial account transactions related to foreign direct investment 27.20 Maturity distinction is recognized as a secondary relationships. This topic is treated in greater detail in classification criterion. Short-term is defined for the chapters 21 and 26. C. Flow of funds 27.22 The form of table described under the section on monetary of assuming the net lending or net borrowing total is statistics shows how the closing stock of a comprehensive already determined. (This still assumes that saving is set of assets for a particular sector may be analysed by determined correctly. The act of balancing the flow of seeing how the opening stock is changed by transactions in funds table may suggest a re-examination of the current the asset, revaluation changes and other changes in the accounts if it is difficult to reconcile the saving figure for a volume of assets to reach the closing stock. This is a sector with the recorded capital and financial transactions.) particular application of the asset accounts described in chapter 13. 1. Flow accounts 27.23 Another popular form of table is that known as a flow of 27.24 The financial account, as presented in table 11.1 and funds table. This may take one of several forms. The most repeated for convenience here as table 27.3, records the net common presentation consists of an articulation of flows acquisition of financial assets and net incurrence of (or stocks) showing for each instrument which sector or liabilities for all institutional sectors by type of financial subsector is the creditor and which the debtor. Another asset. For each sector, the financial account shows the variation is to combine the elements of the capital and liabilities that the sector incurs to mobilize financial financial accounts to examine all accumulation transactions resources and the financial assets that the sector acquires. and not just those concerning financial assets. The rationale For each financial asset and liability, the financial account for this is that the balancing item on the right-hand side of shows the effects of transactions on the level of assets the financial account should be exactly equal in magnitude acquired by each sector and on the level of liabilities but opposite in sign to that on the left-hand side of the incurred by each sector. This information is very valuable capital account. By including the items from the capital in identifying the financial assets that net borrowing sectors account, discrepancies in this account may be revealed by use to finance their deficits and the assets that net lending the exercise of completing the flow of funds table, instead sectors use to allocate their surpluses. Although the Table 27.3: The financial account - concise form - changes in assets Changes in assets Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net acquisition of financial assets 83 172 - 10 189 2 436 47 483 Monetary gold and SDRs -1 -1 1 0 Currency and deposits 39 10 - 26 64 2 89 11 100 Debt securities 7 66 4 10 -1 86 9 95 Loans 19 53 3 3 0 78 4 82 Equity and investment fund shares 10 28 3 66 0 107 12 119 Insurance, pension and standardized guarantee schemes 1 7 1 39 0 48 0 48 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 Other accounts receivable/payable 4 1 5 4 1 15 10 25 502 Links to monetary statistics and the flow of funds movement of financial flows can be mapped at this level of exact form of the assets available. More generally, financial recording, the question of who is financing whom is not corporations play a major role assisting institutional units answered. Table 27.3 shows that non-financial corporations to rebalance their portfolios of assets and liabilities taking incur liabilities predominantly in the form of loans and account of their preferences between investment safety and other equities and investment fund shares. Financial rate of return, liquidity preference and convenience amid corporations incur net liabilities by using the full range of constantly changing market conditions. Thus, financial financial instruments. While the instrument by which the corporations play a critical role in directing financing flows liabilities are incurred is clearly presented in this account, it from net lending sectors to net borrowing sectors and allow is not possible to identify the sector that is providing the lenders to choose their asset instruments and borrowers funds. Similarly, the net acquisition of financial assets can their forms of indebtedness. be tracked. Households acquire net financial assets spread across a range of assets, while financial corporations acquire net financial assets mostly in the form of loans and The format of the account securities. However, it cannot be determined from this level of recording to which sectors the financing is being 27.27 Table 27.4 facilitates the more detailed financial analysis provided. just described by showing transactions in assets cross- classified by type of asset and by the debtor sector in the 27.25 For a full understanding of financial flows and the role they first part and the type of liability cross-classified by the play in the economy, it is often important to know more creditor sector in a similar, second part. The sectors detailed financial relationships between sectors and the transacting in assets or liabilities form the columns of the financial assets by which these relationships are carried out. table while the type of asset, disaggregated by sector of For example, it is useful to show what types of liabilities debtor, is shown in the rows. It would be conceptually government is using to finance its deficit and which sectors possible to present all the relationships between creditors (or the rest of the world) are providing the financing. For and debtors in a single table but this would require a table financial corporations (and those supervising them), it is of very many cells, many of which would be blank. interesting to show not only the composition of financial assets (loans and securities) that they have acquired but 27.28 Table 27.4 is merely illustrative of the type of detail that a also which sectors these are claims upon. In addition, it is country may wish to develop. Initially it may be possible to often desirable to analyse financial flows between show columns only for general government, the financial subsectors within a sector (central government financial sector and the rest of the world separately from all other transactions with local governments or central bank sectors, but even at this level if monetary statistics exist, it financial transactions with deposit-taking institutions) and should be possible to disaggregate the financial sector into across sector boundaries (changes in deposit-taking three subsectors as described earlier. institutions' claims on public non-financial corporations). Such detailed information is necessary to understand how 27.29 Ultimately it is desirable to show all the institutional financing is carried out and how it changes over time. sectors of the SNA and possibly subsectors such as central government and publicly controlled corporations. 27.26 This more detailed approach is particularly important in spelling out the role that financial corporations play in financial transactions. Financial corporations often have 27.30 The degree of detail shown for the financial instruments very small net lending or borrowing balances in will depend on data availability and the relative importance comparison with their total transactions in both financial of each. What follows is a list of possible disaggregations. assets and liabilities. This reflects the basic role of financial intermediation of mobilizing financial resources and 27.31 Currency and deposits may be distinguished according to making them available to other sectors in forms suitable to currency, transferable deposits and other deposits these sectors through transformation of the maturity of identifying that part of each that is denominated in Table 27.3 (cont): The financial account - concise form - changes in liabilities and net worth Changes in liabilities and net worth Total economy Non-financial corporations corporations Households government Goods and Rest of the Financial services NPISHs General world Total Transactions and balancing items Net lending (+) / net borrowing (­) - 56 -1 - 103 174 -4 10 - 10 0 Net acquisition of liabilities 139 173 93 15 6 426 57 483 Monetary gold and SDRs Currency and deposits 65 37 102 -2 100 Debt securities 6 30 38 0 0 74 21 95 Loans 21 0 9 11 6 47 35 82 Equity and investment fund shares 83 22 105 14 119 Insurance, pension and standardized guarantee schemes 48 0 48 0 48 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 Other accounts receivable/payable 26 0 9 4 39 - 14 25 503 System of National Accounts domestic currency or foreign currency and whether the of course, would be complementary to similar work on data creditor or debtor is a resident or non-resident. from other accounts in the SNA. In particular it is useful, when using the flow of funds accounts to facilitate the 27.32 Debt securities and loans may be divided by maturity (short study of the operation of the financial system in the and long-term) as well as by sector. economy, to relate these transactions to the behaviour of the non-financial economy. Similarly, the flow of funds accounts facilitate study of the process of making the 27.33 For equity a distinction between resident and non-resident equality between saving and investment, by tracing the enterprises as well as the distinction between listed, channels by which net lending reaches ultimate borrowing, unlisted and other equity may be helpful. after passing through various financial corporations and assets. 27.34 For insurance, standardized guarantee schemes and for financial derivatives the presentation may be simplified 27.38 In the policy area, a few examples will illustrate the because one party to the transaction must be a financial corporation, either resident or non-resident. For employee usefulness of these tables. Common policy problems faced stock options, the debtor must be either a financial or non- by many nations include questions such as: How will the financial corporation. Most pension schemes are operated central government's deficit be financed? How will the by financial corporations but some may be operated by major non-financial public corporations be financed and by non-financial employers without involving a financial whom? In each of these examples, the provision of answers corporation. to the questions requires an impact analysis on various sectors and types of transaction. The articulation of the accounts within the flow of funds facilitates the analysis 27.35 Trade credits and advances may be made by any sector. and provides a framework in which to assess the answers. The claims of pension funds on pension managers may, in principle, relate to any sector but are likely not to involve households. Other accounts receivable or payable may be 27.39 In the area of financial projections, the use of time-series separated into whether they are with residents or non- from relevant parts of the flow of funds tables enables an residents. examination for consistency of a number of separately prepared sector or market forecasts, and the implications 27.36 The form of table 27.4 should be interpreted as a general for future financial transactions of a particular set of model, and substantial flexibility should be allowed in assumptions about future events (for example, interest specific country circumstances. In many countries, the rates, exchange rates, growth, sector surpluses or deficits). dimensions of the tables will be severely constrained by data availability. It should also be noted that these tables 27.40 Other policy areas where these projections and studies can are extensions of the basic financial account and that the be of assistance are in considering the long-term third dimension to the analysis can be added on a selective development of financial markets and institutions in the basis by identifying particular asset or sector (or subsector) economy and assessments of the need for new types of relationships for which this level of detail would be useful. assets to satisfy the potential demand of savers and investors requiring access to reliable liquid assets. Analytical uses 2. Stock accounts 27.37 A detailed flow of funds table can be used in at least three important areas related to economic policy. Data from these tables can be used in economic analysis and description of 27.41 Just as tables like those above can be compiled and very activity and trends in current periods. They can be used as usefully analysed in terms of flows, so it is instructive to an aid to projections in the context of the production of compile exactly similar tables in terms of the stocks of economic plans or to assess the effect of current economic financial assets and liabilities. Where flows may be fairly policies, or changes in them, on the future path of the volatile from one period to the next, the level of stocks is economy. They can also be used in projects that undertake likely to be more stable and the degree of fluctuation from modelling of the economy to study economic behaviour as the stock level may convey particularly useful additional an aid to the formulation of economic policy. Such studies, information. 504 Links to monetary statistics and the flow of funds Table 27.4: Format for detailed flow of funds table or stocks of financial assets analysed by debtor and creditor Part 1: Asset and creditor Sectors and sub-sectors Part 2: Liability and debtor Monetary gold and SDRs Monetary gold SDRs Currency and deposits Currency Local currency Residents Non-residents Foreign currency Transferable deposits Interbank positions Other transferable deposits Local currency Residents Non-residents Foreign currency Residents Non-residents Other deposits Local currency Residents Non-residents Foreign currency Residents Non-residents Debt securities Short-term {Sectors} Long-term {Sectors} Loans Short-term {Sectors} Long-term {Sectors} Equity and investment fund shares Equity Listed shares Resident enterprises Non-resident enterprises Unlisted shares Resident enterprises Non-resident enterprises Other equity Resident enterprises Non-resident enterprises Investment fund shares/units Money market fund shares/units Resident enterprises Non-resident enterprises Other investment fund shares/units Resident enterprises Non-resident enterprises Insurance, pension and standardized guarantee schemes Non-life insurance technical reserves Life insurance and annuity entitlements Pension entitlements Claims of pension funds on pension managers Entitlements to non-pension benefits Provisions for calls under standardized guarantees Financial derivatives and employee stock options Financial derivatives Options Forwards Employee stock options Other accounts receivable/payable Trade credits and advances {Sectors} Other accounts receivable/payable {Sectors} 505 System of National Accounts 506 Chapter 28: Input-output and other matrix-based analyses A. Introduction 28.1 The purpose of this chapter is to build on the presentation is possible to cast the whole of the sequence of accounts, of the supply and use tables in chapter 14 to examine in including the goods and services account, in a matrix greater detail the possibilities offered by using a matrix format also. Such a matrix is called a social accounting form of presentation of the accounts. As has been noted on matrix (SAM). a number of occasions, the SNA is intended to offer a degree of flexibility in implementation as long as the inherent accounting rules are observed. The fact that the 28.5 It is possible to extend and elaborate a SAM by introducing requirement to balance uses and resources is immediately alternative disaggregations of existing flows or new types obvious within a matrix framework makes this a powerful of flows, just as long as the use and resource of these flows way in which to explore different options while still balance in the usual way. This is such a common extension ensuring the balances are satisfied. One aim of this chapter of a SAM that the usual understanding of what a SAM is is to demonstrate the power of a matrix presentation in this often goes further than a matrix encompassing the standard way. sequence of accounts to include extensions, particularly of the household sector. 1. Input-output tables 3. The structure of the chapter 28.2 A second aim is to describe the basic ideas of input-output matrices. Supply and use tables are an integral part of the SNA and the process of compiling these tables is a 28.6 Chapter 14 describes how the supply and use tables may be powerful way of ensuring consistency between the various used in order to ensure the internal consistency of disparate data sources available to the compiler. For many analytical data sets. Section B of this chapter looks at two particular purposes, though, a transformation from a pair of supply aspects of the supply and use tables where it may be useful and use tables into a single input-output table where row to adopt a different approach to that described in chapter and column totals are equal brings very considerable 14. The first of these concerns the treatment of insurance advantages. Input-output tables cannot be compiled without and freight on imported goods and the second concerns the passing through the supply and use stage (except under treatment of goods that are processed by a unit that is not very restrictive assumptions). They are therefore analytical the legal owner of them. Section B also discusses how constructs that inevitably involve some degree of modelling information cross-classified by establishment and industry in their compilation. can be transformed into information relating to institutional sectors. 28.3 There is a vast literature on the compilation and use of input-output tables and it is impossible in a short chapter to give a full appreciation of the range of complexities of 28.7 Section C is concerned with how a pair of supply and use compilation and inventiveness of applications. The chapter tables may be transformed into a single symmetric input- aims only to give a feel for the sort of operations necessary output matrix. Each of the supply and use tables shows to transform supply and use tables into input-output tables disaggregation by products and industries. In an input- and to give some ideas of their possible applications. The output table, one of these dimensions is eliminated. Thus a Manual of Supply, Use and Input-Output Tables and a visit single table may show the relationship between the supply to the web site of the International Input-Output and use of products or alternatively the output of industries Association (www.iioa.org) are good places to start a more and the demand for the output of industries. detailed investigation of the potential in this field. 28.8 Section D goes on to show how the whole of the accounting 2. Social accounting matrices system can be represented in matrix form. This is a useful pedagogical tool and may be instructive as a stepping-off 28.4 Both the supply and use tables and input-output tables are point for extensions of the accounts such as social matrix representations of the goods and services account. It accounting matrices. 507 System of National Accounts B. Flexibility in the supply and use tables 1. The treatment of margins on imports values given industry by industry include an element of these service margins, but this is deducted on the CIF/FOB 28.9 In discussing valuation in section B of chapter 14, adjustment row to leave the total equal to the total of consideration is given to how transport margins should be imports FOB. The adjustments in this column are incorporated into the accounts and in particular how analogous to a similar column that could be shown international transport charges should be recorded. illustrating the adjustment between purchasers' and basic Paragraphs 14.61 to 14.77 explain that the parallel between prices. basic and producer prices does not carry forward simply to a distinction between CIF and FOB-based prices. The 28.12 A simpler procedure than that just described, though one distinction depends on whether it is the unit providing the not strictly consistent with BPM6 recommendations, is to goods or the unit taking delivery of the goods that is ignore the balance of payments division between goods and responsible for providing the transport and insurance. services and adjust the figures for imports of services by Paragraph 14.77 ends by discussing briefly the practical the amount of services provided by non-residents that are problems in deriving the desired valuation from the included in the detailed figures for imports of goods. This available data sources. It is reproduced here for ensures that the total of imports of goods and services convenience. agrees with the total in the balance of payments but will not agree with the total of imports of goods FOB and of 28.10 It may not be possible to determine from customs services shown there. This makes compiling the supply and declarations which unit is responsible for the transport costs use tables simpler but means that it is not possible to use and, even when it is and conceptually the transport costs imports of goods on a FOB basis to match exports of those should be separated from the value of the goods goods from other countries. Even in this simpler version, themselves, there may be no information and no resources however, the amount of freight and insurance on imports available to make the separation in practice. In such a case provided by residents must be shown as an export of the CIF value of imports may be the only source with a services. disaggregation by type of good. If the disaggregated CIF figures are used for imports of goods, though, that part of 2. Goods processed by a unit not assuming the transport costs and insurance also included in imports economic ownership of services would be double-counted. In order to avoid this, therefore, an adjustment column is inserted into the supply table. The adjustment column consists of a deduction from 28.13 A producer may carry out the same activity under quite the services items for transport and insurance equal to the different economic conditions. Consider farmers growing CIF-to-FOB adjustment for these items with an offsetting grain which is milled into flour before use. Suppose one global adjustment made to imports of goods. Table 14.4, farmer acquires a mill to process his own grain but once reproduced here as table 28.1 gives an example of such an this is acquired he may offer to mill grain for others for a adjustment. fee. The production account for the farmer with a mill will look somewhat different from that for a farmer who does Table 28.1:An example of imports entries in the not have a mill but pays the first farmer a fee for milling supply table with the global CIF to FOB even though both produce flour for sale. adjustment CIF/FOB 28.14 In the case of milling the reasons for subcontracting the adjustment Goods Services activity to another may be the availability of suitable fixed Agriculture, forestry and fishery products capital. Increasingly, however, similar processes are being (0) 37 carried out internationally and in respect of activities more Ores and minerals; electricity, gas and usually associated with manufacturing such as the water (1) 61 assembling of component parts. Here the motivation is less Manufacturing (2-4) 284 one of the availability of capital than of the costs of labour. Construction (5) If the average wages in country X are half of those in Trade, accommodation, food & beverages; transport services (6) country Y, it may be cost-effective for a unit in Y to -6 62 Finance and Insurance (7 less 72-73) -4 17 dispatch the components to a unit in X for assembly and Real estate services; and rental and then have the completed product returned to Y or even leasing services (72-73) shipped directly to a final purchaser. Business and production services (8) 5 Community and social services (92-93) 28.15 Previous editions of the SNA have recommended that Other services (94-99) components for assembly should be recorded as delivered Public administration (91) to the unit in country X and that the whole of the value of CIF/FOB adjustment 10 -10 Purchases abroad by residents 20 23 the completed product should be recorded as output of X Total 0 392 107 and exports from X to Y. This does not match the treatment of grain milling or, for example, repairs to machinery where no such change of ownership of the goods being 28.11 This adjustment column shows the reallocation of service processed is imputed. Imputing a change of ownership of margins from the industries where they are produced (by the parts to be assembled gives rise to significant data resident or non-resident producers) to an adjustment row compilation problems because the value of the assembled for the CIF/FOB adjustment. In the column for goods, the product may be greater than the cost of the components 508 Input-output and other matrix-based analyses plus the fee to assemble them. The value of the finished expenses of 10 and leave an amount of value added, 35 in product may incorporate the results of research and this case. These options are shown in table 28.2. development of the unit contracting the assembly, for instance. The SNA now recommends that products should 28.20 It should be emphasized that it is option 1 that is the only be recorded as being delivered to another unit if there recommendation of the SNA and, for goods sent abroad for is a change of ownership or, in the case where both processing, BPM6. Option 2 is shown as a supplementary producing units belong to the same enterprise, the presentation that may be adopted for reasons of continuity producing unit taking delivery also assumes responsibility with past practices. Option 1 more accurately reflects the for subsequent risks and rewards of production such as economic processes taking place while option 2 focuses on deciding how much to process, what price to charge and the physical transformation process. when to sell. 28.21 When goods are sent abroad for processing, they are 28.16 The question arises of how to record the activity of recorded as neither exports of goods by the country holding assembling goods to order for another unit in the supply economic ownership, nor as imports of goods by the and use tables and the input-output table. The processes of processing country in either the SNA or BPM6. Similarly, assembly for oneself and for another are physically similar after processing they are recorded neither as exports by the but the economics are different. processing country nor as imports of goods by the country of economic ownership. The only item recorded as imports 28.17 Suppose in year 1 a processing unit converts products only and exports is the fee agreed between the economic owner on own account. In year 2 the unit processes the same and the processor. amount on its own account but also processes a similar amount on behalf of another. Suppose the cost of items 28.22 The physical flows of the goods will continue to appear in processed in year 1 is 90, the cost of associated products the merchandise trade figures. However, the product code needed to assemble them is 10 and the value added is 35. after processing may be different from the code on entry, The total value of output is thus 135. In year 2, all other making it difficult to match the incoming and outgoing things being equal, intermediate consumption increases by flows. another 10 to 110 and value added to 70 bringing the value of output to 180. The change in the structure of production 28.23 The presentation of option 2 suggests that the fee can be is difficult to understand in the absence of information on derived as the difference between the value of the goods on the change in the role of the producer who is operating no arrival and departure from the processing country but while longer only on his own behalf but also on behalf of others. this may sometimes give a reasonable approximation of the processing fee, there are many reasons why this may not be 28.18 There are essentially two ways to proceed. The first is to so. treat processing on own account and on behalf of another as different types of activity and different products. In this a. If processing takes any significant amount of time, way in the second year the producer would have one there may be holding gains and losses affecting the activity with inputs of 100, value added of 35 and output of value of the goods. These accrue to the economic 135 as in the first year, plus another activity with inputs of owner, not the processor. 10, value added 35 and output of 45. b. Goods may be lost or damaged or may simply become Table 28.2: Options for recording goods not obsolete while in process. (This has been observed in changing economic the case of electronic components.) These other volume ownership changes also apply to the economic owner and not the processor. Year 1 Year 2 Option 1 Option 2 Cost of materials 90 90 90 180 c. The value of the processed goods may be greater than Other costs 10 20 10 10 20 the costs of the components and the processing fee to Total intermediate the extent that the finished product incorporates part of consumption the value of R&D treated as fixed capital formation of 100 110 100 10 200 the economic owner. Value added 35 70 35 35 70 Output 135 180 135 45 270 28.24 All these situations reinforce the preference for option 1 over option 2 in table 28.2. 28.19 The second alternative is to show the intermediate inputs in the second year as 200, value added as 70 and output as 3. Supply and use tables and sector accounts 270. Value added is the same under both options and the comparison between the second and the first year makes 28.25 As explained in chapter 14, it is possible to derive the three more sense from a transformation point of view under estimates of GDP from a set of supply and use tables. Since option 2. However, adding an extra 90 to both output and these tables can be expressed in volume terms, estimates intermediate consumption is essentially artificial. Further, can also be made of growth rates based on the tables. as noted above, it may be difficult for the processor to put a However, to complete the sequence of accounts, production value on the components he receives and the output he accounts are needed by institutional sector. To ensure that provides to the other unit. The chances are that he only the supply and use table and the sequence of accounts are knows that he receives a fee of 45 to cover his incidental perfectly integrated and consistent, it is desirable to take the 509 System of National Accounts part of the use table showing intermediate consumption and establishment undertaking market production. This is how the components of value added and allocate the columns to it is possible that non-market producers may have small institutional sectors. amounts of operating surplus. It is also possible that both general government and NPISHs may have some 28.26 The starting point for the compilation is the part of the use production for own final use (as capital formation) but none table in table 14.12 relating to intermediate consumption has been assumed here. and value added. This is shown in a somewhat aggregated form in table 28.3. 28.29 The last step is to allocate all columns not yet accounted for between non-financial corporations and households. An 28.27 The easiest allocation is for financial corporations since indication that some part of a market production activity typically such corporations do not undertake secondary should be allocated to households is the presence of mixed activity and other institutional units do not undertake any income as part of the value added of the activity. Thus, in financial activity. When these conditions prevail, the this example, some parts of market production of column for the finance and insurance activity can be taken agriculture, manufacturing, construction and trade are in its entirety as appropriate for the institutional sector. It is attributable to households as well as production for own possible that financial corporations may undertake some final use. (As noted in general some of production for own production for own final use (as capital formation), in final use will be attributable to other sectors. It is not done which case some part of an appropriate column in the so here for reasons of simplicity at such an aggregate level.) section of table 28.3 relating to own account production should be added. No such adjustment has been made in this 28.30 Once these calculations are complete, table 28.4 results, example. showing for each sector not just total intermediate consumption but also a product breakdown of this as well 28.28 The columns relating to non-market producers must be as the items for value added. allocated between general government and NPISHs. In addition, though not in this example, it is possible that 28.31 The figures shown for intermediate consumption, output either general government or NPISHs may have an and the elements of value added for each institutional Table 28.3:The use table from table 14.12 Intermediate consumption of industries (by ISIC categories) Total supply at purchasers' prices Market accommodation and food Education, human health Manufacturing and other Agriculture, forestry and Finance and insurance Subsidies on products Real estate activities Taxes on products Business services Trade, transport, Sub-total market Information and and social work communication Other services Construction industry fishing Use of products R-T and (A) (B-E) (F) (G-I) (J) (K) (L) (M-N) (P-Q) U (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) Products (by CPC section) Total uses 1 Agriculture, forestry and fishery products (0) 128 2 71 0 3 1 2 1 2 0 0 82 2 Ores and minerals; electricity, gas and water (1) 263 3 190 1 6 3 2 1 2 0 0 208 3 Manufacturing (2-4) 2 161 27 675 63 44 16 16 9 19 4 5 878 4 Construction (5) 261 1 9 5 3 1 1 1 1 0 0 22 Trade, accommodation, food & beverages; transport 5 services (6) 216 3 65 3 25 4 4 2 4 0 0 110 6 Finance and Insurance (7 less 72-73) 159 1 36 5 18 1 3 3 7 1 1 76 Real estate services; and rental and leasing 7 services (72-73) 195 1 15 1 8 2 5 2 4 0 1 39 8 Business and production services (8) 272 2 70 12 15 10 18 9 19 7 9 171 9 Community and social services (92-93) 275 0 1 0 0 0 0 1 0 0 2 10 Other services (94-99) 95 1 1 0 1 1 1 0 1 0 0 6 11 Public administration (91) 168 0 0 0 0 0 0 0 0 0 0 0 12 Direct purchases abroad by residents 43 0 13 Domestic purchases by non-residents 0 0 14 Total 4 236 41 1 133 90 123 39 52 28 60 12 16 1 594 15 Total gross value added/GDP 141 -8 37 728 118 139 61 94 66 123 51 66 1 483 16 Compensation of employees 19 547 79 102 32 44 49 79 43 47 1 041 17 Taxes less subsidies on production and imports 141 -8 -2 43 5 -5 -1 4 6 4 1 1 56 18 Mixed income, gross 4 30 3 9 0 0 0 0 0 0 46 19 Operating surplus, gross 16 108 31 33 30 46 11 40 7 18 340 20 Consumption of fixed capital -mixed income 1 3 0 1 0 0 0 0 0 0 5 21 Consumption of fixed capital - other 8 80 11 30 7 12 5 12 1 2 168 22 Total output 78 1 861 208 262 100 146 94 183 63 82 3 077 23 Labour inputs (hours worked) 1 840 31 962 4 244 8 786 1 332 1 290 920 1 562 494 642 53 072 24 Gross fixed capital formation 10 122 8 49 14 7 5 7 1 2 225 25 Closing stocks of fixed assets 142 1 861 143 731 208 143 102 147 22 29 3 528 510 Input-output and other matrix-based analyses sector are those that appear in the production account and generation of income account in the sequence of accounts. C. Deriving an input-output table 1. What is an input-output table? 28.33 The process of replacing the product dimension by an industry one is based on one of several possible models, to be discussed below. This process necessarily means that a 28.32 Essentially an input-output table is derived from a use table symmetric input-output matrix is further removed from where either the columns representing industries in the two basic data sources than a supply and use table and it is left-most quadrants are replaced by products or where the therefore useful to review why making this transition is so products in the two topmost quadrants are replaced by useful. industries. The resulting intermediate consumption matrix is then square, showing products in both rows and columns 28.34 Note that in table 14.12, there is a product for ores and or industries in both. In both cases the row totals for the minerals, electricity and water but no column for it. If there complete matrix match the column totals for the complete is no industry for which this is the principal product, matrix, product by product or industry by industry as the identifying the primary producers rather than the number of case may be. The resulting matrices are therefore referred products will determine the final size of the symmetric to as being symmetric. (square) matrix. Table 28.3 (cont):The use table from table 14.12 Intermediate consumption of industries (by ISIC categories) Final consumption expenditure Gross capital formation Own final use Non-market Sub-total final consumption Exports General government Acquisition less disposals Education, human health Agriculture, forestry and Real estate and private Changes in inventories Sub-total own final use Sub-total gross capital Sub-total non-market Public Administration household services and social services Gross fixed capital Total economy Total industry Construction of valuables Households expenditure Collective formation formation Individual Sub-total Services NPISHs fishing Goods (A) (F) (L) (P-Q) (O) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) 1 1 0 0 1 3 2 5 88 7 0 30 28 0 2 0 2 3 2 1 2 0 0 0 0 5 4 9 217 7 0 40 40 0 0 0 0 -1 0 -1 3 5 17 10 32 42 38 80 990 422 0 573 570 0 3 0 3 176 161 5 10 4 0 0 0 0 11 7 18 40 6 0 2 2 0 0 0 0 213 190 23 5 0 0 0 0 4 5 9 119 0 55 42 42 0 0 0 0 6 0 2 3 5 6 17 23 104 0 2 53 53 0 0 0 0 7 0 0 0 0 8 10 18 57 0 1 115 115 0 0 0 0 22 22 0 8 0 5 7 12 15 24 39 222 0 9 40 40 0 0 0 0 1 1 0 9 0 0 0 0 24 8 32 34 0 2 239 21 14 204 0 204 10 0 0 0 0 2 2 4 10 0 0 85 85 0 0 0 0 11 0 0 0 0 1 1 2 2 0 166 5 2 159 156 3 12 43 43 13 20 9 - 29 - 29 14 6 24 20 50 121 118 239 1 883 462 78 1 399 1 015 16 368 156 212 414 376 28 10 15 5 12 80 97 91 50 141 1 721 1 854 16 0 0 0 70 39 109 1 150 1 150 17 0 0 0 0 1 1 2 58 191 18 3 12 0 15 61 61 19 2 0 80 82 20 10 30 452 452 20 3 0 0 3 8 8 21 1 0 15 16 20 10 30 214 214 22 11 36 100 147 212 168 380 3 604 23 218 780 0 998 7 299 8 000 15 299 69 369 24 1 1 124 126 13 12 25 376 25 17 17 1 851 1 885 201 169 370 5 783 511 System of National Accounts 2. Analytical potential of an input-output matrix (I-A) x = y 28.35 Such tables have algebraic properties that make them or particularly suitable for analyses that enable estimates to be made of the effects of changing relative prices, of labour and capital requirements in the face of changing output x=(I-A)-1y. levels, of the consequences of changing patterns of demand and so on. They may also be used as the basis for an expanded version that may be used to estimate the demands 28.38 The matrix (I-A) is known as the Leontief matrix, after the made by the economy on the environment, for instance. man who pioneered the use of input-output tables and the matrix (I-A)-1 is known as the Leontief inverse. It is the last 28.36 As noted in the introduction, there is a vast literature on formulation that gives the analytical power to input-output how to compile and use input-output tables. The purpose of analysis. this section is simply to indicate the key aspects of converting a pair of supply and use tables into an input- output table. 28.39 Suppose there is an increase in demand, for manufactured products, say. Looking at even the supply and use table it can be seen that to increase the output of these goods, more 28.37 Suppose the entries in the inter-industry matrix are each inputs of almost all types of products are needed. This divided by the figure for output at the bottom of the increase in demand for a range of products is called the corresponding column, and the resulting matrix is designated as A; the vector of outputs is written as x and direct effect of a change in demand. However, the increase the vector of total final demand is written as y. Then in demand in all these products causes a further round of increases in output for all products and this in turn triggers another set of increases in output and so on. Each round of Ax + y = x effects is smaller than the last until it eventually becomes insignificant. The total of all second and subsequent round This can be rewritten as effects is called the indirect effect of a change in demand. Table 28.4:Intermediate consumption and value added cross-classified by industry and institutional sector Non-financial corporations Financial corporations Trade, transport, accommodation Manufacturing and other industry Agriculture, forestry and fishing Information and communication Education, human health and Finance and insurance Real estate activities Business services Total industry Total industry Other services Construction social work and food Use of products Goods and services, (by CPC section) Total uses 1. Agriculture, forestry and fishery products (0) 2 68 0 3 1 1 2 0 0 77 2 2 2. Ores and minerals; electricity, gas and water (1) 3 182 1 6 3 1 2 0 0 198 2 2 3. Manufacturing (2-4) 24 643 61 38 16 9 19 4 5 819 16 16 4. Construction (5) 1 8 5 3 1 1 1 0 0 20 1 1 5. Trade, accommodation, food and beverages; transport services (6) 3 61 3 23 4 2 4 0 0 100 4 4 6. Finance and Insurance (7) excluding real estate 1 36 5 18 2 3 7 1 1 74 2 2 7.Real estate services; and rental and leasing services (72-73) 1 15 1 8 2 2 4 0 1 34 5 5 8.Business and production services (8) 2 68 11 14 9 9 19 7 9 148 19 19 9.Community, social services (92,93) 0 1 0 0 0 0 1 0 0 2 0 0 10. Other services (94-99) 1 1 0 1 1 0 1 0 0 5 1 1 11. Public Administration (91) 0 0 0 0 0 0 0 0 0 0 0 0 14. Total 38 1 083 87 114 39 28 60 12 16 1 477 52 52 17. Total gross value added/GDP 31 691 115 127 61 66 123 51 66 1 331 94 94 28. Total output 69 1 774 202 241 100 94 183 63 82 2 808 146 146 Compensation of employees 18 540 79 99 32 49 79 43 47 986 44 44 Gross mixed income Gross operating surplus 15 108 31 32 30 11 40 7 18 292 46 46 Taxes less subsidies on production and imports -2 43 5 -4 -1 6 4 1 1 53 4 4 Consumption of fixed capital 8 80 11 31 7 5 12 1 2 157 12 12 of which Mixed income 0 Net mixed income Net operating surplus 7 28 20 1 23 6 28 6 16 135 34 34 512 Input-output and other matrix-based analyses 28.40 In terms of the algebra just introduced, the direct effect is For example, cotton is grown as an agricultural product. It equal to Ay, the second round effect to A2y, the third round is then subject to separation into lint and seed (ginning), effect to A3y and so on. It can be shown that (I-A)-1 can be then the lint is converted to yarn and the yarn to fabric. If written as A+A2+A3+A4 etc. This is where the power of each of these activities appears in a different industry, it is having a symmetric matrix comes from since A needs to be possible to see where the value added between the growing square for this formulation to work. of the cotton and the eventual fabric in which it is used arises. 28.41 As long as changes in demand, y, are sufficiently small that the average coefficients in A are likely to be good 3. Secondary products approximations to the new situation, the new level of x can be calculated. The approach breaks down if the changes in demand are so great that significant changes in A are likely 28.43 An industry classification such as ISIC essentially identifies to follow and marginal rather than average coefficients are industries in terms of the sorts of goods or services they needed. typically produce. However, there are more products than industries and, for all sorts of reasons, some products may 28.42 The matrix A is also sometimes called a matrix of be made in several industries. technological coefficients and can provide insights into the way an economy works. In an economy dominated by primary products with little processing carried out in the 28.44 In order to limit the number of products per unit and to domestic economy, there are relatively few significant non- allow integration with basic production statistics, the zero elements in A. As the economy develops and concept of establishment is introduced. In principle, an processing of primary products becomes more establishment produces only one product at one location commonplace, A becomes more populated with entries but the SNA recognizes that in practice it is not possible to reflecting greater vertical and horizontal integration of separate production into such fine detail. Dealing with the activities within the economy. By exploring different fact that many establishments produce more than one industries associated with different stages in the production product is fundamental to the idea of calculating a process it is possible to say where value added is generated. symmetric input-output matrix. Table 28.4 (cont):Intermediate consumption and value added cross-classified by industry and institutional sector General government NPISHs Households Trade, transport, accommodation Manufacturing and other industry Agriculture, forestry and fishing Education, human health and Education, human health and Public Administration Real estate activities Total industry Total industry Total industry Construction social work social work and food Total Use of products Goods and services, (by CPC section) Total uses 1. Agriculture, forestry and fishery products (0) 3 2 5 0 0 1 3 0 0 0 4 88 2. Ores and minerals; electricity, gas and water (1) 4 4 8 1 1 0 8 0 0 0 8 217 3. Manufacturing (2-4) 36 38 74 6 6 8 32 19 6 10 75 990 4. Construction (5) 9 7 16 2 2 0 1 0 0 0 1 40 5. Trade, accommodation, food and beverages; transport services (6) 4 5 9 0 0 0 4 0 2 0 6 119 6. Finance and Insurance (7) excluding real estate 5 17 22 1 1 0 0 2 0 3 5 104 7.Real estate services; and rental and leasing services (72-73) 7 10 17 1 1 0 0 0 0 0 0 57 8.Business and production services (8) 13 24 37 2 2 0 2 6 1 7 16 222 9.Community, social services (92,93) 21 8 29 3 3 0 0 0 0 0 0 34 10. Other services (94-99) 1 2 3 1 1 0 0 0 0 0 0 10 11. Public Administration (91) 1 1 2 0 0 0 0 0 0 0 0 2 14. Total 104 118 222 17 17 9 50 27 9 20 115 1 883 17. Total gross value added/GDP 76 50 126 15 15 11 37 15 12 80 155 1 721 28. Total output 180 168 348 32 32 20 87 42 21 100 270 3 604 Compensation of employees 59 39 98 11 11 1 7 0 3 11 1 150 Gross mixed income 7 30 15 9 61 61 Gross operating surplus 17 10 27 3 3 3 0 0 1 80 84 452 Taxes less subsidies on production and imports 0 1 1 1 1 0 0 0 -1 0 -1 58 Consumption of fixed capital 17 10 27 3 3 5 3 0 0 15 23 222 of which Mixed income 4 3 0 1 0 8 8 3 27 15 8 0 53 53 Net operating surplus 0 0 0 0 0 2 0 0 2 65 69 238 513 System of National Accounts 28.45 The reason that manipulation of supply and use tables is the other is to express the input-output table in terms of needed to produce an input-output table is the existence of industries. secondary products. If there were the same number of industries as products, and if each industry only produced 4. Reallocating secondary products one product, the supply table for the domestic economy would be unnecessary; the column totals for industries would be numerically equal to the row totals for products 28.47 There are two basic approaches to eliminating secondary and the inter-industry matrix would be square as originally products. Both come from applying information from the compiled. As noted elsewhere, the intent behind using use matrix to the supply matrix to reduce it to a purely establishments rather than enterprises, and working at a diagonal one. Once this is done, the supply matrix contains fairly detailed level in the supply and use tables, is to get as no further useful information and is no longer presented. close to this situation as is reasonably practicable. The transformed use matrix is what is referred to as an Inevitably though some secondary production remains. input-output matrix. 28.46 There are three types of secondary production 28.48 In deriving a product by product matrix in the simplest possible way, the final demand quadrant of the use matrix is unaltered. It already expresses demand by product and a. Subsidiary products: those that are technologically does not need changing. The intermediate consumption and unrelated to the primary product. Just a few examples value added parts of the matrix, though, need to be changed include a large retailer with a fleet of trucks used from an industry dimension to a product one. The row primarily for its own purposes that may occasionally totals of the matrix already show the correct product totals offer transport services to another unit, a farmer who so the exercise consists of reallocating entries from one use part of his land as a caravan site, or a mining column to another within the given row total. This is called company that builds access roads and accommodation a technology approach. It assumes that the demand for for its workers. intermediate consumption and labour and capital inputs are determined by the nature of the products made. b. By-products: products that are produced simultaneously with another product but which can be 28.49 In deriving an industry by industry matrix in the simplest regarded as secondary to that product, for example gas possible way, the value added part of the use matrix is produced by blast furnaces. unaltered and because the level of output will not alter, only the composition of intermediate consumption changes, not its total. Thus the exercise is one of reallocating items c. Joint products: products that are produced between rows but not between columns. In contrast to the simultaneously with another product that cannot be said product by product case, the quadrant relating to final to be secondary (for example beef and hides). demand will change and will show demand related to the industry supplying the products and not to the products In order to reduce the supply and use tables to one single themselves. This is called a sales structure approach. It input-output matrix two possibilities exist. One is to assumes that as the level of output of an industry changes, express the input-output matrix in terms of products only; the pattern of sales will remain the same. Table 28.5:A numerical example of reallocating products from construction to manufacturing Manufacturing and Manufacturing and Manufacturing and Manufacturing and other industry other industry other industry other industry Construction Construction Construction Construction Use of products Use table Coefficient form Industry technology Product technology 1 Agriculture, forestry and fishery products (0) 71 0 3.8 0.0 71.0 0.0 71.2 -0.2 2 Ores and minerals; electricity, gas and water (1) 190 1 10.2 0.5 190.0 1.0 190.6 0.4 3 Manufacturing (2-4) 675 63 36.3 30.3 676.8 61.2 677.2 60.8 4 Construction (5) 9 5 0.5 2.4 9.1 4.9 9.0 5.0 5 Trade, accommodation, food & beverages; transport services (6) 65 3 3.5 1.4 65.1 2.9 65.2 2.8 6 Finance and Insurance (7 less 72-73) 36 5 1.9 2.4 36.1 4.9 36.1 4.9 7 Real estate services; and rental and leasing services (72-73) 15 1 0.8 0.5 15.0 1.0 15.0 1.0 8 Business and production services (8) 70 12 3.8 5.8 70.3 11.7 70.2 11.8 9 Community and social services (92-93) 1 0 0.1 0.0 1.0 0.0 1.0 0.0 10 Other services (94-99) 1 0 0.1 0.0 1.0 0.0 1.0 0.0 11 Public administration (91) 0 0 0.0 0.0 0.0 0.0 0.0 0.0 Total 1 133 90 61 43 1135.6 87.4 1136.7 86.3 Total gross value added 728 118 39 57 731.4 114.6 730.3 115.7 Total output 1 861 208 100 100 1 867 202 1 867 202 514 Input-output and other matrix-based analyses 28.50 Both these assumptions, the technology assumption and the shown in the seventh and eighth numeric columns of table sales structure assumption, are rather simplistic and in 28.5. practice a more generalized approach may be used but it is helpful first to examine each of the assumptions in a little 28.56 It is important to note a problem that arises under this more detail. assumption. When the product technology assumption is used, manufactured products produced by the construction Product by product tables industry are assumed to use a small amount of food. However, no agricultural products are actually recorded as 28.51 There are two ways in which a product by product matrix being used in the construction industry so deducting these can be derived. These are: inputs from the recorded entries for construction leads to a negative entry. Negative entries cannot appear under the industry technology assumption. Since negative entries are a. The industry technology assumption where each logically impossible, this is one argument in favour of industry has its own specific means of production using the industry assumption rather than the product irrespective of its product mix. assumption. b. The product technology assumption where each Industry by industry tables product is produced in its own specific way irrespective of the industry where it is produced. 28.57 Just as there are two ways in which a product by product 28.52 It is simplest to explain these by example. In the upper part matrix can be derived, there are two ways in which an of table 14.12, the construction industry is shown as industry by industry matrix can be derived. These are: producing 6 units (out of 208) of manufacturing products. In the lower part of table 14.12, reproduced as table 28.3, a. The fixed product sales structure where it is assumed the inputs necessary for manufacturing and for construction the allocation of demand to users depends on the are shown. These are reproduced in the first two numeric product and not the industry from where it is sold. columns in table 28.5. The next two numeric columns express these in percentage form. Thus, for example, one b. The fixed industry sales structure where it is assumed unit of manufacturing requires 0.038 units of agricultural that users always demand the same mix of products products, 0.102 units of ores and minerals and so on. from an industry. Construction uses no agricultural products, 0.005 units of ores and minerals and so on. 28.58 Although a table similar to table 28.5 is not presented for the industry by industry tables, its construction is similar 28.53 In order to create the product by product matrix, it is and straightforward but would show the entries across the necessary to deduct the costs associated with the production rows of the use tables rather than down the columns. of 6 units of manufactured goods from the column for construction and add it to the column for manufacturing. 28.59 In order to create an industry by industry table, it is On completion of this exercise for all secondary necessary to move the use of 6 units of manufactured production, the columns will represent products rather than products from the row for the manufacturing to the row for industries. the construction. On completion of this exercise for all secondary production, the rows will represent industries Industry technology assumption rather than products. 28.54 Under the industry technology assumption, the coefficients Fixed product sales structure showing how manufactured products are produced are assumed to depend on the industry they happen to be 28.60 In this case, to allocate the 6 units of manufactured goods produced in. Thus to reallocate the 6 units of manufacturing supplied by the construction industry to the row for products from the construction industry to a column that construction, a proportion of the row for manufacturing is will now refer to manufactured products only (ignoring allocated to the construction row using the proportions in other secondary products for the moment) a set of inputs, the manufacturing row. It follows that such a matrix will derived as 6 times the coefficients for construction is added not contain negative entries. to the manufacturing column and deducted from the construction column. The results of this are shown in the fifth and sixth numeric columns of table 28.5. Fixed industry sales structures Product technology assumptions 28.61 Here the 6 units of manufactured goods supplied by the construction industry are reallocated to the construction row from the manufacturing row using the proportions of 28.55 Under the product technology assumption, the coefficients the construction row. Such a matrix can contain negative showing how manufactured products are produced are elements. those of the manufacturing industry regardless of where they are actually produced. In this case, to reallocate the 6 units of manufacturing products from the construction The choice of approach to be used industry a set of inputs derived as 6 times the coefficients for manufacturing is added to the manufacturing column 28.62 There are four basic choices open to the input-output and deducted from the construction column. The results are compiler. 515 516 System of National Accounts Intermediate consumption by product groups Exports General government 0 0 Use of products Sub-total final consumption expenditure Households NPISHs Sub-total gross capital formation Gross fixed capital formation Changes in inventories Acquisition less disposals of valuables Agriculture, forestry and fishing Manufacturing and other industry Construction Trade, transport, accommodation and food Finance and insurance Real estate activities Business and information services Education, human health and social work Other services Public Administration Total industry Goods Services Sub-total Collective Individual Total economy Agriculture, forestry and fishing 3 43 0 3 0 2 1 0 3 3 0 2 60 7 0 17 15 0 2 0 2 3 2 1 0 87 f Manufacturing and other industry 32 658 74 39 0 18 21 0 37 47 6 42 974 403 0 449 446 0 3 0 3 84 80 4 0 1 910 Construction 1 10 5 3 0 1 1 0 2 11 0 7 40 6 0 2 2 0 0 0 0 196 173 23 0 244 Trade, transport, accommodation and food 4 69 6 18 0 4 2 0 6 8 0 5 123 16 55 36 36 0 0 0 0 3 3 0 0 233 Finance and insurance 1 34 7 16 0 0 6 0 2 7 1 17 91 0 2 53 53 0 0 0 0 0 0 0 0 146 Real estate activities 1 16 1 7 0 5 2 0 5 8 1 10 57 0 1 115 115 0 0 0 0 22 22 0 0 195 Business and information services 2 72 16 12 0 17 15 0 26 21 10 22 212 0 9 33 33 0 0 0 0 1 1 0 0 255 Education, human health and social work 0 1 0 0 0 0 0 0 1 24 0 8 34 0 2 239 21 14 204 0 204 0 0 0 0 275 Other services 1 1 0 1 0 1 0 0 2 2 0 2 10 0 0 81 81 0 0 0 0 0 0 0 0 91 Public Administration 0 0 0 0 0 0 0 0 0 1 0 1 2 0 0 166 5 2 159 156 3 0 0 0 0 168 Adjustments: Taxes less subsidies 1 35 5 2 0 1 1 0 0 1 0 2 48 0 0 10 0 54 54 0 0 0 0 21 21 0 0 133 Imports 0 213 0 10 0 3 0 0 6 0 0 0 232 0 0 0 0 140 140 0 0 0 0 84 74 0 10 456 Direct purchases abroad by residents 43 43 43 Purchases in domestic market by non-residents 20 9 - 29 - 29 0 Total at purchaser's prices 46 1 151 114 110 0 52 50 0 90 133 19 118 1 883 462 78 1 399 1 015 16 368 156 212 414 376 28 10 4 236 Total gross value added/GDP 41 758 130 123 0 94 145 0 166 142 72 50 1 721 1 854 Compensation of employees 19 565 80 90 0 44 51 0 100 113 49 39 1 150 Taxes less subsidies on production -2 43 5 -4 0 4 6 0 3 2 1 1 58 191 Consumption of fixed capital 12 88 11 27 0 12 20 0 17 21 3 10 222 Mixed income, gross 6 33 13 8 0 0 0 0 0 0 0 0 61 Operating surplus, gross 18 118 31 29 0 46 88 0 63 27 23 10 452 Total output Table 28.6:Example of a product by product input-output matrix 87 1 909 244 233 0 146 195 0 256 275 91 168 3 604 Intermediate consumption by industry Exports General government Use ofindustry output Sub-total final consumption expenditure Households NPISHs Sub-total gross capital formation Gross fixed capital formation Changes in inventories Acquisition less disposals of valuables Agriculture, forestry and fishing Manufacturing and other industry Construction Trade, transport, accommodation and food Finance and insurance Real estate activities Business and information services Education, human health and social work Other services Public Administration Total industry Goods Services Sub-total Collective Individual Total economy Agriculture, forestry and fishing 3 44 0 3 2 1 3 3 0 2 61 7 0 18 16 0 2 0 2 3 2 1 0 89 Manufacturing and other industry 32 632 72 43 18 20 39 46 5 41 948 392 2 435 432 0 3 0 3 85 81 5 0 1 862 Construction 1 13 5 3 1 1 2 11 0 7 44 8 0 5 5 0 0 0 0 187 165 22 0 244 Trade, transport, accommodation and food 4 74 7 21 4 2 8 9 0 6 135 20 53 45 45 0 0 0 0 8 7 0 0 262 Finance and insurance 1 31 7 18 0 6 3 7 1 17 91 0 2 53 53 0 0 0 0 0 0 0 0 146 Real estate activities 1 15 1 8 5 2 6 8 1 10 56 0 1 116 116 0 0 0 0 21 21 0 0 194 Business and information services 2 76 17 14 17 15 29 21 9 22 223 5 9 41 41 0 0 0 0 5 4 0 0 282 Education, human health and social work 0 1 0 0 0 0 1 24 0 8 34 0 2 239 21 14 204 0 204 0 0 0 0 275 Other services 1 1 0 1 1 0 2 2 0 2 9 0 0 73 73 0 0 0 0 0 0 0 0 82 Public Administration 0 0 0 0 0 0 0 1 0 1 2 0 0 166 5 2 159 156 3 0 0 0 0 168 Adjustments: Taxes less subsidies 1 35 5 2 1 1 0 1 0 2 48 10 0 54 54 0 0 0 0 21 21 0 0 133 Imports 0 213 0 10 3 0 6 0 0 0 232 0 0 140 140 0 0 0 0 84 74 0 10 456 Direct purchases abroad by residents 43 43 43 Purchases in domestic market by non-residents 20 9 - 29 - 29 0 Total at purchaser's prices 47 1 133 114 123 52 48 99 133 16 118 1 883 462 78 1 399 1 015 16 368 156 212 414 376 28 10 4 236 Total gross value added/GDP 42 728 130 139 94 146 184 142 66 50 1 721 1 854 Compensation of employees 10 122 8 49 7 5 21 71 2 39 334 Taxes less subsidies on production -2 43 5 -5 4 6 3 2 1 1 58 191 Consumption of fixed capital 4 0 0 0 0 15 0 21 2 10 52 Mixed income, gross 3 0 12 0 0 0 0 0 0 0 15 Table 28.7:Example of an industry by industry input-output matrix Operating surplus, gross 2 0 0 0 0 80 0 20 0 10 112 Total output 89 1 861 244 262 146 194 283 275 82 168 3 604 Input-output and other matrix-based analyses 517 System of National Accounts a. A product by product approach using a product tables. Indeed some countries prefer to work with very technology assumption, detailed supply and use tables and not produce symmetric tables at all. b. A product by product approach using an industry technology assumption, 28.66 As an illustration of the differences involved, tables 28.6 and 28.7 show the results of converting the supply and use c. An industry by industry approach assuming a fixed tables in chapter 14 to, first, a product by product matrix product sales structure, using only the industry technology assumption and then an industry by industry matrix using only the product sales structure. d. An industry by industry approach assuming a fixed industry sales structure. The database required for the transformation Options a and d may result in negative entries; options b and c do not. 28.67 The starting point for the production of a symmetric input- output table is a pair of supply and a use tables both at basic 28.63 Both product by product and industry by industry tables prices. Even the calculation of a use table in basic prices is may be compiled. They serve different analytical functions. one step away from basic statistics and actual observations, For example, to ensure that price indices are strictly reinforcing the fact that the input-output tables are consistent, a product by product matrix is to be preferred. analytical constructs, not a compilation of directly observed For a link to labour market questions, an industry by phenomena. industry table may be more useful. Although traditionally a lot of interest focused on the product by product tables, this 28.68 Further, it is advantageous to separate the use table at basic was accompanied in large part by an attention to the underlying technology. Increasingly the economic prices into two, one showing those elements relating to interaction of different industries has brought more interest domestic output and the other those elements relating to in the industry by industry tables. imports. The statistical requirements for such a separation are demanding but the results allow considerable flexibility in the treatment of imports and permit a clear analysis of Hybrid approaches the impact of demand on supplies from resident producers and on foreign suppliers. 28.64 In practice, no single method is used on its own. Knowledge of the type of product or industry in question 28.69 The exact manner of dealing with imports is a subject of should dictate whether an industry-based conversion considerable complexity where a number of options are procedure or a product-based one is most appropriate. available also. In some economies, some important Some secondary products may be dealt with one way and products will only be imported and so separating these others another despite the fact that, on occasion, negative values may initially appear. "non-competing" imports from the rest may be of particular interest. 28.65 The extent of variation between the various approaches will depend on a number of factors, including in particular the 28.70 Another topic that requires careful consideration is the extent of secondary production in the supply matrix. In degree of detail that is desirable for product and industry general, the greater the degree of disaggregation and thus classifications. This may vary depending on the resources the less secondary production to be reallocated, the closer available to the statistical office and the sort of use to be the input-output tables will resemble the supply and use made of the results. Table 28.8:The goods and services account in matrix form Goods and services Production Use of income Capital account account accounts accounts Total use E R E R E R E R Goods and services Intermediate Final Gross capital account consumption consumption formation E Exports 540 1 883 1 399 414 4 236 R Imports 499 Production account Output E 3 737 R Total supply 4 236 518 Input-output and other matrix-based analyses D. Social accounting matrices 1. Expressing the sequence of accounts in successive sets of rows and columns can be introduced matrix form until the whole sequence of accounts is covered, as in table 28.10. 28.71 The part of the use table relating to the destination of products represents one side of the goods and services 28.74 By including the entries for the rest of the world as well as account in matrix form. However, it can also be expressed for the total economy, the balancing items from the balance as a series of sub-matrices; one for intermediate of payments can be shown as, for instance, the -41 in table consumption, one for final consumption, one for capital 28.9. formation and one for exports. These sub-elements can be associated with the production account, the use of income 28.75 It is also possible to extend table 28.10 to show the account, the capital account and the rest of the world incorporation of the balance sheets as in table 28.11. For account respectively. Similarly the supply table represents this, a row above the initial table is introduced to show the the other side of the goods and services account but can opening balance sheet and three rows below it. The first of also be written as two sub-matrices, one associated with the these shows the entries for the other changes in the volume production account (output) and one with the rest of the of assets account, the second relates to the revaluation world (imports). By writing the supply table horizontally account and the last is the closing balance sheet. Two and the supply table vertically in terms of these sub- adjustments also need to be made to table 28.6. The first matrices and their associated accounts, table 28.8 emerges. concerns the item for the consumption of fixed capital, The rows and columns labelled E denote the total economy which is transposed from the row for the capital account and those labelled R the rest of the world. and column for the production account and placed in the column for the capital account and row for the production 28.72 The attraction of this format is that the total across the set account but with a negative sign. The second is to of rows for the goods and services account is equal to the subdivide the capital account with the first set of rows and total down the columns for the same account. There is no columns covering all items in the account but the second match for the second set of rows for the production set covering the product details for gross capital formation account, but it is not difficult to bring this about. The and thus forming part of the asset account for non-financial entries for value added can be inserted in a third set of rows assets. with the entries underneath intermediate consumption. In this way the sum down the columns for the production 28.76 Reading down the columns starting with the opening account is then equal to the rows for the same account. But balance sheet entry for fixed assets, for example, this value there is now an unmatched third set of rows containing plus the value of capital formation, less consumption of value added. Since value added ultimately carries forward fixed capital, plus other changes in the volume of assets to the allocation of primary income account, the third set of plus revaluation items is equal to the value on the closing rows can be so labelled as in table 28.9. balance sheet. For financial assets less liabilities the matching identity holds. 28.73 If, to match this third set of rows, a third set of columns is inserted between the production account columns and those for the use of income account, property income can be 2. Expanding the matrix inserted at the intersection of the third set of rows and columns and a fourth set of rows inserted to show the 28.77 It is possible to expand and rearrange the rows and columns balance of primary income as it appears in the secondary of the matrix so long as this is done consistently in both distribution of income account. Proceeding in this way, dimensions. It is not strictly necessary to adhere to the Table 28.9:The supply and use table in matrix form Goods and services Production Use of income Capital account account accounts accounts Total E R E R E R E R Goods and services Intermediate Final Gross capital account consumption consumption formation E Exports 540 1 883 1 399 414 4 236 R Imports 499 499 Production account Output E 3 737 3 737 R Primary distribution of income accounts Value added 1 854 - 41 Total 4 236 499 3 737 519 System of National Accounts order of the sequence of accounts or the degree of detail Mapping individuals to households is necessarily difficult shown there. The transactions to be included can be and depends to a greater or lesser extent on a set of expanded or contracted as can the sets of institutional units assumptions. Any analysis of how government policies will to be identified. affect households and their consumption depends on making such a mapping. 28.78 The example of transposing consumption of fixed capital from being a positive entry on one side of the account to a 4. A SAM for labour accounts negative entry on the other demonstrates how the matrix formulation may be used to enhance the articulation of the asset accounts. 28.83 One example of where a SAM is useful is in the case of labour accounts, showing the level and composition of 28.79 It is also possible to include alternative classifications of employment and unemployment. SAMs have often key items. For example a row called "human needs" could provided additional information on this issue, via a be included showing how much food, housing etc was subdivision of compensation of employees by type of needed for each group of households, based on the person employed. This subdivision applies to both the use functional classification of household consumption. In the of labour by industry, as shown in the supply and use table, column for consumption expenditure, the set of needs can and the supply of labour by socio-economic subgroup, as be then cross-classified by product and household group. shown in the allocation of primary income account for households. It implies that the matrix presents not only the supply and use of various products, but also the supply and 28.80 A further expansion of the matrix may be to show the from- use of various categories of labour services. whom-to-whom details of such flows as property income and transfers. 28.84 In order to have a comprehensive picture of the relationship between households and the labour market, the following 28.81 The matrix presentation is very powerful in terms of the sets of information are likely to be needed: flexibility it can encompass, and in displaying the interaction of the accounts in a compact and graphic manner. On the other hand, there are disadvantages to the a. Various stocks underlying the flows in the SAM, such matrix presentation also. as size and composition of the population by household group (including the potential labour force) and production capacity by industry; a. Without explanatory text describing each of the main elements, a reader has to have a very good understanding of the SNA to interpret the numeric b. For the self-employed, it may be desirable to have entries in the table. information on the possession of assets (for example, agricultural land, consumer durables) as well as b. Such a table always contains lots of white space which information on financial assets and liabilities; means that it is not an effective way of presenting a large amount of data. c. Related non-monetary socio-economic indicators, such as life expectancy, infant mortality, adult literacy, In general, the matrix format is best used to explain the nutrient intake, access to (public) health and education structure of the accounts being presented with individual facilities, and housing situation by household group cells, or a combination of cells, following in a more (see Towards a System of Social and Demographic traditional format. Statistics (United Nations, 1975)); 3. Disaggregating households d. Some re-routings such as social transfers in kind by groups of households. 28.82 Expanding the accounting matrix of the sequence of accounts to incorporate the disaggregation of households is 28.85 Comparing labour incomes of all employed persons as the usual form of a satellite account known as a social shown in the SAM, a decomposition of these incomes into accounting matrix (SAM). As such it moves beyond a full-time equivalent employment and average wage rates, rigorous accounting structure based on observations to and the potential labour force by type of person and make an allocation of income into household groups household group (expressed in "full-time" equivalents), possibly based on a household income and expenditure yields detailed information on the composition of survey. In some cases this is based on a single survey. The unemployment and an aggregate indicator ("full-time problem, as explained in chapter 24 on the household equivalent unemployment") which is consistent, both sector, is that income flows in the SNA relate to individuals conceptually and numerically, with the other whether as employees, recipients of property income or macroeconomic indicators; these can also be derived from transfer recipients while expenditure relates to households. the SAM framework. 520 Primary Secondary Goods and distribution of distribution of services Production income income Use of income Capital Financial account account accounts accounts accounts accounts accounts Total E R E R E R E R E R E R E R Goods and services Intermediate Final Gross capital account consumption consumption formation E Exports 540 1 883 1 399 414 4 236 R Imports 499 499 Production account Output E 3 737 3 737 R 0 Primary distribution of income Property accounts Value added income 1 632 438 50 2 120 - 41 40 -1 Secondary distribution of Balance of income primary Current accounts income transfers E 1 642 1 174 17 2 833 R - 51 55 4 Use of Change in income Disposable pension accounts income entitlements E 1 604 11 1 615 R - 13 - 13 Capital Consumption Capital accounts of fixed capital Saving transfers E 222 205 61 1 489 R - 13 4 -9 Net Financial borrowing or accounts net lending E 10 10 R - 10 - 10 Total 4 236 499 3 737 0 2 120 -1 2 833 4 1 615 - 13 489 -9 0 0 Table 28.10:The flow accounts in the sequence of accounts in matrix form Input-output and other matrix-based analyses 521 522 Financial Opening Non-financial assets less System of National Accounts balance sheet assets liabilities 4 621 469 Primary Secondary Goods and distribution of distribution of services Production income income Use of income Financial account account accounts accounts accounts Capital account Asset account accounts Total E R E R E R E R E R R E E R E R Goods and services Intermediate Final Gross capital account consumption consumption formation E Exports 540 1 883 1 399 414 4 236 R Imports 499 499 Production Consumption account Output of fixed capital E 3 737 - 222 3 515 R 0 Primary distribution of income Property accounts Value added income 1 632 397 50 2 079 - 41 40 -1 Secondary distribution of Balance of income primary Current accounts income transfers E 1 642 1 174 17 2 833 R - 51 55 4 Use of Change in income Disposable pension accounts income entitlements E 1 604 11 1 615 R - 13 - 13 Capital Capital account Saving transfers E 205 61 1 267 R - 13 4 -9 Acquisition of Asset non-financial account assets E 192 192 R 0 Financial Net borrowing accounts or net lending E 10 10 R - 10 10 0 Total 4 236 499 3 515 0 2 079 -1 2 833 4 1 615 - 13 267 -9 192 0 10 0 Other changes in the volume of assets account 10 Revaluation account 280 8 Table 28.11:The sequence of accounts including the balance sheets in matrix form Closing balance sheet 5 103 487 Chapter 29: Satellite accounts and other extensions A. Introduction 29.1 The sequence of accounts is fully integrated in large part 29.5 Broadly speaking, there are two types of satellite accounts. because of the underlying rigour of the accounting system. One type involves some rearrangement of central However, the guidelines given in earlier chapters are not classifications and the possible introduction of necessarily to be followed without variation. A great complementary elements. Such satellite accounts mostly strength of the SNA is that its articulation is sufficiently cover accounts specific to given fields such as education, robust that a great deal of flexibility can be applied in its tourism and environmental protection expenditures and implementation while still remaining integrated, may be seen as an extension of the key sector accounts just economically complete and internally consistent. The referred to. They may involve some differences from the purpose of this chapter is to illustrate some of the ways in central system, such as an alternative treatment of ancillary which this flexibility can be applied. activities, but they do not change the underlying concepts of the SNA in a fundamental way. The main reason for developing such a satellite account is that to encompass all 1. Functional classifications the detail for all sectors of interest as part of the standard system would simply overburden it and possibly distract 29.2 As noted in several earlier chapters, moving away from attention from the main features of the accounts as a whole. what is purchased to answer the question of why outlays Many elements shown in a satellite account are invisible in are incurred adds considerably to the analytical power of the central accounts. Either they are explicitly estimated in the system. One approach to this question is the use of the making of the central accounts, but they are merged for functional classifications of expenditure and outlays. A presentation in more aggregated figures, or they are only description of these classifications is given in section B. implicit components of transactions which are estimated These functional classifications are central to the SNA and globally. also provide a useful starting point for some types of satellite accounts. 29.6 The second type of satellite analysis is mainly based on concepts that are alternatives to those of the SNA. The sorts of variations in the basic concepts that may be considered 2. Key sector accounts are discussed in section D. These include a different production boundary, an enlarged concept of consumption 29.3 Instead of using the product and industry classifications or capital formation, an extension of the scope of assets, (CPC and ISIC) in their standard order and at the same and so on. Often a number of alternative concepts may be level of their hierarchies, it can be very instructive to select used at the same time. This second type of analysis may a group of products or industries of particular importance to involve, like the first, changes in classifications, but in the the economy, designated here as a key sector. The choice second type the main emphasis is on the alternative might be very specific, for example concentrating on a concepts. Using those alternative concepts may give rise to single agricultural crop or mineral output, or may be more partial complementary aggregates, the purpose of which is general such as all the goods and services primarily serving to supplement the central system. tourism. In either case, a set of supply and use tables may be compiled concentrating on the key sector and 29.7 Section E suggests some sorts of tables that might be useful aggregating other products and industries. In some cases, in the context of a satellite account. Again, flexibility in the where the activity is undertaken by relatively few, presentation of tables is recommended but the subjects of relatively large enterprises, it may be possible to go further the tables given in section E have proved to be useful in a and compile a complete sequence of accounts for the key number of cases. sector also. These approaches are described in section C. 29.8 The emphasis on the flexibility of the SNA extends to 3. Satellite accounts allowing complete flexibility about how many and what sort of satellite or other extended accounts may be developed. Satellite accounts, especially of the second sort, 29.4 A further and more extensive form of flexibility is that of a allow experimentation with new concepts and satellite account. As its name indicates, it is linked to, but methodologies, with a much wider degree of freedom than distinct from, the central system. Many satellite accounts is possible within the central system. When a number of are possible but, though each is consistent with the central countries develop similar satellites, exchanging experience system, they may not always be consistent with each other. can lead to beneficial refinements and the establishment of 523 System of National Accounts international guidelines in a particular topic and ultimately examples of this sort of research are reported in section F of the possibility of changes in the central system itself. Some this chapter. B. Functional classifications 29.9 The SNA uses special classifications to analyse b. In studies of household expenditure and saving, some consumption, or more generally outlays, by different researchers have considered expenditures on consumer sectors according to the purpose for which the expenditure durables as capital rather than current expenses. is undertaken. Such classifications are referred to as COICOP facilitates this by identifying expenditures on functional classifications. The classifications concerned durable goods; are: c. In studies of the impact of economic growth on the a. Classification Of Individual COnsumption by Purpose environment, researchers often wish to identify (COICOP); environmental protection expenditure. COFOG and COPP both include this as one of their first level categories. b. Classification Of the Functions Of Government (COFOG); 1. COICOP c. Classification Of the Purposes of Non-profit Institutions serving households (COPNI); 29.13 There are 14 main categories in COICOP. The first 12 sum to total individual consumption expenditure of households. The last two identify those parts of consumption d. Classification of Outlays of Producers by Purpose expenditure by NPISHs and general government that are (COPP). treated as social transfers in kind. Together all 14 items represent actual final consumption by households. The 14 29.10 Full details of all the classifications can be found in categories are as follows: Classifications of Expenditure According to Purpose (United Nations, 2000). 1. Food and non-alcoholic beverages, 29.11 The main purpose of these classifications is to provide 2. Alcoholic beverages, tobacco and narcotics, statistics which experience has shown to be of general interest for a wide variety of analytical uses. For example, COICOP shows items such as household expenditure on 3. Clothing and footwear, food, health and education services all of which are important indicators of national welfare; COFOG shows 4. Housing, water, electricity, gas and other fuels, government expenditure on health, education, defence and so on and is also used to distinguish between collective 5. Furnishings, household equipment and routine services and individual consumption goods and services household maintenance, provided by government; COPP may provide information on the "outsourcing" of business services, that is, on the 6. Health, extent to which producers buy-in catering, cleaning, transport, auditing and other services that were previously carried out as ancillary activities within the enterprise. 7. Transport, 29.12 Functional classifications also provide the means to recast 8. Communication, key aggregates of the SNA for particular kinds of analyses, some of which are described in later sections of the chapter. 9. Recreation and culture, For example: 10. Education, a. It can be argued that, for several analytical purposes, the SNA definition of gross capital formation is too 11. Restaurants and hotels, narrow. In studies of the causes of labour productivity, researchers would often like to have a measure of 12. Miscellaneous goods and services, "human capital" which is normally derived from information on past expenditures on education. The four functional classifications each identify 13. Individual consumption expenditure of NPISHs, expenditures on education and thus it is possible to derive education expenditure incurred by households, 14. Individual consumption expenditure of general government, non-profit institutions and producers; government. 524 Satellite accounts and other extensions 29.14 Household budget surveys frequently use a classification 2. Health, scheme based on COICOP to collect household expenditure information. This then has to be reallocated to products for 3. Recreation and culture, use in a supply and use table as discussed in chapters 14 and 28. 4. Education, 2. COFOG 5. Social protection, 29.15 There are ten main categories of COFOG as follows: 6. Religion, 1. General public services, 7. Political parties, labour and professional organizations. 2. Defence, 29.18 This classification is a somewhat reduced version of the classification for all non-profit institutions given in chapter 3. Public order and safety, 23. 4. Economic affairs, 4. COPP 5. Environmental protection, 29.19 There are six main categories in COPP as follows: 6. Housing and community amenities, 1. Outlays on infrastructure, 7. Health, 2. Outlays on research and development, 8. Recreation, culture and religion, 3. Outlays on environmental protection, 9. Education, 4. Outlays on marketing, 10. Social protection. 5. Outlays on human resource development, 29.16 As noted in chapter 22, COFOG is used in the analysis and presentation of the government finance presentation of 6. Outlays on current production programmes, statistics. administration and management. 3. COPNI 29.20 In principle, COPP applies to all producers, whether market or non-market, although not all categories are of equal interest for both kinds of producers. It is probable that, in 29.17 There are seven main categories in COPNI as follows: practice, classification of outlays of producers by purpose will mainly be of interest for classifying transactions of 1. Housing, market producers. C. Satellite accounts for key sector and other special sector accounts 29.21 The sequence of accounts is normally compiled for the 29.22 It can be very useful for economic analysis to identify whole economy or for all institutional units belonging to particular activities that play a key role in the economy's the same institutional sector or subsector. Within the supply external transactions. These key activities may include the and use tables, production units may be grouped to show petroleum sector, mining activities or crops (coffee, for the elements of the production account and generation of example), when they account for an important part of income account, even if the production units are not exports, foreign exchange assets and, very often, complete institutional units. Although the rows and government resources. columns of the supply and use tables often follow CPC and ISIC, at similar levels of their respective hierarchies, it is 29.23 The SNA does not try to provide specific and precise quite possible to select a number of industries that are of criteria for the definition of what identifies a key sector or special interest in a given country. It is common practice to activity. It is a matter of judgement in a given country, refer to such groupings of industries as "sectors" even based on economic analysis and economic and social policy though they do not constitute institutional sectors as the requirements. For instance, even a small industry at an term is used in the SNA. infant stage might deserve to be treated as a key activity. 525 System of National Accounts 29.24 The first step in drawing up key sector accounts is to secondary activities. It is useful to know the nature of the identify the key activities and their corresponding products. secondary products, but not necessarily their destination. This may involve grouping together items shown in different parts of ISIC or CPC. For example, accounting for 29.27 When the key sector relates to an agricultural industry or oil and natural gas may cover extraction of crude petroleum product, such as coffee in certain countries, the situation is and natural gas (ISIC division 06), manufacture of refined more complex. Many producers may be unincorporated petroleum products (ISIC class 1920), transport via enterprises that do not qualify as quasi-corporations. pipelines (ISIC class 4930), wholesale of solid, liquid and Ideally, the key sector accounts would include a complete gaseous fuels and related products (ISIC class 4661) and set of accounts for the households that carry out these retail sale of automobile fuel (ISIC class 4730). The productive activities. Because this may be difficult to do in extension of the key sector(s) depends on local practice, it may be necessary to show only the accounts and circumstances; for example, it may be useful for the energy transactions which are most closely linked with the key sector to cover petrochemical processing. activity such as the production and generation of income accounts from the one side and main transactions of the 29.25 The key products and key industries accounts may be capital and financial accounts from the other. analysed in the context of a supply and use table. Key industries are shown in detail in columns and other 29.28 In many cases, government plays an important role in industries may be aggregated. In the rows, key products are connection with key activities, either via taxes and property similarly shown in detail and other products aggregated. income receipts, regulatory activity or subsidies. Below the supply and use table, extra rows may show Accordingly, the detailed study of transactions between the labour inputs, gross fixed capital formation and stocks of key sector and general government is very important. The fixed assets. In the use part of the table, columns for gross classification of transactions may be extended to identify fixed capital formation and changes in inventories those flows connected with the key activity, including the respectively may be broken down between one or more key relevant taxes on products. These flows may be received by sectors or industries and other sectors or industries. In a various government agencies, such as ministries for special country where the key activity is carried out by very purposes, universities, funds or special accounts. Similarly, heterogeneous types of producers, such as small farmers it is very useful for economic analysis to indicate what uses and large plantations owned and operated by corporations, are made by government of these resources, especially in it may be useful to show the two groups of producers the case when they are routed via a government agency. separately, as they have wholly different cost structures and This calls for a specific analysis by purpose of this part of behave differently. government expenditure. 29.26 Thereafter, a set of accounts, following the sequence of 29.29 The distinction between public, foreign controlled or accounts as far as possible, may be compiled for the key national private corporations is fundamental when dealing sector. In the case of energy and mining activities, the key with a key sector. sector generally consists of a limited number of large corporations where access to the commercial accounts of 29.30 One more step may consist in showing in additional tables the corporations is usually possible. All transactions of the the "from-whom-to-whom?" relationship between the key corporations are covered, even when they carry out sector and each other sector and the rest of the world. D. Satellite accounts; options for conceptual variations 29.31 This section looks at some of the options that might be classification, but the inputs of secondary activities are not adopted in developing a satellite account of the second separated from those of the principal activities. Ancillary type, where some of the basic concepts of the central activities, on the other hand, are not analysed and classified system are intentionally varied. It is deliberately illustrative according to their own nature and the related products do rather than exhaustive. not appear as autonomous products. 1. Production and products 29.34 When examining certain kinds of activity and products, it may be useful not only to separate secondary from principal activity, but also to identify and recognize the 29.32 Within the production boundary of the central framework ancillary activities in order to obtain a full picture of the of the SNA, producer units are establishments, classified inputs corresponding to the activity being examined. according to their principal economic activity. Such units are classified according to ISIC. 29.35 Consider the example of transportation. The output of transportation activities in the central framework covers 29.33 When establishments, and consequently industries, are not only transport services rendered to third parties, whether as homogeneous at a given level of the ISIC, they undertake a principal or secondary product. Own-account both a principal activity and one or more secondary transportation is treated as an ancillary activity; its inputs activities. The output of these secondary activities is are unidentified components of the costs of the producing identified according to its nature, following a product units it serves. To obtain a broader picture of transportation 526 Satellite accounts and other extensions activity, own-account transportation of producing units concessions, equity participation, soft loans, differential may be identified and measured. exchange rates, differential domestic prices, etc., may then be added to subsidies, other current transfers, or capital 29.36 In some instances, it may be useful to consider enlarging transfers embodied in the central framework data. the production boundary. For instance, to make an overall estimate of the transportation function in an economy, it 29.42 Externalities are impacts on third parties that are not might be useful to cover transport services rendered by accounted for in the value of monetary transactions households using their own cars and to try to value the time between two economic units or that result from actions of people spend using transport facilities. Generally speaking, these units in the absence of any monetary transaction. As the scope of non-market activities may be extended such, externalities may give rise to a wide range of implicit considerably. transfers. For example, pollution and nuisance created by producers may have negative effects on final consumers. 29.37 The process of identifying principal, secondary and These negative effects might (with difficulty) be estimated ancillary activities works well when the activity in question and recorded as negative transfers from producers to is identified in one of the standard classifications and so households. In order to balance these negative transfers, appears in the central framework. However, in some one possibility might be to introduce a concept of important cases, such as tourism and environmental production of externalities which would result in an output protection activities, the process of identification is of negative or positive services and the corresponding final complex because not all the relevant activities and products consumption. appear in the central framework classifications. In this case, the use of the word "industry" is not in strict accordance 29.43 Flows in the other changes in volume of assets account and with the normal usage just as "sector" is used in a special the revaluation account of the central framework are sense in the context of key sector accounts. candidates for enlarged concepts of transfers and disposable income. Uncompensated seizures, for example, 2. Income could be recorded as a transfer (albeit unwillingly on the part of the former owner). In countries where holding gains or losses on financial assets or liabilities are significant, Primary incomes real holding gains and losses on financial assets and liabilities could be added to disposable income in order to 29.38 When the production boundary is extended, as suggested derive a broader measure of income. above, the magnitude of primary incomes is increased, income being imputed for the additional activities which are inserted within the boundary of production. 3. Uses of goods and services 29.39 In conditions of high inflation, nominal interest may be 29.44 The coverage of uses of goods and services, either for judged not to be an appropriate measure of the return to lent intermediate or final consumption or capital formation, funds. Nominal interest includes an implicit or explicit obviously changes as a result of enlarging the concept of component as compensation for the change inflation causes production. For example, if services rendered to each other in the real value of monetary assets and liabilities. This by members of the same household were included in component may be analysed as a holding gain for the production, they would have to be also included in final borrower and a holding loss for the lender, rather than as an consumption. element of property income. 29.45 The borderline between intermediate consumption, final Transfers and disposable income consumption and capital formation may also be modified in various ways. Two often mentioned cases refer to human capital and consumer durables. If at least part of final 29.40 Several kinds of transfers in addition to those in the central consumption on education and health were treated as fixed framework may be delineated, if meaningful. Some capital formation, the corresponding central framework examples follow. transactions would be reclassified from consumption to fixed capital formation resulting in human capital assets. 29.41 Implicit transfers may be made explicit. Implicit transfers As an immediate consequence, the concept of consumption change the situation between units without any flow being of fixed capital would be extended. treated as an imputed transfer in the central framework. For instance, tax benefits refer to the advantages or disadvantages economic units incur as a consequence of tax 29.46 An alternative to the inclusion of expenditures on consumer legislation by reference to an average situation. Another durables such as cars and furniture in household final example is the case of non-market services provided free of consumption would be to treat them as fixed capital charge by government units to market producers. In the formation. Only that part of the resulting fixed asset central framework these services are treated as collective estimated as the capital services provided by the durable consumption of government. If a further analysis were to would then enter final consumption. Strictly speaking, this treat them as an addition to intermediate consumption of procedure implies enlarging the concept of production to market producers, a counterpart should be introduced, include household services. (This is one subject discussed preferably in subsidies on production. This approach may further in section E.) be undertaken systematically to measure all types of transfers between government and particular sectors, such 29.47 As a consequence of the changes just considered, the as agriculture. The implicit benefits resulting from tax concept of saving would be extended. 527 System of National Accounts 4. Assets and liabilities appear under two or more headings. However, even without double counting, it should be noted that different satellite 29.48 The scope of non-financial assets could be modified as a accounts, each with a different focus, may not be consistent consequence of extending the concept of production or with respect to other headings. For example, if an education modifying the borderline between consumption and capital satellite account treats some teaching done in hospitals as formation, as indicated in the previous paragraphs. education rather than health, the measure of health in that satellite will differ from that in any other satellite where such a displacement has not been made. 29.49 The scope of financial assets and liabilities could also be broadened by including contingent assets and liabilities in the classification of financial instruments. Further, 6. Aggregates alternative rules about the valuation of financial assets may be used, for example using fair value estimates instead of 29.51 A number of the complementary or alternative analyses market value. mentioned above may modify the main aggregates as shown in the central framework either directly or indirectly. 5. Purposes Examples of direct modifications are the increase in output and value added when final consumption of household 29.50 Section B describes the functional classifications. In the services for own use is included within the boundary of standard version, headings at a given level are mutually production, or the increase in fixed capital formation if exclusive. For example, teaching in hospitals must be human capital is considered an economic asset. Other classified as either education or health expenditure but not aggregates are indirectly modified; saving in the latter case, both. Consequently, for an education or health account, it disposable income in the former. might be desirable to reclassify a number of transactions. In order to preserve as great a degree of consistency with the 29.52 In some types of analysis the objective is to focus on one central system as possible, any reclassifications should be specific field of concern, such as education or tourism. treated as removing an item from one heading and placing Changes in some concepts and aggregates of the central it in another rather than allowing double counting. Double framework may be introduced, but this is not the primary counting would mean that transactions classified by intention, nor is it intended to give a different picture of the purpose were no longer additive since some of them would overall economic process. E. Possible tables for a satellite account 29.53 The previous section described what variations in the basic 29.56 In addition, for many products of special interest, there may concepts, accounting rules and classifications of the SNA be particular taxes or subsidies associated with their could be applied in a satellite account. This section production or use. Taking these two factors together, suggests some sorts of tables that it might be useful to therefore, in addition to the items above, the following is compile for a satellite account. required: 1. Scoping a functionally orientated account c. An analysis of any transfers associated with either production or use. 29.54 The starting point is to decide which products are of interest and which are the industries involved in their 29.57 It is also useful in many cases to associate non-monetary production. The resources devoted to the production of the figures with the monetary ones. This means assembling the items include not only current costs but also fixed capital following information: used in production. Once the items are produced, the question arises of how they are used. This leads to requiring d. Information on employment and the availability of information on the following topics: assets. a. A detailed analysis of the supply and use of the 29.58 Once these four sets of data are assembled, it should be products in question; possible to develop a satellite account that covers the analysis of uses of, or benefits from, the expenditure on the b. Information on the fixed capital used in the production items, production including the labour and capital process. employed, transfers and other ways of financing the uses. All of this can be expressed in value terms and, when relevant, in physical quantities. 29.55 For many items, the units using the products are responsible for bearing the expense of acquiring the product but satellite accounts may frequently be compiled 2. Determining the products of interest for areas, such as health or education, where there may be an important distinction between who pays for the product 29.59 For any field of interest, the starting point is to identify the and who consumes it. products specific to this field. It is customary, in the context 528 Satellite accounts and other extensions of a satellite account, to identify these as characteristic framework) and intermediate consumption. Market products and connected products. Characteristic products products, products for own final use and non-market are those that are typical of the field; for instance, for products are distinguished and, for the last-named, health, characteristic products are health services, public individual and collective consumption may be shown administration services, education and R&D services in separately. Intermediate consumption generally has a health. broader coverage than in the central framework, as the output of the relevant ancillary activities is identified with 29.60 The second category, connected goods and services, intra-establishment deliveries being recorded. As a includes products whose uses are interesting because they consequence, it covers (actual) intermediate consumption are clearly covered by the concept of expenditure in a given as defined in the central framework and internal field, without being typical, either by nature or because intermediate consumption. In some cases, such as transport they are classified in broader categories of products. In services, the last component may be important in size. health, for example, transportation of patients may be Sometimes, it could be considered that this internal considered connected services; also pharmaceutical intermediate consumption should be treated as final products and other medical goods, such as spectacles, are consumption and added to actual final consumption, as in very often treated as connected goods and services. the use of ancillary education and health services, thus broadening the scope of household actual final consumption. Alternatively, the scope of consumption may 29.61 Together characteristic products and connected products be narrowed, if the use of certain services is treated as fixed are referred to as specific products. capital formation in a satellite account instead of intermediate or final consumption as in the central 3. Measuring production framework. 29.62 For characteristic products, the satellite account should Capital formation show the way these goods and services are produced, what kinds of producers are involved, what kinds of labour and fixed capital they use and the efficiency of the production 29.66 Item 2 is capital formation in specific goods and services. process and, hence, of the allocation of resources. Since, item 2 includes changes in inventories, if appropriate, it may cover work-in-progress in specific services. In an account for culture, for example, there may 29.63 For connected products, there is no particular interest in also be acquisition less disposals of valuables. their conditions of production because they are not typical of the field of interest. If the conditions of production are important, then the items should be considered 29.67 Item 3, fixed capital formation of characteristic activities in characteristic products and not connected products. For non-specific products and their acquisitions less disposals example, pharmaceutical products might be considered of non-produced non-financial assets is a bit more complex: characteristic in the account for health of a country in the first stages of developing a domestic industry. The precise a. It does not cover the total fixed capital formation of borderline between characteristic and connected products these activities because that part consisting of specific depends on the economic organization in a given country products is already included in item 2. and the purpose of a satellite account. b. Only the fixed capital formation of activities whose 4. Components of uses/national expenditure output consists of characteristic goods and services is covered in item 3. (If the exclusion of capital formation 29.64 The components of uses or national expenditure are the of activities whose output consists of connected goods following: and services proves important, the products and activities in question may have to be redefined to be characteristic.) 1. Consumption of specific goods and services, 2. Capital formation in specific goods and services, c. An analysis based on establishments may give a broader coverage than normal because they may cover some secondary activities. 3. Fixed capital formation of characteristic activities in non-specific products, d. Item 3 includes acquisitions less disposals of non- produced non-financial assets. 4. Specific current transfers, 5. Specific capital transfers. Transfers Each of these items is discussed below. 29.68 Items 4 and 5, specific current transfers and specific capital transfers, are the most important components of national expenditure in cases such as social protection or Consumption development aid. In these fields, items 1 and 2 refer only to the administrative costs, both current and capital, of the 29.65 Item 1 is consumption of specific goods and services. It agencies managing social protection or international aid. covers actual final consumption (as defined in the central The core of the expenditure consists of transfers. 529 System of National Accounts 29.69 In some situations, there may be subsidies designed to b. Producers for own final use; reduce the prices paid by final consumers for certain goods or services, such as food, transport services, or housing c. Non-market producers; services. They are commonly called consumption subsidies. In the central framework, when these goods and d. Government as a collective consumer; services are considered market products, they are included in final consumption at purchasers' prices. In a satellite account there are two options: either consumption (item 1) e. Households as consumers; is valued differently from the central framework in order to include the value of consumption subsidies or consumption f. Rest of the world. is valued as it is in the central framework and specific current transfers (item 4) must include consumption 29.76 Households as consumers are the most important type of subsidies. Subsidies included in item 4 may also be directed users or beneficiaries in many satellite accounts. In order to toward reducing the prices of intermediate consumption. be useful for social analysis and policy, a further Item 4 may also include other subsidies on production. breakdown of households is necessary. For this purpose, one of the sorts of subsectoring of households discussed in 29.70 In each field a classification of specific transfers has to be chapter 24 could be considered. established. As it is used for analysing both uses and financing, this classification covers all specific transfers, 6. Financing independently of whether they are counterparts of items 1 to 3 or not. 29.77 Because users do not always bear the expenses themselves, it may be desirable to try to analyse the units that ultimately Total uses and national expenditure bear the expenses. This is more feasible when the field of interest covers complete institutional units than when it 29.71 The total uses of resident units are the sum of the five concerns establishments (or units of homogeneous components above. From this, current uses financed by the production) covering only part of the output of the whole rest of the world are deducted to reach national enterprise. expenditure. National expenditure is thus equal to total uses of resident units financed by resident units. It is desirable if 29.78 One way to approach the question of financing is to first possible to distinguish between current and capital uses establish what types of financing are used and then identify financed by the rest of the world. which sorts of units provide each type of financing. The question of "ultimate" bearer of the cost also needs 29.72 National expenditure, as defined above, does not include addressing. Some household consumption is provided by transactions in financial instruments. However, for certain government as social transfers in kind, which in turn is types of analysis, such as development aid, loans which are largely financed by taxes received by government from given or received at preferential conditions must be households and enterprises. In one sense, therefore, it could accounted for. Benefits or costs resulting from rates of be argued that social transfers in kind are ultimately interest lower than the market ones involve implicit financed by households and enterprises. Some conventions transfers as described in chapter 22. have to be established about how far back down the financing chain to go to determine the "ultimate", or 29.73 Uses/national expenditure may be shown by type of perhaps more correctly the indirect, source of financing. products and transfers or by type of purpose (programmes). The main emphasis may be put on one or the other of these 29.79 Another problem that arises is that, except in cases of two alternatives, or they might be used jointly, depending transactions in kind, there is no necessary link between one on the field covered or the aim of the analysis pursued. The source of funding and one type of expenditure. However, it approach by programme is particularly relevant in the case is convenient to pair various types of financing and of environmental protection or social protection. expenditure to see how far they correspond, as follows: 5. Users or beneficiaries a. Intermediate consumption of market producers compared with revenue from sales; 29.74 For users or beneficiaries, the terminology used may differ from one satellite account to another. "Users" is more b. Intermediate and final consumption of government relevant to tourism or housing for example, "beneficiaries" compared with taxes; to social protection or development aid. In both cases, the terms refer to who is using the goods and services or c. Intermediate and final consumption of NPISHs benefitting from the transfers involved. compared with contributions received; 29.75 At the most aggregated level, the classification of users or d. Final consumption expenditure by households beneficiaries is simply a rearrangement of the central compared with compensation of employees and framework classification of institutional sectors and types transfers such as pensions. of producers, in which the production and consumption aspects are separated. It may be as follows: 29.80 Capital formation may be funded in a number of ways; from revenue from sales, from the disposal of assets a. Market producers; (including financial assets), from the receipt of a transfer in 530 Satellite accounts and other extensions kind or from borrowing. In the case of capital formation by 7. Production and products government, this may be funded by the issue of securities or by capital transfers or loans from the rest of the world. 29.83 As with key sector accounts, it will almost always be useful to develop a set of supply and use tables for the 29.81 The source of financing of transfers depends in large part characteristic and connected products of interest and the on the field being studied. If social benefits are included, producers of the characteristic products. This may be they should be treated as mainly financed by social extended to cover the generation of income account also contributions from other households. Governments will be and non-monetary data concerning employment and the provider of transfers in some cases (including subsidies) indicators of output. and the recipient in others (including taxes). 8. Physical data 29.82 In a number of cases, it may be particularly relevant to identify financing from the rest of the world. 29.84 Data measured in physical or other non-monetary units should not be considered a secondary part of a satellite account. They are essential components, both for the information they provide directly and in order to analyse the monetary data adequately. F. Examples of satellite accounts 29.85 As explained in the introduction, there are two types of Nevertheless, some of the most recent work in this is satellite accounts, serving two different functions. The first reviewed for those interested. type, sometimes called an internal satellite, takes the full set of accounting rules and conventions of the SNA but 29.88 Other satellite accounts have been developed or are under focuses on a particular aspect of interest by moving away development. Some, such as a satellite investigating from the standard classifications and hierarchies. Examples productivity across a number of countries reported in are tourism, coffee production and environmental Productivity in the European Union: A Comparative protection expenditure. The second type, called an external Industry Approach (EU KLEMS Project, 2003), have been satellite, may add non-economic data or vary some of the conducted to date as a research exercise. Others, such as accounting conventions or both. It is a particularly suitable accounts for water and forests, have been developed as way to explore new areas in a research context. An example elaborations of the main environmental satellite account may be the role of volunteer labour in the economy. Some SEEA to the point where international guidelines on these sets of satellite accounts may include features of both are now accepted. Further satellite accounts for agricultural internal and external satellites. products would be useful for a number of developing countries. Here and elsewhere, as there is agreement on how to compile a new form of satellite account, new 29.86 The boundary between satellite accounts and a international guidelines can be developed. International straightforward elaboration of the SNA or even with other guidelines on satellite accounts themselves may be subject systems is not clear cut. The links to balance of payments to revision and may eventually move towards an accepted and the international accounts as presented in BPM6, international standard as is planned for the SEEA. government finance statistics as in GFSM2001 or MFSM could all be seen as a form of satellite account. The treatment of NPIs in chapter 23 and the informal sector in 1. Tourism satellite accounts chapter 25 are clearly satellite accounts. Even the pension table in chapter 17 could be seen as a form of satellite 29.89 The tourism satellite account (TSA) is a long established account, even though its compilation is part of the central satellite account with more than 70 countries having guidelines of the SNA. compiled one at some stage. A manual of international guidelines, known as the 2008 Tourism Satellite Accounts: Recommended Methodological Framework (Eurostat, 29.87 In this section, some further satellite accounts are Organisation for Economic Co-operation and described. The descriptions are brief, being intended to give Development, World Tourism Organization, United a flavour of the accounts only; references are given for Nations, 2008) updates the first version of 2000. The further information. Four areas in total are described. For coverage of second homes and the activity of meetings and two of these, the tourism satellite account and the conferences are extensions to the TSA made in the 2008 environmental satellite account, the international manuals update. are now in their second version. The health satellite account is still in a preliminary version but under active revision. The fourth area covers unpaid household production 29.90 The goal of the tourism satellite account is to provide the activities. This has been an area of interest for very many following information: years but the difficulties in determining how to measure unpaid activities has so far been a stumbling block in a. Macroeconomic aggregates that describe the size and reaching international agreement on how to proceed. the economic contribution of tourism such as tourism 531 System of National Accounts direct gross value added (TDGVA) and tourism direct undertaken by the tourist. Travelling for business or for gross domestic product (TDGDP), consistent with education or training is included. The purpose of the similar aggregates for the total economy and other tourist's visit is categorized according to whether it is productive economic activities and functional areas of personal or business and professional. The personal interest; heading is further divided into eight categories: holidays, leisure and recreation; visiting friends and relatives; b. Detailed data on tourism consumption, a more extended education and training; health and medical care; religion or concept associated with the activity of visitors as pilgrimages; shopping; transit and other. consumers, and the description of how this demand is met by domestic supply and imports, integrated within Definition and scope of tourism expenditure tables derived from supply and use tables that can be compiled both at current values and in volume terms; 29.94 Tourism expenditure is defined as the amount paid for the acquisition of consumption goods and services as well as c. Detailed production accounts of the tourism industries, valuables for own use or to give away after or during including data on employment linkages with other tourism trips. It includes expenditures by visitors productive economic activities and gross fixed capital themselves as well as expenses that are paid for or formation; reimbursed by others. d. A link between economic data and non-monetary Definition and scope of tourism consumption information on tourism such as number of trips (or visits), duration of stay, purpose of trip, modes of transport, etc. which are required to specify the 29.95 The concept of tourism consumption goes beyond that of characteristics of the economic variables. tourism expenditure in that it also includes services associated with occasional accommodation on own account, tourism social transfers in kind and other imputed Defining visitors and tourists consumption. While information on tourism expenditure can be obtained by surveys of tourists, the adjustments to 29.91 At the centre of the TSA is the idea of a visitor. A visitor is tourism consumption have to be estimated from other defined as someone who is outside their usual environment sources. but not employed by an entity resident in the place he is visiting. The usual environment is not identical with 29.96 Tourism consumption can be characterized according to country of residence. It refers to the area within which a where the tourism takes place and whether the tourist is a person is normally to be found. It includes the area around resident or non-resident in a manner similar to that already the home and also the place of work. Thus border workers, described for tourism. although they cross a country boundary, are not visitors. Visitors are therefore a subset of travellers. Characteristic products 29.92 Visitors may be divided into two categories: those that are 29.97 The consumption products considered by the TSA are overnight visitors called tourists and those that are same divided into tourism characteristic products and other day visitors called excursionists. Further, it is important to consumption products. Tourism characteristic products are divide tourists according to their country of residence into further subdivided into internationally comparable tourism domestic and external tourists. A resident visiting a country characteristic products and country specific tourism abroad is undertaking outbound tourism; a non-resident characteristic products. The TSA manual includes a list of visiting the domestic economy is undertaking inbound the first. Other consumption products are divided between tourism. The total amount of tourism undertaken by tourism connected products and non-tourism related residents, known as national tourism, is the sum of products. Non-consumption products include all products domestic tourism (tourism within the domestic economy that do not constitute consumption goods and services. undertaken by residents) plus outbound tourism. Internal These include valuables, tourism gross fixed capital tourism is the sum of domestic tourism plus inbound formation and collective consumption. A list of 12 tourism. classifications of products and activities characteristic of tourism are given in the TSA manual. Within the Outside the Total country country Tourism industries Domestic Outbound National Residents 29.98 A tourism industry represents the grouping of those tourism tourism tourism establishments whose main activity corresponds to a Non-resi- Inbound characteristic product. Tourism industries cover dents tourism accommodation for visitors, the food and beverage serving Internal industry, railway, road, water and air passenger transport, Total transport equipment rental, travel agencies and other tourism reservation service industries, the cultural industry, the sports and recreational industry, the retail trade of country 29.93 Tourism is not restricted to activities normally thought of specific tourism characteristic goods and country specific as typical of recreation but includes all activities tourism characteristic industries. 532 Total domestic supply and internal tourism consumption (at purchasers' prices) (*) TOURISM INDUSTRIES Taxes less 1 - b. Output of subsidies on Domestic 1 - a. Trade and Internal accommodation domestic products supply (at Tourism 1- accommodation Other industries imports* transport tourism services 12- Country specific producers nationally purchasers' ratios (%) Accommodation services for ... TOTAL margins consumption associated with all tourism industries (at basic prices) produced and prices) for visitors visitors except in types of vacation 1-b imported home ownership Products output tourism output tourism output tourism output tourism output tourism output tourism output tourism output tourism output tourism output tourism output tourism share share share share share share share share share share share (in value) (in value) (in value) (in value) (in value) (in value) (in value) (in value) (in value) (in value) (in value) (6.5)= (4.3) x 100 (5.15) = (6.4) = (6.4) (5.1) (5.1a) (5.1b) (5...) (5.12) (5.13) (5.14) (5.13) + (6.1) (6.2) (6.3) (5.15)+ (6.1) (4.3) (5.14) + (6.2) + (6.3) A. Consumption products (*) A.1 Tourism characteristic products (d) 1 ­ Accommodation services for visitors X X 1.a ­ Accommodation services for visitors other than 1.b X X 1.b ­ Accommodation services associated with all types X X of vacation home ownership 2 ­ Food and beverage serving services X X 3 ­ Railway passenger transport services X X 4 ­ Road passenger transport services X X 5 ­ Water passenger transport services X X 6 ­ Air passenger transport services X X 7 ­ Transport equipment rental services X X 8 ­ Travel agencies and other reservation services X X 9 ­ Cultural services X X 10 ­ Sports and recreational services X X 11 ­ Country-specific tourism characteristic goods X X X X X X X X X 12 ­ Country-specific tourism characteristic services X X A.2 Other consumption products (a) (d) X X B. Non consumption products (d) X X B.1 Valuables X X X X X X X X X B.2 Other non consumption products (**) (b) (d) X X I. TOTAL OUTPUT (at basic prices) II. TOTAL INTERMEDIATE CONSUMPTION (at purchasers price) (c) (I - II) TOTAL GROSS VALUE ADDED (at basic prices) Compensation of employees Other taxes less subsidies on production Gross mixed income Gross operating surplus X does not apply ... Means that all tourism industries of the proposed list have to be considered one by one in the enumeration * Imports excludes direct purchase of residents abroad Table 29.1:Table 6 from the Tourism Satellite Accounts (*) The value of A. Consumption products, is net of the gross service charges paid to travel agencies, tour operators and other reservation services. (**) Includes all other goods and services that circulate in the economy of reference. (a) If relevant and feasible, countries should separately identify both components ("tourism connected products" and "non-tourism related consumption products"). In both cases, goods and services should be separately identified, if possible (see para. 4.15.). (b) Goods and services should be separately identified, if possible (see para. 4.16.) (c) Breakdown should be provided, if possible (see para. 4.17.) (d) For goods, the tourism share is to be established on the retail trade margin only (see Annex 4) 533 Satellite accounts and other extensions System of National Accounts 29.99 Based on this information a full set of TSA accounts e. encouraging the development of comprehensive and consisting of 10 tables can be compiled. The first three consistent data sets over time; consist of tourism expenditure. Table 4 shows a breakdown between domestic and inbound tourism and the adjustments f. facilitating international comparisons. that need to be made to move from tourism expenditure to tourism consumption. Table 5 shows the supply of the 29.104 As with the SNA, the SEEA accounts provide a score- tourism industry. Table 6 is the heart of the TSA and shows keeping function from which key indicators can be derived the main aggregates derived; the aggregates are listed and a management function in that they can be used in the below. Table 7 covers employment. Tables 8 and 9 cover analysis of policy options. The accounts provide a sound fixed capital and collective consumption. Table 10 covers basis for the calculation of measures which may already be non-monetary information. included in sets of sustainable development indicators, but they may also be used to develop new indicators, such as Main aggregates environmentally adjusted macroaggregates which would not otherwise be available. 29.100 The following aggregates are taken to be a set of relevant indicators of the size of tourism in an economy. They The different parts of the SEEA include: 29.105 The SEEA should be seen as a satellite account to the SNA a. Internal tourism expenditure; with features of both internal and external satellites. The full system consists of three main sections, two of which can be implemented more or less independently and a third b. Internal tourism consumption; which is designed to integrate the first two with each other and with the SNA. The three sections consist of: c. Gross value added of the tourism industry (GVATI); a. An extended form of supply and use tables capable of d. Tourism direct gross value added (TDGVA); incorporating physical data alone or in addition to monetary data; e. Tourism direct gross domestic product (TDGDP). b. Elaborations of parts of the central framework of the 29.101 The derivation of these items is shown in table 6 of the TSA SNA with some extensions; and manual which is included as table 28.1. c. Consideration of extending the SNA to allow the effects of depletion and degradation to impact the 2. Environmental accounting macroaggregates such as GDP. 29.102 Environmental accounts aim to reflect within a framework Physical and hybrid supply and use tables based on the SNA the impacts of using (and sometimes using up) natural resources and the generation of residuals that pollute the air and water. They also identify specific 29.106 Four different types of flows are distinguished in the SEEA. activities undertaken to prevent or combat the environmental impacts of human activity. a. Products are goods and services produced within the economic sphere and used within it, including flows of goods and services between the national economy and 29.103 An interim version of SEEA, the satellite for Integrated the rest of the world. Environmental and Economic Accounts was published in 1993. An updated version was released in 2003. Work is in hand to revise this further with a view to publication in b. Natural resources cover mineral and energy resources, 2012. The goals of the SEEA are to assist in: soil, water and biological resources. a. encouraging the adoption of standard classifications in c. Ecosystem inputs cover air and the gases necessary for environmental statistics, which extends the value and combustion and the water to sustain life. relevance of existing environmental information; d. Residuals are the unintended and undesired outputs from the economy which have zero price and may be b. bringing a new dimension to environmental statistics recycled or discharged into the environment. by applying the economic accounting traditions linking "Residuals" is the single word used to cover solid stocks and flows; waste, effluents (discharges to water) and emissions (discharges to air). c. providing a link with the economic information contained within the traditional economic accounts, 29.107 The first set of environmental accounts consists of a link to leading to improvements in the reliability and environmental statistics formed by structuring physical coherence of both sets of information; environmental data in a supply and use or input-output framework. Physical flow accounts consist of merging d. identifying use and ownership and hence responsibility accounts for products, natural resources, ecosystem inputs for environmental impacts; and residuals, each account being expressed in terms of 534 Satellite accounts and other extensions supply to the economy and use by the economy. Purely a. Relevant ancillary activities should be treated as physical accounts can show the relative importance of secondary products; different economic activities in terms of their effect on the environment. b. A set of characteristic products should be identified; 29.108 However, the power of this approach comes from being c. Transfers specific to environmental protection need to able to draw parallels between the physical and monetary be identified; flows to compare and contrast this environmental importance with the corresponding importance of the d. National expenditure on environmental protection can activities in economic terms. The hybrid supply and use or be calculated; input-output tables superimpose monetary values for products on their physical equivalents and add the balancing item of value added. Hybrid input-output tables e. The sectors financing the expenditure can be identified. have been successfully used to explore environmental themes such as greenhouse effects or solid waste. Examples 29.115 All these steps are described in detail in the SEEA manual. can be found in the SEEA manual. There is discussion there also on a set of characteristic products identified as the "environment industry" for comparable international use. An example of an 29.109 An example of a hybrid SEEA input-output table is given in environmental protection expenditure account is shown in table 29.2. table 29.3. Identifying environmental aspects of the central Asset accounts framework 29.116 For stocks and changes in stocks, the asset accounts 29.110 The second strand of the accounting system is to identify described in chapter 11 are used for natural resources, in precisely those monetary transactions in the SNA that are both value terms and physical units. In the SEEA, asset directly related to the environment. In terms of flows, this accounts may be compiled in physical terms for natural concerns environmental taxes, property income and resources that have no monetary value and thus do not property rights, and environmental protection, natural appear within the SNA asset boundary. For resources such resource use and management expenditure. as air and water that may not have a monetary value, nor even a stock value, accounts of changes in physical units may still be useful. Environmental taxes, property income and property rights Integrating environmental adjustments in the flow accounts 29.111 An environmental tax is one whose tax base is a physical unit (or proxy of it) that has a proven specific negative 29.117 The third and last main section of the SEEA is the external impact on the environment. Four types of taxes can be part of the satellite account. It relaxes the constraint which considered to be environmental; energy taxes, transport has been respected in the accounts described so far not to taxes, pollution taxes and resource taxes. As elsewhere in make any fundamental change to the SNA. The idea is the SNA, care has to be taken to distinguish between taxes simple, to convert hybrid tables to fully monetized tables and fees for a service. Landfill charges, for example, may by placing monetary values on those flows below and to the fall in the latter category even though levied by right of a hybrid table which have so far been expressed in government. physical terms only. However, although the idea is simple, implementing it is not. This part of the SEEA is more 29.112 Resource rent on natural assets is shown in the SNA as experimental and consensus on proposals made so far has property income when paid to another unit. As shown in not been reached. chapter 20, however, it is possible to identify the element of operating surplus corresponding to the resource rent on a Depletion natural asset used by the owner also. 29.118 Valuing inputs into the economic system is the first and 29.113 Another aspect of importance for the use of natural easier step. Since these inputs are incorporated into resources is the question of permits to use these over an products which are sold in the market place, in principle it extended period, as discussed in chapter 17. Permits may is possible to use direct means to assign a value for them relate to extraction of natural resources or the use of them based on market principles. Even within the SNA, such as a sink. valuations are sometimes made though the results are placed in the other changes in assets account rather than in A set of accounts for environmental protection the flow accounts. Thus another way of looking at the expenditure process of incorporating the use of environmental inputs into the system is to relocate some of the other changes in assets items into the accounts portraying transactions. In 29.114 A set of environmental protection accounts can be particular, if an environmental resource is not being used compiled using fairly standard satellite account techniques sustainably, an alternative measure of income allowing for according to the following steps: the consumption of natural capital as well as consumption 535 536 0RQHWDU\ GDWD LQ LWDOLFV LQ ELOOLRQV RI FXUUHQF\ XQLWV SK\VLFDO GDWD QRQ LWDOLF LQ PLOOLRQV RI WRQQHV (FRQRP\ 5HVLGXDOV 1DWLRQDO 3URGXFWV ,QGXVWULHV &RQVXPSWLRQ &DSLWDO 52: SURGXFWV 7RWDO HFRQRP\ 52: GHVWLQDWLRQ 0DWHULDO EDODQFH 7RWDO XVH GHVWLQDWLRQ 3K\VLFDO 0RQHWDU\ 3URGXFWV XVHG E\ 3URGXFWV XVHG IRU 3URGXFWV XVHG 3URGXFWV XVHG E\ 3URGXFWV LQGXVWU\ FRQVXPSWLRQ IRU FDSLWDO 52: H[SRUWV 3K\VLFDO System of National Accounts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able 29.2:Example of a hybrid supply and use table from the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able 29.3:Example of a combined supply and use table for environmental protection goods and services 537 Satellite accounts and other extensions System of National Accounts of fixed capital may be considered to take account of the the level of NDP of environmental impacts on natural and depletion of natural resources. man-made capital and on human health? Defensive expenditure 29.127 "Damage-adjusted income" is thus a first step on the way to converting GDP-type measures to welfare indices but many other aspects of welfare are deliberately ignored. 29.119 Some actions are already taken to limit residuals generation or to mitigate the impact of those which are emitted. These expenditures are sometimes referred to as defensive 3. Health satellite accounts expenditures. One possible way to adjust the macroeconomic aggregates is to treat this expenditure as 29.128 The health care industry is of significant size and capital formation with offsetting depreciation. importance in many countries in terms of the number of people employed and level of turnover and is always a Accounting for environmental degradation matter of significant policy concern. The System of Health Accounts (SHA) (Organisation for Economic Co-operation and Development, 2000) builds on experience over the 29.120 This is the most difficult part of environmental accounting previous 15 years of information being collected on health and one where there is still a wide divergence of views. care data. One of the main purposes of the manual was to There are two problems raised by the question of how to provide a framework for analysing health care systems incorporate the effects of degradation in the SNA. The first from an economic point of view, consistent with national is how to place a value on degradation; the second how to accounting rules. As part of this, the conceptual links locate this valuation in the accounts. between the SHA and health satellite accounts were examined. The manual is currently in the process of being 29.121 The variety of approaches advocated can be illustrated updated as a joint effort by the OECD, Eurostat and WHO, briefly in terms of the focus of attention. with a revised version expected about the end of 2010. 29.122 One approach is to focus on maintenance costing. (This is 29.129 In order to see how a health satellite account can be the approach taken in the 1993 version of the SEEA.) The developed it is useful to begin by looking at the SHA. There object of the exercise is to answer the question: What would are four categories of information provided: a functional the value of net domestic product have been if hypothetical classification of health care, an analysis of health care environmental standards were met using current costs and provider units, information on expenditure on health care current technologies? and information about the funding of health care. Each of these is described briefly in turn. 29.123 The problem with this approach is that if the question is posed in respect of significant changes in environmental Functional classification of health care standards, the resultant price rises involved are likely to bring about a change in behaviour that would affect the level of demand for those products. In turn this would show 29.130 The activities of health care cover the application of up either as a change in the level of output of those medical, paramedical and nursing knowledge and products or a change in the technology of production to technology, either by institutions or individuals, in pursuit reduce dependence on the newly expensive products. of the following goals: Nevertheless, for marginal changes in standards, this technique may be used to give an upper bound on the a. Promoting health and preventing disease; impact on NDP from moving to more rigorous environmental standards. The aggregates from such an b. Curing illness and reducing premature mortality; exercise are referred to as "environmentally adjusted". c. Caring for persons affected by chronic illness who 29.124 A second type of cost-based estimates, known as "greened require nursing care; economy modelling" attempts to resolve the problems raised by maintenance cost approaches for the non- d. Caring for persons with health-related impairment, marginal cases of changes in environment standards. They disability and handicaps who require nursing care; attempt to answer the question: What level of GDP could be achieved if steps were taken to internalize maintenance e. Assisting patients to die with dignity; costs? f. Providing and administering public health; 29.125 A particular application of greened economy models aims not just to determine a set of values for output, demand and so on which satisfy the national accounting balances but to g. Providing and administering health programmes, health determine levels of output which lead to levels of income insurance and other funding arrangements. that are sustainable over a given time period. It attempts to answer the question: What level of income and 29.131 Following from this there are three main functional environmental functions can be sustained indefinitely? classifications of health care; 29.126 Damage-based measures derive from the impact of actual a. Personal health care services and goods; residual generation. The biggest impact is on human health. They attempt to answer the question: What is the impact on b. Collective health care services; 538 Satellite accounts and other extensions c. Health care related functions. e. Health administration and health insurance; 29.132 Each of these headings is broken down into a number of f. Total current expenditure on health (the sum of the finer categories. Personal health care distinguishes services above); of curative care, services of rehabilitative care, services of long-term nursing care, ancillary services to health care and medical goods dispensed to outpatients. Collective health g. Gross capital formation in health care industries; care services are divided between preventive and public health services on the one hand and health administration h. Total expenditure on health. and health insurance on the other. Health-related functions include capital formation of health care provider 29.137 The production boundary of health care services is very institutions, education and training of health personnel, close to that of the SNA but with two exceptions. research and development in health, food, hygiene and Occupational health care is included within the SHA drinking water control, environmental health, whereas it is treated as an ancillary service in the SNA. The administration and provision of social services in kind to cash transfers to private households (the caregivers at assist those living with disease and impairment, and home) are treated as output of domestic services paid for by administration and provision of health-related cash the transfers. benefits. Health care provider units Funding of health care 29.133 The providers of health care are divided into the following 29.138 The funding of health care is divided between that provided categories: by general government, that from the private sector and that from the rest of the world. Within general government a distinction is made between the levels of government and a. Hospitals; social security funds. Within the private sector a distinction is made between private social insurance, other private b. Nursing and residential care facilities; insurance, private households, NPISHs and corporations excluding health insurance. c. Providers of ambulatory health care; Converting the SHA to health satellite accounts d. Retailers and other providers of medical goods; 29.139 The following steps are required in order to translate the e. Provision and administration of public health economic framework of the SHA into a health satellite programmes; account: f. Health administration and insurance; a. A comprehensive listing of goods and services considered specific to the production of health care g. Other industries (rest of the economy); services needs to be determined; h. Rest of the world. b. The boundary line of production to define total expenditure on health needs to be determined; 29.134 Each of these providers can be allocated to one or more of the institutional sectors of the SNA. c. The activities for which capital formation will be recorded need to be determined; Expenditure on health care d. Specific transactions need to be identified; 29.135 Total expenditure on health measures the final use by resident units of health care goods and services plus gross capital formation in health care provider industries e. The detailed analysis of transfers as an integral part of (institutions where health care is the predominant activity). health accounting needs to be provided; 29.136 Expenditure on health can be divided into the following f. Ultimate users and ultimate bearers of health expenses categories; need to be identified. a. Personal health care services; 29.140 One of the difficulties with establishing a list of characteristic products is that the CPC does not deal with b. Medical goods dispensed to outpatients; categories of health care services in the detail that is required for health accounts. Therefore a more detailed classification is required. Further, since health care is often c. Total personal expenditure on health; a public responsibility information drawn from administrative data is often inadequate to provide the d. Prevention and public health services; degree of detail that is required for a satellite account. 539 540 Table 8.2. SHA supply and use table (part 1) Total supply, Taxes on products Providers of health care services and goods Imports of purchasers' prices minus subsidies Total Principal Secondary Occupational Private Other Total health care System of National Accounts on products* producers producers health care households producers economy goods and Resources (home care) services Goods and services Output supply: Health care goods and services by function HC.1 Services of curative care HC.2 Services of rehabilitative care HC.3 Services of long-term nursing care HC.4Ancilliary services to health care HC.5 Medical goods dispensed to out-patients Total supply of personal health care HC.6 Prevention and public health services HC.7 Health administration and health insurance Total supply of health care services and goods Other products Total (*): Including trade and transport margins which are of negligible magnitude for health care services and goods for final use. Table 29.4:Example of a supply and use table from the System of Health Accounts Table 8.3. SHA input-output table (part 2) Total uses in Taxes on Providers of health care services and goods Exports of purchasers' products Total Principal Secondary Occupational Private Other Total health care Final consumption expenditure Gross prices minus producers producers health care households producers economy goods and Households NPISHs Government capital subsidies (home care) services formation Resources on products* Goods and services Intermediate consumption uses: Health care goods and services by function HC.1 Services of curative care HC.2 Services of rehabilitative care HC.3 Services of long-term nursing care HC.4 Ancilliary services to health care HC.5 Medical goods dispensed to out-patients Total personal health care HC.6 Prevention and public health services HC.7 Health administration and health insurance Total health care services and goods Other products Total Total gross value added/GDP Compensation of employees Taxes on products Other taxes on production Subsidies on products Other subsidies on production Operating surplus, net Mixed income, net Consumption of fixed capital Operating surplus, gross Mixed income, gross Total Labour inputs Gross fixed capital formation Table 29.4 (cont):Example of a supply and use table from the System of Health Accounts Stock of fixed assets, net (*): Including trade and transport margins which are of negligible magnitude for health care services and goods for final use. 541 Satellite accounts and other extensions System of National Accounts 29.141 Despite these difficulties it is proposed that four additional the value of leisure when some of these activities are accounts would extend the SHA into a satellite account for valued but this is not considered in this section. health: 29.147 There is fairly widespread agreement that the way in which a. Production account and health care value added by the to start measuring household services for own consumption health care industry; is by means of measuring the amount of time spent on them. There is increasing interest in conducting time use b. Intermediate inputs to the production of health care surveys that make such information available. Time use industries by type of input; surveys, however, are not unambiguous. There is the question of multitasking. For example, it is possible for somebody to prepare a meal, keep an eye on a small child c. Gross capital stock of the health care industry; and help an older child with their homework all at the same time. Should the total amount of time be divided by three or d. An input-output table of health care industries. should each activity count the whole amount of time spent? 29.142 Table 29.4 shows indicative supply and use tables that 29.148 There is a question about the borderline with leisure. Some might be drawn up for health care. people would regard gardening as a chore; others may see it as a leisure activity. While looking after children on a full- time basis clearly counts as a household service, does the 4. Unpaid household activity amount of time grandparents spend with their grandchildren necessarily count as household services or is 29.143 This section is not concerned with a normal satellite this a leisure activity? account. It is difficult to determine products that are characteristic solely of unpaid household activity nor are 29.149 There is a question about how to value household activity. there agreed standard tables to be produced. However, it is One possibility is to have a complete production account an area of considerable analytical and policy interest and an and, for example, to consider the food purchased by a area where there is considerable research work being household as an input into the preparation of meals. In this undertaken currently. The purpose of this section therefore way households would consume very few goods directly; is simply to report on the approaches being considered and many of them would be treated as intermediate give some indication of where further information on consumption to some kind of service output. The ongoing research may be found. alternative, which is usually the approach adopted, is to leave the inputs as household consumption expenditure and 29.144 It is convenient to separate the consideration into three simply make separate estimates of the time that has not areas; been previously valued. a. unpaid household services; 29.150 The basic question in valuing the time spent on household services is whether to use the opportunity cost of the person b. a consideration of the treatment of consumer durables; performing the task or a comparator cost. Both of these present difficulties. The opportunity cost seems appealing because application of economic theory suggests that c. the question of volunteer labour in general. somebody capable of earning more money than the comparator would indeed earn the extra money and pay Unpaid household services somebody else to undertake the household tasks. But this is clearly not what happens in practice. Comparator costs may be difficult to come by and may be unrealistic. A 29.145 The question of valuing household services produced for professional plumber, for example, may be able to fix a own consumption is interesting in its own right. In addition leaking tap in a matter of minutes whereas an amateur may it is often argued that the growth of GDP in industrialized spend an hour over it. If the plumber's wage is applied to countries since the end of the Second World War is due in the time spent by the amateur, clearly the amount of part to the increasing participation in the labour force of the production estimated will be unrealistically high. women previously undertaking only household activities. It is often argued that, had household activities been valued, the women's change of occupation would not have led to 29.151 Various attempts to resolve the question of valuing output such large increases in GDP. For long-term analysis can be found in the literature. Examples include Household therefore, there may be quite considerable interest in Production and Consumption: Proposal for a Methodology placing a value on unpaid household activities. of Household Satellite Accounts (Eurostat, 2003), Household Production and Consumption in Finland, 2001 - Household Satellite Account (Statistics Finland and the 29.146 There is no ambiguity in the central framework of the SNA; National Consumer Research Centre, 2006) and Beyond the unpaid household services are excluded from the Market: Designing Non-market Accounts for the United production boundary. However, in a satellite account it is States (United States National Research Council, 2005). perfectly possible to extend the production boundary so that such services may be included. Even with an extended production boundary, however, it is unlikely that services Consumer durables that cannot be performed by a third party such as eating, sleeping and exercising would be treated as part of the 29.152 It is frequently argued that consumer durables should be production boundary. Some work has been done to estimate treated as a form of fixed capital formation by households 542 Satellite accounts and other extensions and not simply as final consumption expenditure. It is true individuals providing the services a wage but may provide that there is a grey area concerning some household them with food and accommodation. In principle, these equipment. In some circumstances, the cost of a house may costs should be treated as wages and salaries in kind. include all kitchen equipment such as cookers, refrigerators and washing machines; in other cases these appliances are 29.158 It is possible for there to be some volunteer labour within treated as consumption expenditure. government, for example teaching assistants. There may be some unpaid people working in corporations, for example 29.153 The main reason for excluding consumer durables from the as part of a work experience scheme, but volunteer labour asset boundary is linked to the exclusion of household in market NPIs is quite common, for example in a museum services. If washing clothes for the household were to be an or art gallery as guides or custodians. activity within the production boundary when undertaken by machine, it is not clear why it would be excluded when 29.159 Even if the owner of a quasi-corporation or an enterprise undertaken by hand. does not take his salary, it could be argued that in principle this should be treated as first the receipt of compensation of 29.154 Nevertheless there is certainly interest in monitoring the employees and then an injection of capital of the same acquisition of consumer durables. The acquisition is often amount into the enterprise. It is unlikely to be recorded as cyclical in nature, although sometimes variation in such but this case is clearly different in kind from the expenditure may simply follow the introduction of a new normal understanding of voluntary labour. product. 29.160 The question of valuing volunteer labour is the same as that 29.155 There are two approaches that could be taken in a satellite of valuing the time spent on unpaid household activities account. The first is to adopt an alternative treatment for and the same alternatives are available. If voluntary labour consumer durables at the same time as valuing unpaid were valued, the following accounting entries would be household production. The other is to leave unpaid necessary: household production excluded from the production boundary but consider replacing consumer durables by an estimate of the services they provide. Treating consumer a. compensation of employees of the unit employing the durables as assets is also of interest in the context of volunteer labour; measuring household saving and wealth. Examples of this type of analysis can be found in Durable Goods and their b. income for the household to which the volunteer Effect on Household Saving Ratios in the Euro Area (Jalava belongs; et al, 2006). c. a transfer of the same amount by the volunteer to the Volunteer labour employing unit; 29.156 The provision of unpaid services to households is excluded d. final consumption expenditure of the employing unit; from the production boundary. This exclusion applies whether the household being provided with the services is e. almost always social transfers in kind. the one to which the volunteer belongs or another. 29.157 If a volunteer is providing services to a non-market This is the same as the way it is recommended that labour producer or to a market NPI, the activity in which they inputs to collective construction projects are measured. participate is included within the production boundary. However, the value of the services provided appears at cost. 29.161 Even in the case of market NPIs, as explained in chapter This may be strictly zero or it may be nominal, including 23, it is possible that in a satellite context the market NPI wages and salaries in kind. For example, religious orders could be regarded as undertaking non-market activity also offering health and education services may not pay the and this would include the activity of volunteers. 543 System of National Accounts 544 Annex 1: The classification hierarchies of the SNA and associated codes A. Introduction A1.1 As explained in chapter 2, the accounts of the SNA are built around a small number of conceptual elements, in particular sectors, transactions and classifications of the items subject to transactions and other flows, especially assets and liabilities. For each of these elements, a hierarchical classification exists. Accounts can be compiled at greater or lesser degrees of detail by using higher or lower levels of these hierarchies. In some cases, a full specification requires information about two or even three hierarchies. For example, entries in the accounts typically refer to a sector and a transaction or other flow and may specify what type of product or asset is the subject of the entry. A1.2 As well as the classification hierarchies of the conceptual elements particular to the SNA, use is also made of other classification systems, including those describing the industrial classification used for production and classifications of goods and services, some of which describe the nature of the items and others that describe the purpose they are intended to serve. A1.3 Summary accounts are regularly collected by international agencies and to facilitate this, a set of standardized codes is used to identify the items, usually in time series form, that are the subject of data transmission. A1.4 The purpose of this annex is to provide more information on each of these aspects. Section B lists in full detail the various classification hierarchies of the system. International data collection does not cover all the detail shown but where collection is common and codes are developed, these are shown alongside the entries in the classification. A1.5 The main international classification systems external to the SNA that are frequently used and referred to are the following: COFOG, COICOP and COPNI Publication reference: United Nations. 2000. Classification of expenditure according to purpose: Classification of the functions of government (COFOG), Classification of individual consumption according to purpose (COICOP), Classification of the purposes of nonprofit institutions serving households (COPNI), Classification of the outlays of producers according to purpose (COPP). Department of Economic and Social Affairs, Statistics Division, Statistical papers, Series M, No 84. United Nations, New York. Web reference: http://unstats.un.org/unsd/class/default.asp ISIC Publication reference: United Nations. 2008. International Standard Industrial Classification of all Economic Activities (ISIC) Revision 4. Department of Economic and Social Affairs, Statistics Division, Statistical papers, Series M, No 4, Rev. 4. United Nations, New York. Web reference: http://unstats.un.org/unsd/class/default.asp CPC Publication reference: United Nations. 2008. Central Product Classification (CPC) Version 2. Department of Economic and Social Affairs, Statistics Division, Statistical papers, Series M, No 77, Ver. 2. United Nations, New York. Web reference: http://unstats.un.org/unsd/class/default.asp SITC Publication reference: United Nations. 2006. Standard Industrial Trade Classification Revision. Department of Economic and Social Affairs, Statistics Division, Statistical papers, Series M, No 34, Rev 4. United Nations, New York. Web reference: http://unstats.un.org/unsd/trade/default.htm HS Publication reference: World Customs Organization. 2007. Harmonized Commodity Description and Coding System, Revision 4 Brussels. Web reference: http://publications.wcoomd.org/index.php 545 System of National Accounts B. The classification hierarchies of the SNA A1.6 Four sets of hierarchies are described. The first of these relates to sectors. The second covers transactions and the third covers other flows. The last set relates to stocks. Each set is described in turn in the following sections. 1. Sectors (S codes) A1.7 The sectoring principles of the SNA are described in chapter 4. The following list brings all the aspects of the potential types of disaggregation together in a comprehensive list. The list is extensive and it is unlikely that all aspects will be covered by any country in all periods as a matter of course. Some of the possible breakdowns may not contain any institutional units and others may contain so few that publication at this degree of detail is not possible. Nevertheless, the full list is shown for the sake of completeness. A1.8 Some abbreviations, standard within the SNA, are used in detailing sector codes. A special group of units are those known as non- profit institutions, designated as NPIs. Within the corporations sectors, units that are not NPIs are referred to as for-profit institutions, or FPIs. It is worth reiterating that an NPI is not prohibited from making a profit, it is simply prohibited from distributing any profit it makes to its owners. Thus NPIs within the corporations sectors are market producers just as the FPIs are. A1.9 Not all NPIs are market producers. Those that are not are divided between those controlled by government, where they are still referred to as NPIs, and those not controlled by government. All of these serve households and form a separate sector of their own. They are known as non-profit institutions serving households, or NPISHs. A1.10 Not all entries in the classification have an assigned code; only those that are regularly used in international transmission programmes. A1.11 The full list of institutional sectors and subsectors is shown below. Total economy (S1) Non-financial corporations (S11) Non-financial corporations ­ NPIs Non-financial corporations ­ FPIs Public non-financial corporations Public non-financial corporations ­ NPIs Public non-financial corporations ­ FPIs National private non-financial corporations National private non-financial corporations ­ NPIs National private non-financial corporations ­ FPIs Foreign controlled non-financial corporations Foreign controlled non-financial corporations ­ NPIs Foreign controlled non-financial corporations ­ FPIs Financial corporations (S12) Central bank (S121) Deposit-taking corporations, except the central bank (S122) Deposit-taking corporations ­ NPIs Deposit-taking corporations ­ FPIs Public deposit-taking corporations Public deposit-taking corporations ­ NPIs Public deposit-taking corporations ­ FPIs National private deposit-taking corporations National private deposit-taking corporations ­ NPIs National private deposit-taking corporations ­ FPIs Foreign controlled deposit-taking corporations Foreign controlled deposit-taking corporations ­ NPIs Foreign controlled deposit-taking corporations ­ FPIs 546 The classification hierarchies of the SNA and associated codes Money market funds (S123) Money market funds ­ NPIs Money market funds ­ FPIs Public money market funds Public money market funds ­ NPIs Public money market funds ­ FPIs National private money market funds National private money market funds ­ NPIs National private money market funds ­ FPIs Foreign controlled money market funds Foreign controlled money market funds ­ NPIs Foreign controlled money market funds ­ FPIs Non-MMF investment funds (S124) Non-MMF investment funds ­ NPIs Non-MMF investment funds ­ FPIs Public non-MMF investment funds Public non-MMF investment funds ­ NPIs Public non-MMF investment funds ­ FPIs National private non-MMF investment funds National private non-MMF investment funds ­ NPIs National private non-MMF investment funds ­ FPIs Foreign controlled non-MMF investment funds Foreign controlled non-MMF investment funds ­ NPIs Foreign controlled non-MMF investment funds ­ FPIs Other financial intermediaries, except insurance corporations and pension funds (S125) Other financial corporations ­ NPIs Other financial corporations ­ FPIs Public other financial corporations Public other financial corporations ­ NPIs Public other financial corporations ­ FPIs National private other financial corporations National private other financial corporations ­ NPIs National private other financial corporations ­ FPIs Foreign controlled other financial corporations Foreign controlled other financial corporations ­ NPIs Foreign controlled other financial corporations ­ FPIs Financial auxiliaries (S126) Financial auxiliaries ­ NPIs Financial auxiliaries ­ FPIs Public financial auxiliaries Public financial auxiliaries ­NPIs Public financial auxiliaries ­ FPIs National private financial auxiliaries National private financial auxiliaries ­ NPIs National private financial auxiliaries ­ FPIs Foreign controlled financial auxiliaries Foreign controlled financial auxiliaries ­ NPIs Foreign controlled financial auxiliaries ­ FPIs Captive financial institutions and money lenders (S127) Captive financial institutions ­ NPIs Captive financial institutions ­ FPIs Public captive financial institutions Public captive financial institutions ­ NPIs Public captive financial institutions ­ FPIs National private captive financial institutions National private captive financial institutions ­ NPIs National private captive financial institutions ­ FPIs Foreign controlled captive financial institutions Foreign controlled captive financial institutions ­ NPIs Foreign controlled captive financial institutions ­ FPIs 547 System of National Accounts Insurance corporations (S128) Insurance corporations ­ NPIs Insurance corporations ­ FPIs Public insurance corporations Public insurance corporations ­ NPIs Public insurance corporations ­ FPIs National private insurance corporations National private insurance corporations ­ NPIs National private insurance corporations ­ FPIs Foreign controlled insurance corporations Foreign controlled insurance corporations ­ NPIs Foreign controlled insurance corporations ­ FPIs Pension funds (S129) Pension funds ­ NPIs Pension funds ­ FPIs Public pension funds Public pension funds ­ NPIs Public pension funds ­ FPIs National private pension funds National private pension funds ­ NPIs National private pension funds ­ FPIs Foreign controlled pension funds Foreign controlled pension funds ­ NPIs Foreign controlled pension funds ­ FPIs A1.12 General government social security is organized differently in different countries and two coding systems of general government are presented to allow for this. When social security is organized by one unit for all levels of government, total general government consists of four subsectors, one for each level of government and one for the social security unit. When each level of government includes its own social security provision, then there are only three subsectors, one for each level of government including social security provision. The theoretical hierarchical structure for government is as follows. General government (S13) General government social security General government excluding social security General government non-profit institutions Central government Central government social security Central government excluding social security Central government non-profit institutions State government State government social security State government excluding social security State government non-profit institutions Local government Local government social security Local government excluding social security Local government non-profit institutions A1.13 In practice, the alternative partial structures, with associated codes, are as follows. General government (S13) General government (S13) Social security is one separate institutional unit for all Social security is not a separate institutional unit but is levels of general government included at the appropriate levels of general government Central government excluding social security (S1311) Central government including social security (S1321) State government excluding social security (S1312) State government including social security(S1322) Local government excluding social security (S1313) Local government including social security (S1323) General government social security (S1314) 548 The classification hierarchies of the SNA and associated codes Households (S14) Employers (S141) Own account workers (S142) Employees (S143) Recipients of property and transfer income (S144) Recipients of property income (S1441) Recipients of pensions (S1442) Recipients of other transfers (S1443) Non-profit institutions serving households (S15) National private Foreign controlled Rest of the world (S2) 2. Classifications of transactions A1.14 The transaction classifications relate to: a. Products (including produced assets); b. Non-produced assets; c. Distributive transactions. Transactions in products (P codes) A1.15 Product codes are used to describe the supply and use of goods and services produced within the SNA. All the items listed appear in the goods and services account. In addition, output and intermediate consumption appear in the production account, final and actual consumption expenditure appear in the use of income accounts and capital formation appears in the capital account. A1.16 All entries in the classification can be further elaborated by applying a second classification to that shown here. For capital formation the asset classification (codes AN1) is used within the accumulation accounts. For output, intermediate consumption and final consumption product codes as in the CPC could be used. For final consumption, functional codes could be used, COFOG for government consumption, COICOP for households and COPNI for NPISHs. For imports and exports, either SITC or HS codes could be used. A1.17 Capital formation and fixed capital formation (as well as some of the balancing items) may be shown either gross or net of consumption of fixed capital. Gross entries are shown with a trailing g, net entries by a trailing n. The qualifier c is used for consumption of fixed capital, the difference between gross and net fixed capital measures. Output (P1) Market output (P11) Output for own final use (P12) Non-market output (P13) Intermediate consumption (P2) Final consumption expenditure (P3) Individual consumption expenditure (P31) Collective consumption expenditure (P32) Actual final consumption (P4) Actual individual consumption (P41) Actual collective consumption (P42) 549 System of National Accounts Capital formation (P5) Gross fixed capital formation (P51g) Consumption of fixed capital (-) (P51c) Consumption of fixed capital on gross operating surplus (-) (P51c1) Consumption of fixed capital on gross mixed income (-) (P51c2) Net fixed capital formation (P51n) Acquisitions less disposals of fixed assets (P511) Acquisitions of new fixed assets (P5111) Acquisitions of existing fixed assets (P5112) Disposals of existing fixed assets (P5113) Costs of ownership transfer on non-produced assets (P512) Changes in inventories (P52) Acquisitions less disposals of valuables (P53) Exports of goods and services (P6) Exports of goods (P61) Exports of services (P62) Imports of goods and services (P7) Imports of goods (P71) Imports of services (P72) Transactions in non-produced assets (NP codes) A1.18 Non-produced assets can be the subject of some of the same transactions as products (capital formation, imports and exports). The codes used for transactions in non-produced assets can be further disaggregated if desired by appending the classification of non- produced non-financial assets, AN2. Acquisitions less disposals of non-produced assets (NP) Acquisitions less disposals of natural resources (NP1) Acquisitions less disposals of contracts, leases and licences (NP2) Purchases less sales of goodwill and marketing assets (NP3) Distributive transactions (D codes) A1.19 Distributive transaction codes appear in all the sequence of accounts from the generation of income account up to and including the capital account. As their name implies, they show the impact of distribution and redistribution of income (and saving in the case of capital transfers). For all distributive transactions, the receivable entries for all sectors including the rest of the world must balance the payable entries. A1.20 Four groups of transactions appear in the generation of income account and the allocation of primary income account. These are compensation of employees, taxes on production and imports, subsidies and property income. Compensation of employees (D1) Wages and salaries (D11) Employers' social contributions (D12) Employers' actual social contributions (D121) Employers' actual pension contributions (D1211) Employers' actual non-pension contributions(D1212) Employers' imputed social contributions (D122) Employers' imputed pension contributions (D1221) Employers' imputed non-pension contributions (D1222) Taxes on production and imports (D2) Taxes on products (D21) Value added type taxes (VAT) (D211) Taxes and duties on imports excluding VAT (D212) Import duties (D2121) Taxes on imports excluding VAT and duties (D2122) 550 The classification hierarchies of the SNA and associated codes Export taxes (D213) Taxes on products except VAT, import and export taxes (D214) Other taxes on production (D29) Subsidies (D3) Subsidies on products (D31) Import subsidies (D311) Export subsidies (D312) Other subsidies on products (D319) Other subsidies on production (D39) Property income (D4) Investment income Interest (D41) Distributed income of corporations (D42) Dividends (D421) Withdrawals from income of quasi-corporations (D422) Reinvested earnings on foreign direct investment (D43) Investment income disbursements (D44) Investment income attributable to insurance policyholders (D441) Investment income payable on pension entitlements (D442) Investment income attributable to collective investment fund share holders (D443) Rent (D45) A1.21 Four groups of transactions appear in the secondary distribution of income account. These are current taxes on income, wealth, etc., net social contributions, social benefits and other current transfers. Together they represent all current transfers in the SNA except social transfers in kind. A1.22 Employers' contributions appear in both the generation of income account and allocation of primary income account as payable by employers and receivable by employees. In the secondary distribution of income account, these amounts are payable by households and receivable by those administering social insurance schemes. In order to show exactly the same value in each case, the deduction of the charge that represents part of the output of the schemes and final consumption of the beneficiary households is also shown in the secondary distribution of income account as a separate item. The item social insurance scheme service charges is thus an adjustment item only and not a distributive transaction in itself. Current transfers (other than social transfers in kind) Current taxes on income, wealth, etc. (D5) Taxes on income (D51) Other current taxes (D59) Net social contributions (D61) Employers' actual social contributions (D611 = D121) Employers' actual pension contributions (D6111 = D1211) Employers' actual non-pension contributions (D6112 = D1212) Employers' imputed social contributions (D612 = D122) Employers' imputed pension contributions (D6121 = D1221) Employers' imputed non-pension contributions (D6122 = D1222) Households' actual social contributions (D613) Households' actual pension contributions (D6131) Households' actual non-pension contributions (D6132) Households' social contribution supplements (D614) Households' pension contribution supplements (D6141) Households' non-pension contribution supplements (D6142) Social insurance scheme service charges(-) Social benefits other than social transfers in kind (D62) Social security benefits in cash (D621) Social security pension benefits (D6211) Social security non-pension benefits in cash (D6212) Other social insurance benefits (D622) Other social insurance pension benefits (D6221) 551 System of National Accounts Other social insurance non-pension benefits (D6222) Social assistance benefits in cash (D623) Other current transfers (D7) Net non-life insurance premiums (D71) Net non-life direct insurance premiums (D711) Net non-life reinsurance premiums (D712) Non-life insurance claims (D72) Non-life direct insurance claims (D721) Non-life reinsurance claims (D722) Current transfers within general government (D73) Current international cooperation (D74) Miscellaneous current transfers (D75) Current transfers to NPISHs (D751) Current transfers between resident and non-resident households (D752) Other miscellaneous current transfers (D759) A1.23 Transactions concerning social transfers in kind and the adjustment for the change in pension entitlements appear in the redistribution of income in kind account, the use of income account and the use of adjustable disposable income account. Social transfers in kind (D63) Social transfers in kind - non-market production (D631) Social transfers in kind - purchased market production (D632) Adjustment for the change in pension entitlements (D8) A1.24 Capital transfers appear in the capital account. By convention, as explained in chapter 10, all capital transfers are shown on the right-hand side of the account, with the payables having a negative sign. The codes for capital transfers, therefore, have either r for receivable or p for payable appended to the basic code. Capital transfers, receivable (D9r) Capital taxes (D91r) Investment grants (D92r) Other capital transfers (D99r) Capital transfers, payable (D9p) Capital taxes (D91p) Investment grants (D92p) Other capital transfers (D99p) Transactions in financial assets and liabilities (F codes)) A1.25 The codes for transactions in financial assets and liabilities follow a slightly different pattern from those used for non-financial assets because there is only one type of transaction shown in the financial account, either acquisition of or disposals of financial assets and liabilities. The hierarchical element comes from itemizing the assets and liabilities concerned. There is a perfect match between the codes used for stock levels (positions) of financial assets and liabilities and the flows in them, except that the stocks have prefix AF and the transactions F. A1.26 The full list of codes for transactions in financial assets and liabilities is shown below. Net acquisition of financial assets/Net incurrence of liabilities (F) Monetary gold and SDRs (F1) Monetary gold (F11) SDRs (F12) Currency and deposits (F2) Currency (F21) Transferable deposits (F22) Inter-bank positions (F221) 552 The classification hierarchies of the SNA and associated codes Other transferable deposits (F229) Other deposits (F29) Debt securities (F3) Short-term (F31) Long-term (F32) Loans (F4) Short-term (F41) Long-term(F42) Equity and investment fund shares (F5) Equity (F51) Listed shares (F511) Unlisted shares (F512) Other equity (F519) Investment fund shares/units (F52) Money market fund shares/units (F521) Non-MMF investment fund shares/units (F522) Insurance, pension and standardized guarantee schemes (F6) Non-life insurance technical provisions (F61) Life insurance and annuity entitlements (F62) Pension entitlements (F63) Claims of pension funds on pension managers (F64) Entitlements to non-pension benefits (F65) Provisions for calls under standardized guarantees (F66) Financial derivatives and employee stock options (F7) Financial derivatives (F71) Options (F711) Forwards (F712) Employee stock options (F72) Other accounts receivable/payable (F8) Trade credits and advances (F81) Other accounts receivable/payable (F89) 3. Other flows A1.27 Other flows comprise the entries appearing in the other changes in assets account and balancing and net worth items. Entries in the other changes in assets account (K codes) A1.28 Codes K1 to K6 relate to other flows in the changes in the volume of assets account. K7 codes show the holding gains and losses appearing in the revaluation account. Economic appearance of assets (K1) Economic disappearance of non-produced assets (K2) Depletion of natural resources (K21) Other economic disappearance of non-produced assets (K22) Catastrophic losses (K3) Uncompensated seizures (K4) Other changes in volume n.e.c. (K5) 553 System of National Accounts Changes in classification (K6) Changes in sector classification and structure (K61) Changes in classification of assets and liabilities (K62) Nominal holding gains and losses (K7) Neutral holding gains and losses (K71) Real holding gains and losses (K72) Balancing and net worth items (B codes) A1.29 The balancing items of the current accounts appear with codes B1 to B8. Each of these may be shown gross or net of consumption of fixed capital. To indicate which is the case, g or n is appended to the end of the code. A1.30 The B10 codes all relate to changes in net worth. Like balancing items, these are accounting constructs derived by deducting entries on one side of the account from the entries on the other. However, while balancing items show the excess of right-hand side entries over those on the left-hand side, net worth items show the excess of entries on the left-hand side of the account over those on the right-hand side. A1.31 Code B11, external balance of goods and services, is an item from the rest of the world account. It has no direct counterpart in the total economy sectors but added to gross (or net) domestic expenditure for the total economy gives gross (or net) domestic product. Code B12, current external balance, is also from the rest of the world account and is analogous to saving for a domestic sector when the external balance of goods and services is taken in place of value added. A1.32 Code B90, unlike all the other codes in this section, relates to stock positions and not flows. It shows the value of net worth calculated as the excess of assets over liabilities. A1.33 The full list of balancing and net worth items is shown below. Value added, gross / Gross domestic product (B1g) Operating surplus, gross (B2g) Mixed income, gross (B3g) Entrepreneurial income(B4g) Balance of primary incomes, gross / National income, gross (B5g) Disposable income, gross (B6g) Adjusted disposable income, gross (B7g) Saving, gross (B8g) Net lending (+) / net borrowing (­) (B9) Changes in net worth (B10) Changes in net worth due to saving and capital transfers (B101) Changes in net worth due to other changes in volume of assets (B102) Changes in net worth due to nominal holding gains and losses(B103) Changes in net worth due to neutral holding gains and losses (B1031) Changes in net worth due to real holding gains and losses (B1032) External balance of goods and services (B11) Current external balance (B12) Net worth (B90) 554 The classification hierarchies of the SNA and associated codes 4. Entries related to stocks of assets and liabilities Balance sheet entries (L codes) A1.34 For a single balance sheet, as for the financial account, the only codes necessary are those giving the details of assets by type, using AN and AF codes. However, an account can be drawn up showing the stock levels at the start (LS) and end (LE) of a period, and the total changes between them (LX). All three codes need to be qualified by asset types. The LX entries are the sum of the entries of P5, NP, F and K codes for the assets in question for the period covered. A1.35 From the entries in the opening balance sheet a value of net worth (B90) can be calculated. The difference between this and the value of B90 in the closing balance sheet must be equal to the balance of all the LX codes, which must also be equal to the value for B10. Opening balance sheet (LS) Changes in balance sheet (LX) Closing balance sheet (LE) Non-financial assets (AN codes) A1.36 Transactions in non-financial assets are classified by the purpose for which the assets are acquired. All assets serve as a store of value but, with the exception of valuables that are solely a store of value, other non-financial assets are primarily acquired for use in production. The AN codes, given in full below, combine some elements of function with a descriptive code. A desk, for example, could be part of AN113, machinery and equipment, or almost any of the inventory codes or even as a valuable. A1.37 The classification of non-financial assets is split initially between produced (AN1) and non-produced assets (AN2). The three major subheadings for produced assets are fixed assets (AN11), inventories (AN12) and valuables (AN13). The three major sub- headings for non-produced assets are natural resources (AN21), contracts, leases and licences (AN22) and purchases less sales of goodwill and marketing assets (AN23). A1.38 The entry for costs of ownership transfer on non-produced assets (AN116) is anomalous. The flow exists and is treated as part of fixed capital formation, that is as the acquisition of fixed assets. However, when stock levels are itemized, the value of these costs of ownership transfer is included with the non-produced assets to which they refer and so are not shown separately as part of AN11. The item is included in the full list, shown below, for expository purposes only. Produced non-financial assets (AN1) Fixed assets by type of asset (AN11) Dwellings (AN111) Other buildings and structures (AN112) Buildings other than dwellings (AN1121) Other structures (AN1122) Land improvements (AN1123) Machinery and equipment (AN113) Transport equipment (AN1131) ICT equipment (AN1132) Other machinery and equipment(AN1133) Weapons systems (AN114) Cultivated biological resources (AN115) Animal resources yielding repeat products (AN1151) Tree, crop and plant resources yielding repeat products (AN1152) (Costs of ownership transfer on non-produced assets (AN116)) Intellectual property products (AN117) Research and development (AN1171) Mineral exploration and evaluation (AN1172) Computer software and databases (AN1173) Computer software (AN11731) Databases(AN11732) Entertainment, literary or artistic originals (AN1174) Other intellectual property products (AN1179) Inventories by type of inventory (AN12) Materials and supplies (AN121) Work-in-progress (AN122) Work-in-progress on cultivated biological assets (AN1221) 555 System of National Accounts Other work-in-progress (AN1222) Finished goods (AN123) Military inventories (AN124) Goods for resale (AN125) Valuables (AN13) Precious metals and stones (AN131) Antiques and other art objects (AN132) Other valuables (AN133) Non-produced non-financial assets (AN2) Natural resources (AN21) Land (AN211) Mineral and energy reserves (AN212) Non-cultivated biological resources (AN213) Water resources (AN214) Other natural resources (AN215) Radio spectra (AN2151) Other (AN2159) Contracts, leases and licences (AN22) Marketable operating leases (AN221) Permissions to use natural resources (AN222) Permissions to undertake specific activities (AN223) Entitlement to future goods and services on an exclusive basis (AN224) Purchases less sales of goodwill and marketing assets (AN23) Financial assets (AF codes) A1.39 As explained in the section on transactions in financial assets and liabilities, conceptually there is a one-to-one match between those F codes and the stock levels or positions (AF codes). In practice, though, balance sheet data may be less detailed and not exist beyond the first-level breakdown, shown below. If desired, however, the AF codes can be disaggregated in line with the detail provided for F codes. Monetary gold and SDRs (AF1) Currency and deposits (AF2) Debt securities (AF3) Loans (AF4) Equity and investment fund shares/units (AF5) Insurance, pension and standardized guarantee schemes (AF6) Financial derivatives and employee stock options (AF7) Other accounts receivable/payable (AF8) C. Supplementary items A1.40 At various places, mention is made of the possibility of itemizing supplementary or memorandum items. A full list of such suggestions follows with an indication of how supplementary codes may be constructed. A general convention is that a supplementary code begins with X and is linked to the code of a standard item by building on the code of that item. 1. Non-performing loans A1.41 The following codes apply to stocks and flows of non-performing loans mentioned in chapters 11 and 13. Since loans have the codes AF4 and F4, the supplementary codes begin XAF4 for stocks and XF4 for flows. The codes for stocks are: XAF4_NNP Loans: nominal value, non-performing 556 The classification hierarchies of the SNA and associated codes XAF4_MNP Loans: market value, non-performing and the associated flows XF4_NNP Loans: nominal value, non-performing XF4_MNP Loans: market value, non-performing In both sets of codes, the underscore is a placeholder for the detailed codes for loans where relevant, for example, on the balance sheet. XAF41NNP Short-term loans: nominal value, non-performing XAF42MNP Long-term loans: market value, non-performing 2. Capital services A1.42 The following codes apply to capital services described in chapter 20. XCS Capital services XCSC Capital services ­ Corporations and general government P51c1 Consumption of fixed capital XRC Return to capital XOC Other costs of capital XCSU Capital services ­ Unincorporated enterprises P51c2 Consumption of fixed capital XRU Return to capital XOU Other costs of capital 3. Pensions table A1.43 The following codes apply to the supplementary table described in part 2 of chapter 17. Different codes are proposed for the columns and rows of the table. Columns A1.44 In the Column description the letter "W" corresponds to "non-government" and the numbers in these codes refer to the corresponding institutional sectors. a. Liabilities recorded in the main sequence of accounts · Schemes where responsibility for the design and implementation lies outside general government XPC1W Defined contribution schemes XPB1W Defined benefit schemes XPCB1W Total · Schemes where responsibility for the design and implementation lies within general government XPCG Defined contribution schemes · General government employee defined benefit schemes XPBG12 In the financial corporations sector XPBG13 In the general government sector b. Liabilities not recorded in the main sequence of accounts XPBOUT13 In the general government sector XP1314 Social security pension schemes XPTOT Total pension schemes XPTOTNRH Of which: Non-resident households 557 System of National Accounts Rows a. Opening balance sheet XAF63LS Pension entitlements b. Transactions XD61p Social contributions relating to pension schemes XD6111 Employer actual social contributions XD6121 Employer imputed social contributions XD6131 Household actual social contributions XD6141 Household social contribution supplements XD619 Other (actuarial) accumulation of pension entitlements in social security funds XD62p Pension benefits XD8 Adjustment for the change in pension entitlements XD91 Change in pension entitlements due to transfers of entitlements XD92 Changes in entitlements due to negotiated changes in scheme structure c. Other economic flows XK7 Revaluations XK5 Other changes in volume d. Closing balance sheet XAF63LE Pension entitlements e. Related indicators XP1 Output XAFN Assets held by pension schemes at end-year 4. Consumer durables A1.45 Consumer durables are referred to in chapters 3 and 13. They are coded using X as a prefix plus DHHCE (durable household consumption expenditure) plus a one digit affix for subgroups and two digits for the items. The corresponding COICOP numbers are also provided. COICOP SNA codes XDHHCE1 Furniture and household appliances 05.1.1 XDHHCE11 Furniture and furnishings 05.1.2 XDHHCE12 Carpets and other floor coverings 05.3.1 XDHHCE13 Major household appliances whether electric or not 05.5.1 XDHHCE14 Major tools and equipment for house and garden XDHHCE2 Personal transport equipment 07.1.1 XDHHCE21 Motor cars 07.1.2 XDHHCE22 Motor cycles 07.1.3 XDHHCE23 Bicycles 07.1.4 XDHHCE24 Animal drawn vehicles XDHHCE3 Recreational and entertainment goods 08.2.0 XDHHCE31 Telephone and telefax equipment 09.1.1 XDHHCE32 Equipment for the reception, recording and reproduction of sound and pictures 09.1.2 XDHHCE33 Photographic and cinematographic equipment and optical instruments 09.1.3 XDHHCE34 Information processing equipment 09.2.1 XDHHCE35 Major durables for outdoor recreation 09.2.2 XDHHCE36 Musical instruments and major durables for indoor recreation XDHHCE4 Other durable goods 12.3.1 XDHHCE41 Jewellery, clocks and watches 06.1.3 XDHHCE42 Therapeutic medical appliances and equipment 558 The classification hierarchies of the SNA and associated codes 5. Foreign direct investment A1.46 Supplementary items for foreign direct investment (FDI), referred to in, for example, chapters 11 and 13, can be coded with X as prefix plus the F or AF code plus a FDI suffix, for example: XF42FDI Foreign direct investment transaction in long-term loans 6. Contingent positions A1.47 Supplementary codes for contingent positions, mentioned in chapters 11 and 12, can be coded with X as prefix plus the AF code plus a CP suffix, for example: XAF11CP when the pledge of monetized gold may affect its usability as reserve asset 7. Currency and deposits A1.48 Supplementary items for the classification of national and foreign denominated currency and deposits, as mentioned in chapter 11, can be coded with X as prefix plus the F or AF code plus a suffix NC indicating currency and deposits in national currency or an affix FC with an international currency code indicating currency and deposits in foreign currency, for example: a. For transactions XF21LC Local currency notes and coins XF22FC Deposits in foreign currency b. For stocks XAF21LC Local currency notes and coins XAF22FC Deposits in foreign currency 8. Classification of debt securities according to outstanding maturity A1.49 Chapter 11 suggests classifying debt securities according to outstanding maturity. This can be achieved by using an X prefix plus the AF code plus a suffix indicating a maturity date, for example: XAF32Y20 Debt securities maturing in 2020 9. Listed and unlisted debt securities A1.50 Supplementary items on debt securities can be coded with X as prefix plus the F or AF code plus a 1 for listed and 2 for unlisted, for example: a. For transactions XF321 Listed debt securities XF322 Unlisted debt securities b. For stocks XAF321 Listed debt securities XAF322 Unlisted debt securities shares 10. Long-term loans with outstanding maturity of less than one year and long-term loans secured by a mortgage A1.51 Long-term loans with outstanding maturity of less than one year and long-term loans secured by mortgage can be coded with X as prefix plus the F of AF code plus an affix L1 indicating outstanding maturity of less than one year and a suffix LM indicating loans secured by a mortgage, for example: 559 System of National Accounts a. For transactions XF42L1 Long-term loans with outstanding maturity of less than one year XF42LM Long-term loans secured by a mortgage b. For stocks XAF42L1 Long-term loans with outstanding maturity of less than one year XAF42LM Long-term loans secured by a mortgage 11. Listed and unlisted investment shares A1.52 Listed and unlisted investment fund shares can be coded with X as prefix plus the F or AF code plus 1 for listed and 2 for unlisted, for example: a. For transactions XF5291 Listed investment fund shares XF5292 Unlisted investment fund shares b. For stocks XAF5291 Listed investment fund shares XAF5292 Unlisted investment fund shares 12. Arrears in interest and repayments A1.53 Arrears in interest and repayments can be coded with X as prefix plus the AF code plus an IA affix for interest arrears and PA affix for repayment arrears, for example: XAF42IA Interest arrears on long term loans XAF42PA Repayment arrears on long term loans 13. Personal and total remittances A1.54 Personal remittances and total remittances between resident and non-resident households, mentioned in chapter 8, can be coded with X as prefix plus the current transfer code plus a suffix PR for personal remittances and TR for total remittances, as follows: XD5452PR Personal remittances between resident and non-resident households XD5452TR Total remittances between resident and non-resident households 560 The sequence of accounts Annex 2: The sequence of accounts The production account..................................................................................................... 562-3 The generation of income account.................................................................................... 562-3 The allocation of primary income account......................................................................... 564-5 The entrepreneurial income account................................................................................. 564-5 The allocation of other primary income account ............................................................... 566-7 The secondary distribution of income account .................................................................. 566-7 The use of disposable income account............................................................................. 568-9 The redistribution of income in kind account..................................................................... 568-9 The use of adjusted disposable income account .............................................................. 568-9 The capital account ........................................................................................................... 590-1 The financial account ........................................................................................................ 592-3 The other changes in the volume of assets account......................................................... 594-5 The revaluation account.................................................................................................... 596-7 The balance sheets........................................................................................................... 598-9 Shaded cells are those where the value is determined using the accounting rules of the system; Cells with a zero entry are those where an entry is possible but in practice it may be negligible. Blank cells indicate either an entry is not possible or a disaggregation is not provided. 561 System of National Accounts Production account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items P7 Imports of goods and services 499 499 P71 Imports of goods 392 392 P72 Imports of services 107 107 P6 Exports of goods and services 540 540 P61 Exports of goods 462 462 P62 Exports of services 78 78 P1 Output 3 604 3 604 P11 Market output 3 077 3 077 P12 Output for own final use 147 147 P13 Non-market output 380 380 P2 Intermediate consumption 1 477 52 222 115 17 1 883 1 883 D21 Taxes on products 141 141 D31 Subsidies on products (-) -8 -8 B1g Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 P51c Consumption of fixed capital 157 12 27 23 3 222 222 B1n Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 B11 External balance of goods and services - 41 - 41 Generation of income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items D1 Compensation of employees 986 44 98 11 11 1 150 1 150 D11 Wages and salaries 841 29 63 11 6 950 950 D12 Employers social contributions 145 15 35 0 5 200 200 D121 Employers actual social contributions 132 14 31 0 4 181 181 D1211 Employers' actual pension contributions 122 14 28 0 4 168 168 D1212 Employers' actual non-pension contributions 10 0 3 0 0 13 13 D122 Employers imputed social contributions 13 1 4 0 1 19 19 D1221 Employers' imputed pension contributions 12 1 4 0 1 18 18 D1222 Employers' imputed non-pension contributions 1 0 0 0 0 1 1 D2 Taxes on production and imports 235 235 D21 Taxes on products 141 141 D211 Value added type taxes (VAT) 121 121 D212 Taxes and duties on imports excluding VAT 17 17 D2121 Import duties 17 17 D2122 Taxes on imports excluding VAT and duties 0 0 D213 Export taxes 1 1 D214 Taxes on products except VAT, import and export taxes 2 2 D29 Other taxes on production 88 4 1 0 1 94 94 D3 Subsidies - 44 - 44 D31 Subsidies on products -8 -8 D311 Import subsidies 0 0 D312 Export subsidies 0 0 D319 Other subsidies on products -8 -8 D39 Other subsidies on production - 35 0 0 -1 0 - 36 - 36 B2g Operating surplus, gross 292 46 27 84 3 452 452 B3g Mixed income, gross 61 61 61 P51c1 Consumption of fixed capital on gross operating surplus 157 12 27 15 3 214 P51c2 Consumption of fixed capital on gross mixed income 8 8 B2n Operating surplus, net 135 34 0 69 0 238 238 B3n Mixed income, net 53 53 53 562 The sequence of accounts Production account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items P7 Imports of goods and services 499 499 P71 Imports of goods 392 392 P72 Imports of services 107 107 P6 Exports of goods and services 540 540 P61 Exports of goods 462 462 P62 Exports of services 78 78 P1 Output 2 808 146 348 270 32 3 604 3 604 P11 Market output 2 808 146 0 123 0 3 077 3 077 P12 Output for own final use 0 0 0 147 0 147 147 P13 Non-market output 348 32 380 380 P2 Intermediate consumption 1 883 1 883 D21 Taxes on products 141 141 D31 Subsidies on products (-) -8 -8 Generation of income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B1g Value added, gross / Gross domestic product 1 331 94 126 155 15 1 854 1 854 B1n Value added, net / Net domestic product 1 174 82 99 132 12 1 632 1 632 D1 Compensation of employees D11 Wages and salaries D12 Employers social contributions D121 Employers actual social contributions D1211 Employers' actual pension contributions D1212 Employers' actual non-pension contributions D122 Employers imputed social contributions D1221 Employers' imputed pension contributions D1222 Employers' imputed non-pension contributions D2 Taxes on production and imports D21 Taxes on products D211 Value added type taxes (VAT) D212 Taxes and duties on imports excluding VAT D2121 Import duties D2122 Taxes on imports excluding VAT and duties D213 Export taxes D214 Taxes on products except VAT, import and export taxes D29 Other taxes on production D3 Subsidies D31 Subsidies on products D311 Import subsidies D312 Export subsidies D319 Other subsidies on products D39 Other subsidies on production 563 System of National Accounts Allocation of primary income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items D1 Compensation of employees 6 6 D11 Wages and salaries 6 6 D12 Employers social contributions 0 0 D121 Employers actual social contributions 0 0 D1211 Employers' actual pension contributions 0 0 D1212 Employers' actual non-pension contributions 0 0 D122 Employers imputed social contributions 0 0 D1221 Employers' imputed pension contributions 0 0 D1222 Employers' imputed non-pension contributions 0 0 D2 Taxes on production and imports 0 D21 Taxes on products 0 D211 Value added type taxes (VAT) 0 D212 Taxes and duties on imports excluding VAT 0 D2121 Import duties 0 D2122 Taxes on imports excluding VAT and duties 0 D213 Export taxes 0 D214 Taxes on products except VAT, import and export taxes 0 D29 Other taxes on production 0 D3 Subsidies 0 D31 Subsidies on products 0 D311 Import subsidies 0 D312 Export subsidies 0 D319 Other subsidies on products 0 D39 Other subsidies on production 0 D4 Property income 134 168 42 41 6 391 44 435 D41 Interest 56 106 35 14 6 217 13 230 D42 Distributed income of corporations 47 15 62 17 79 D421 Dividends 39 15 54 13 67 D422 Withdrawals from income of quasi-corporations 8 0 8 4 12 D43 Reinvested earnings on foreign direct investment 0 0 0 14 14 D44 Investment income disbursements 47 47 0 47 D441 Investment income attributable to insurance policy holders 25 25 0 25 D442 Investment income payable on pension entitlements 8 8 0 8 Investment income attributable to collective investment funds D443 share holders 14 14 0 14 D45 Rent 31 0 7 27 0 65 65 B5g Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 B5n Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Entrepreneurial account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items D4 Property income 87 153 240 240 D41 Interest 56 106 162 162 D42 Distributed income of corporations D421 Dividends D422 Withdrawals from income of quasi-corporations D43 Reinvested earnings on foreign direct investment D44 Investment income disbursements 47 47 47 D441 Investment income attributable to insurance policy holders 25 25 25 D442 Investment income payable on pension entitlements 8 8 8 Investment income attributable to collective investment funds D443 share holders 14 14 14 D45 Rent 31 0 31 31 B4g Entrepreneurial income, gross 301 42 343 343 B4n Entrepreneurial income, net 144 30 174 174 564 The sequence of accounts Allocation of primary income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B2g Operating surplus, gross 292 46 27 84 3 452 452 B3g Mixed income, gross 61 61 61 B2n Operating surplus, net 135 34 0 69 0 238 238 B3n Mixed income, net 53 53 53 D1 Compensation of employees 1 154 1 154 2 1 156 D11 Wages and salaries 954 954 2 956 D12 Employers social contributions 200 200 0 200 D121 Employers actual social contributions 181 181 0 181 D1211 Employers' actual pension contributions 168 168 0 168 D1212 Employers' actual non-pension contributions 13 13 0 13 D122 Employers imputed social contributions 19 19 0 19 D1221 Employers' imputed pension contributions 18 18 0 18 D1222 Employers' imputed non-pension contributions 1 1 0 1 D2 Taxes on production and imports 235 235 235 D21 Taxes on products 141 141 141 D211 Value added type taxes (VAT) 121 121 121 D212 Taxes and duties on imports excluding VAT 17 17 17 D2121 Import duties 17 17 17 D2122 Taxes on imports excluding VAT and duties 0 0 0 D213 Export taxes 1 1 1 D214 Taxes on products except VAT, import and export taxes 2 2 2 D29 Other taxes on production 94 94 94 D3 Subsidies - 44 - 44 - 44 D31 Subsidies on products -8 -8 -8 D311 Import subsidies 0 0 0 D312 Export subsidies 0 0 0 D319 Other subsidies on products -8 -8 -8 D39 Other subsidies on production - 36 - 36 - 36 D4 Property income 96 149 22 123 7 397 38 435 D41 Interest 33 106 14 49 7 209 21 230 D42 Distributed income of corporations 10 25 7 20 0 62 17 79 D421 Dividends 10 25 5 13 0 53 14 67 D422 Withdrawals from income of quasi-corporations 2 7 9 3 12 D43 Reinvested earnings on foreign direct investment 4 7 0 3 0 14 0 14 D44 Investment income disbursements 8 8 1 30 0 47 0 47 D441 Investment income attributable to insurance policy holders 5 0 0 20 0 25 0 25 D442 Investment income payable on pension entitlements 8 8 0 8 Investment income attributable to collective investment funds D443 share holders 3 8 1 2 0 14 0 14 D45 Rent 41 3 0 21 0 65 65 0 0 Entrepreneurial account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Code Transactions and balancing items Total B2g Operating surplus, gross 292 46 27 84 3 452 452 B3g Mixed income, gross 61 61 61 B2n Operating surplus, net 135 34 0 69 0 238 238 B3n Mixed income, net 53 53 53 D4 Property income 96 149 245 245 D41 Interest 33 106 139 139 D42 Distributed income of corporations 10 25 35 35 D421 Dividends 10 25 35 35 D422 Withdrawals from income of quasi-corporations 0 0 D43 Reinvested earnings on foreign direct investment 4 7 11 11 D44 Investment income disbursements 8 8 16 16 D441 Investment income attributable to insurance policy holders 5 5 5 D442 Investment income payable on pension entitlements 0 0 Investment income attributable to collective investment funds D443 share holders 3 8 11 11 D45 Rent 41 3 44 44 565 System of National Accounts Allocation of other primary income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items D1 Compensation of employees 6 6 D2 Taxes on production and imports D3 Subsidies D4 Property income 47 15 42 41 6 151 63 214 D41 Interest 35 14 6 55 13 68 D42 Distributed income of corporations 47 15 62 17 79 D421 Dividends 39 15 54 0 54 D422 Withdrawals from income of quasi-corporations 8 8 36 44 D43 Reinvested earnings on foreign direct investment 0 14 14 D44 Investment income disbursements 0 0 0 D441 Investment income attributable to insurance policy holders 0 0 0 D442 Investment income payable on pension entitlements 0 0 0 Investment income attributable to collective investment funds D443 share holders 0 0 0 D45 Rent 7 27 0 34 34 B5g Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 B5n Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Secondary distribution of income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items Current transfers 98 277 248 582 7 1 212 17 1 229 D5 Current taxes on income, wealth, etc. 24 10 0 178 0 212 1 213 D51 Taxes on income 20 7 0 176 0 203 1 204 D59 Other current taxes 4 3 0 2 0 9 9 D61 Net social contributions 333 333 0 333 D611 Employers actual social contributions 181 181 0 181 D6111 Employers' actual pension contributions 168 168 0 168 D6112 Employers' actual non-pension contributions 13 13 0 13 D612 Employers' imputed social contributions 19 19 0 19 D6121 Employers' imputed pension contributions 18 18 0 18 D6122 Employers' imputed non-pension contributions 1 1 0 1 D613 Households' actual social contributions 129 129 0 129 D6131 Households' actual pension contributions 115 115 0 115 D6132 Households' actual non-pension contributions 14 14 0 14 D614 Households' social contributions supplements 10 10 0 10 D6141 Households' pension contribution supplements 8 8 0 8 D6142 Households' non-pension contribution supplements 2 2 0 2 Social insurance scheme service charges 6 6 0 6 D62 Social benefits other than social transfers in kind 62 205 112 0 5 384 0 384 D621 Social security benefits in cash 53 53 0 53 D6211 Social security pension benefits 45 45 0 45 D6212 Social security non-pension benefits in cash 8 8 0 8 D622 Other social insurance benefits 62 205 7 0 5 279 0 279 D6221 Other social insurance pension benefits 49 193 5 0 3 250 0 250 D6222 Other social insurance non-pension benefits 13 12 2 0 2 29 0 29 D623 Social assistance benefits in cash 52 52 52 D7 Other current transfers 12 62 136 71 2 283 16 299 D71 Net non-life insurance premiums 8 13 4 31 0 56 2 58 D711 Net non-life direct insurance premiums 8 0 4 31 0 43 1 44 D712 Net non-life reinsurance premiums 13 13 1 14 D72 Non-life insurance claims 48 48 12 60 D721 Non-life direct insurance claims 45 45 0 45 D722 Non-life reinsurance claims 3 3 12 15 D73 Current transfers within general government 96 96 0 96 D74 Current international cooperation 31 31 1 32 D75 Miscellaneous current transfers 4 1 5 40 2 52 1 53 D751 Current transfers to NPISHs 1 1 5 29 0 36 0 36 Current transfers between resident and non-resident D752 households 7 7 1 8 D759 Other miscellaneous current transfers 3 0 0 4 2 9 0 9 B6g Disposable income, gross 228 25 317 1 219 37 1 826 1 826 B6n Disposable income, net 71 13 290 1 196 34 1 604 1 604 566 The sequence of accounts Allocation of other primary income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B4g Entrepreneurial income, gross 301 42 343 343 B4n Entrepreneurial income, net 144 30 174 174 D1 Compensation of employees 1 154 1 154 2 1 156 D2 Taxes on production and imports 235 235 235 D3 Subsidies - 44 - 44 - 44 D4 Property income 22 123 7 152 38 190 D41 Interest 14 49 7 70 21 91 D42 Distributed income of corporations 7 20 0 27 17 44 D421 Dividends 5 13 0 18 14 32 D422 Withdrawals from income of quasi-corporations 2 7 0 9 3 12 D43 Reinvested earnings on foreign direct investment 0 3 0 3 0 3 D44 Investment income disbursements 1 30 0 31 0 31 D441 Investment income attributable to insurance policy holders 0 20 0 20 0 20 D442 Investment income payable on pension entitlements 0 8 0 8 0 8 Investment income attributable to collective investment funds D443 share holders 1 2 0 3 0 3 D45 Rent 0 21 0 21 21 Secondary distribution of income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B5g Balance of primary incomes, gross / National income, gross 254 27 198 1 381 4 1 864 1 864 B5n Balance of primary income, net / National income, net 97 15 171 1 358 1 1 642 1 642 Current transfers 72 275 367 420 40 1 174 55 1 229 D5 Current taxes on income, wealth, etc. 213 213 0 213 D51 Taxes on income 204 204 0 204 D59 Other current taxes 9 9 9 D61 Net social contributions 66 213 50 0 4 333 0 333 D611 Employers actual social contributions 31 110 38 0 2 181 0 181 D6111 Employers' actual pension contributions 27 104 35 0 2 168 0 168 D6112 Employers' actual non-pension contributions 4 6 3 0 0 13 0 13 D612 Employers' imputed social contributions 12 2 4 0 1 19 0 19 D6121 Employers' imputed pension contributions 12 1 4 0 1 18 0 18 D6122 Employers' imputed non-pension contributions 0 1 0 0 0 1 0 1 D613 Households' actual social contributions 25 94 9 0 1 129 0 129 D6131 Households' actual pension contributions 19 90 6 0 0 115 0 115 D6132 Households' actual non-pension contributions 6 4 3 0 1 14 0 14 D614 Households' social contributions supplements 10 10 0 10 D6141 Households' pension contribution supplements 8 8 0 8 D6142 Households' non-pension contribution supplements 2 2 0 2 Social insurance scheme service charges 2 3 1 6 0 6 D62 Social benefits other than social transfers in kind 384 384 0 384 D621 Social security benefits in cash 53 53 0 53 D6211 Social security pension benefits 45 45 0 45 D6212 Social security non-pension benefits in cash 8 8 0 8 D622 Other social insurance benefits 279 279 0 279 D6221 Other social insurance pension benefits 250 250 0 250 D6222 Other social insurance non-pension benefits 29 29 0 29 D623 Social assistance benefits in cash 52 52 52 D7 Other current transfers 6 62 104 36 36 244 55 299 D71 Net non-life insurance premiums 47 47 11 58 D711 Net non-life direct insurance premiums 44 44 44 D712 Net non-life reinsurance premiums 3 3 11 14 D72 Non-life insurance claims 6 15 1 35 0 57 3 60 D721 Non-life direct insurance claims 6 1 35 42 3 45 D722 Non-life reinsurance claims 15 15 0 15 D73 Current transfers within general government 96 96 0 96 D74 Current international cooperation 1 1 31 32 D75 Miscellaneous current transfers 0 0 6 1 36 43 10 53 D751 Current transfers to NPISHs 36 36 36 Current transfers between resident and non-resident D752 households 1 1 7 8 D759 Other miscellaneous current transfers 6 6 3 9 567 System of National Accounts Use of disposable income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items P3 Final consumption expenditure 352 1 015 32 1 399 1 399 P31 Individual consumption expenditure 184 1 015 31 1 230 1 230 P32 Collective consumption expenditure 168 1 169 169 D8 Adjustment for the change in pension entitlements 0 11 0 0 11 0 11 B8g Saving, gross 228 14 - 35 215 5 427 427 B8n Saving, net 71 2 - 62 192 2 205 205 B12 Current external balance - 13 - 13 Redistribution of income in kind account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items D63 Social transfers in kind 184 31 215 215 D631 Social transfers in kind - non-market production 180 31 211 211 D632 Social transfers in kind - purchased market production 4 4 4 B7g Adjusted disposable income, gross 228 25 133 1 434 6 1 826 1 826 B7n Adjusted disposable income, net 71 13 106 1 411 3 1 604 1 604 Use of adjusted disposable income account Uses S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items P4 Actual final consumption 168 1 230 1 1 399 1 399 P41 Actual individual consumption 1 230 1 230 1 230 P42 Actual collective consumption 168 1 169 169 D8 Adjustment for the change in pension entitlements 0 11 0 0 11 0 11 B8g Saving, gross 228 14 - 35 215 5 427 427 B8n Saving, net 71 2 - 62 192 2 205 205 B12 Current external balance - 13 - 13 568 The sequence of accounts Use of disposable income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B6g Disposable income, gross 228 25 317 1 219 37 1 826 1 826 B6n Disposable income, net 71 13 290 1 196 34 1 604 1 604 P3 Final consumption expenditure 1 399 1 399 P31 Individual consumption expenditure 1 230 1 230 P32 Collective consumption expenditure 169 169 D8 Adjustment for the change in pension entitlements 11 11 0 11 Redistribution of income in kind account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B6g Disposable income, gross 228 25 317 1 219 37 1 826 1 826 B6n Disposable income, net 71 13 290 1 196 34 1 604 1 604 D63 Social transfers in kind 215 215 215 D631 Social transfers in kind - non-market production 211 211 211 D632 Social transfers in kind - purchased market production 4 4 4 Use of adjusted disposable income account Resources S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B7g Adjusted disposable income, gross 228 25 133 1 434 6 1 826 1 826 B7n Adjusted disposable income, net 71 13 106 1 411 3 1 604 1 604 P4 Actual final consumption 1 399 1 399 P41 Actual individual consumption 1 230 1 230 P42 Actual collective consumption 169 169 D8 Adjustment for the change in pension entitlements 11 11 0 11 569 System of National Accounts Capital account Changes in assets S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items P5g Gross capital formation 308 8 38 55 5 414 414 P5n Net capital formation 151 -4 11 32 2 192 192 P51g Gross fixed capital formation 280 8 35 48 5 376 376 P511 Acquisitions less disposals of fixed assets 263 8 35 48 5 359 359 P5111 Acquisitions of new fixed assets 262 8 38 45 5 358 358 P5112 Acquisitions of existing fixed assets 5 0 0 3 1 9 9 P5113 Disposals of existing fixed assets -4 -3 0 -1 -8 -8 P512 Costs of ownership transfer on non-produced assets 17 17 17 P51c Consumption of fixed capital - 157 - 12 - 27 - 23 -3 - 222 - 222 AN11 Gross fixed capital formation by type of asset AN111 Dwellings AN112 Other buildings and structures AN1121 Buildings other than dwellings AN1122 Other structures AN1123 Land improvements AN113 Machinery and equipment AN1131 Transport equipment AN1132 ICT equipment AN1139 Other machinery and equipment AN114 Weapons systems AN115 Cultivated biological resources AN1151 Animal resources yielding repeat products AN1152 Tree, crop and plant resources yielding repeat products AN116 Costs of ownership transfer on non-produced assets AN117 Intellectual property products AN1171 Research and development AN1172 Mineral exploration and evaluation AN1173 Computer software and databases AN11731 Computer software AN11732 Databases AN1174 Entertainment, literary or artistic originals AN1179 Other intellectual property products P52 AN12 Changes in inventories 26 0 0 2 0 28 28 AN121 Materials and supplies AN122 Work-in-progress AN1221 Work-in-progress on cultivated biological assets AN1222 Other work-in-progress AN123 Finished goods AN124 Military inventories AN125 Goods for resale P53 AN13 Acquisitions less disposals of valuables 2 0 3 5 0 10 10 NP Acquisitions less disposals of non-produced assets -7 0 2 4 1 0 0 NP1 Acquisitions less disposals of natural resources -6 0 2 3 1 0 0 AN21 Natural resources AN211 Land AN212 Mineral and energy reserves AN213 Non-cultivated biological resources AN214 Water resources AN215 Other natural resources AN2151 Radio spectra AN2159 Other NP2 Acquisitions less disposals of contracts, leases and licences -1 0 0 1 0 0 0 0 AN22 Contracts, leases and licences AN221 Marketable operating leases AN222 Permits to use natural resources AN223 Permits to undertake specific activities Entitlement to future goods and services on an exclusive AN224 basis NP3 AN23 Purchases less sales of goodwill and marketing assets 0 0 0 0 0 D9r Capital transfers, receivable D91r Capital taxes, receivable D92r Investment grants, receivable D99r Other capital transfers, receivable D9p Capital transfers, payable D91p Capital taxes, payable D92p Investment grants, payable D99p Other capital transfers, payable B9 Net lending (+) / net borrowing () - 56 -1 - 103 174 -4 10 - 10 0 570 The sequence of accounts Capital account Changes in liabilities and net worth S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B8n Saving, net 71 2 - 62 192 2 205 205 B12 Current external balance - 13 - 13 P5g Gross capital formation 414 414 P5n Net capital formation 192 192 P51g Gross fixed capital formation 376 376 P511 Acquisitions less disposals of fixed assets 359 359 P5111 Acquisitions of new fixed assets 358 358 P5112 Acquisitions of existing fixed assets 9 9 P5113 Disposals of existing fixed assets -8 -8 P512 Costs of ownership transfer on non-produced assets 17 17 P51c Consumption of fixed capital - 222 - 222 AN11 Gross fixed capital formation by type of asset AN111 Dwellings AN112 Other buildings and structures AN1121 Buildings other than dwellings AN1122 Other structures AN1123 Land improvements AN113 Machinery and equipment AN1131 Transport equipment AN1132 ICT equipment AN1139 Other machinery and equipment AN114 Weapons systems AN115 Cultivated biological resources AN1151 Animal resources yielding repeat products AN1152 Tree, crop and plant resources yielding repeat products AN116 Costs of ownership transfer on non-produced assets AN117 Intellectual property products AN1171 Research and development AN1172 Mineral exploration and evaluation AN1173 Computer software and databases AN11731 Computer software AN11732 Databases AN1174 Entertainment, literary or artistic originals AN1179 Other intellectual property products P52 AN12 Changes in inventories 28 28 AN121 Materials and supplies AN122 Work-in-progress AN1221 Work-in-progress on cultivated biological assets AN1222 Other work-in-progress AN123 Finished goods AN124 Military inventories AN125 Goods for resale P53 AN13 Acquisitions less disposals of valuables 10 10 NP Acquisitions less disposals of non-produced assets 0 0 NP1 Acquisitions less disposals of natural resources 0 0 AN21 Natural resources AN211 Land AN212 Mineral and energy reserves AN213 Non-cultivated biological resources AN214 Water resources AN215 Other natural resources AN2151 Radio spectra AN2159 Other NP2 Acquisitions less disposals of contracts, leases and licences AN22 Contracts, leases and licences AN221 Marketable operating leases AN222 Permits to use natural resources AN223 Permits to undertake specific activities Entitlement to future goods and services on an exclusive AN224 basis NP3 AN23 Purchases less sales of goodwill and marketing assets D9r Capital transfers, receivable 33 0 6 23 0 62 4 66 D91r Capital taxes, receivable 2 2 2 D92r Investment grants, receivable 23 0 0 0 0 23 4 27 D99r Other capital transfers, receivable 10 0 4 23 0 37 37 D9p Capital transfers, payable - 16 -7 - 34 -5 -3 - 65 -1 - 66 D91p Capital taxes, payable 0 0 0 -2 0 -2 0 -2 D92p Investment grants, payable - 27 - 27 - 27 D99p Other capital transfers, payable - 16 -7 -7 -3 -3 - 36 -1 - 37 B101 Changes in net worth due to saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 571 System of National Accounts Financial account Changes in assets S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items Net acquisition of financial assets 83 172 - 10 189 2 436 47 483 F1 Monetary gold and SDRs -1 -1 1 0 F11 Monetary gold 0 0 0 0 F12 SDRs -1 -1 1 0 F2 Currency and deposits 39 10 - 26 64 2 89 11 100 F21 Currency 5 15 2 10 1 33 3 36 F22 Transferable deposits 30 -5 - 27 27 1 26 2 28 F221 Interbank positions -5 -5 -5 F229 Other transferable deposits 30 0 - 27 27 1 31 2 33 F29 Other deposits 4 0 -1 27 0 30 6 36 F3 Debt securities 7 66 4 10 -1 86 9 95 F31 Short-term 10 13 1 3 0 27 2 29 F32 Long-term -3 53 3 7 -1 59 7 66 F4 Loans 19 53 3 3 0 78 4 82 F41 Short-term 14 4 1 3 0 22 3 25 F42 Long-term 5 49 2 0 0 56 1 57 F5 Equity and investment fund shares 10 28 3 66 0 107 12 119 F51 Equity 10 25 3 53 0 91 12 103 F511 Listed shares 5 23 1 48 0 77 10 87 F512 Unlisted shares 3 1 1 2 0 7 2 9 F519 Other equity 2 1 1 3 0 7 0 7 F52 Investment fund shares/units 0 3 0 13 0 16 0 16 F521 Money market fund shares/units 0 2 0 5 0 7 0 7 F522 Non MMF investment fund shares/units 0 1 0 8 0 9 0 9 F6 Insurance, pension and standardized guarantee schemes 1 7 1 39 0 48 0 48 F61 Non-life insurance technical reserves 1 2 0 4 0 7 0 7 F62 Life insurance and annuity entitlements 0 0 0 22 0 22 0 22 F63 Pension entitlements 11 11 0 11 F64 Claim of pension fund on pension managers 3 3 0 3 F65 Entitlements to non-pension benefits 2 2 0 2 F66 Provisions for calls under standardized guarantees 0 2 1 0 0 3 0 3 F7 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 F71 Financial derivatives 3 8 0 1 0 12 0 12 F711 Options 1 3 0 1 0 5 0 5 F712 Forwards 2 5 0 0 0 7 0 7 F72 Employee stock options 0 2 2 2 F8 Other accounts receivable/payable 4 1 5 4 1 15 10 25 F81 Trade credits and advances 3 1 3 7 8 15 F89 Other accounts receivable/payable 1 1 4 1 1 8 2 10 572 The sequence of accounts Financial account Changes in liabilities and net worth S11 S12 S13 S14 S15 S1 S2 Non-financial corporations corporations government Households Goods and Rest of the economy Financial services General NPISHs world Total Total Code Transactions and balancing items B9 Net lending (+) / net borrowing () - 56 -1 - 103 174 -4 10 - 10 0 Net acquisition of liabilities 139 173 93 15 6 426 57 483 F1 Monetary gold and SDRs F11 Monetary gold F12 SDRs 0 F2 Currency and deposits 65 37 102 -2 100 F21 Currency 35 35 1 36 F22 Transferable deposits 26 2 28 0 28 F221 Interbank positions -5 -5 -5 F229 Other transferable deposits 31 2 33 33 F29 Other deposits 39 39 -3 36 F3 Debt securities 6 30 38 0 0 74 21 95 F31 Short-term 2 18 4 0 0 24 5 29 F32 Long-term 4 12 34 0 0 50 16 66 F4 Loans 21 0 9 11 6 47 35 82 F41 Short-term 4 0 3 2 2 11 14 25 F42 Long-term 17 0 6 9 4 36 21 57 F5 Equity and investment fund shares 83 22 105 14 119 F51 Equity 83 11 94 9 103 F511 Listed shares 77 7 84 3 87 F512 Unlisted shares 3 4 7 2 9 F519 Other equity 3 3 4 7 F52 Investment fund shares/units 11 11 5 16 F521 Money market fund shares/units 5 5 2 7 F522 Non MMF investment fund shares/units 6 6 3 9 F6 Insurance, pension and standardized guarantee schemes 48 0 48 0 48 F61 Non-life insurance technical reserves 7 7 0 7 F62 Life insurance and annuity entitlements 22 22 0 22 F63 Pension entitlements 11 11 0 11 F64 Claim of pension fund on pension managers 3 3 0 3 F65 Entitlements to non-pension benefits 2 2 0 2 F66 Provisions for calls under standardized guarantees 3 0 3 0 3 F7 Financial derivatives and employee stock options 3 8 0 0 0 11 3 14 F71 Financial derivatives 2 7 0 0 0 9 3 12 F711 Options 2 2 0 0 0 4 1 5 F712 Forwards 0 5 0 0 0 5 2 7 F72 Employee stock options 1 1 2 2 F8 Other accounts receivable/payable 26 0 9 4 39 - 14 25 F81 Trade credits and advances 6 0 6 4 0 16 -1 15 F89 Other accounts receivable/payable 20 0 3 0 0 23 - 13 10 573 System of National Accounts Other changes in the volume of assets account Changes in assets S11 S12 S13 S14 S15 S1 S2 General government Goods and services Rest of the world Total economy Non-financial corporations corporations Households Financial NPISHs account account Total Other flows K1 Economic appearance of assets 26 0 7 0 0 33 33 AN1 Produced non-financial assets 3 3 3 AN2 Non-produced non-financial assets 26 0 4 0 0 30 30 AN21 Natural resources 22 4 26 26 AN22 Contracts, leases and licences 4 4 4 AN23 Goodwill and marketing assets 0 0 K2 Economic disappearance of non-produced non-financial assets -9 0 -2 0 0 - 11 - 11 K21 Depletion of natural resources -6 0 -2 0 0 -8 -8 AN21 Natural resources -6 -2 -8 -8 K22 Other economic disappearance of non-produced non-financial assets -3 0 0 0 0 -3 -3 AN21 Natural resources 0 0 AN22 Contracts, leases and licences -1 -1 -1 AN23 Goodwill and marketing assets -2 -2 -2 K3 Catastrophic losses -5 0 -6 0 0 - 11 - 11 AN1 Produced non-financial assets -5 -4 -9 -9 AN2 Non-produced non-financial assets -2 -2 -2 AF Financial assets/liabilities 0 0 K4 Uncompensated seizures -5 0 5 0 0 0 0 AN1 Produced non-financial assets -1 1 0 0 AN2 Non-produced non-financial assets -4 4 0 0 AF Financial assets/liabilities 0 0 K5 Other changes in volume n.e.c. 1 1 0 0 0 2 2 AN1 Produced non-financial assets 1 1 1 AN2 Non-produced non-financial assets 0 0 AF Financial assets/liabilities 1 1 1 K6 Changes in classification 6 -2 -4 0 0 0 0 K61 Changes in sector classification and structure 6 0 -4 0 0 2 2 AN1 Produced non-financial assets 3 -3 0 0 AN2 Non-produced non-financial assets 1 -1 0 0 AF Financial assets 2 2 2 K62 Changes in classification of assets and liabilities 0 -2 0 0 0 -2 -2 AN1 Produced non-financial assets -2 -2 -2 AN2 Non-produced non-financial assets 0 0 0 0 0 AF Financial assets 0 0 0 0 0 Total other changes in volume 14 -1 0 0 0 13 13 AN1 Produced non-financial assets -2 -2 -3 0 0 -7 -7 AN11 Fixed assets 1 -3 -2 -2 AN12 Inventories -3 -3 -3 AN13 Valuables -2 -2 -2 AN2 Non-produced non-financial assets 14 0 3 0 0 17 17 AN21 Natural resources 10 0 1 0 0 11 11 AN22 Contracts, leases and licences 4 2 6 6 AN23 Goodwill and marketing assets 0 0 0 AF Financial assets 2 1 0 0 0 3 3 AF1 Monetary gold and SDRs 0 0 AF2 Currency and deposits 0 0 AF3 Debt securities 0 0 AF4 Loans 0 0 AF5 Equity and investment fund shares/units 2 2 2 AF6 Insurance, pension and standardized guarantee schemes 1 1 1 AF7 Financial derivatives and employee stock options 0 0 AF8 Other accounts receivable/payable 0 0 574 The sequence of accounts Other changes in the volume of assets account Changes in liabilities and net worth S11 S12 S13 S14 S15 S1 S2 General government Goods and services Rest of the world Total economy Non-financial corporations corporations Households Financial NPISHs account account Total Other flows K1 Economic appearance of assets AN1 Produced non-financial assets AN2 Non-produced non-financial assets AN21 Natural resources AN22 Contracts, leases and licences AN23 Goodwill and marketing assets K2 Economic disappearance of non-produced non-financial assets K21 Depletion of natural resources AN21 Natural resources K22 Other economic disappearance of non-produced non-financial assets AN21 Natural resources AN22 Contracts, leases and licences AN23 Goodwill and marketing assets K3 Catastrophic losses AN1 Produced non-financial assets AN2 Non-produced non-financial assets AF Financial assets/liabilities K4 Uncompensated seizures AN1 Produced non-financial assets AN2 Non-produced non-financial assets AF Financial assets/liabilities K5 Other changes in volume n.e.c. 0 0 0 1 0 1 1 AN1 Produced non-financial assets AN2 Non-produced non-financial assets AF Financial assets/liabilities 0 0 0 1 0 1 1 K6 Changes in classification 0 0 2 0 0 2 2 K61 Changes in sector classification and structure 0 0 2 0 0 2 2 AN1 Produced non-financial assets AN2 Non-produced non-financial assets AF Financial assets 0 0 2 0 0 2 2 K62 Changes in classification of assets and liabilities 0 0 0 0 0 0 0 AN1 Produced non-financial assets 0 AN2 Non-produced non-financial assets 0 AF Financial assets 0 0 0 0 0 0 0 Total other changes in volume 0 0 2 1 0 3 3 AN1 Produced non-financial assets AN11 Fixed assets AN12 Inventories AN13 Valuables AN2 Non-produced non-financial assets AN21 Natural resources AN22 Contracts, leases and licences AN23 Goodwill and marketing assets AF Financial assets 0 0 2 1 0 3 3 AF1 Monetary gold and SDRs AF2 Currency and deposits AF3 Debt securities AF4 Loans 0 0 AF5 Equity and investment fund shares/units 2 2 2 AF6 Insurance, pension and standardized guarantee schemes 1 1 1 AF7 Financial derivatives and employee stock options AF8 Other accounts receivable/payable B102 Changes in net worth due to other changes in volume of assets 14 -1 -2 -1 0 10 575 System of National Accounts Revaluation account Changes in assets S11 S12 S13 S14 S15 S1 S2 General government Goods and services Rest of the world Total economy Non-financial corporations corporations Households Financial NPISHs account account Total Other flows AN Non-financial assets 144 4 44 80 8 280 280 AN1 Produced non-financial assets 63 2 21 35 5 126 126 AN11 Fixed assets 58 2 18 28 5 111 111 AN12 Inventories 4 1 2 7 7 Nominal holding gains and losses AN13 Valuables 1 2 5 8 8 AN2 Non-produced non-financial assets 81 2 23 45 3 154 154 AN21 Natural resources 80 1 23 45 3 152 152 AN22 Contracts, leases and licences 1 1 2 2 AN23 Goodwill and marketing assets AF Financial assets/liabilities 8 57 1 16 2 84 7 91 AF1 Monetary gold and SDRs 11 1 12 12 AF2 Currency and deposits 0 0 AF3 Debt securities 3 30 6 1 40 4 44 AF4 Loans 0 0 AF5 Equity and investment fund shares/units 5 16 10 1 32 3 35 AF6 Insurance, pension and standardized guarantee schemes 0 0 AF7 Financial derivatives and employee stock options 0 0 AF8 Other accounts receivable/payable 0 0 AN Non-financial assets 101 3 32 56 6 198 198 AN1 Produced non-financial assets 60 2 20 34 5 121 121 AN11 Fixed assets 58 2 18 28 5 111 111 AN12 Inventories 1 1 2 4 4 AN13 Valuables 1 1 4 6 6 AN2 Non-produced non-financial assets 41 1 12 22 1 77 77 Neutral holding gains AN21 Natural resources 40 1 12 22 1 76 76 AN22 Contracts, leases and licences 1 1 1 AN23 Goodwill and marketing assets AF Financial assets/liabilities 18 71 8 36 3 136 12 148 AF1 Monetary gold and SDRs 14 2 16 16 AF2 Currency and deposits 8 3 17 2 30 2 32 AF3 Debt securities 2 18 4 1 25 3 28 AF4 Loans 1 24 3 28 1 29 AF5 Equity and investment fund shares/units 3 14 9 26 2 28 AF6 Insurance, pension and standardized guarantee schemes 1 1 5 7 1 8 AF7 Financial derivatives and employee stock options 0 0 AF8 Other accounts receivable/payable 3 1 4 3 7 AN Non-financial assets 43 1 12 24 2 82 82 AN1 Produced non-financial assets 3 0 1 1 0 5 5 AN11 Fixed assets 0 0 0 0 0 AN12 Inventories 3 0 0 0 0 3 3 Real holding gains and losses AN13 Valuables 0 0 1 1 0 2 2 AN2 Non-produced non-financial assets 40 1 11 23 2 77 77 AN21 Natural resources 40 0 11 23 2 76 76 AN22 Contracts, leases and licences 0 1 0 0 0 1 1 AN23 Goodwill and marketing assets AF Financial assets/liabilities - 10 - 14 -7 - 20 -1 - 52 -5 - 57 AF1 Monetary gold and SDRs 0 -3 -1 0 0 -4 0 -4 AF2 Currency and deposits -8 0 -3 - 17 -2 - 30 -2 - 32 AF3 Debt securities 1 12 0 2 0 15 1 16 AF4 Loans -1 - 24 -3 0 0 - 28 -1 - 29 AF5 Equity and investment fund shares/units 2 2 0 1 1 6 1 7 AF6 Insurance, pension and standardized guarantee schemes -1 -1 0 -5 0 -7 -1 -8 AF7 Financial derivatives and employee stock options 0 0 0 0 0 AF8 Other accounts receivable/payable -3 0 0 -1 0 -4 -3 -7 576 The sequence of accounts Revaluation account Revaluation account Changes in assets Changes in liabilities and net worth S11 S11 S12 S12 S13 S13 S14 S14 S15 S15 S1 S1 S2 S2 General government General government Goods and services Goods and services Rest of the world Rest of the world Total economy Total economy Non-financial Non-financial corporations corporations corporations corporations Households Households Financial Financial NPISHs NPISHs account account account account Total Total Other flows Other flows AN AN Non-financial assets Non-financial assets 144 4 44 80 8 280 280 AN1 AN1 Produced non-financial assets Produced non-financial assets 63 2 21 35 5 126 126 AN11 AN11 Fixed assets Fixed assets 58 2 18 28 5 111 111 AN12 AN12 Inventories Inventories 4 1 2 7 7 Nominal holding gains and losses Nominal holding gains and losses AN13 AN13 Valuables Valuables 1 2 5 8 8 AN2 AN2 Non-produced non-financial assets Non-produced non-financial assets 81 2 23 45 3 154 154 AN21 AN21 Natural resources Natural resources 80 1 23 45 3 152 152 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 1 1 2 2 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets AF AF Financial assets/liabilities Financial assets/liabilities 18 8 5751 17 16 0 20 84 76 157 9191 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 11 1 12 12 1212 AF2 AF2 Currency and deposits Currency and deposits 0 0 AF3 AF3 Debt securities Debt securities 31 34 30 7 6 1 40 42 24 4444 AF4 AF4 Loans Loans 0 0 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 17 5 17 16 10 1 34 32 13 3535 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes 0 0 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 0 0 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable 0 0 B103 Changes in net worth due to nominal holding gains/losses 134 10 38 96 10 288 -8 280 AN AN Non-financial assets Non-financial assets 101 3 32 56 6 198 198 AN1 AN1 Produced non-financial assets Produced non-financial assets 60 2 20 34 5 121 121 AN11 AN11 Fixed assets Fixed assets 58 2 18 28 5 111 111 AN12 AN12 Inventories Inventories 1 1 2 4 4 AN13 AN13 Valuables Valuables 1 1 4 6 6 AN2 AN2 Non-produced non-financial assets Non-produced non-financial assets 41 1 12 22 1 77 77 Neutral holding gains Neutral holding gains AN21 AN21 Natural resources Natural resources 40 1 12 22 1 76 76 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 1 1 1 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets AF AF Financial assets/liabilities Financial assets/liabilities 37 18 7168 8 13 36 5 33 136 126 12 22 148 148 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 14 2 16 16 1616 AF2 AF2 Currency and deposits Currency and deposits 81 26 32 17 21 30 30 22 3232 AF3 AF3 Debt securities Debt securities 21 18 21 4 4 1 25 26 23 2828 AF4 AF4 Loans Loans 18 1 24 37 3 1 28 29 1 2929 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 3 14 14 14 9 26 28 2 2828 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes 1 17 5 77 11 88 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 0 0 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable 33 12 1 64 13 77 B1031 Changes in net worth due to neutral holding gains/losses 82 6 27 87 6 208 - 10 214 AN AN Non-financial assets Non-financial assets 43 1 12 24 2 82 82 AN1 AN1 Produced non-financial assets Produced non-financial assets 3 0 1 1 0 5 5 AN11 AN11 Fixed assets Fixed assets 0 0 0 0 0 AN12 AN12 Inventories Inventories 3 0 0 0 0 3 3 Real holding gains and losses Real holding gains and losses AN13 AN13 Valuables Valuables 0 0 1 1 0 2 2 AN2 AN2 Non-produced non-financial assets Non-produced non-financial assets 40 1 11 23 2 77 77 AN21 AN21 Natural resources Natural resources 40 0 11 23 2 76 76 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 0 1 0 0 0 1 1 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets AF AF Financial assets/liabilities Financial assets/liabilities - 19 - 10 - 17 - 14 -76 - - - 20 5 - -13 --50 52 --75 - 57 - 57 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 00 -30 -10 00 00 -04 - 40 - -44 AF2 AF2 Currency and deposits Currency and deposits -81- -026 -32 - - 17 0 - -21 30 --30 --22 - 32 - 32 AF3 AF3 Debt securities Debt securities 10 1213 03 20 00 15 16 01 1616 AF4 AF4 Loans Loans --118 - 24 0 - -37 03 - - 01 28 --29 -01 - 29 - 29 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 23 23 00 10 10 66 11 77 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes -10 - -17 00 -50 00 --77 --11 - -88 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 00 00 00 00 00 0 0 0 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable -33- 00 00 -12 - - 01 --64 --13 - -77 B1032 Changes in net worth due to real holding gains/losses 52 4 11 9 4 80 2 66 577 System of National Accounts S11 S12 S13 S14 S15 S1 S2 General government Goods and services Rest of the world Total economy Non-financial corporations corporations Households Financial NPISHs account account Total Stocks and changes in assets AN Non-financial assets 2 151 93 789 1 429 159 4 621 4 621 AN1 Produced non-financial assets 1 274 67 497 856 124 2 818 2 818 AN11 Fixed assets 1 226 52 467 713 121 2 579 2 579 AN12 Inventories 43 22 48 1 114 114 AN13 Valuables 5 15 8 95 2 125 125 AN2 Opening balance sheet Non-produced non-financial assets 877 26 292 573 35 1 803 1 803 AN21 Natural resources 864 23 286 573 35 1 781 1 781 AN22 Contracts, leases and licences 13 3 6 22 22 AN23 Goodwill and marketing assets AF Financial assets/liabilities 982 3 421 396 3 260 172 8 231 805 9 036 AF1 Monetary gold and SDRs 690 80 770 770 AF2 Currency and deposits 382 150 840 110 1 482 105 1 587 AF3 Debt securities 90 950 198 25 1 263 125 1 388 AF4 Loans 50 1 187 115 24 8 1 384 70 1 454 AF5 Equity and investment fund shares/units 280 551 12 1 749 22 2 614 345 2 959 AF6 Insurance, pension and standardized guarantee schemes 25 30 20 391 4 470 26 496 AF7 Financial derivatives and employee stock options 5 13 0 3 0 21 0 21 AF8 Other accounts receivable/payable 150 19 55 3 227 134 361 AN Non-financial assets 300 -2 57 116 11 482 482 AN1 Produced non-financial assets 195 -4 29 67 7 294 294 AN11 Fixed assets 165 -2 23 53 7 246 246 AN12 Inventories 27 0 1 4 0 32 32 AN13 Valuables 3 -2 5 10 0 16 16 Total changes in assets AN2 Non-produced non-financial assets 105 2 28 49 4 188 188 AN21 Natural resources 101 1 26 48 4 180 180 AN22 Contracts, leases and licences 4 1 2 1 0 8 8 AN23 Goodwill and marketing assets 0 0 0 0 0 0 0 AF Financial assets/liabilities 93 230 -9 205 4 523 54 577 AF1 Monetary gold and SDRs 0 10 1 0 0 11 1 12 AF2 Currency and deposits 39 10 - 26 64 2 89 11 100 AF3 Debt securities 10 96 4 16 0 126 13 139 AF4 Loans 19 53 3 3 0 78 4 82 AF5 Equity and investment fund shares/units 17 44 3 76 1 141 15 156 AF6 Insurance, pension and standardized guarantee schemes 1 8 1 39 0 49 0 49 AF7 Financial derivatives and employee stock options 3 8 0 3 0 14 0 14 AF8 Other accounts receivable/payable 4 1 5 4 1 15 10 25 AN Non-financial assets 2 451 91 846 1 545 170 5 103 5 103 AN1 Produced non-financial assets 1 469 63 526 923 131 3 112 3 112 AN11 Fixed assets 1 391 50 490 766 128 2 825 2 825 AN12 Inventories 70 0 23 52 1 146 146 AN13 Valuables 8 13 13 105 2 141 141 AN2 Non-produced non-financial assets 982 28 320 622 39 1 991 1 991 Closing balance sheet AN21 Natural resources 965 24 312 621 39 1 961 1 961 AN22 Contracts, leases and licences 17 4 8 1 0 30 30 AN23 Goodwill and marketing assets 0 0 0 0 0 0 0 AF Financial assets/liabilities 1 075 3 651 387 3 465 176 8 754 859 9 613 AF1 Monetary gold and SDRs 0 700 81 0 0 781 1 782 AF2 Currency and deposits 421 10 124 904 112 1 571 116 1 687 AF3 Debt securities 100 1 046 4 214 25 1 389 138 1 527 AF4 Loans 69 1 240 118 27 8 1 462 74 1 536 AF5 Equity and investment fund shares/units 297 595 15 1 825 23 2 755 360 3 115 AF6 Insurance, pension and standardized guarantee schemes 26 38 21 430 4 519 26 545 AF7 Financial derivatives and employee stock options 8 21 0 6 0 35 0 35 AF8 Other accounts receivable/payable 154 1 24 59 4 242 144 386 578 The sequence of accounts S11 S11 S12 S12 S13 S13 S14 S14 S15 S15 S1 S1 S2 S2 General government General government Goods and services Goods and services Rest of the world Rest of the world Total economy Total economy Non-financial Non-financial corporations corporations corporations corporations Households Households Financial Financial NPISHs NPISHs account account account account Total Total Stocks and changes assets Stocks and changes in in liabilities ANAN Non-financial assets Non-financial assets 2 151 93 789 1 429 159 4 621 4 621 AN1 AN1 Produced non-financial assets Produced non-financial assets 1 274 67 497 856 124 2 818 2 818 AN11 AN11 Fixed assets Fixed assets 1 226 52 467 713 121 2 579 2 579 AN12 AN12 Inventories Inventories 43 22 48 1 114 114 AN13 AN13 Valuables Valuables 5 15 8 95 2 125 125 AN2 AN2 Opening balance sheet Opening balance sheet Non-produced non-financial assets Non-produced non-financial assets 877 26 292 573 35 1 803 1 803 AN21 AN21 Natural resources Natural resources 864 23 286 573 35 1 781 1 781 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 13 3 6 22 22 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets AFAF Financial assets/liabilities Financial assets/liabilities 982 3 221 421 3 3 544 396687 3 260 189 121 172 231 78762 805 1 274 036 9 9 036 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 690 80 0 770 770 770 770 AF2 AF2 Currency and deposits Currency and deposits 382 40 1 281 150102 84010 11038 11471 482 105 116 587 1 1 587 AF3 AF3 Debt securities Debt securities 90 44 950 1 053 212 198 2 25 263 11311 77 125 388 1 1 388 AF4 AF4 Loans Loans 50 897 1 187 115328 24 169 43 8 384 11437 70 17 454 1 1 454 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 280 1 987 765 551 12 4 1 749 22 614 22756 345 203 959 2 2 959 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes 25 12 435 30 20 19 391 45 470 471 26 25 496 496 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 54 1310 0 3 0 21 14 70 2121 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable 237 150 19 22 55 8 35 3 227 302 59 134 361 361 B90 Net worth - 88 - 30 498 4 500 210 5 090 - 469 4 621 ANAN Non-financial assets Non-financial assets 300 -2 57 116 11 482 482 AN1 AN1 Produced non-financial assets Produced non-financial assets 195 -4 29 67 7 294 294 AN11 AN11 Fixed assets Fixed assets 165 -2 23 53 7 246 246 Total changes in liabilities and net worth AN12 AN12 Inventories Inventories 27 0 1 4 0 32 32 AN13 AN13 Valuables Valuables 3 -2 5 10 0 16 16 Total changes in assets AN2 AN2 Non-produced non-financial assets Non-produced non-financial assets 105 2 28 49 4 188 188 AN21 AN21 Natural resources Natural resources 101 1 26 48 4 180 180 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 4 1 2 1 0 8 8 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets 0 0 0 0 0 0 0 AFAF Financial assets/liabilities Financial assets/liabilities 157 93 224 230 -102 9 20516 46 505 523 7254 577 577 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 0 10 1 0 0 11 121 1212 AF2 AF2 Currency and deposits Currency and deposits 39 0 10 65 - 26 37 64 0 20 89 102 2 - 11 100 100 AF3 AF3 Debt securities Debt securities 10 7 96 64 445 16 0 00 126 116 2313 139 139 AF4 AF4 Loans Loans 19 21 53 0 39 3 11 06 78 47 354 8282 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 100 17 44 39 32 76 0 10 141 141 1515 156 156 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes 10 848 10 39 1 00 49 49 00 4949 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 33 88 00 30 00 14 11 30 1414 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable 426 10 59 44 10 15 39 - 1410 2525 B10 Changes in net worth, total 236 4 - 54 305 9 500 - 18 482 B101 Saving and capital transfers 88 -5 - 90 210 -1 202 - 10 192 B102 Other changes in volume of assets 14 -1 -2 -1 0 10 10 B103 Nominal holding gains/losses 134 10 38 96 10 288 -8 280 B1031 Neutral holding gains/losses 82 6 27 87 6 208 - 10 198 B1032 Real holding gains/losses 52 4 11 9 4 80 2 82 ANAN Non-financial assets Non-financial assets 2 451 91 846 1 545 170 5 103 5 103 AN1 AN1 Produced non-financial assets Produced non-financial assets 1 469 63 526 923 131 3 112 3 112 AN11 AN11 Fixed assets Fixed assets 1 391 50 490 766 128 2 825 2 825 AN12 AN12 Inventories Inventories 70 0 23 52 1 146 146 AN13 AN13 Valuables Valuables 8 13 13 105 2 141 141 AN2 AN2 Non-produced non-financial assets Non-produced non-financial assets 982 28 320 622 39 1 991 1 991 Closing balance sheet Closing balance sheet AN21 AN21 Natural resources Natural resources 965 24 312 621 39 1 961 1 961 AN22 AN22 Contracts, leases and licences Contracts, leases and licences 17 4 8 1 0 30 30 AN23 AN23 Goodwill and marketing assets Goodwill and marketing assets 0 0 0 0 0 0 0 AFAF Financial assets/liabilities Financial assets/liabilities 1 3 378 075 651 3 3 768 387789 3 465 205 127 176 754 88267 859 1 346 613 9 9 613 AF1 AF1 Monetary gold and SDRs Monetary gold and SDRs 0 700 81 0 0 781 7821 782 782 AF2 AF2 Currency and deposits Currency and deposits 421 40 346 110 124139 90410 112 38 11573 571 116 114 687 1 1 687 AF3 AF3 Debt securities Debt securities 100 51 046 1 1 117 257 4 214 2 25 0 389 11427 138 100 527 1 1 527 AF4 AF4 Loans Loans 69 918 1 240 0 118337 27 180 849 462 11484 74 52 536 1 1 536 AF5 AF5 Equity and investment fund shares/units Equity and investment fund shares/units 297 2 087 804 595 15 6 1 825 0 23 0 755 22897 360 218 115 3 3 115 AF6 AF6 Insurance, pension and standardized guarantee schemes Insurance, pension and standardized guarantee schemes 26 12 483 38 21 19 430 1 45 519 520 26 25 545 545 AF7 AF7 Financial derivatives and employee stock options Financial derivatives and employee stock options 87 21 18 00 60 00 35 25 100 3535 AF8 AF8 Other accounts receivable/payable Other accounts receivable/payable 154 263 10 24 31 5912 435 341 242 45 144 386 386 B90 Net worth 148 - 26 444 4 805 219 5 590 - 487 5 103 579 System of National Accounts 580 Annex 3: Changes from the 1993 System of National Accounts A. Introduction A3.1 The System of National Accounts 2008 (2008 SNA) retains environment, advances in methodological research and the basic theoretical framework of its predecessor, the needs of users. System of National Accounts 1993 (1993 SNA). However, in line with the mandate of the United Nations Statistical A3.2 In sections B through G, the changes in the 2008 SNA are Commission, the 2008 SNA introduces treatments for new grouped together in six sections. The descriptions given only highlight the main differences between the 1993 and aspects of economies that have come into prominence, 2008 SNA while refraining from exhaustive elaborates on aspects that have increasingly become the descriptions. The discussion of the changes also includes focus of analytical attention and clarifies guidance on a cross-references to the corresponding paragraphs in the wide range of issues. The changes in the 2008 SNA bring chapters. In section H a check-list of changes by chapter is the accounts into line with developments in the economic given. B. Further specifications of statistical units and revisions in institutional sectoring 1. Producer unit undertaking ancillary activities 2. Artificial subsidiaries not regarded as to be recognized as a separate establishment institutional units unless resident in an in certain cases economy different from that of their parents Reference: chapter 5, paragraphs 5.41to 5.42 Reference: chapter 4, paragraphs 4.62 to 4.64 A3.3 The 2008 SNA recommends that if the activity of a unit A3.6 Ancillary corporations as described in the 1993 SNA are undertaking purely ancillary activities is statistically named as artificial subsidiaries in the 2008 SNA. Artificial observable, in that separate accounts for the production it subsidiaries are subsidiary corporations wholly owned by undertakes are readily available, or if it is located in a the parent corporation and created to provide services to the geographically different location from the establishments it parent corporation, or other corporations in the same group, serves, it should be recognized as a separate establishment. often in order to avoid taxes, to minimize liabilities in the When such an ancillary establishment is recognized, it is event of bankruptcy, or to secure other technical classified according to its own principal activity and seen advantages under the tax or corporation legislation in force as producing primary output. in a particular country. An artificial subsidiary is not treated as an institutional unit unless it is resident in an economy different from that of its parent. A3.4 The value of output of an ancillary establishment should be derived on a sum of costs basis, including the costs of the capital used by the unit. The output of the ancillary unit is 3. Branch of a non-resident unit recognized as treated as intermediate consumption of the establishments it an institutional unit serves and the output should be allocated across those establishments using an appropriate indicator such as the Reference: chapter 4, paragraph 4.47 output, value added or employment. The output is deemed to be market output when the parent enterprise is a market A3.7 The 1993 SNA simply stated that an unincorporated producer or producing for own final use and non-market enterprise owned by a non-resident institutional unit should otherwise. In the latter case, the cost of the capital should be treated as a notional resident unit in the country where it not be included in estimating the value of the output. is located. Such a unit is identified as a branch in the 2008 SNA and treated as an institutional unit. The 2008 SNA A3.5 In the 1993 SNA, a producer unit undertaking purely specifies indicative criteria to help recognize the branch of ancillary activities was always regarded as an integral part a non-resident unit as an institutional unit; namely, the unit of the establishments it served. engages in significant production of goods and services for 581 System of National Accounts a long period of time in that territory and is subject to the activity of the group of subsidiaries was income tax laws, if any, of the economy in which it is concentrated. Consequently, they were to be classified as located even if it may have a tax-exempt status. financial corporations only when the main activity of the group of corporations they controlled was financial. 4. Residence of multiterritory enterprises clarified 7. Head office to be allocated to the institutional sector of the majority of its Reference: chapter 4, paragraph 4.13 subsidiaries A3.8 The 2008 SNA provides guidelines for determining the Reference: chapter 4, paragraph 4.53 residence of multiterritory enterprises that operate a seamless operation over more than one economic territory. Such enterprises are typically involved in cross-border A3.15 The term "holding company" is sometimes mistakenly used activities and include shipping lines, airlines, hydroelectric where "head office" is more correct. The activities of a schemes on border rivers, pipelines, bridges, tunnels and head office, as defined in section M class 7010 of the ISIC undersea cables. When it is not possible to identify a parent Rev. 4, includes the overseeing and managing of other units or separate branches, it is recommended to prorate the total of the enterprise; undertaking the strategic or organizational operations of a multiterritory enterprise by the individual planning and decision making role of the enterprise; economic territories in which it operates. exercising operational control and managing the day-to-day operations of their related units. Such a unit therefore, produces non-financial or financial services depending A3.9 The 1993 SNA did not give explicit guidance for upon the type of output of its subsidiaries. The 2008 SNA determining the residence of multiterritory enterprises. recommends that the head office should be allocated to the non-financial corporations sector unless all or most of its 5. Special purpose entities recognized subsidiaries are financial corporations, in which case it is treated by convention as a financial auxiliary in the Reference: chapter 4, paragraphs 4.55 to 4.58; chapter financial corporations sector. 22, paragraphs 22.51 to 22.54 A3.16 The 1993 SNA did not give explicit guidance for treatment A3.10 The 2008 SNA provides guidance on the treatment of units of head offices. with no employees and no non-financial assets, units known variously as special purpose entities (SPEs) or 8. Subsector for non-profit institutions special purpose vehicles. There is no common definition of an SPE but some of its characteristics are that it has little introduced physical presence, is always related to another corporation, often as a subsidiary, and it is often resident in a territory Reference: chapter 4, paragraphs 4.35, 4.94, 4.103 and other than the territory of residence of its parent. 4.128 A3.11 Such a unit is treated as an institutional unit and allocated A3.17 Like the 1993 SNA, the 2008 SNA assigns non-profit to sector and industry according to its principal activity institutions (NPIs) to different institutional sectors, unless it falls into one of three categories; (a) captive regardless of motivation, tax status, type of employees or financial institutions, (b) artificial subsidiaries of the activity they are engaged in. Recognizing the increasing corporations, and (c) special purpose units of government. interest in considering the full set of NPIs as evidence of "civil society", the 2008 SNA recommends that NPIs A3.12 The 1993 SNA did not give explicit guidance for treatment within the corporate and government sectors be identified of such units. in distinct subsectors so that supplementary tables summarizing all NPI activities can be separately derived in 6. Holding company allocated to the financial a straightforward manner as and when required. corporations sector 9. Definition of financial services enlarged Reference: chapter 4, paragraph 4.54 Reference: chapter 4, paragraph 4.98 and chapter 6, A3.13 ISIC Rev. 4, in section K class 6420, describes a holding paragraph 6.158 company as one that holds the assets of subsidiary corporations but does not undertake any management A3.18 The 2008 SNA defines financial services more explicitly activities. Such a unit, therefore, produces only a financial than in the 1993 SNA to ensure that the increase in financial service. Accordingly, the 2008 SNA recommends that services other than the financial intermediation, specifically holding companies should always be allocated to the financial risk management and liquidity transformation, are financial corporations sector and treated as captive captured. Financial services include monitoring services, financial institutions even if all of their subsidiary convenience services, liquidity provision, risk assumption, corporations are non-financial corporations. underwriting and trading services. Chapter 17 gives guidance on when both explicit and implicit financial A3.14 The 1993 SNA recommended that holding companies were services should be identified, including margins on foreign to be assigned to the institutional sector in which the main exchange dealing and dealing in securities. 582 Changes from the 1993 System of National Accounts 10. Subsectoring of the financial corporation its liabilities. The subsectors are (i) Central Bank, (ii) sector revised to reflect new developments Deposit-taking corporations except the central bank, (iii) in financial services, markets and Money market funds (MMFs), (iv) Non-MMF investment funds, (v) Other financial intermediaries except insurance instruments corporations and pension funds, (vi) Financial auxiliaries, (vii) Captive financial institutions and money lenders, (viii) Reference: chapter 4, paragraphs 4.98 to 4.116. Insurance corporations (ICs) and (ix) Pension funds (PFs). A3.19 The 2008 SNA has introduced a slightly more detailed classification of the financial corporations sector to allow A3.20 Due to the substantial variations among countries in more flexibility and better consistency with other monetary defining money, the 2008 SNA does not include a and financial statistics systems such as those of the definition of money. However, the classification of International Monetary Fund and the European Central financial corporations and instruments is designed to be Bank. The financial corporations sector is divided into nine compatible with national money definitions. Because subsectors (as opposed to five in the 1993 SNA) according "Money market funds" are separately distinguished, they to the activity of the unit in the market and the liquidity of can be included or excluded as desired. C. Further specifications of the scope of transactions including the production boundary 1. Research and development is not an 2. Method for calculating financial ancillary activity intermediation services indirectly measured (FISIM) refined Reference: chapter 6, paragraph 6.207 Reference: chapter 6, paragraphs 6.163 to 6.165. A3.21 The 2008 SNA does not treat the research and development A3.24 The method for calculating financial intermediation activity as an ancillary activity. Research and development services indirectly measured, widely known as FISIM, has is creative work undertaken on a systematic basis in order been refined in the light of experience in implementing the to increase the stock of knowledge, including knowledge of 1993 SNA recommendations. By convention the 2008 SNA man, culture and society, and enable this stock of recommends that FISIM applies only to loans and deposits knowledge to be used to devise new applications. This does and only when those loans and deposits are provided by, or not extend to including human capital as assets within the deposited with, financial institutions. The 2008 SNA SNA. It is recommended that a separate establishment calculates the output of FISIM on loans (yL) and deposits should be distinguished for research and development when (yD) only, using a reference rate (rr). Assuming that these possible. loans and deposits attract interest rates of rL and rD respectively, the output of FISIM should be calculated A3.22 The 2008 SNA recommends that the output of research and according to the formula (rL - rr) yL + (rr - rD) yD. development should be valued at market prices if purchased (outsourced) or at the sum of total production costs plus an A3.25 The method recommended in the 2008 SNA for the appropriate mark-up representing the costs of fixed assets calculation of FISIM implies several changes to the 1993 used in production if undertaken on own account. Research SNA formula. For financial intermediaries, all loans and and development undertaken by specialized commercial deposits are included, not just those made from research laboratories or institutes is valued by receipts from intermediated funds. The reference rate should contain no sales, contracts, commissions, fees, etc. in the usual way. service element and reflect the risk and maturity structure Research and development undertaken by government of deposits and loans. The rate prevailing for inter-bank units, universities, non-profit research institutes, etc. is non- borrowing and lending may be a suitable choice as a market production and should be valued on the basis of the reference rate. However, different reference rates may be total costs incurred excluding a return to capital used. needed for each currency in which loans and deposits are denominated, especially when a non-resident financial A3.23 The 1993 SNA recognized that research and development is institution is involved. For banks within the same economy, undertaken with the objective of improving efficiency or there is often little if any service provided in association productivity, or deriving other future benefits. However, with banks lending to and borrowing from other banks. although these characteristics have the nature of investment activities, research and development was treated as part of A3.26 The 2008 SNA recommends that the consumption of intermediate consumption. It was recommended, though, FISIM should be allocated between users (lenders as well that it should not be treated as an ancillary activity but that as borrowers) treating the allocated amounts either as a separate establishment should be identified as secondary intermediate consumption by enterprises or as final activity. consumption or exports. 583 System of National Accounts A3.27 The 1993 SNA calculated FISIM as the difference between valuation on the recording of other transactions in which property income receivable and interest payable. The central banks are involved, such as interest payments and property income receivable excluded that part which was receipts. Neither did it indicate which unit or units use the receivable from investment of own funds. The 1993 SNA output of central banks thus valued. recognized that in practice it may be difficult to find any method of allocating FISIM among different users and, 4. Recording of the output of non-life insurance therefore, accepted that some countries may prefer to continue to use the convention whereby the whole of the services improved services are allocated to intermediate consumption of a notional industry. This possibility has been removed in the Reference: chapter 6, paragraphs 6.184 to 6.190 and 2008 SNA. 6.199; chapter 17, paragraphs 17.13 to 17.42 3. Output of central bank clarified A3.32 It is recognized that in cases of catastrophic losses the output of the insurance activity estimated using the basic Reference: chapter 6, paragraphs 6.151 to 6.156; chapter algorithm of the 1993 SNA, depending on the balance of 7, paragraphs 7.122 to 7.126 premiums and claims (on an accrual basis), could be extremely volatile (even negative). The 2008 SNA, therefore recommends that the output of the non-life A3.28 The services produced by the central bank are identified in insurance activity should be calculated using adjusted three broad groups, namely financial intermediation, claims and adjusted premiums supplements. With the monetary policy services and supervisory services application of this method, the net premiums receivable and overseeing financial corporations. The 2008 SNA adjusted claims due may no longer be necessarily equal for recommends that separate establishments should be each period. identified for units of the central bank undertaking production of these different services when the level of activity is significant for the accounts as a whole. This A3.33 The 2008 SNA recommends three approaches for facilitates the distinction between the market and non- estimating non-life insurance output, namely the market output of the central bank. Financial intermediation "expectation approach", the "accounting approach" and the services represent market production, monetary policy "cost approach". The expectation approach consists in services represent non-market production and borderline replicating the ex ante model used by insurer corporations cases, such as supervisory services, may be treated as to set their premiums, on the basis of their expectations. In market or non-market services depending on whether accepting risk and setting premiums, insurers consider both explicit fees are charged that are sufficient to cover the their expectation of loss (claims) and of income (premiums costs of providing such services or not. and premium supplements). This expected margin (premiums plus expected premium supplements minus expected claims) provides a much better measure of the A3.29 The 2008 SNA provides guidance that non-market insurance service than the 1993 SNA formula applied ex activities are to be regarded as acquisition of collective post. Ideally, the micro data from the accounts of the services by general government with a matching transfer insurance corporations could be used for the expectation from the central bank to the government, so there is no net approach for estimating output of the insurance corporation cost to the government for these services. Market output is but this information is seldom available to the statistical provided on an individual basis to all sectors of the organizations. In the absence of such data, the 2008 SNA economy against payment for the services. recommends the application of a statistical technique to simulate this approach by using macrostatistics, and using A3.30 In cases when the interest rate set by the central bank is so smoothed past data to forecast the expected claims. high or so low as to imply the inclusion of an implicit subsidy or tax, the 2008 SNA recommends that these A3.34 Alternatively, an accounting approach may be used should be explicitly recorded as such if they are significant. whereby output is calculated as: actual premiums earned These taxes or subsidies should be shown as receivable by plus premium supplements less adjusted claims incurred; and payable by government but with a matching transfer where adjusted claims are determined by using claims due from the government to the central bank in the case of a tax plus the changes in equalization provisions and, if and a transfer from the central bank to government in the necessary, changes to own funds. case of a subsidy. A3.35 If the necessary accounting data are not available and the A3.31 The 1993 SNA recommended that the services of central historical statistical data are not sufficient to allow use of banks be measured on the basis of receipts from fees, an expectations approach to estimate the output, the output commissions, and financial intermediation services of non-life insurance may be estimated as the sum of costs indirectly measured. Application of this method sometimes (including intermediate costs, labour and capital costs) plus resulted in unusually large positive or negative estimates of an allowance for "normal profit". output. For this reason, in 1995 the Inter-Secretariat Working Group on National Accounts (ISWGNA) revised the recommendation for measuring the output of central A3.36 For exceptionally large claims, such as those following a banks. If the traditional approach consistently leads to catastrophe, the claims may be recorded as capital transfers inappropriate results, countries may, as a second best rather than, as normal, current transfers. option, measure output at cost as in the case for other non- market output. However, the ISWGNA did not provide A3.37 The 2008 SNA changes the terminology from "claims due" further guidance on the implications of the cost based to "claims incurred". 584 Changes from the 1993 System of National Accounts 5. Reinsurance similarly treated as direct A3.40 In the 1993 SNA reinsurance transactions were consolidated insurance with those for direct insurance so that the division between direct insurance and reinsurance was not shown. Reference: chapter 6, paragraph 6.200; chapter 17, 6. Valuation of output for own final use by paragraphs 17.56 to 17.65 households and corporations to include a return to capital A3.38 The 2008 SNA recommends that reinsurance should be treated in the same way as direct insurance. The Reference: chapter 6, paragraph 6.125 transactions between the direct insurer and the reinsurer are recorded as an entirely separate set of transactions and no A3.41 The 2008 SNA recommends that when estimating the value consolidation takes place between the transactions of the of the output of goods and services produced by households direct insurer as issuer of policies to its clients on the one and corporations for own final use, it is appropriate to hand and the holder of a policy with the reinsurer on the include a return to capital as part of the sum of costs when other. The premiums are shown as being first payable to the this approach is used for estimating output in the absence of direct insurer and then a lesser premium is payable to the comparable market prices. However, no return to capital reinsurer. This non-consolidation is referred to as gross should be included when production for own final use is recording on the part of the direct insurer. undertaken by non-market producers. A3.42 The 1993 SNA did not include the return to capital in A3.39 The services produced by the reinsurance corporation are estimating the output of goods and services produced for treated as the intermediate consumption by the direct own final use by households and corporations when these insurer. were estimated as the sum of costs. D. Extension and further specification of the concepts of assets, capital formation and consumption of fixed capital 1. Change of economic ownership introduced A3.45 The 1993 SNA did not explicitly define ownership. Often it seemed to imply legal ownership, but in some instances it relied on the concept of change of economic ownership Reference: chapter 3, paragraphs 3.21, 3.26, 3.169; when legal ownership remained unchanged. chapter 10, paragraph 10.5 2. Asset boundary extended to include A3.43 The principle of change of ownership is central to the research and development determination of the timing of recording of transactions in goods, services and financial assets. The term "economic Reference: chapter 10, paragraphs 10.103 to 10.105 ownership" better reflects the underlying reality economic accounts are attempting to measure. Economic ownership A3.46 As noted in section C, in the 2008 SNA the activity of takes account of where the risks and rewards of ownership research and development is not treated as an ancillary lie. A change in ownership from an economic point of view activity. The output of research and development should be means that all risks, rewards, rights and responsibilities of capitalized as "intellectual property products" except in ownership are transferred. cases where it is clear that the activity does not entail any economic benefit to its producer (and hence owner) in which case it is treated as intermediate consumption. With A3.44 The 2008 SNA gives guidance to distinguish between legal the inclusion of research and development in the asset ownership and economic ownership and recommends that boundary, the 1993 SNA asset category of patented entities assets be recorded on the balance sheets of the economic as a form of non-produced assets disappears and is replaced rather than the legal owner. For a non-financial asset, the by research and development under fixed assets. user and not the legal owner may assume economic ownership if the legal owner agrees that the user is entitled A3.47 In order to treat R&D in this way, several issues have to be to the benefits deriving from using the asset in production addressed. These include deriving measures of research and in return for assuming the risks involved. Similarly when development, price indices and service lives. Specific products change hands, it is the unit that assumes the risks guidelines, together with handbooks on methodology and in the case of destruction, theft, etc. that is the economic practice, will provide a useful way of working towards owner. Ownership is also associated with assuming risk in solutions that give the appropriate level of confidence in the case of financial assets. When the time of recording the resulting measures. depends on change of ownership, it is the change of economic ownership that is intended, unless otherwise A3.48 Treatment of research and development giving rise to specified. produced assets has removed the 1993 SNA inconsistency 585 System of National Accounts of treating the patented entities as non-produced assets but Goods for resale treating royalty payments as payments for services. Valuables Precious metals and stones 3. Revised classification of assets introduced Antiques and other art objects Other valuables Reference: chapter 3, paragraphs 3.5, 3.30 to 3.31, 3.37 to Non-produced assets 3.39; chapter 10, paragraph 10.8 Natural resources Land A3.49 The definition of asset has been refined in the 2008 SNA, Mineral and energy resources covering the issues such as risk, demonstrable value and Non-cultivated biological resources constructive obligations. It is defined as a store of value Water resources representing a benefit or series of benefits accruing to the Other natural resources economic owner by holding or using the entity over a Radio spectra period of time. It is a means of transferring value from one Other accounting period to another. Contracts, leases and licences Marketable operating leases A3.50 With regard to the classification of assets, the 2008 SNA, Permits to use natural resources like its predecessor, distinguishes at the first level of the Permits to undertake specific activities classification between non-financial assets and financial Entitlement to future goods and services on an assets/liabilities. Within non-financial assets, it exclusive basis distinguishes between produced and non-produced assets. Goodwill and marketing assets Classification of produced and non-produced assets is no longer distinguished between tangible and intangible assets. Non-produced assets in the 2008 SNA are split A3.52 In the 2008 SNA assets classification there are several into three categories, natural resources, contracts leases changes within the fixed assets category. and licences, and purchase and sale of goodwill and marketing assets. a. Within buildings and structures, a category has been added for land improvements. This replaces the 1993 A3.51 The non-financial assets are classified in the 2008 SNA as SNA term "major improvements to non-produced non- follows: financial assets". The costs of ownership transfer on all land are to be included with land improvements. Produced assets Fixed assets b. The information, computer and telecommunications Dwellings (ICT) equipment has been included as a new category Other buildings and structures under machinery and equipment. Non-residential buildings Other structures c. Weapons systems are recognized as produced assets Land improvements and classified separately. Machinery and equipment Transport equipment d. The term "intangible fixed assets" has been renamed as ICT equipment "intellectual property products". The word "products" Other machinery and equipment is included to make clear that it does not include third Weapons systems party rights which are non-produced assets in the SNA. Cultivated biological resources Animal resources yielding repeat products. Tree, crop and plant resources yielding repeat e. Research and development products are included products within intellectual property products. As a result patented entities no longer appear as non-produced Costs of ownership transfer on non-produced assets assets and are subsumed in research and development. Intellectual property products Research and development Mineral exploration and evaluation f. The item "mineral exploration" has been renamed Computer software and databases "mineral exploration and evaluation" to emphasize that Computer software the coverage conforms to the international accounting Databases standards. Entertainment, literary or artistic originals Other intellectual property products g. Computer software has been modified to include Inventories databases; software and databases are two sub- Materials and supplies components. Work in progress Work-in-progress on cultivated biological h. The term "other intellectual property products" resources replaces "other intangible fixed assets". Other work-in-progress Finished goods A3.53 The only change to inventories is to show military Military inventories inventories separately. 586 Changes from the 1993 System of National Accounts A3.54 Changes within the non-produced assets category are as 5. The asset category "computer software" follows. modified to include databases a. The "tangible non-produced assets" of the 1993 SNA Reference: chapter 10, paragraphs 10.110 to 10.114 are renamed as "natural resources". A3.59 The 1993 SNA asset category "computer software" has b. Other natural resources such as radio spectra have been been modified in the 2008 SNA to include databases in the added, and the heading "intangible non-produced title as "computer software and databases" with a further assets" has been split into two subcategories, split between "computer software" and "databases". "contracts, leases and licences" and "goodwill and marketing assets". A3.60 The 2008 SNA gives explicit guidance for valuation of the computer software and databases purchased from the · Contracts, leases and licences are split into four market or developed in-house. The computer software and subcategories; marketable operating leases, databases purchased on the market should be valued at permissions to use natural resources, permissions to purchasers' prices, while those developed in-house should undertake specific activities, and entitlement to future be valued at their estimated basic price or at their costs of production (including a return to capital for market goods and services on an exclusive basis. producers) if it is not possible to estimate the basic price. · The previous category of purchased goodwill is A3.61 The 2008 SNA recommends treating all databases holding changed to purchased goodwill and marketing assets data with a useful life of more than one year as fixed assets. with changes in coverage as described below in item Both databases created on own account and those for sale 11. should be included if they meet this criterion. 4. Extension of the assets boundary and A3.62 In the 1993 SNA only "large" databases were recognized as assets. government gross capital formation to include expenditure on weapons systems 6. Originals and copies recognized as distinct products Reference: chapter 10, paragraphs 10.87 and 10.144 Reference: chapter 10, paragraphs 10.100 to 10.101 A3.55 The military weapons systems comprising vehicles and other equipment such as warships, submarines, military A3.63 The 2008 SNA provides guidance on the treatment of aircraft, tanks, missile carriers and launchers, etc. are used originals and copies of intellectual property products as continuously in the production of defence services, even if distinct products. It recommends that if a copy is sold their peacetime use is simply to provide deterrence. The outright and is expected to be used in production for more 2008 SNA, therefore, recommends that military weapons than a year then it should be treated as a fixed asset. A copy systems should be classified as fixed assets and that the made available under a licence to use should also be treated classification of military weapons systems as fixed assets as a fixed asset if it will be used in production for a period should be based on the same criteria as for other fixed in excess of one year and the licensee assumes all the risks assets; that is, produced assets that are themselves used and rewards of ownership. repeatedly, or continuously, in processes of production for more than one year. A3.64 If the acquisition of a copy with a licence to use is purchased with regular payments over a multiyear contract A3.56 Single-use items, such as ammunition, missiles, rockets, and the licensee is judged to have acquired economic bombs, etc., delivered by weapons or weapons systems are ownership of the copy, then it should be regarded as the treated as military inventories. However, some single-use acquisition of an asset. If regular payments are made for a items, such as certain types of ballistic missiles with a licence to use without a long-term contract, then the highly destructive capability, may provide an ongoing payments should be treated as payments for a service of service of deterrence against aggressors and therefore meet using the copy. the general criteria for classification as fixed assets. A3.65 If there is a large initial payment followed by a series of A3.57 Unlike in the 1993 SNA, strategic inventories are no longer smaller payments in succeeding years, the initial payment separated from other inventories of the same type of should be recorded as gross fixed capital formation and the products. succeeding payments should be treated as payments for a service. A3.58 The 1993 SNA treated as gross fixed capital formation only those expenditures by the military on fixed assets of a kind A3.66 If the licence allows the licensee to reproduce the original that could be used for civilian purposes of production. On and subsequently assume responsibility for the distribution, the other hand, military weapons, and vehicles and support and maintenance of these copies, then this is equipment whose sole purpose was to launch or deliver described as a licence to reproduce and should be regarded such weapons, were not treated as gross fixed capital as the sale of part or whole of the original to the unit formation but as intermediate consumption. holding the licence to reproduce. 587 System of National Accounts A3.67 The 1993 SNA did not provide guidance on the treatment of 9. Mineral exploration and evaluation originals and copies as distinct products. Reference: chapter 10, paragraphs 10.106 to 10.108 7. The concept of capital services introduced A3.73 The 2008 SNA maintains the distinction between the act of exploring for mineral resources (treated as a produced Reference: chapter 20 asset) and the mineral resources themselves (treated as non- produced assets). The term "mineral exploration" has been A3.68 Capital services for assets used in market production were renamed as "mineral exploration and evaluation" to match implicitly included within the 1993 SNA but were not the term used in the International Accounting Standards separately identified. Given the importance of identifying and has been defined accordingly. them for productivity measurement and other analysis, a new chapter has been added in the 2008 SNA explaining A3.74 The 2008 SNA gives guidance that mineral exploration and the role of capital services and their appearance in the evaluation should be valued at market prices if purchased accounts. Details can be presented in a supplementary table or at the sum of costs plus an appropriate mark-up if for market producers, bringing into the SNA the advances undertaken on own account. in research in recent decades in the fields of growth and productivity and helping to satisfy the analytical needs of A3.75 The 2008 SNA recognizes that because the market price is many users. seldom available for mineral resources, the default valuation is the present value of future receipts of resource rent. 8. Treatment of costs of ownership transfer elaborated A3.76 Payments by an extractor to the owner of the mineral resources corresponding to a share of the resource rent Reference: chapter 10, paragraphs 10.48 to 10.52, should be shown as property income even if they are paragraph 10.97 and paragraphs 10.158 to 10.162 described as taxes and treated as such in a government's own accounts. A3.69 Like the 1993 SNA, the 2008 SNA continues to treat the A3.77 The 1993 SNA recommended that when the legal owner of costs of ownership transfer as fixed capital formation. a mineral reserve contracts with another unit to undertake Costs of ownership transfer on acquisition of an asset extraction, on pragmatic grounds the resource may should be written off over the period the asset is expected continue to be shown on the balance sheet of the legal to be held by the purchaser rather than over the whole life owner with payments by the extractor to the owner treated of the asset (as was recommended in the 1993 SNA). Costs as property income. of ownership transfer on the disposal of an asset should also be written off over the period the asset is held. Recognizing this recommendation may be difficult to 10. Land improvements implement when there is no adequate data, the 2008 SNA recommends that these costs should still be recorded as Reference: chapter 10, paragraphs 10.79 to 10.81 gross fixed capital formation but written off as consumption of fixed capital in the year they are incurred. Installation and de-installation costs should be included in A3.78 Land improvements continue to be treated as gross fixed the costs of ownership transfer when they are separately capital formation. The 2008 SNA recommends treating invoiced and in the purchaser's price of the asset otherwise. land improvements as a category of fixed assets distinct from the non-produced land asset as it existed before improvement. In cases where it is not possible to separate the value of the land before improvement and the value of A3.70 Terminal costs (for example dismantling costs) should be those improvements, the land should be allocated to the written off over the whole life of the asset, regardless of the category that represents the greater part of the value. The number of owners during the life of the asset. In practice, it costs of ownership transfer on all land are to be included in may be difficult to predict terminal costs accurately. Any the land improvements. amount not already covered by consumption of fixed capital during the life of the asset is written off at the time A3.79 The 1993 SNA recorded improvements to land as gross the costs are incurred as consumption of fixed capital. fixed capital formation, but in the balance sheet such improvements were included with land itself. A3.71 In the 1993 SNA, costs of ownership transfer in acquiring an asset were recommended to be written down over the 11. Goodwill and marketing assets life of the asset. If the asset was sold before the end of its life, the remaining costs of ownership transfer on Reference: chapter 10, paragraphs 10.196 to 10.199 acquisition not already written off were written off in the other changes in volume of assets account. A3.80 The 2008 SNA renames "purchased goodwill" as "purchased goodwill and marketing assets". Purchased A3.72 The 1993 SNA was not explicit about the treatment of goodwill and marketing assets continue to be treated as terminal costs. non-produced assets, though at a higher level in the 588 Changes from the 1993 System of National Accounts hierarchy than that in 1993 SNA, specifically at the same A3.86 The 2008 SNA recommends that the consumption of fixed level as natural resources and contracts, leases and licences. capital should be measured at the average prices of the period with respect to a constant-quality price index of the asset concerned. A3.81 In the 1993 SNA, goodwill was recorded only following the takeover of an enterprise. For that reason it was described as "purchased goodwill". Goodwill was not recognized in A3.87 The 1993 SNA did not give guidance about whether the any other context. The 2008 SNA recognizes that this prices to be used for measurement of the consumption of difference may actually include assets such as mastheads, fixed capital should relate to the general price level or logos, customer lists and so on which are described whether they should be asset specific. collectively as "marketing assets". Exceptionally, identified marketing assets may be sold individually and separately from the whole corporation in which case their sale should 14. Definition of cultivated biological resources also be recorded under this item. made symmetric to uncultivated resources A3.82 The 2008 SNA recommends a consistent approach for Reference: chapter 10, paragraph 10.88 calculating the value of the "purchased goodwill and marketing assets" as the excess of the value paid for an enterprise as a going concern over the sum of its assets less A3.88 The definition of cultivated biological resources in the the sum of its liabilities, each item of which has been 2008 SNA has been clarified making it specific that their separately identified and valued irrespectively of whether natural growth and regeneration are treated as production the entity is a listed or unlisted corporation, a quasi- only in cases where these are under the direct control, corporation or is unincorporated. responsibility and management of institutional units. A3.83 In the 1993 SNA, purchased goodwill was calculated A3.89 Cultivated assets of the 1993 SNA have been renamed as differently depending on whether the business was an cultivated biological resources in the 2008 SNA. unincorporated enterprise or a corporation. For an unincorporated enterprise, purchased goodwill was derived as the excess of the purchase price over the separately 15. Intellectual property products introduced identified and valued assets less liabilities. For corporations it was described as the difference between the share price immediately before the sale and the actual sale price per Reference: chapter 10, paragraph 10.98 share, multiplied by the number of shares. It did not make any distinction between listed and unlisted corporations in A3.90 The accounting treatment of assets previously called the calculation of purchased goodwill. "intangible produced assets" and now labelled, more descriptively, "intellectual property products" has been 12. Water resources treated as an asset in some clarified and expanded in the 2008 SNA. These assets are further split into research and development; mineral cases exploration and evaluation; computer software and databases; entertainment, literary or artistic originals; and Reference: chapter 10, paragraph 10.184 other intellectual property products. A3.84 In the 2008 SNA the definition of water resources has been 16. Concept of resource lease for natural extended to potentially cover rivers, lakes, artificial resources introduced reservoirs and other surface catchments in addition to aquifers and other groundwater resources. It consists of surface and groundwater resources used for extraction to Reference: chapter 7, paragraph 7.109 the extent that their scarcity leads to the enforcement of ownership or use rights, market valuation and some measure of economic control. A3.91 The 2008 SNA introduces the concept of a resource lease to cover the situation where the natural resource continues to be shown in the balance sheet of the legal owner even A3.85 The 2008 SNA recommends that water bodies should in though the lessee is the unit using the resource in principle be valued in a manner parallel to the valuation of production and is thus in effect the economic owner. In mineral resources but with an indication that more return, the lessee makes a regular payment recorded as pragmatic alternatives may have to be used such as property income and described as rent. By convention, no estimates based on access fees. decline in the value of a natural resource is recorded in the SNA as a transaction similar to consumption of fixed 13. Consumption of fixed capital to be measured capital. In the SNA the natural resource is effectively treated as having an infinite life as far as income generation at the average prices of the period with is concerned. A resource lease may apply to any natural respect to a constant-quality price index of resource recognized as an asset in the SNA. the asset concerned A3.92 The 1993 SNA did not discuss the concept of a resource Reference: chapter 10, paragraph 10.156 lease for natural resources. 589 System of National Accounts 17. Changes in the items appearing in the other Economic appearance of assets changes in the volume of assets account Economic disappearance of non-produced assets Depletion of natural resources introduced Other economic disappearance of non-produced assets Reference: chapter 12 Catastrophic losses Uncompensated seizures Other changes in volume n.e.c. A3.93 With a view to giving more structural listing of possible Changes in classification causes for changes in assets other than transactions, the list Changes in sector classification and structure of items appearing in the other changes in volume of assets Changes in classification of assets and liabilities account has changed in the 2008 SNA. The other changes Nominal holding gains and losses in the volume of assets show changes in the assets/ Neutral holding gains and losses liabilities in seven main categories and some subcategories Real holding gains and losses as follows: E. Further refinement of the treatment and definition of financial instruments and assets 1. Treatment of securities repurchase represented by the value of the stock option. Ideally the value of the option should be spread over the period agreement clarified between the grant date and vesting date; if this is not possible they may be recorded at the vesting date. Reference: chapter 11, paragraphs 11.74 to 11.77 A3.97 The 1993 SNA did not provide guidance on the treatment of The 2008 SNA adds explanation of securities repurchase employee stock options. agreement and gold loans and deposits. A securities repurchase agreement (repo) is an arrangement involving 3. Treatment of non-performing loans the sale of securities or other assets at a specified price with a commitment to repurchase the same or similar elaborated assets at a fixed price on a specified future date. Reference: chapter 11, paragraph 11.129; chapter 13, A3.94 The 2008 SNA continues to treat a repo as a collateralized paragraphs 13.66 to 13.68 loan and recognizes the possibility of on-selling of securities that have been repoed. In the case of on selling of A3.98 Guidance on the treatment of impaired (non-performing) the repoed security, a negative asset should be recorded for loans has been elaborated in the 2008 SNA. It provides a the lender to avoid double-counting. definition of a non-performing loan as a loan on which payments of interest and/or principal are past due by 90 A3.95 The 1993 SNA text suggested that on-selling of securities days or more, or interest payments equal to 90 days or more that have been repoed is either not allowed or not practised. have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons (such as a debtor filing for bankruptcy) to doubt that payments will be made in full. 2. Treatment of employee stock options described A3.99 The 2008 SNA recommends that the non-performing loan should continue to be recorded at nominal value in the main Reference: chapter 11, paragraph 11.124; chapter 17, accounts and interest should be shown accruing until a loan paragraphs 17.384 to 17.398 is repaid or the principal is written off by mutual agreement. Two memorandum items in respect of non- A3.96 Employee stock options are a common tool used by performing loans are recommended, the nominal value of companies to motivate their employees. An employee stock loans deemed to be non-performing and the market option is an agreement made on a given date (the "grant" equivalent value of these loans. The closest approximation date) under which an employee may purchase a given to market equivalent value is fair or "mark-to-market" number of shares of the employer's stock at a stated price value, which is "the value that approximates the value that (the "strike" price) either at a stated time (the "vesting" would arise from a market transaction between two date) or within a period of time (the "exercise" period) parties". In the absence of fair value data, the memorandum immediately following the vesting date. The 2008 SNA item will have to use a second best approach and show recommends that transactions in employee stock options nominal value less expected loan losses. In addition, should be recorded in the financial account as the interest receivable on the non-performing loans should be counterpart to the element of compensation of employees shown as an "of which" item. 590 Changes from the 1993 System of National Accounts A3.100 The 2008 SNA recommends that these memorandum items A3.108 When the coupons are linked to a broad index, the full should be standard for the government sector, the financial amounts paid as coupons, after indexation, are accrued as corporations sector and for the rest of the world. interest. When the value of the principal is index-linked the difference between the eventual redemption price and the A3.101 The 1993 SNA did not give guidance on the criteria to be issue price is treated as interest accruing over the life of the applied to the recording of non-performing loans. instrument. 4. Treatment of guarantees elaborated A3.109 If the link is to a narrow index, interest accruals are determined by fixing the rate at which interest accrues at the time of issue. Any deviation of the index from the Reference: chapter 17, paragraphs 17.207to 17.224 expected path is treated as holding gains or losses. Because the rate is settled at the time the security is issued, the A3.102 The treatment of several classes of guarantees has been holding gains and losses will not normally cancel out over clarified in the 2008 SNA. It recognizes three classes of the life of the instrument. guarantees and provides guidance for their treatment. The first sort of guarantees are those provided by means of a A3.110 In the 1993 SNA the guidance about how transactions financial derivative, such as a credit default swap. These relating to index-linked debt securities should be recorded derivatives are actively traded on financial markets and the was not precise. derivative presents no new features for the SNA. 6. Treatment of debt instruments indexed to a A3.103 The second class of guarantees, standardized guarantees, is foreign currency revised composed of the sorts of guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines, such as export credit guarantees and student loan Reference: chapter 17, paragraph 17.281 guarantees. In this case, although it is not possible to establish the likelihood of any one loan defaulting, it is A3.111 The 2008 SNA recommends that debt instruments with standard practice to estimate how many out of a batch of both principal and coupon payments indexed to a foreign similar loans may default. It operates on the same principle currency should be classified and treated as though the as for non-life insurance and should be treated similarly. If instrument is denominated in that foreign currency. the guarantor is part of general government and deliberately sets the fees below the level of expected defaults, a subsidy A3.112 The 1993 SNA recommended that in the case of debt should be imputed to the guarantee holders. instruments denominated in a foreign currency, changes in the value of the principal in domestic currency terms that A3.104 The third class of guarantees, described as one-off arise from exchange rate variations should be treated as guarantees, consists of those where the risk is so particular holding gains (non-transactions). However, in the case of that it is not possible for the probability of it being called to debt instruments indexed to a foreign currency, such be estimated with any degree of accuracy. In most cases, changes are treated as interest (transactions). The 2008 the granting of a one-off guarantee is considered a SNA recommendation removes the anomaly by treating contingency and is not recorded as a financial liability. instruments that have economically equivalent characteristics identically. A3.105 The initial discussion was in terms of loan guarantees, but the extension of standardized guarantees to other financial 7. Flexibility on valuation of unlisted equity instruments in late 2008 suggested generalizing this treatment. Reference: chapter 13, paragraphs 13.69 to 13.70 A3.106 The 1993 SNA treated guarantees as contingent liabilities A3.113 Not all equity is listed and quoted on stock exchanges. This and thus had no record of the existence of the guarantee situation often arises for direct investment enterprises, until it was activated. Further, it did not provide explicit private equity, equity in unlisted and delisted companies, guidance for the treatment of flows arising at activation. listed but illiquid companies, joint ventures and unincorporated enterprises. The 2008 SNA provides 5. Treatment of index-linked debt securities guidance on alternative options of valuing such equity. Some of the alternative recommended options are recent elaborated transaction price, net asset value, present value or price to earnings ratios, book values reported by enterprises with Reference: chapter 17, paragraph 17.274 to 17.282 macrolevel adjustments by the statistical compiler, own funds at book value and apportioning global value. A3.107 The issue concerns the case where the coupon or principal payments, or both, payable on securities such as bonds are A3.114 The 1993 SNA gave rather restricted guidance on how to determined by indicators agreed by to the parties, but the value unlisted equity. It recommended that the value of values of the indicators are not known when the agreement shares in corporations that are not quoted on stock is made. Under such an arrangement, the amount of the exchanges or otherwise traded regularly should be increase in value of the security to be treated as interest estimated using the prices of quoted shares that are cannot be known at the time of issue. The 2008 SNA comparable in earnings and dividend history and prospects, recommends two approaches to determine the interest adjusting downward, if necessary, to allow for the inferior accrued in each accounting period. marketability or liquidity of unquoted shares. 591 System of National Accounts 8. Unallocated gold accounts treated as 12. Fees payable on securities lending and gold financial assets and liabilities loans Reference: chapter 11, paragraph 11.45 Reference: chapter 17, paragraph 17.254 A3.115 The 2008 SNA recommends that the unallocated gold A3.121 The 2008 SNA recommends that all fees payable to the accounts should be treated as financial assets and liabilities owners of securities used for securities lending and to the and classified with deposits in foreign currency if these owners of gold used for gold loans (whether from allocated deposits denominated in gold are held with non-residents. or non-allocated gold accounts) should be recorded by convention as interest. The interest may have a FISIM component, separately identified, if the unit providing the 9. Definition of monetary gold and gold bullion loan is classified as a financial institution. revised A3.122 The 1993 SNA did not give guidance on the issue of fees Reference: chapter 11, paragraph 11.45 and 11.46 payable on securities lending and gold loans. 13. Financial asset classification A3.116 The definition of monetary gold has changed in the 2008 SNA in order to align with BPM6. The change stems from the recognition of allocated and unallocated gold accounts Reference: chapter 11 whereby the allocated gold account provides title to the physical gold and the unallocated gold account is a deposit A3.123 To reflect the innovations in the financial market since the denominated in gold. The latter is treated as foreign adoption of the 1993 SNA, and to maintain its relevance, currency if held with non-residents. Gold bullion (that is, the financial asset classification has been changed in the coins, ingots or bars with a minimum purity of at least 995 2008 SNA. The classification of financial assets and parts per thousand) is the only financial asset recognized liabilities in the 2008 SNA is as follows: with no corresponding liability when held as a reserve asset by the monetary authorities. Monetary gold is defined as Monetary gold and SDRs gold to which the monetary authorities (or others who are Monetary gold subject to the effective control of the monetary authorities) SDRs have title and is held as a reserve asset and comprises gold Currency and deposits bullion and unallocated gold accounts with non-residents. Currency Transferable deposits A3.117 The 1993 SNA does not discuss allocated or unallocated Inter-bank positions metal accounts. Other transferable deposits Other deposits Debt securities 10. Liability in special drawing rights recognized Short-term Long-term Reference: chapter 11, paragraphs 11.47 to 11.49 Loans Short-term A3.118 The 2008 SNA recommends to treat special drawing rights Long-term (SDRs) issued by the International Monetary Fund as being Equity and investment fund shares an asset of the country holding the SDR and a claim on the Equity participants in the scheme collectively. Further, it is Listed shares recommended that the allocation and cancellation of SDRs Unlisted shares be recorded as transactions. The asset and liability aspects Other equity of SDRs should be recorded separately. As a result of the Investment fund shares/units changed treatment of SDRs, it recommends that monetary Money market fund shares/units gold and SDRs be shown as separate subitems. Other investment fund shares/units Insurance, pension and standardized guarantee schemes Non-life insurance technical provisions A3.119 The 1993 SNA classified SDRs as assets without Life insurance and annuity entitlements corresponding liabilities. Pension entitlements Claims of pension funds on pension managers 11. Distinction made between deposits and Entitlements to non-pension benefits loans Financial derivatives and employee stock options Financial derivatives Options Reference: chapter 11, paragraph 11.56 Forwards Employee stock options A3.120 The 2008 SNA continues to distinguish between loans and Other accounts receivable/payable deposits. With a view to avoiding ambiguity between loans Trade credits and advances and deposits when both parties to the transaction are banks, Other accounts receivable/payable it introduces a category "inter-bank positions". 592 Changes from the 1993 System of National Accounts A3.124 The 2008 SNA renames "securities other than shares" as A3.130 The 2008 SNA recommends a number of changes to the "debt securities" and "shares and other equity" as "equity 1993 SNA recommendations in the case of defined benefit and investment fund shares". The category of financial schemes: derivatives introduced in an update to the 1993 SNA is extended to include employee stock options. a. the level of the employer's contribution should be determined by assessing the increase in the net present 14. Distinction between financial leasing and value of the pension entitlement the employee has operating leasing based on economic earned in the period in question, adding any costs charged by the pension fund for operating the scheme ownership and deducting the amount of any contribution the employee makes; Reference: chapter 17, paragraphs 17. 301 to 17.309 b. this amount should be determined actuarially, taking A3.125 The 2008 SNA presents an overview setting out the into account only the life expectancy of the employee principles of the appropriate treatment of leases and and not any future earnings or the impact of any future licences. It recognizes the distinction between an operating pay increases on the ultimate pension benefit; lease and a financial lease according to whether the lessee is regarded as the economic owner of the asset or not. c. an explicit liability of the pension fund to the employee should be shown in the financial account and balance A3.126 The distinction between operating leasing and the financial sheet; and leasing in the 1993 SNA was interpreted to be based simply on the length of the time of lease. d. the assets of the fund are then to be regarded as belonging to the fund and not (as stated in the 1993 15. Changes in recommendations for recording SNA) as belonging to the employee. pension entitlements A3.131 Depending on the relationship between the fund and the employer, any excess of the liabilities over the available Reference: chapter 17, paragraphs 17. 116 to 17.206 assets may represent a claim of the pension fund on the employer (and any excess of the assets over the liabilities a A3.127 The 2008 SNA recognizes that employment-related claim by the employer on the pension fund). pension entitlements are contractual engagements, that are expected or likely to be enforceable. They should be A3.132 The 2008 SNA recognizes that there is a cost to recognized as liabilities towards households, irrespectively administering any pension scheme including non- of whether the necessary assets exist in segregated schemes autonomous schemes and unfunded schemes. In principle, or not. there should be a value of output of the pension fund. This is to be determined on the basis of the sum of costs, and by A3.128 For pensions provided by government via social security convention is deemed to be payable by the employees however, countries have some flexibility to deviate from holding the pension entitlements. this procedure in the set of standard tables. This is because the division between which pensions are provided by social A3.133 The 2008 SNA recommends that when an obligation to pay security and which by other employment-related schemes pensions passes from one unit to another, this should be varies considerably from country to country. However, the recorded as a transaction in pension liabilities even if full range of information required for a comprehensive neither unit has previously recorded such liabilities. analysis of pensions should be provided in a supplementary table that shows the liabilities and associated flows of all private and government pension schemes, whether funded A3.134 The 1993 SNA recognized pension obligations on the or unfunded and including social security. balance sheet only for funded "private" schemes. Hence, the activities of many pension schemes, such as social security and unfunded employer schemes, did not lead to A3.129 The 1993 SNA stated that the actual social contributions by recognition of financial assets/liabilities. Further, the employer and employee in a period should be the amount pension liabilities recognized were limited to the funds actually paid into a pension fund. For a defined available and were not determined by the claims of contribution scheme, this is correct and complete since the employees and others on the schemes. eventual payment depends only on the amounts set aside in a pension fund. For a defined benefit scheme, however, there is no guarantee that the amounts set aside will exactly A3.135 The 1993 SNA treated the activity of non-autonomous match the liability of the employer to the pension pension funds and unfunded pension schemes as ancillary entitlements of employee. activities where the output was not separately recognized. 593 System of National Accounts F. Further specifications of the scope of transactions concerning government and public sector 1. The boundary between private/public/ 4. Exceptional payments from public government sectors clarified corporations should be recorded as withdrawals from equity Reference: chapter 4, paragraphs 4.25 and 4.77 to 4.80, chapter 22 Reference: chapter 22, paragraphs 22.135 A3.141 The 2008 SNA recommends that exceptional payments A3.136 Recognizing the fact that the powers, motivation and from public corporations should be recorded as functions of government are different from those of other withdrawals from equity when these are made from sectors of the economy and that it organizes its operations accumulated reserves or sales of assets. Only regular through different institutional units, the 2008 SNA gives distributions from the entrepreneurial income of extra guidance for the distinction between general corporations should be recorded as dividends. government and public corporations. It provides a decision tree to help clarify the conceptual basis for allocating the A3.142 The 1993 SNA guidance in this respect was different for institutional units to one of the mutually exclusive corporations and quasi-corporations in that exceptional institutional sectors and to identify government and other payments from a public corporation were recorded as public units. regular payments of dividends while similar payments from public quasi-corporations were recorded as withdrawals 2. Treatment of restructuring agencies from equity. elaborated 5. Exceptional payments from government to public quasi-corporations should be treated Reference: chapter 22, paragraphs 22.47 to 22.50 as capital transfers A3.137 Some public units are involved in the restructuring of Reference: chapter 22, paragraphs 22.138 corporations that may or may not be controlled by government. Two examples of public restructuring A3.143 The 2008 SNA recommends that exceptional payments agencies concern (a) the reorganization of the public sector from government to public quasi-corporations to cover and the indirect management of privatization, and (b) accumulated losses should be treated as capital transfers as impaired assets, mainly in a context of a banking or other for public corporations. However, exceptional payments by financial crisis. The 2008 SNA provides guidelines for the government to both public corporations and public quasi- treatment of restructuring agencies. corporations should be recorded as additions to equity when they are made with a clear commercial perspective reflected in a valid expectation of a return in the form of A3.138 The 1993 SNA did not provide guidance for the treatment property income. of restructuring agencies. A3.144 In the 1993 SNA, exceptional payments from government 3. Treatment of government issued permits to public corporations were recorded as capital transfers but exceptional payments from government to public quasi- clarified corporations were recorded as additions to equity. Reference: chapter 22, paragraphs 22.88 to 22.90 6. Accrual recording of taxes Reference: chapter 22, paragraphs 22.91 to 22.94 A3.139 The 2008 SNA recommends that if a permit issued by the government does not involve the use of an underlying government owned asset, then the payment for the licence A3.145 The 2008 SNA confirms the accrual basis of recording of is a tax. Notwithstanding, if the licence is legally and taxes. However, it allows some practical flexibility in two practically transferable to a third party, then it acquires the cases in order to ensure that uncollectible taxes are not characteristics of an asset and it may be classified as an shown as accruing. One of these relates to taxes on income asset in the category of contracts, leases and licences. to be recorded when the tax liability is assessed with some measure of certainty rather than when the income is earned. The other refers to taxes arising from activities in the A3.140 When the licence is to make use of a natural resource "parallel" economy when the timing of the taxable event is (including natural resources that qualify as assets and unlikely to be known. In this case also the time of recording which the government controls on behalf of the should be the time of assessment. The 2008 SNA also gives community), payments for the licence are treated either as guidance that in assessing the amount of taxes accruing, the acquisition of an asset in the category of contracts, care must be taken not to include tax unlikely ever to be leases or licences or as the payment of rent. collected. 594 Changes from the 1993 System of National Accounts 7. Tax credits A3.148 Public-private partnerships (PPPs) are long-term contracts between two units, whereby a private unit acquires or builds an asset or set of assets, operates it for period and Reference: chapter 22, paragraphs 22.95 to 22.98 then hands the asset over to a unit in the public sector. Such arrangements are usually between a private enterprise and A3.146 Tax credits represent tax relief and so reduce the tax government but other combinations are possible, with a liability of the beneficiary. Some tax credits are payable, public corporation as either party or a private NPI as the that is any credit in excess of the tax liability is payable to second party. The 2008 SNA provides indicative guidance the beneficiary. Some subsidies or social benefits are made on the characteristics to be examined to determine whether available via the tax system in the form of tax credits, and the private or public partner is the economic (as opposed to the incidence of linking payment systems with the tax legal) owner of the assets in question. collection system is increasing. The 2008 SNA recommends that the payable credits should be recorded on A3.149 The 1993 SNA did not give guidance on the treatment of a gross basis even though this is counter to the public-private partnerships. recommendations in GFSM2001 and Revenue Statistics. The presentation should permit the derivation of tax credits 9. Taxes on holding gains continue to be on a net basis also. shown as current taxes on income and wealth A3.147 The 1993 SNA did not give guidance on the treatment of tax credits. Reference: chapter 8, paragraph 8.61 8. Treatment of ownership of fixed assets A3.150 The 2008 SNA recommends that taxes on holding gains created through public-private partnerships continue to be shown as current taxes on income and clarified wealth even though the tax base (the realized holding gains) is not included in the SNA definition of income. It recommends that where possible and relevant, it should be Reference: chapter 22, paragraphs 22.154 to 22.163 shown as a separate subcategory. G. Harmonization between concepts and classifications of the SNA and BPM6 1. Centre of predominant economic interest as owner of these items. The changes should be recorded in the basic criterion for determining the the other changes in the volume of assets account and not as capital transfers. residence of the unit A3.154 The 1993 SNA did not offer specific guidance on the Reference: chapter 4, paragraph 4.10 treatment of flows of goods and changes in the financial account arising from a change in residence of individuals. A3.151 With globalization, an increasing number of institutional units have connections to two or more economies. The 2008 SNA and BPM6 use the concept of "centre of 3. Goods sent abroad for processing are predominant economic interest" as the basic criterion for recorded on change of ownership basis determining whether or not an entity is a resident in an economic territory. Reference: Chapter 6, paragraphs 6.85 to 6.86 and chapter 14, paragraphs 14.37 to 14.42 A3.152 The 1993 SNA recommended the centre of economic interest as the criterion to determine the residence of A3.155 The 2008 SNA recommends that imports and exports institutional units but did not give guidance on the should be recorded on a strict change of ownership basis. treatment of the residence of individuals having several That is, flows of goods between the country owning the international residences where they may remain for short goods and the country providing the processing services periods. should not be recorded as imports and exports of goods. Instead the fee paid to the processing unit should be 2. Individuals changing residence recorded as the import of processing services by the country owning the goods and an export of processing Reference: chapter 26, paragraphs 26.37 to 26.39 services by the country providing it. A3.153 The 2008 SNA confirms that when persons change their A3.156 The same treatment is recommended for recording the country of residence, there is no change of ownership of the goods of one establishment sent for processing to another non-financial assets, financial assets and liabilities owned establishment of the same enterprise within the same by those persons. All that is required is a reclassification of economy when the receiving establishment does not take the appropriate country of residence of the (economic) on responsibility for the consequences of the continuation 595 System of National Accounts of the production process. In such a case, the only output of A3.158 Merchanting is defined as the purchase of a good by a the establishment receiving the goods is providing the resident (of the compiling economy) from a non-resident processing services. and the subsequent resale of the good to another non- resident, without the good entering the merchant's economy. The 2008 SNA recommends that goods acquired A3.157 The 1993 SNA treated goods that were sent abroad for by global manufacturers, wholesalers and retailers and processing and then returned to the country from where those cases of commodity dealing being settled in the they were dispatched as undergoing an effective change of commodity should be recorded as negative exports on ownership. The goods were therefore recorded in exports acquisition and positive exports on disposal. The difference when they left the first country and again in imports when between the two appears in exports of goods but appears as they returned to the country. The country undertaking the the production of a service in the merchant's economy, processing was shown as producing goods that were analogous to trade margins applied to domestically traded recorded at their full value, even though the processor goods. In the case where goods are acquired in one period never had to pay for the value of the goods on entry. and not disposed of until a subsequent period, they should appear in changes in inventories of the merchant even 4. Merchanting though these inventories are held abroad. A3.159 The 1993 SNA did not give guidance on the treatment of Reference: chapter 14, paragraphs 14.73. merchanting. H. A check-list of changes in each chapter 1. Introduction concept is described in exactly the same way in the SNA and BPM6. A3.160 The purpose of this section of the chapter is to list the issues affecting each of the chapters of the 2008 SNA · Figure 4.1 is introduced to show in the form of a flow relative to the text in the 1993 SNA. There is no intention to chart how institutional units are allocated to sectors. give a detailed list of the impact of these changes, simply to itemize which items affect the previous text. · Both financial and non-financial corporations are now disaggregated to show non-profit institutions as A3.161 Nothing is shown for chapters 1 and 2. Chapter 1, the separate subsectors to facilitate the derivation of a introduction, is largely unaffected by the details of the satellite account for NPIs. changes. Chapter 2, the overview, effectively includes all of the changes that appear later. · A similar distinction is made for general government were NPIs may also be separately identified. A3.162 Chapters 3 to 13 correspond to chapters of the same number in the 1993 SNA. Changes to those chapters are · The text makes clear the difference between a head presented but not the main thrust of the chapters, assuming office and a holding company to clarify the situation this is familiar to readers. Chapters 14 to 29 are reordered where a head office is loosely described as a holding or contain new material or both. Lists of changes, where company. appropriate, and a brief synopsis of the coverage of these chapters are provided. · There is a section on special purpose entities making clear the sorts of considerations that need to be taken A3.163 References to chapters and annexes of the 1993 SNA use into account in order to classify them appropriately. Roman numerals, as in that publication. Chapters and annexes referenced by Arabic numerals relate to the 2008 · The 2008 SNA avoids the expression "ancillary SNA. corporation" that was referred to in the 1993 SNA and was the cause of some confusion. Chapter 3: Stocks and flows and accounting rules · There is new text to identify a set of indicators which · The major issue here is the introduction of the can be used to determine whether the government distinction between economic and legal ownership. controls corporations and non-profit institutions. · There has been an extension and refinement of the Chapter 4: Institutional units and sectors subsectors of financial corporations. · The description of residence is not changed in · At the end of the chapter there is a brief reference to substance but wording has been used so that this central banks of currency boards. 596 Changes from the 1993 System of National Accounts Chapter 5: Enterprises establishments and · Revised text is available on the treatment of insurance industries. taking account of the results of the task force on this subject. · Text referring to enterprises that are horizontally integrated is now consistent with ISIC Rev.4. · Similarly there is a revised treatment on reinsurance. · On vertically integrated enterprises, the SNA · There is discussion of how the output associated with recommends identifying establishments where ISIC the issuing of standardized guarantees should be simply classifies the enterprise as a whole to the treated. principal activity contributing largest share to the value added. · Research and development is no longer treated as intermediate consumption but in most cases as fixed · There is new and more extensive discussion on capital formation. ancillary activities. · New text is presented on the appropriate treatment on Chapter 6: The production account originals and copies following the recommendations or of the Canberra group. · The term "knowledge-capturing products" has been introduced to cover those items that have some of the · Weapons systems are a new classification item within characteristics of goods and some of the characteristics gross fixed capital formation. of services. · In describing consumption of fixed capital it is in now · Reference is made to the non-observed economy. There recommended that asset-specific prices should be used is more extensive discussion on this in chapter 25. rather than a general deflation index to estimate the declining value of assets. The process of estimating consumption of fixed capital should be linked to · The text describes the revised treatment of deliveries estimates of capital stock. This subject is taken further between establishments of the same enterprise or in chapter 20. indeed between different enterprises depending on whether there is a transfer of economic ownership and the degree of risk involved in further processing. (This Chapter 7: The distribution of income accounts is the domestic equivalent to goods sent abroad for processing.) · The entrepreneurial accounts and thus the allocation of other primary income account are now restricted to · The three-way distinction of production is now referred financial and non-financial corporations. to as market production, production for own final use and non-market production. · References to measures of employment have been updated to include the recommendations of the · When output for own final use for market producers is International Conference of Labour Statisticians estimated by the sum of costs it should now include a (ICLS) that was held in late 2008. return to fixed capital. · There are significant changes to the measurement of · There is more discussion on how to measure output that social contributions. The first of these is that the takes a long time to complete. distinction is made between contributions relating to pensions and those relating to other benefits. Further, · There is greater clarification on how to measure storage the fact that pension entitlements are now recorded in and how to identify when this is a productive activity some cases even when there is no fund set aside to meet rather than a holding gain. This subject is elaborated in the needs has consequences for the measurement of an annex to chapter 6. social contributions. · There is more extensive discussion on how to measure · Investment income now includes the earnings on the output of central banks. investment funds. · The treatment of financial services is treated in more · Within taxes on production, taxi and casino licences are detail in chapter 6 and in even greater detail in part 4 of now included. chapter 17. Some of the developments since the publication of the 1993 SNA on the treatment of · Within property income, a new subheading of financial intermediation service charges indirectly investment income has been introduced parallel to that measured (FISIM) have been incorporated in the text. used in BPM6. 597 System of National Accounts · The concept of the resource lease is introduced in · Weapons systems are introduced as a new category. relation to the payment of rent. · Intellectual property products are introduced as a new · The possibility of implicit taxes and subsidies being category. recorded in respect of interest rates charged and paid by central banks is introduced. · Research and development is now treated as fixed capital formation in most cases. · The treatment of super dividends and withdrawals from income for both corporations and quasi-corporations · The title for mineral exploration has been changed to has been rationalized. In connection with this, the term include evaluation in line with data availability retained earnings has been introduced explicitly for all according to IASB recommendations. enterprises. · There has been a change to the software heading that · The treatment for the investment income deemed now includes databases explicitly and greater payable under pensions is now changed in the case of clarification about when databases are included. defined benefit schemes to cover the whole of the increase in the entitlement regardless of whether such · Within inventories, a new category of military income is actually earned by the pension fund unit inventories is included. responsible. · There is greater clarification on the treatment of Chapter 8: The redistribution of income accounts contracts, leases and licences and a further explanation of this appears in part 5 of chapter 17. · The changes relating to social contributions mentioned in connection with chapter 7 carry through to chapter 8. · There is greater clarification on the measurement and inclusion of purchased goodwill and marketing assets. · Within transfers there is explicit mention of household remittances payable to and receivable from individuals Chapter 11: The financial account working abroad. · The disaggregation of social transfers in kind has been · There is a changed treatment of monetary gold and of simplified. metal accounts in general. Chapter 9: The use of income accounts · Liabilities are now recognized for SDRs. · Within the new classification of financial assets, a · The distinction between individual and collective category is introduced for inter-bank positions. services has been changed to follow the changes made to the COFOG classification. · A revised treatment of index-linked securities when · It has been recognized that it is possible for NPISHs to they are linked to a narrow index has been introduced. have collective consumption though no excessive efforts should be made to try to identify such instances. · Two items relating to investment funds have been introduced. Chapter 10: The capital account · Insurance technical reserves are increased to include pension entitlements even where there is no fund, · Non-produced assets are distinguished into three possible claims on the manager of the pension fund and categories: natural resources; contracts, leases and reserves for standardized guarantees. licences; and purchased goodwill and marketing assets. · Improvements to land are treated as a fixed asset · Employee stock options are included in a class along separately from the natural asset that represents the with financial derivatives. value of the land in its unchanged state. · There are recommended memorandum items in respect · On costs of ownership transfer, there is clarification on of non-performing loans. the treatment of terminal costs and the time over which consumption of fixed capital of ownership costs should Chapter 12: The other changes in assets accounts be written down. · A new classification of all the volume changes is · Information, computer and telecommunications presented each of which can be applied to any class of equipment is introduced as a new category of gross assets making the transition from one balance sheet to fixed capital formation. another simpler. 598 Changes from the 1993 System of National Accounts · It is clarified that the only losses in inventories that Chapter 17: Cross-cutting and other special issues appear in the other volume change account are those that are irregular. Even if the losses are very large, if · This chapter replaces and extends in both the amount of these appear on a regular basis they are to be recorded detail and the range of subjects material included in as withdrawals from inventories. annexes III and IV of the 1993 SNA. It provides more detail on issues that were the subject of extensive Chapter 13: The balance sheet consideration in the update. These subjects are: a. insurance, including reinsurance and annuities; · The concept of an asset account is presented in this chapter. Previously it appeared only in chapter 2. b. social insurance schemes and in particular pensions including a supplementary table; · There is greater description of the possible ways to establish the valuation of equity. c. standardized guarantees; · The flow of funds analysis has been moved to chapter d. financial services, showing where explicit and implicit charges are made on the complete set of financial 27. instruments; Chapter 14: The supply and use tables and goods e. contracts, leases and licences, bringing together all and services account aspects of such arrangements; f. employee stock options. · The material here contains some from the previous chapter XV. The rest is covered in chapter 28. Chapter 18: Elaborating and presenting the accounts · There is significant reformulation of the text in this chapter. · Like chapter 16, this is new material about the synthesis of the accounts but concentrates mainly on practical · There is a greater description of how transport charges issues. are to be recorded in a supply and use table and how they affect producer and purchaser prices. Chapter 19: Population and labour inputs · The revised treatments for intra-enterprise deliveries · This chapter is based on the previous chapter XVII but and goods sent abroad for processing have major is less dependent on flowcharts for explanation of consequences for this chapter. different labour-related concepts. · There is a description of deflation of supply and use · The consequences of the ICLS held in late 2008 are tables. incorporated. · There is a short section on volunteer labour. Chapter 15: Price and volume actions · There is discussion of quality-adjusted labour inputs. · In the 1993 SNA, chapter XVI was concerned with prices and volumes. The present chapter includes · There is a section on labour productivity. significant revisions in the light of the various manuals that have been issued since 1993, those on consumer Chapter 20: Capital services and the national prices, producer prices, import and export prices and accounts the revised International Comparison Program manuals. · This is a new chapter in response to one of the items on the research agenda in the 1993 SNA. It provides a non- · The chapter includes text on the application of price technical introduction to the subject of capital services indices to deflating national accounts. and the link to gross operating surplus. It suggests a supplementary table that may be included on an optional basis. Chapter 16: Summarizing and integrating the accounts Chapter 21: Measuring corporate activity · This brings into the main run of chapters material · This is a new chapter discussing subjects such as previously only appearing in chapter II. mergers and acquisitions, globalization, the 599 System of National Accounts consequences of financial distress and a link to ILO initiative with emphasis on informal employment commercial accounting. The material on mergers and as well as on production. The subject remains on the acquisitions is drawn from The Benchmark Definition research agenda. of Foreign Direct Investment. Chapter 26: The rest of the world accounts and Chapter 22: The general government and public links to the balance of payments sectors · This chapter replaces the previous chapter XIV and · This is a new chapter aimed at providing a link to annex II of the 1993 SNA. It has been revised to be government finance statistics, debt and deficit consistent with BPM6. There has been extensive procedures and external debt in so far as the public collaboration in the drafting of BPM6 and the SNA so sector is concerned. that in many cases exactly the same wording is used in both manuals. · The subject of the public sector was not discussed in the 1993 SNA. · BPM6 introduces a new set of accounts closer to the SNA sequence of accounts making the bridge tables · More specific information is given on how to determine simpler from the SNA perspective. when government controls corporations and non-profit institutions. · The functional categories of BPM6, direct investment, portfolio investment, financial derivatives, other · The concept of economically significant prices is investment and reserve assets, are introduced. discussed and the definition provided. · A link is presented to the government finance Chapter 27: Links to monetary statistics and the presentation of accounts. flow of funds · The treatment of tax credits is made explicit. · Some of this text was in the previous chapters XI and XII but is expanded to show the connection with · Debt operations are discussed. monetary and financial statistics. · The recording of government guarantees is discussed. · The flow of funds accounts are discussed here. · There is a discussion of how the relationship between Chapter 28: Input-output and other matrix-based government and corporations should be recorded in the analysis case of financial distress. · This draws on the previous chapter XX and a research · Public-private partnerships are discussed. agenda item on the matrix presentation. It also draws on material in the Eurostat manual on input-output tables Chapter 23: Non-profit institutions available only in 2008. · This also is a new chapter which provides a link · The chapter includes the sector breakdown of the between the SNA and the handbook on satellite material in the supply and use table in order to provide accounts of the non-profit institutions. a link to the sequence of accounts. Chapter 24: The household sector Chapter 29: Satellite accounts and other extensions · This provides an elaboration of the question of subsectoring households. · The material in this chapter is drawn in part from the · It discusses some aspects of household production in previous chapters XVIII, XIX and XXI. It also includes detail. new material on satellite accounts that have been developed or revised since 1993. Chapter 25: Informal aspects of the economy 2. Annexes and other items · This item was also part of the research agenda of the 1993 SNA. A3.164 Annexes 1 and 2 correspond to the previous annex V. · The chapter covers two themes, the non-observed A3.165 The present annex, annex 3, corresponds with the previous economy and the informal sector. The latter follows the Annex I. 600 Changes from the 1993 System of National Accounts A3.166 Annex 4 is new and includes information on the research A3.168 The glossary is included with the publication instead of agenda that was included in the front matter of the 1993 being a separate document. SNA. A3.169 More information on the revision process is available on the United Nations Statistics Division website and further A3.167 There is a list of references included in the 2008 SNA; no information about developments on the research agenda external references were provided in the 1993 SNA. will be posted there. 601 System of National Accounts 602 Annex 4: Research Agenda A. Introduction A4.1 The SNA is designed to give a realistic and compact view clarification of some points. This list will be kept on the of the economy that is suitable for policy and analytical United Nations Statistics Division website and updated as use. As the economy changes and policy and analytical new items emerge and those recommendations on existing needs evolve, the SNA must be reviewed to see if it is still items are agreed. relevant for these purposes. The most obvious example of a change in economic conditions that provokes a re- A4.5 In assessing the priority to be given to an item, three assessment of the adequacy of the national accounting questions need to be addressed. framework is the financial crisis that evolved from late 2008 onwards. Luckily, it was possible to make this assessment before this publication was finished and only a. How urgent and important is the topic to ensure that the minor changes were found necessary in addition to those SNA continues to be relevant to the users? already proposed for the update, in particular the treatment of standardized guarantees. It had originally been proposed b. How widespread are the consequences of change and that these should apply only to loans; the events of the how complicated will implementation be? crisis suggested this should be applied to a wider range of financial instruments. c. Is the topic completely new or has much of the preparation for considering the item been completed? A4.2 It is unusual for economic perspectives to change so quickly and so dramatically as was the case in 2007-08. The process of selecting items for investigation is one that However, there are always some emerging features that will involve widespread consultation and involvement of may cause national accountants to re-assess their current both compilers and users in the review process. methodology. One example is the introduction of tradable emission permits as one step to combat global warming. How to record transactions in them is not fully addressed in A4.6 All attempts to update the SNA, including the experience of the 2008 SNA, and given their rapid uptake and the large the 1993 and 2008 revisions, show that it is very difficult to values concerned it is clear that this shortcoming needs to update only parts of the system because of the integrated be remedied quickly. nature of the accounting rules. The list of issues that follows is grouped broadly by subject area but it should be recognized at the outset that each is likely to have A4.3 While the 2008 SNA addresses some of the issues consequences beyond the subject heading. connected with globalization, such as the changed treatment of goods for processing in response to increased A4.7 The topics identified to date have been grouped into four outsourcing of services, it is clear that there may be other broad headings. These are: aspects of this trend that may lead to a reconsideration of how the phenomenon is reflected in the accounts. One possibility is alternative, supplementary, presentations of a. Basic accounting rules; multinational enterprises based on alternative definitions of residence and ownership. b. The concept of income; A4.4 It is not possible to expect to capture all the issues that will c. Issues concerning financial instruments; arise even in the near future. The objective of this chapter is to list those that have emerged in the course of the present d. Issues involving non-financial assets. revision but where more extensive consideration is needed than was possible in the course of the revision. Some may result not in changes to the SNA but simply greater Each of these is the subject of one of the following sections. 603 System of National Accounts B. Basic accounting rules 1. The relationship of SNA and IASB ancillary production. They may also share the outputs and costs of research and development activities. Given their A4.8 The International Accounting Standards Board is an close ties it may be sometimes desirable to consider an independent, privately funded accounting standard-setter. enterprise group as a single entity and to consolidate the The Board members come from nine countries and have a accounts of its members. (This is already the practice in variety of functional backgrounds. The IASB is committed some other statistics such as AMNE, FATS and Bank for to developing, in the public interest, a single set of high International Settlements (BIS) consolidated quality, understandable and enforceable global accounting presentations.) Members of an enterprise group are usually standards that require transparent and comparable engaged in different activities and sometimes in more than information in general purpose financial statements. one sector, and so consolidation could affect aggregates, such as industry value added, and sectoral balance sheets. It is therefore probable that the most likely way forward A4.9 The IASB works with national commercial accounting would be by way of supplementary tables. standard-setters to achieve convergence in accounting standards around the world. Nearly one hundred countries currently require or permit the use of IFRSs (International A4.13 Separate consideration needs to be given to the case where Financial Reporting Standards) or have a policy of some parts of the group are non-resident. convergence with them. The development of IFRSs reflects the changing needs and circumstances of the global 3. Trusts economy in ways that can be directly relevant to the use and requirements of the SNA. The adoption of IFRSs by A4.14 The SNA recommends that trusts be treated as quasi- corporations can have a major impact on corporate corporations. In some cases, though, when one is used in accounting and the data available from corporate accounts. effect as an SPE for a corporation, it is not considered to be a separate institutional unit but is merged with its parent, so A4.10 The IASB works in a three-stage process to develop a new long as they are both resident in the same economy. standard. The first is a draft with an invitation to comment (ITC); the second is an exposure draft (ED) also inviting A4.15 No detailed description of trusts is given, though some may comment; the third is the new standard. At each stage the be owned by households and NPIs as well as by background to the issue is clearly explained and the reasons corporations. Further clarification on the nature of trusts are given for the choice recommended. In both the first two and when their assets should be treated as belonging to stages comments are invited from any interested party. The separate units and when merged with the assets of their development of a regular dialogue between the national owners would be helpful. accounts community and the IASB would be a way to assure the needs of national accountants were represented to the IASB and national accountants were aware of the 4. Final consumption of corporations possible developments in the data sources. Already during the 2008 revision consultation of IASB standards and their A4.16 In the SNA, no final consumption is recorded for counterpart for public accounting standards (the corporations because corporations are not considered to be International Public Sector Accounting Standards Board, final users of goods and services, except for capital IPSASB) has been extremely beneficial. It is therefore products which, with the exception of valuables, are desirable that a dialogue be established and maintained acquired for the purpose of production. However, large with the IASB with a view to amending the SNA to follow corporations often undertake sponsorship of cultural and new accounting standards when appropriate. sporting events. To date, the SNA regards the payments involved as a form of advertising but it could be argued that A4.11 One area of developing interest in international accounting, they are a form of individual consumption and could be relating back to the question of multinational enterprises, is treated as final consumption expenditure of corporations that of mergers and acquisitions. The text in chapter 21 and social transfers in kind to households. Further, by draws on information in the OECD Benchmark Definition imposing regulations such as environmental standards, the of Foreign Direct Investment. IASB work in this area government may achieve the same effect as if they levied should be monitored to see if these recommendations need taxes and spent the income on environmental protection, amending. which would be treated as collective consumption. There may thus be instances where it would be more appropriate to record some expenditures by corporations as final 2. Consolidation of enterprise groups consumption. A4.12 Many enterprises operating within an economy are linked 5. Measuring the output of government with other enterprises by complete or partial common ownership and a shared management structure to form an services enterprise group. Enterprises also often share common ownership and management with foreign affiliates. It is A4.17 The SNA recommends that the value of non-market common for enterprises within an enterprise group to trade production provided without charge, or at prices that are with each other, sometimes exclusively, as when they not economically significant, should be estimated as the perform an intermediate stage in a vertically integrated sum of the costs of production (paragraphs 6.128 to 6.132). production process, and share the outputs and costs of The basis for this recommendation is the lack of market 604 Research Agenda prices for non-market production. However, there is use of off-market interest rates by the central bank may continuing research on trying to find alternative ways to cause distortions in measuring its output and value added. measure the output of government. The second issue concerns the use of off-market rates which implies that there are flows between the central bank 6. The treatment of social transfers in kind to and the counter-party in addition to those concerned with financial intermediation. the rest of the world A4.18 In the SNA, social transfers in kind only take place between 8. The treatment of establishments in the SNA government units, NPISHs and households. Paragraph 8.141 explains that it is assumed that the amount of social A4.21 At the present there are two reasons to have the concept of transfers in kind payable to the rest of the world are establishment within the SNA. The first of these is to probably negligible and, in any case, are offset by similar provide a link to source information when this is collected benefits receivable from the rest of the world. In some on an establishment basis. In cases where basic information cases, these assumptions may be inappropriate and an is collected on an enterprise basis, this reason disappears. explicit way of recording these could be elaborated. Such The second reason is for use in input-output tables. an elaboration would have to consider the consequences of Historically, the rationale was to have a unit that related as having a difference between total consumption expenditure far as possible to only one activity in only one location so and total actual consumption. that the link to the physical processes of production was as clear as possible. With the change of emphasis from the 7. Output of central banks: taxes and subsidies physical view of input-output to an economic view, and from product-by-product matrices to industry-by-industry on interest rates applied by central banks ones, it is less clear that it is essential to retain the concept of establishment in the SNA. A4.19 The treatment and measurement of the output of central banks is described in paragraphs 6.150 to 6.151. Three broad groups of financial services are identified: monetary 9. The inclusion of international organizations policy services, financial intermediation and borderline in the SNA cases. A4.22 In the SNA, international organizations are treated as units A4.20 One of the borderline cases arises when the financial that are resident in the rest of the world (paragraphs 4.173 intermediation of central banks includes policy measures, to 4.175). It would in principle be possible to treat such as setting interest rates higher or lower than market international organizations as a standard subset of the rest interest rates. This generates a number of issues. The first is of the world and indeed to compile a full set of accounts for how to measure the output of the central bank, because the them. C. The concept of income 1. Clarification of income concept in the SNA also equal to the sum of final expenditures minus expenditures on imports by institutional units resident in a territory. The "natural" valuation of the production measure A4.23 As discussed in paragraph 8.24, the concept of income in of GDP is basic prices, while the "natural' valuation of the the SNA differs from that generally understood in expenditure measure of GDP is market prices. In the SNA economics. In particular, holding gains and losses are not it is the production measure that is adjusted (by adding considered to form part of income in the SNA. It is not only taxes less subsidies on products) to achieve consistency. economic theory that treats holding gains and losses as Implicit in this is the idea that taxes less subsidies on income, but also business accounting standards. The SNA products are a form of income and not just a form of excludes holding gains and losses from production and then redistribution of income. extends this to an exclusion from most income flows, though not interest which continues to be recorded in nominal terms. A thorough review of the concept of income A4.25 If it were decided to value GDP at basic prices then the in the SNA, including the implications for all property sequence of accounts would need to be modified, and there income flows would be beneficial. Some particular aspects are various possibilities as to how this might be done. This are covered in some of the following items. might lead to showing the two primary functions of government, production of non-market services and redistribution of national income, separately. 2. GDP at basic prices A4.24 Gross domestic product (GDP) is equal to the sum of the 3. The role of taxes in the SNA gross value added of all the institutional units resident in a territory engaged in production (that is, gross value added A4.26 As just noted, taxes on products are treated as a form of at basic prices) plus any taxes, minus any subsidies, on income in the SNA. Most economists, however, tend to products not included in the value of their outputs. GDP is regard these as taxes on consumption. This category does 605 System of National Accounts not exist in the SNA and nor does consumer subsidies. A4.31 The ISWGNA established an Electronic Discussion Group Taxes on financial transactions (such as taxes on issue, (EDG) in 1999 to obtain the views of a broad group of purchase, and sale of securities) are treated as taxes on users and compilers on how macroeconomic statistics production even though there is often no service involved. should record the accrual of interest on bonds and other It may be appropriate to review the SNA treatment of all tradable debt securities. The moderator of the EDG taxes and subsidies to ensure that these accord with users' provided a report in October 2002 that concluded that while understanding and need, or if not that the rationale for any the participants to the EDG were strongly divided, the differences is made quite explicit and prominent. majority were in favour of the debtor approach. The ISWGNA subsequently considered the report and supported its conclusion. It then made a recommendation to 4. Life insurance the UNSC proposing that the SNA should recommend the debtor approach and the UNSC agreed. The A4.27 At present in the SNA there is an inconsistency between the recommendation and descriptions of the two approaches treatment of property income accruing to pension can be found in paragraphs 17.252 to 17.254. beneficiaries under a defined benefit scheme and other forms of life insurance. For the pension beneficiaries, the A4.32 Discussion of certain update issues, including the treatment amount of property income ascribed to them matches the of concessional loans, non-performing loans, interest on increase in their claims with no reduction of property index-linked debt securities and interest in arrears, showed income made according to whether the source of funding is that the debtor/creditor debate has implications beyond the from holding gains or not. For life insurance policies, recording of interest on securities. A full consideration of insurance companies retain part of the holding gains made the definition of income in the SNA would have to on reserves belonging to the policyholders but this reconsider this issue. retention is not treated as part of the fee charged by insurance companies. Thus there may be an understatement of the output of insurance companies. This question needs 7. Calculation of FISIM addressing and also the appropriate treatment when holding losses occur. A4.33 The treatment of financial intermediation services indirectly measured (FISIM) is described in paragraphs 6.163 to 6.169. The SNA recommends that FISIM should 5. Reinvested earnings be calculated with respect to a reference rate that contains no service element and reflects the risk and maturity A4.28 The SNA recommends that the retained earnings of a structure of deposits and loans. Different reference rates foreign direct investment enterprise should be treated as if may be needed for domestic and foreign financial they were distributed to foreign direct investors in institutions. The assumption behind the FISIM approach is proportion to their ownership of the equity of the that it is the service element, and not the interest flows, that enterprise. These earnings are then reinvested by those reflect varying degrees of risk, with riskier clients paying a owners as additions to equity in the financial account. This higher service charge. This assumption has been queried amount is in addition to any actual distributions made out and is being investigated. of the distributable income. This approach is also adopted for the earnings of investment funds. 8. High inflation A4.29 It has been proposed that this treatment could be extended A4.34 It has long been recognized that high inflation can distort to other types of unit, particularly public corporations. If measures of interest, since a portion is required simply to the attribution of retained earnings to the owners of counteract the real holding losses that occur for financial corporations were adopted, it would mean that dividends instruments that are not indexed for inflation. By the would be replaced by reinvested earnings in the allocation 1970s, when inflation was an important problem of primary income account and this total less dividends throughout much of the world, the treatment of interest actually paid would be shown as additions to (or in some under high inflation was considered an important issue for case withdrawals from) equity in the financial account. national accounts. However, contrary guidance is given by This would mean that distribution of earnings from Annex B to chapter XIX of the 1993 SNA and chapter 7 of corporations was measured on a strict accrual basis but Inflation Accounting - A manual on National Accounting would also mean that the saving of corporations would under Conditions of High Inflation (Organisation for always be zero. Such a change would have serious Economic Co-operation and Development, 1996). It is implications for interpretation of the accounts since it therefore recommended that the search for a single would be built on a different paradigm from the current universally accepted treatment of interest under high treatment of dividends and corporate saving. inflation remains on the research agenda. 6. Accruing interest in the SNA 9. The measurement of neutral and real holding gains and losses A4.30 Through the 1990s and into the 2000s a vigorous discussion was conducted among the international A4.35 The SNA recommends the nominal holding gains and statistical community about the appropriate way to record losses recorded in the revaluation account should be interest on securities such as bonds. Two general decomposed into neutral and real holding gains and losses. approaches were identified in the discussion, the so-called In paragraph 12.85, the use of a comprehensive price index debtor and creditor approaches. covering as wide a range of goods, services and assets as 606 Research Agenda possible is recommended. Some national accountants have be attributable to the financial resources available to the suggested that different price indices should be used for producer. different classes of asset. The full impact of this suggestion requires investigation. 11. Income from activities undertaken on an informal basis 10. Income arising from assets A4.37 Establishing the connection between the work on the informal sector and the SNA was an important contribution A4.36 The introduction of capital services into the SNA of the 2008 update to the SNA. Interest in this area recognizes that part of value added is due to the continues to attract considerable attention especially in contribution of fixed assets and other non-financial assets developing countries. It is desirable that there should be to the income generated by production. A question has been continuing involvement of national accountants with the raised about whether some part of value added should also work of the Delhi Group and other initiatives in this field. D. Issues involving financial instruments 1. Issues arising from a financial crisis 4. Provisions A4.41 In business accounting, there are three degrees of A4.38 As noted in the introduction, a financial crisis provides a "promises": liabilities, provisions and contingent liabilities. crucial test of the robustness of the SNA and the adequacy Their definitions are the following. of its recommendations in situations not encountered since the SNA was first adopted. Until all the consequences of a. A liability is a present obligation of the entity arising the situation in 2008 are revealed, and indeed thereafter, from past events, the settlement of which is expected to there will be a need to continue to examine the steps taken result in an outflow from the entity of resources in response to the crisis to ensure both the steps and their embodying economic benefits or service potential. consequences are adequately captured in the national accounts. b. A provision is a liability of uncertain timing or amount. c. A contingent liability is a possible obligation that arises 2. Recognition of social security entitlements from past events and whose existence will be as liabilities confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A4.39 As discussed in part 2 of chapter 17, social security entitlements are not recorded in the main accounts but they A4.42 In the SNA, liabilities and provisions relating to financial are shown in a supplementary table along with the pension instruments are generally recognized in the main accounts entitlements of some other pension schemes managed by only if there is a corresponding financial asset of equal general government. Provisional criteria for determining value held by a counter-party. However, it is recommended whether the entitlements are shown in the main accounts or that certain provisions that do not satisfy this criterion, such only in the supplementary table are described in paragraph as those for non-performing loans, should be recorded as 17.187. Work continues to refine these criteria and to find memorandum items. Contingent liabilities are not agreed methods to determine the value of these liabilities. recognized at all in the core accounts, except in the case of standardized guarantees. 3. Wider use of fair value for loans A4.43 The problem is that recognition of a reduction in the value of an asset in the SNA necessarily implies a reduction in the corresponding liability but the asset holder may not A4.40 The SNA recommends that the values of loans to be wish to reveal to the counter-party the fact that they regard recorded in the balance sheets of both creditors and debtors some of the claim as uncollectable. Not doing so however should be at nominal value, that is, at the amounts of overstates the value of the assets. principal that the debtors are conceptually obliged to pay the creditors when loans mature. However, it is common 5. Debt concessionality for the fair value of loans to differ from the nominal value for a number of reasons. At present the SNA recommends A4.44 Further work is required to clarify whether concessional memorandum items recording fair values only for loans loans involve a subsidy on any service charge associated specifically characterized as non-performing. The with interest payments or a transfer representing the possibility of a more extensive use of fair value in place of difference between the market rate of interest and the nominal value could be considered. agreed rate. If the latter, the next problem is whether the 607 System of National Accounts transfer should be paid period by period on an ongoing 7. Reverse transactions basis as a current transfer or as a one-off capital transfer at the time the loan is issued. A4.46 Work on a complex group of transactions known as reverse transactions has been pursued for several years. These 6. Equity valuation and its implications transactions take their name from two common characteristics: (i) a commitment to reverse the transaction A4.45 At the moment there are a number of alternatives for on a specified future date (or on demand), and (ii) that, valuing equity given in the SNA. There is a question about although legal ownership is transferred to the purchaser, whether more standardized recommendations can be made. many of the risks and benefits of ownership remain with the original owner. Reversible transactions include repurchase agreements, securities lending without cash collateral, gold swaps, and gold loans/deposits. E. Issues involving non-financial assets 1. Tradable emission permits the resource to be used to extinction. In this case the SNA recommends that economic ownership of the natural A4.47 Tradable emission permits are a relatively new resource remains with the lessor while the lessee pays phenomenon, but they are gaining rapidly in importance. royalties recorded as rent. Only the lessee and not the lessor The full treatment of all types of permits is not explicitly undertakes production. This means that the reduction in the described in the SNA, and in order to remove uncertainty, value of capital due to production is recorded in the balance this shortcoming should be addressed as quickly as sheet of the owner as an other change in volume of assets. possible. The link between the rundown in the value of the assets and its use in production is lost. As in the previous case, the fact that part of the rent paid is compensation for the reduction 2. Leases to use or exploit natural resources in the value of the asset is not recognized. A4.48 Part 5 of chapter 17 deals with the treatment of licences and 3. Broadening the fixed asset boundary to permits to use a natural resource. Because the treatment for individual resources was developed independently there are include other intellectual property assets some inconsistent treatments recommended. Innovation A4.49 In the case of a natural resource that has an infinite life and whose use in production does not affect the nature or value A4.52 The fixed asset boundary of the SNA has been expanded to of the asset, the owner may allow the resource to be used include the output of research and experimental for an extended period of time in such a way that, in effect, development (R&D) that meets the general definition of an the user controls the use of the resource during this time asset. It is evident that R&D captures part, but not all, of the with little if any intervention from the legal owner. In the innovation process. It may exclude many expenditures by case of land, the SNA recommends that the agreement the production and engineering departments of an between the owner and the user constitutes a sale of the enterprise. These same departments may also be land. In the case of a lease of the radio spectrum, the SNA responsible for identifying a potential new product and recommends that the permission to use the spectrum does referring it to the R&D department to develop the science not change the ownership of the spectrum but constitutes a behind it. In addition, an enterprise may incur other non-produced asset under the heading contracts, leases and expenditures before a new product goes to market. These licences. In the case of permission to use the atmosphere or include market research to determine the demand for a new a water body as an environmental sink, the SNA product and marketing expenditures to promote it. recommends that the payment be treated as a tax. A4.50 In the case of a natural resource that is subject to Marketing assets replenishment and which can be used indefinitely providing the use is restricted and the owner extends or withholds A4.53 Marketing assets include brand names, mastheads, permission to continued use of the asset from one year to trademarks, logos and domain names. Marketing is a key the next, payments by the user to the owner are recorded as driver of brand value and big corporations invest heavily in rent. No adjustment is made to the value of rent recorded as building and supporting their brands by advertising, to whether the use is in fact sustainable or not. If it were not sponsorship and other measures to build a positive image sustainable, part of the payment should be seen as being with customers. The SNA treats marketing assets as being compensation for the non-sustainable use. non-produced and the expenditures incurred in their creation as intermediate consumption. They appear in the A4.51 In the case of a natural resource that is not capable of balance sheet only when they are sold. The major reason replenishment on a human time-scale and the use in for not treating marketing assets as fixed assets is due to the production eventually exhausts it, the owner may permit difficulty of measuring their value. 608 Research Agenda Human capital A4.59 An overview and rationalization of these practices could be helpful. A4.54 Apart from any staff training required in bringing a new product to market, innovation expenditures are 5. Distinction between current maintenance disembodied from the people undertaking the innovation. and capital repairs Therefore they exclude to a large extent the "investment in human capital". A4.60 The SNA draws a distinction between ordinary maintenance and repairs to fixed assets and major renovations, reconstructions or enlargements (see A4.55 Human input is the major input in most production paragraphs 6.225 to 6.228), but acknowledges that the processes, and the value of that input is to a large extent distinction is not clear-cut. The former are recorded as dependent on the knowledge that humans bring to the intermediate consumption and the latter as gross fixed production process. It is well recognized that an educated capital formation. population is vital to economic well-being in most countries. Despite the fact that there are major conceptual and practical problems with identifying the value of an A4.61 Major renovations or enlargements increase the educated labour force, there are repeated requests to performance or capacity of existing fixed assets or address this issue within the SNA framework. significantly extend the previously expected service life. Ordinary maintenance and repairs are required so that an asset can be utilized over the whole of the service life 4. Costs of ownership transfer of valuables and expected on acquisition. If the owner neglects maintenance non-produced assets and repairs, then the expected service life may be drastically reduced and unforeseen obsolescence must be recorded as an other volume change in the value of the A4.56 The SNA draws a distinction between the costs of asset. ownership transfer incurred in acquiring and disposing of non-financial assets on the one hand and financial assets on A4.62 If the requirement for treatment as fixed capital were to the other. Costs of ownership transfer incurred on prevent a reduction in service life, rather than necessarily transactions in non-financial assets are recorded as gross extend it, the problem of the borderline between ordinary fixed capital formation, while costs of ownership transfer maintenance and major extensions would disappear and the incurred on transactions in financial assets are recorded as problem that the consequences of the neglect of intermediate consumption. The rationale for the different maintenance are not reflected in a reduction in net domestic treatments is that non-financial assets are used in product could be avoided. production and the income generated from production needs to be sufficient to cover the costs of using those assets, including costs of ownership transfer. Financial 6. Treatment of Private-Public Partnerships assets are not used in production and are held as stores of value, to earn property income or in the expectation of A4.63 Public private partnerships (PPPs) are described in chapter holding gains. It is also common for the ownership of 22. Further developments in their treatment in the SNA financial assets and liabilities to change hands rapidly. await the development and adoption of standards under development by the IASB and IPSASB. The ISWGNA is A4.57 Valuables are non-financial assets but they are held as monitoring developments. stores of value and are not used in production. As such, they have more in common with financial assets than they 7. Transfer of ownership of an asset during its do with other non-financial assets. Therefore, it is arguable life that costs of ownership transfer on valuables should be recorded as intermediate consumption rather than, as at present, fixed capital formation. A4.64 Both the case where a natural resource is leased for an extended period of time and the case of PPPs are ones where the economic ownership of an asset effectively A4.58 Costs of ownership transfer on fixed assets are not recorded changes hands part way through its life. The terms of the separately but are added to the price paid by the purchaser arrangements are such that recompense from the initial user and subtracted from the price received by the seller to for the change of ownership to the second user is bundled obtain the acquisition and disposal values, respectively. into the arrangements for payments during the lease. The The costs of ownership transfer on non-produced assets are transfer of the ownership has to be recorded as an other recorded in a separate category of gross fixed capital change in the classification of assets and is not reflected in formation. An exception is made in the case of land where the production or distribution of income accounts. 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E.08.XVII.8 Available from: http://unstats.un.org/unsd/industry/docs/M90.pdf United Nations (forthcoming): Companion Guide to ISIC and CPC, Statistical papers, series F, No. 101, United Nations publication United Nations Economic Commission for Europe (1992): Guidebook to Statistics on the Hidden Economy United Nations Economic Commission for Europe (1993): Inventory of National Practices in Estimating Hidden and Informal Economic Activities for National Accounts. Available from: http://www.unece.org/stats/publications/NOE1993.pdf United Nations Economic Commission for Europe (2003): Non-observed Economy in National Accounts - Survey of National Practices, Geneva. United Nations Publication Sales No. E.03.II.E.56. Available from: http://www.unece.org/stats/publications/NOE2003.pdf United Nations Economic Commission for Europe (2008): Non-observed Economy in National Accounts - Survey of Country Practices, Ge- neva. United Nations Publication Sales No. E.08.II.E.8. 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Also available from: http://publications.wcoomd.org/index.php 615 System of National Accounts 616 Glossary A Acquisitions of goods and services by institutional units occur when they become the new owners of the goods or when the delivery of services to them is completed. ..............................................................................................................................9.36 Activity see also principal activity, secondary activity, ancillary activity Actual final consumption measures the amount of consumption goods and services acquired. ..................................................................9.7 Actual final consumption of general government is measured by the value of the collective consumption services provided to the community, or large sections of the community, by general government. .............................................................................9.117 Actual final consumption of households is measured by the value of all the individual consumption goods and services acquired by resident households. .........................................................................................................................................................9.116 Actual final consumption of NPISHs is measured by the value of the collective consumption services provided to the community, or large sections of the community, by NPISHs. .............................................................................................................9.118 Actual premium see premium Adjusted disposable income is the balancing item in the redistribution of income in kind account. It is derived from the disposable income of an institutional unit or sector by adding the value of the social transfers in kind receivable by that unit or sector and subtracting the value of the social transfers in kind payable by that unit or sector. ......................................8.32 Ancillary activity An ancillary activity is a supporting activity undertaken within an enterprise in order to create the conditions within which the principal or secondary activities can be carried out. .......................................................................................5.36 Animal resources yielding repeat products cover animals whose natural growth and regeneration are under the direct control, responsibility and management of institutional units. ...............................................................................................................10.92 Asset An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time. It is a means of carrying forward value from one accounting period to another. ........................................................................................................................................ 3.5, 3.30, 10.8, 11.3 Asset boundary for fixed assets The asset boundary for fixed assets consists of goods and services that are used in production for more than one year. ..............................................................................................................................................................10.33 Asset-backed securities and collateralized debt obligations are arrangements under which payments of interest and principal are backed by payments on specified assets or income streams. ...............................................................................................11.67 B Balance of primary incomes The balance of primary incomes is defined as the total value of the primary incomes receivable by an institutional unit or sector less the total of the primary incomes payable. ...........................................................7.18 Balance sheet A balance sheet is a statement, drawn up in respect of a particular point in time, of the values of assets owned and of the liabilities owed by an institutional unit or group of units. ....................................................................................13.2 Balancing item A balancing item is an accounting construct obtained by subtracting the total value of the entries on one side of an account (resources or changes in liabilities) from the total value of the entries on the other side (uses or changes in assets). It cannot be measured independently of the entries in the accounts. As a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account. ...................................................3.9 617 System of National Accounts Banker's acceptance A banker's acceptance involves the acceptance by a financial corporation, in return for a fee, of a draft or bill of exchange and the unconditional promise to pay a specific amount at a specified date. .................................... 11.68 Barter A barter transaction is one where one basket of goods and services is exchanged for another basket of different goods and services without any accompanying monetary payment. .................................................................................................. 9.49 Basic price 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, by the producer as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer. .............................................................. 6.51 Bills are defined as securities that give the holders the unconditional rights to receive stated fixed sums on a specified date. ............. 11.64 Bonds and debentures are securities that give the holders the unconditional right to fixed payments or contractually determined variable payments, that is, the earning of interest is not dependent on earnings of the debtors. ..................................... 11.64 Boundary see production boundary, asset boundary Buildings other than dwellings include whole buildings or parts of buildings not designated as dwellings. Fixtures, facilities and equipment that are integral parts of the structures are included. ......................................................................................... 10.74 C Capital taxes consist of taxes levied at irregular and infrequent intervals on the values of the assets or net worth owned by institutional units or on the values of assets transferred between institutional units as a result of legacies, gifts inter vivos or other transfers. ........................................................................................................................................................... 10.207 Capital transfers are unrequited transfers where either the party making the transfer realizes the funds involved by disposing of an asset (other than cash or inventories), relinquishing a financial claim (other than accounts receivable) or the party receiving the transfer is obliged to acquire an asset (other than cash) or both conditions are met. ............................... 8.10, 10.19 Captive financial institutions and money lenders consist of institutional units providing financial services, where most of either their assets or liabilities are not transacted on open financial markets. ................................................................................ 4.113 Central bank The central bank is the national financial institution that exercises control over key aspects of the financial system. ..... 4.104 Changes in inventories are measured by the value of the entries into inventories less the value of withdrawals and less the value of any recurrent losses of goods held in inventories during the accounting period. ................................................... 10.118 Changes in net worth due to nominal holding gains/losses is defined as the algebraic sum of the positive or negative nominal holding gains on all the assets and liabilities of an institutional unit. ...................................................................................... 12.77 Changes in net worth due to saving and capital transfers represent the positive or negative amount available to the unit or sector for the acquisition of non-financial and financial assets. .............................................................................................. 10.21 Claim A claim (benefit) is the amount payable to the policy holder by the direct insurer or reinsurer in respect of an event covered by the policy occurring in the period for which the policy is valid. .................................................................... 6.187, 17.5 Claims outstanding cover claims that have not been reported, have been reported but are not yet settled or have been both reported and settled but not yet paid. ......................................................................................................................................... 6.187, 17.5 Collective consumption service A collective consumption service is a service provided simultaneously to all members of the community or to all members of a particular section of the community, such as all households living in a particular region. ... 9.4 Compensation of employees is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period. .......................................................................................... 7.5 Computer software consists of computer programs, program descriptions and supporting materials for both systems and applications software. ........................................................................................................................................................... 10.110 Consumer durable A consumer durable is a good that may be used for purposes of consumption repeatedly or continuously over a period of a year or more. ..................................................................................................................................................... 9.42 618 Consumption good or service A consumption good or service is defined as a good or service that is used (without further transformation in production as defined in the SNA) by households, NPISHs or government units for the direct satisfaction of individual needs (or wants) or for the collective needs of members of the community. ........................................9.2 Consumption of fixed capital is the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage. ................................................................................................................................................... 6.240, 10.25 Consumption of goods and services is the act of completely using up the goods and services in a process of production or for the direct satisfaction of human needs or wants. ..................................................................................................................9.39 Consumption The activity of consumption consists of the use of goods and services for the satisfaction of individual or collective human needs or wants. ......................................................................................................................................................9.39 Contracts, leases and licences are treated as assets only when both the following conditions are satisfied. The terms of the contract, lease or licence specify a price for the use of an asset or provision of a service that differs from the price that would prevail in the absence of the contract, lease or licence. One party to the contract must be able legally and practically to realize this price difference. ..............................................................................................................................10.16, 10.186 Corporation The term corporation covers legally constituted corporations and also cooperatives, limited liability partnerships, notional resident units and quasi-corporations. ....................................................................................................................4.7 Costs of ownership transfer The costs of ownership transfer consist of the following kinds of items (i) All professional charges or commissions incurred by both units acquiring or disposing of an asset such as fees paid to lawyers, architects, surveyors, engineers and valuers, and commissions paid to estate agents and auctioneers. (ii) Any trade and transport costs separately invoiced to the purchaser, (iii) All taxes payable by the unit acquiring the asset on the transfer of ownership of the asset. (iv) Any tax payable on the disposal of an asset. (v) Any delivery and installation or disinstallation costs not included in the price of the asset being acquired or disposed of. (vi) Any terminal costs incurred at the end of an asset's life such as those required to render the structure safe or to restore the environment in which it is situated. .........................................................................................................................................10.51 Credit derivatives are financial derivatives whose primary purpose is to trade credit risk. ...................................................................11.123 Cross-country interest rate swap A cross-currency interest rate swap, sometimes known as a currency swap, involves an exchange of cash flows related to interest payments and an exchange of principal amounts at an agreed exchange rate at the end of the contract. ............................................................................................................................................................11.121 Cultivated biological resources cover animal resources yielding repeat products and tree, crop and plant resources yielding repeat products whose natural growth and regeneration is under the direct control, responsibility and management of an institutional unit. .....................................................................................................................................................................10.88 Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. ........................................................................................................................................................11.52 Current international cooperation consists of current transfers in cash or in kind between the governments of different countries or between governments and international organizations. ....................................................................................................8.128 Current taxes on capital consist of taxes that are payable periodically, usually annually, on the property or net wealth of institutional units, excluding taxes on land or other assets owned or rented by enterprises and used by them for production, such taxes being treated as other taxes on production. ..........................................................................................................8.63 Current taxes on income, wealth, etc. consist mainly of taxes on the incomes of households or profits of corporations and of taxes on wealth that are payable regularly every tax period (as distinct from capital taxes levied infrequently). .........................8.15 Current transfer A current 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 directly in return as counterpart and does not oblige one or both parties to acquire, or dispose of, an asset. .............................................................................................................8.10 Current transfers between households consist of all current transfers made, or received, by resident households to or from other resident or non-resident households. ....................................................................................................................................8.133 619 System of National Accounts Current transfers to NPISHs consist of transfers received by NPISHs from other resident or non-resident institutional units in the form of membership dues, subscriptions, voluntary donations, etc. whether made on a regular or occasional basis. ... 8.132 Current transfers within general government consist of current transfers between different government units. .................................... 8.126 D Databases consist of files of data organized in such a way as to permit resource-effective access and use of the data. ...................... 10.112 Debt reorganization (also referred as debt restructuring) is defined as arrangements involving both the creditor and the debtor (and sometimes third parties) that alter the terms established for servicing an existing debt. ................................. 26.106 Debt restructuring see debt reorganization Debt securities are negotiable instruments serving as evidence of a debt. .............................................................................................. 11.64 Deductible VAT is the VAT payable on purchases of goods or services intended for intermediate consumption, gross fixed capital formation or for resale that a producer is permitted to deduct from his own VAT liability to the government in respect of VAT invoiced to his customers. .................................................................................................................................... 6.58 Defined benefit scheme A defined benefit scheme is one where the benefits payable to an employee on retirement are determined by the use of a formula, either alone or as a minimum amount payable. .......................................................................... 17.129 Defined contribution scheme A defined contribution scheme is one where the benefits payable to an employee on retirement are defined exclusively in terms of the level of the fund built up from the contributions made over the employee's working life and the increases in value that result from the investment of these funds by the manager of the scheme. ..... 17.128 Deposit-taking corporations except the central bank have financial intermediation as their principal activity. To this end, they have liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits. ........................................................................................................................................................ 4.105 Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. .................................... 26.84 Disposable income is the balancing item in the secondary distribution of income account. It is derived from the balance of primary incomes of an institutional unit or sector by adding all current transfers, except social transfers in kind, receivable by that unit or sector and subtracting all current transfers, except social transfers in kind, payable by that unit or sector. ... 8.20 Distributable income of a corporation is equal to entrepreneurial income, plus all current transfers receivable, less all current transfers payable and less the adjustment for the change in pension entitlements relating to the pension scheme of that corporation. ........................................................................................................................................................ 7.131 Dividends are a form of investment income to which shareholders become entitled as a result of placing funds at the disposal of corporations. ............................................................................................................................................................................. 7.128 Durable good A durable good is one that may be used repeatedly or continuously over a period of more than a year, assuming a normal or average rate of physical usage. A consumer durable is a good that may be used for purposes of consumption repeatedly or continuously over a period of a year or more. ............................................................................... 9.42 Dwellings are buildings, or designated parts of buildings, that are used entirely or primarily as residences, including any associated structures, such as garages, and all permanent fixtures customarily installed in residences. ............................ 10.68 E Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value. They involve changes in the volume, composition, or value of an institutional unit's assets and liabilities. ..................................................... 3.6 Economic owner The economic owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled to claim the benefits associated with the use of the entity in question in the course of an economic activity by virtue of accepting the associated risks. ............................................................................ 3.26 620 Economic owner The economic owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled to claim the benefits associated with the use of the entity inquestion in the course of an economic activity by virtue of accepting the associated risks. .............................................................................10.5 Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy. These prices normally result when (a) the producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs and (b) consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged. ......................................................................................................................................................6.95, 22.28 Employee stock option An employee stock option is an agreement made on a given date (the "grant" date) under which an employee may purchase a given number of shares of the employer's stock at a stated price (the "strike" price) either at a stated time (the "vesting" date) or within a period of time (the "exercise" period) immediately following the vesting date. ...................................................................................................................................................................11.125 Employees are persons who, by agreement, work for a resident institutional unit and receive remuneration for their labour. ..............19.20 Employers' social contributions are social contributions payable by employers to social security funds or other employment-related social insurance schemes to secure social benefits for their employees. ........................................................................7.56 Employment is defined as all persons, both employees and self-employed persons, engaged in some productive activity that falls within the production boundary of the SNA. .......................................................................................................................19.19 Enterprise An enterprise is the view of an institutional unit as a producer of goods and services. .............................................................5.1 Entertainment, literary and artistic originals consist of the original films, sound recordings, manuscripts, tapes, models, etc., on which drama performances, radio and television programming, musical performances, sporting events, literary and artistic output, etc., are recorded or embodied. .........................................................................................................................10.115 Entitlement to future goods and services on an exclusive basis relates to the case where one party which has contracted to purchase goods or services at a fixed price at a time in the future is able to transfer the obligation of the second party to the contract to a third party. ..................................................................................................................................................10.195 Equity comprises all instruments and records acknowledging claims on the residual value of a corporation or quasi-corporation after the claims of all creditors have been met. ................................................................................................................11.83 ESO see employee stock option Establishment An establishment is an enterprise, or part of an enterprise, that is situated in a single location and in which only a single productive activity is carried out or in which the principal productive activity accounts for most of the value added. .............................................................................................................................................................5.2, 5.14 Existing fixed asset An existing fixed asset is one whose value was included in the stock of fixed capital of at least one producer unit in the domestic economy at some earlier point in time either in the current period or in the immediately previous accounting period. .................................................................................................................................................................10.38 Expenditure measure of GDP The expenditure measure of gross domestic product (GDP) is derived as the sum of expenditure on final consumption plus gross capital formation plus exports less imports. ................................................................16.47 Expenditures on goods and services are defined as the values of the amounts that buyers pay, or agree to pay, to sellers in exchange for goods or services that sellers provide to them or to other institutional units designated by the buyers. ........................9.32 Export subsidies consist of all subsidies on goods and services that become payable by government when the goods leave the economic territory or when the services are delivered to non-resident units. .....................................................................7.103 Export taxes consist of taxes on goods or services that become payable to government when the goods leave the economic territory or when the services are delivered to non-residents. ..........................................................................................................7.95 F Final consumption expenditure is the amount of expenditure on consumption goods and services. ...........................................................9.7 621 System of National Accounts Final consumption expenditure of households see household final consumption expenditure Final consumption expenditure of general government see general government final consumption expenditure Final consumption expenditure of NPISHs consists of the expenditure, including expenditure whose value must be estimated indirectly, incurred by resident NPISHs on individual consumption goods and services and possibly on collective consumption services. .............................................................................................................................................................. 9.115 Financial assets consist of all financial claims, shares or other equity in corporations plus gold bullion held by monetary authorities as a reserve asset. ............................................................................................................................................... 3.36, 11.8 Financial auxiliaries consist of financial corporations that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted. .................................... 4.111 Financial claim A financial claim is the payment or series of payments due to the creditor by the debtor under the terms of a liability. ....................................................................................................................................................... 3.35, 11.7 Financial corporations consist of all resident corporations that are principally engaged in providing financial services, including insurance and pension funding services, to other institutional units. ................................................................................... 4.98 Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, through which specific financial risks can be traded in financial markets in their own right. ................................................. 11.111 Financial intermediaries are institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. .............................................................................................. 4.101 Fines and penalties are compulsory payments imposed on institutional units by courts of law or quasi-judicial bodies. ...................... 8.135 Finished goods consist of goods produced as outputs that their producer does not intend to process further before supplying them to other institutional units. ............................................................................................................................................. 10.142 Fixed assets are produced assets that are used repeatedly or continuously in production processes for more than one year. ................ 10.11 Foreign exchange swap A foreign exchange swap is a spot sale/purchase of currencies and a simultaneous forward purchase/sale of the same currencies. ........................................................................................................................................................ 11.121 Forward contract A forward contract is an unconditional financial contract that represents an obligation for settlement on a specified date. Futures and other forward contracts are typically, but not always, settled by the payment of cash or the provision of some other financial instrument rather than the actual delivery of the underlying item and therefore are valued and traded separately from the underlying item. .................................................................................................... 11.120 Forward foreign exchange contract A forward foreign exchange contract involves two counterparties who agree to transact in foreign currencies at an agreed exchange rate in a specified amount at some agreed future date. .............................. 11.121 Forward rate agreement A forward rate agreement (FRA) is an arrangement in which two parties, in order to protect themselves against interest rate changes, agree on an interest rate to be paid, at a specified settlement date, on a notional amount of principal that is never exchanged. .................................................................................................................... 11.121 Full-time equivalent employment is the number of full-time equivalent jobs, defined as total hours actually worked by all employed persons divided by the average number of hours actually worked in full-time jobs. ..................................................... 19.43 G GDP see expenditure measure of GDP, income measure of GDP, production measure of GDP General government final consumption expenditure consists of expenditure, including expenditure whose value must be estimated indirectly, incurred by general government on both individual consumption goods and services and collective consumption services. .............................................................................................................................................................. 9.114 622 GNI Gross national income (GNI) is defined as GDP plus compensation of employees receivable from abroad plus property income receivable from abroad plus taxes less subsidies on production receivable from abroad less compensation of employees payable abroad less property income payable abroad and less taxes plus subsidies on production payable abroad. ................................................................................................................................................................16.54 Goods and services account The goods and services account shows the balance between the total goods and services supplied as resources to the economy as output and imports (including the value of taxes less subsidies on products not already included in the valuation of output) and the use of the same goods and services as intermediate consumption, final consumption, capital formation and exports. ......................................................................................................16.27 Goods are physical, produced objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets. ............................6.15 Goods for resale are goods acquired by enterprises, such as wholesalers or retailers, for the purpose of reselling them to their customers. .........................................................................................................................................................10.145 Goodwill and market assets The value of goodwill and marketing assets is defined as the difference between the value paid for an enterprise as a going concern and the sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued. ........................................................................................................................................10.199 Government units are unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area. ...................................................................................................4.9 Gross capital formation shows the acquisition less disposal of produced assets for purposes of fixed capital formation, inventories or valuables. ............................................................................................................................................................10.24 Gross fixed capital formation in a particular category of fixed asset consists of the value of producers' acquisitions of new and existing products of this type less the value of their disposals of fixed assets of the same type. ....................................10.64 Gross fixed capital formation is measured by the total value of a producer's acquisitions, less disposals, of fixed assets during the accounting period plus certain specified expenditure on services that adds to the value of non-produced assets. ..............10.32 Gross national income is the aggregate value of the gross balances of primary incomes for all sectors. ..................................................7.20 Gross national income see GNI Gross or net national disposable income may be derived from gross or net national income by adding all current transfers in cash or in kind receivable by resident institutional units from non-resident units and subtracting all current transfers in cash or in kind payable by resident institutional units to non-resident units. .......................................................................8.26 Gross value added at basic prices is defined as output valued at basic prices less intermediate consumption valued at purchasers' prices. ....................................................................................................................................................................6.77 Gross value added at producers' prices is defined as output valued at producers' prices less intermediate consumption valued at purchasers' prices. ....................................................................................................................................................................6.78 Gross value added is the value of output less the value of intermediate consumption. ...............................................................................6.8 H Horizontal integration A horizontally integrated enterprise is one in which several different kinds of activities that produce different kinds of goods or services for sale on the market are carried out in parallel with each other. ......................................5.21 Household A household is a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food. ............................4.4 Household final consumption expenditure consists of the expenditure, including expenditure whose value must be estimated indirectly, incurred by resident households on individual consumption goods and services, including those sold at prices that are not economically significant and including consumption goods and services acquired abroad. .................9.113 623 System of National Accounts Households' actual social contributions are social contributions payable on their own behalf by employees, self-employed or non-employed persons to social insurance schemes. ................................................................................................................... 8.85 Households' social contribution supplements consist of the property income earned during the accounting period on the stock of pension and non-pension entitlements. ............................................................................................................................. 8.86 I Import duties consist of customs duties, or other import charges, that are payable on goods of a particular type when they enter the economic territory. ............................................................................................................................................................... 7.93 Import subsidies consist of subsidies on goods and services that become payable when the goods cross the frontier of the economic territory or when the services are delivered to resident institutional units. ..................................................................... 7.101 Income in kind received by employees is measured by the value of the goods and services provided by employers to their employees in remuneration for work done. ................................................................................................................................ 9.51 Income measure of GDP The income measure of gross domestic product (GDP) is derived as compensation of employees plus gross operating surplus plus gross mixed incomes plus taxes less subsidies on both production and imports. ......... 16.48 Index-linked securities are instruments for which either the coupon payments (interest) or the principal or both are linked to an index such as a price index or the price of a commodity. .................................................................................................... 11.70 Individual consumption good or service An individual consumption good or service is one that is acquired by a household and used to satisfy the needs or wants of members of that household. ................................................................................................ 9.3 Industry An industry consists of a group of establishments engaged in the same, or similar, kinds of activity. ............................... 5.46, 5.2 Information, computer and telecommunications (ICT) equipment consists of devices using electronic controls and also the electronic components forming part of these devices. ........................................................................................................ 10.85 Institutional unit An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities. ............................................................... 4.2 Insurance claim see claim Insurance corporations consist of incorporated, mutual and other entities whose principal function is to provide life, accident, sickness, fire or other forms of insurance to individual institutional units or groups of units or reinsurance services to other insurance corporations. ...................................................................................................................................... 4.115 Insurance premium, see premium Intellectual property products are the result of research, development, investigation or innovation leading to knowledge that the developers can market or use to their own benefit in production because use of the knowledge is restricted by means of legal or other protection. ................................................................................................................................................. 10.98 Interest is a form of income that is receivable by the owners of certain kinds of financial assets, namely deposits, debt securities, loans and (possibly) other accounts receivable for putting the financial asset at the disposal of another institutional unit. .................................................................................................................................................................... 7.113 Interest rate swap An interest rate swap contract involves an exchange of cash flows related to interest payments, or receipts, on a notional amount of principal, which is never exchanged, in one currency over a period of time. ................................ 11.121 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. .......................................................... 6.213 Inventories are produced assets that consist of goods and services, which came into existence in the current period or in an earlier period, and that are held for sale, use in production or other use at a later date. ........................................................... 10.12 Investment funds are collective investment undertakings through which investors pool funds for investment in financial or non-financial assets. ................................................................................................................................................................. 11.94 624 Investment grants consist of capital transfers made by governments to other resident or non-resident institutional units to finance all or part of the costs of their acquiring fixed assets. .......................................................................................................10.208 Investment income is the income receivable by the owner of a financial asset in return for providing funds to another institutional unit. .....................................................................................................................................................................7.108 Invoiced VAT is the VAT payable on the sales of a producer. It is shown separately on the invoice that the producer presents to the purchaser. ...............................................................................................................................................................................6.58 J Joint venture A joint venture involves the establishment of a corporation, partnership or other institutional unit in which each party legally has joint control over the activities of the unit. ..................................................................................................22.56 K Kind-of-activity unit A kind-of-activity unit is an enterprise, or a part of an enterprise, that engages in only one kind of productive activity or in which the principal productive activity accounts for most of the value added. ...........................................5.12 L Labour force The labour force consists of those who are actively prepared to make their labour available during any particular reference period for producing goods and services that are included within the production boundary of the SNA. .........19.17 Land consists of the ground, including the soil covering and any associated surface waters, over which ownership rights are enforced and from which economic benefits can be derived by their owners by holding or using them. .............................10.175 Land improvements are the result of actions that lead to major improvements in the quantity, quality or productivity of land, or prevent its deterioration. .......................................................................................................................................................10.79 Lease see financial lease, operational lease, resource lease, contracts, leases and licences, permits Lease - financial A financial lease is one where the lessor as legal owner of an asset passes the economic ownership to the lessee who then accepts the operating risks and receives the economic benefits from using the asset in a productive activity. 17.304 Legal entity A legal or social entity is one whose existence is recognized by law or society independently of the persons, or other entities, that may own or control it. ......................................................................................................................................4.6 Legal owner The legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled in law and sustainable under the law to claim the benefits associated with the entities. ................3.21, 10.5 Legally constituted corporation A legally constituted corporation is a legal entity, created for the purpose of producing goods or services for the market, that may be a source of profit or other financial gain to its owner(s). It is collectively owned by shareholders who have the authority to appoint directors responsible for its general management. ...................4.39 Liability A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor). ................................................................................................3.5, 3.33, 11.5 Life insurance and annuities entitlements show the extent of financial claims policy holders have against an enterprise offering life insurance or providing annuities. ......................................................................................................................................11.106 Licences see Contracts, leases and licences Life insurance is an activity whereby a policy holder makes regular payments to an insurer in return for which the insurer guarantees to provide the policy holder (or in some cases another nominated person) with an agreed sum, or an annuity, at a given date or earlier if the policy holder dies beforehand. .............................................................................................17.6 Listed shares are equity securities listed on an exchange. ........................................................................................................................11.86 Loans are financial assets that are created when a creditor lends funds directly to a debtor, and are evidenced by documents that are not 625 System of National Accounts negotiable. .......................................................................................................................................................... 11.72 Local unit A local unit is an enterprise, or a part of an enterprise, that engages in productive activity at or from one location. ............. 5.13 M Machinery and equipment covers transport equipment, machinery for information, communication and telecommunications (ICT) equipment, and other machinery and equipment. .............................................................................................. 10.82 Market output consists of output intended for sale at economically significant prices. ............................................................................ 6.99 Market producers are establishments, all or most of whose output is market production. ...................................................................... 6.133 Marketable operating leases are third-party property rights relating to fixed assets. ............................................................................ 10.190 Marketing assets consist of items such as brand names, mastheads, trademarks, logos and domain names. ....................................... 10.198 Materials and supplies consist of all products that an enterprise holds in inventory with the intention of using them as intermediate inputs into production. ................................................................................................................................................ 10.131 Military inventories consist of single-use items, such as ammunition, missiles, rockets, bombs, etc., delivered by weapons or weapons systems. ............................................................................................................................................................ 10.144 Mineral and energy resources consist of mineral and energy reserves located on or below the earth's surface that are economically exploitable, given current technology and relative prices. .............................................................................. 10.179 Mineral exploration and evaluation consists of the value of expenditures on exploration for petroleum and natural gas and for non-petroleum deposits and subsequent evaluation of the discoveries made. ......................................................................... 10.106 Miscellaneous current transfers consist of current transfers other than insurance-related premiums and claims, current transfers within general government and current international cooperation. .............................................................................. 8.129 Monetary gold is gold to which the monetary authorities (or others who are subject to the effective control of the monetary authorities) have title and that is held as a reserve asset. ............................................................................................................... 11.45 Monetary transaction A monetary transaction is one in which one institutional unit makes a payment (receives a payment) or incurs a liability (receives an asset) stated in units of currency. ..................................................................................................... 3.55 Money market fund shares or units represent a claim on a proportion of the value of an established money market fund. .................. 11.99 Money market funds (MMFs) are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested primarily in money market instruments, MMF shares/units, transferable debt instruments with a residual maturity of not more than one year, bank deposits and instruments that pursue a rate of return that approaches the interest rates of money market instruments. MMF shares can be transferred by cheque or other means of direct third- party payment. .................................................................................................................................................... 4.107 N Natural resources consist of naturally occurring resources such as land, water resources, uncultivated forests and deposits of minerals that have an economic value. .................................................................................................................................... 10.15 NDP Net domestic product (NDP) is defined as gross domestic product (GDP) less the consumption of fixed capital. ....................... 16.52 Net borrowing see net lending Net lending is defined as the difference between changes in net worth due to saving and capital transfers and net acquisitions of non-financial assets (acquisitions less disposals of non-financial assets, less consumption of fixed capital). If the amount is negative it represents net borrowing. ................................................................................................................. 10.28 Net national disposable income see NNDI 626 Net national income see NNI Net non-life insurance premiums comprise both the actual premiums payable by policyholders to obtain insurance cover during the accounting period (premiums earned) and the premium supplements payable out of the property income attributed to insurance policyholders less the service charges payable to the insurance corporation. ...............................8.117 Net social contributions are the actual or imputed contributions made by households to social insurance schemes to make provision for social benefits to be paid. Fees charged by the administrators of the schemes are excluded from contributions payable. .................................................................................................................................................................8.82 Net value added is the value of output less the values of both intermediate consumption and consumption of fixed capital. ....................6.8 Net worth is defined as the value of all the assets owned by an institutional unit or sector less the value of all its outstanding liabilities. ..............................................................................................................................................................13.4 Neutral holding gains and losses A neutral holding gain (loss) over a period is the increase (decrease) in the value of an asset that would be required, in the absence of transactions and other changes in the volume of assets, to maintain command over the same amount of goods and services as at the beginning of the period. ..............................................................12.75 NNDI Net national disposable income (NNDI) is defined as net national income (NNI) plus current transfers receivable from abroad less current transfers payable abroad. ........................................................................................................................16.57 NNI Net national income (NNI) is defined as gross national income (GNI) less the consumption of fixed capital. ..............................16.55 Nominal holding gain - financial asset The nominal holding gain on a financial asset is the increase in value of the asset, other than transactions in the assets (including the accrual of interest over a period of time) and other changes in the volume of assets. ..................................................................................................................................................................12.74 Nominal holding gain - liability The nominal holding gain on a liability is the decrease in value of the liability, other than by transactions or by other volume changes. ...................................................................................................................................12.74 Nominal holding gain - non-financial asset The nominal holding gain on a non-financial asset is the value of the benefit accruing to the owner of that asset as a result of a change in its price over a period of time. ...............................................................12.74 Non-cultivated biological resources consist of animals, birds, fish and plants that yield both once-only and repeat products over which ownership rights are enforced but for which natural growth and/or regeneration is not under the direct control, responsibility and management of institutional units. ......................................................................................10.182 Non-deductible VAT is VAT payable by a purchaser that is not deductible from his own VAT liability, if any. ....................................6.58 Non-financial corporations are corporations whose principal activity is the production of market goods or non-financial services. ......4.94 Non-life insurance claims are the amounts payable in settlement of damages that result from an event covered by a non-life insurance policy during the current accounting period. .................................................................................................................8.118 Non-life insurance is an activity similar to life insurance except that it covers all other risks, accidents, sickness, fire, etc. ...................17.6 Non-life insurance technical reserves consist of prepayments of net premiums and reserves to meet outstanding non-life insurance claims. ...............................................................................................................................................................11.105 Non-market output consists of goods and individual or collective services produced by non-profit institutions serving households (NPISHs) or government that are supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole. .................................................................................................................................6.128 Non-market producers consist of establishments owned by government units or NPISHs that supply goods or services free, or at prices that are not economically significant, to households or the community as a whole. ................................................6.133 Non-monetary transactions are transactions that are not initially stated in units of currency. ...................................................................3.75 Non-money-market (MMF) investment funds are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested predominantly in financial assets other than short-term assets and in non-financial assets 627 System of National Accounts (usually real estate). ........................................................................................................................................... 4.108 Non-performing loan A loan is non-performing when payments of interest or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons (such as a debtor filing for bankruptcy) to doubt that payments will be made in full. .................................................................................................................................................. 13.66 Non-produced assets consist of three categories (i) natural resources, (ii) contracts, leases and licences, and (iii) purchased goodwill and marketing assets. ................................................................................................................................................ 10.14 Non-profit institutions are legal or social entities created for the purpose of producing goods and services but whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them. .............................................................................................................................................................. 4.8, 4.83 Non-profit institutions serving households (NPISHs) consist of non-market NPIs that are not controlled by government. .................... 4.93 O Operating lease An operating lease is one where the legal owner is also the economic owner and accepts the operating risks and receives the economic benefits from the asset by using it in a productive activity. ............................................................ 17.301 Options are contracts that give the purchaser of the option the right, but not the obligation, to buy (a "call" option) or to sell (a "put" option) a particular financial instrument or commodity at a predetermined price (the "strike" price) within a given time span (American option) or on a given date (European option). ............................................................................... 11.117 Other buildings and structures comprise non-residential buildings, other structures and land improvements. ...................................... 10.73 Other capital transfers consist of all capital transfers except capital taxes and investment grants. ....................................................... 10.210 Other current transfers consist of all current transfers between resident institutional units, or between resident and non-resident units, other than current taxes on income, wealth, etc., social contributions and benefits, and social benefits in kind. ........ 8.19 Other deposits comprise all claims, other than transferable deposits, that are represented by evidence of deposit. ............................... 11.59 Other employment-related social insurance benefits are social benefits payable by social insurance schemes other than social security to contributors to the schemes, their dependants or survivors. .............................................................................. 8.109 Other equity is equity that is not in the form of securities. ...................................................................................................................... 11.88 Other financial corporations are institutional units providing financial services, where most of their assets or liabilities are not available on open financial markets. ...................................................................................................................................... 4.101 Other financial intermediaries except insurance corporations and pension funds consist of financial corporations that are engaged in providing financial services by incurring liabilities, in forms other than currency, deposits or close substitutes for deposits, on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. .......................................................................................................................................................... 4.109 Other flows are changes in the value of assets and liabilities that do not result from transactions. ................................................... 3.7, 3.99 Other intellectual property products include any such products that constitute fixed assets but are not captured as research and development, mineral exploration and evaluation, computer software and databases or entertainment, literary and artistic originals. ........................................................................................................................................................................... 10.117 Other investment fund shares or units represent a claim on a proportion of the value of an established investment fund other than a money market fund. ..................................................................................................................................................... 11.100 Other investment is a residual category that includes positions and transactions other than those included in direct investment, portfolio investment, financial derivatives and employee stock options and reserve assets. ........................................... 26.94 Other machinery and equipment consists of machinery and equipment not elsewhere classified. ......................................................... 10.86 628 Other structures include structures other than buildings, including the cost of the streets, sewer, etc. ...................................................10.76 Other subsidies on production consist of subsidies except subsidies on products that resident enterprises may receive as a consequence of engaging in production. ......................................................................................................................................7.106 Other subsidies on products consist of subsidies on goods or services produced as the outputs of resident enterprises, or on imports, that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation. ....................................................................7.105 Other taxes on production consist of all taxes except taxes on products that enterprises incur as a result of engaging in production. ....7.97 Other transferable deposits are those where one party or both parties to the transaction, or either the creditor or debtor or both of the positions, is not a bank. .......................................................................................................................................................11.58 Other work-in-progress consists of output (other than on cultivated biological resources) that is not yet sufficiently processed to be in a state in which it is normally supplied to other institutional units. ............................................................................10.141 Output for own final use consists of products retained by the producer for his own use as final consumption or capital formation. ....6.114 Output is defined as the goods and services produced by an establishment, excluding the value of any goods and services used in an activity for which the establishment does not assume the risk of using the products in production, and excluding the value of goods and services consumed by the same establishment except for goods and services used for capital formation (fixed capital or changes in inventories) or own final consumption. ...................................................................6.89 Owner, see legal owner, economic owner P Payments of compensation consist of current transfers paid by institutional units to other institutional units in compensation for injury to persons or damage to property caused by the former that are not settled as payments of non-life insurance claims. .................................................................................................................................................................8.140 Pension entitlements show the extent of financial claims both existing and future pensioners hold against either their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee. ..........................................................................................................................................................11.107 Pension fund sub-sector The pension fund sub-sector consists of only those social insurance pension funds that are institutional units separate from the units that create them. ..........................................................................................................................4.116 Permit to undertake a specific activity A permit to undertake a specific activity is one where the permits are limited in number and so allow the holders to earn monopoly profits, the monopoly profits do not come from the use of an asset belonging to the permit-issuer, a permit holder is able both legally and practically to sell the permit to a third party. .............10.192 Permits to use natural resources are third-party property rights relating to natural resources. ..............................................................10.191 Permits see also Contracts, leases and licences Population The population of a country is most simply defined as all those persons who are usually resident in the country. ..............19.10 Portfolio investment is defined as cross-border transactions and positions involving debt or equity securities, other than those included in direct investment or reserve assets. ....................................................................................................................26.91 Premium - actual The actual premium is the amount payable to the direct insurer or reinsurer to secure insurance cover for a specific event over a stated time period. ...........................................................................................................................6.186, 17.4 Premium - earned The premium earned is the part of the actual premium that relates to cover provided in the accounting period. ........17.5 Premium - net Net premiums are defined as actual premiums plus premium supplements less the insurance service charge payable by the policy holders. .....................................................................................................................................................17.35 629 System of National Accounts Premium - unearned The unearned premium is the amount of the actual premium received that relates to the period past the accounting point. ............................................................................................................................................................................... 17.5 Premium earned The premium earned is the part of the actual premium that relates to cover provided in the accounting period. ....... 6.187 Premium see actual premium, premium earned, unearned premium, net premium Price The price of a good or service is defined as the value of one unit of that good or service. ........................................................... 15.11 Primary incomes are incomes that accrue to institutional units as a consequence of their involvement in processes of production or ownership of assets that may be needed for purposes of production. ..................................................................................... 7.2 Principal activity The principal activity of a producer unit is the activity whose value added exceeds that of any other activity carried out within the same unit. .............................................................................................................................................. 5.8 Producer's price The producer's price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to the purchaser. It excludes any transport charges invoiced separately by the producer. ................................................................................................................... 6.51 Product balance The product balance for any product recognizes that the sum of output at basic prices plus imports plus trade and transport margins plus taxes on products less subsidies on products is equal to the sum of intermediate consumption, final consumption and capital formation, all expressed at purchasers' prices, plus exports. ....................................... 14.5 Production boundary The production boundary of the SNA includes the following activities (a) The production of all goods or services that are supplied to units other than their producers, or intended to be so supplied, including the production of goods or services used up in the process of producing such goods or services. (b) The own-account production of all goods that are retained by their producers for their own final consumption or gross capital formation. (c) The own-account production of knowledge-capturing products that are retained by their producers for their own final consumption or gross capital formation but excluding (by convention) such products produced by households for their own use. (d) The own-account production of housing services by owner occupiers. (e) The production of domestic and personal services by employing paid domestic staff. ......................................................................................................... 6.27 Production is an activity, carried out under the responsibility, control and management of an institutional unit, that uses inputs of labour, capital, and goods and services to produce outputs of goods and services. ........................................................... 6.2 Production measure of GDP The production measure of gross domestic product (GDP) is derived as the value of output less intermediate consumption plus any taxes less subsidies on products not already included in the value of output................. 16.47 Products are goods and services (including knowledge-capturing products) that result from a process of production. ........................... 6.14 Property income is the sum of investment income and rent. ................................................................................................................... 7.107 Provisions for calls under standardized guarantees consist of prepayments of net fees and provisions to meet outstanding calls under standardized guarantees. .................................................................................................................................. 11.110 Public monuments are identifiable because of particular historical, national, regional, local, religious or symbolic significance. ....... 10.78 Purchased goodwill see goodwill and marketing assets Purchaser's price The purchaser's price is the amount paid by the purchaser, excluding any VAT or similar tax deductible by the purchaser, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser's price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place. ............................................................................................................................................................. 6.64 Purchasing power parity A purchasing power parity (PPP) is defined as the number of units of B's currency that are needed in B to purchase the same quantity of individual good or service as one unit of A's currency will purchase in A. .................. 15.199 Q Quasi-corporation A quasi-corporation is either an unincorporated enterprise owned by a resident institutional unit that has sufficient 630 information to compile a complete set of accounts and is operated as if it were a separate corporation and whose de facto relationship to its owner is that of a corporation to its shareholders, or an unincorporated enterprise owned by a non-resident institutional unit that is deemed to be a resident institutional unit because it engages in a significant amount of production in the economic territory over a long or indefinite period of time. ...................................4.42 Quoted shares see listed shares R Real GDI Real gross domestic income (real GDI) measures the purchasing power of the total incomes generated by domestic production. ........................................................................................................................................................15.188 Real holding gains and losses A real holding gain (loss) is the amount by which the value of an asset increases (decreases) over the neutral holding gain for the period, in the absence of transactions and other changes in the volume of assets. ............12.76 Realized holding gain A holding gain (loss) is realized when an asset that has increased (decreased) in value due to holding gains (losses) since the beginning of the accounting period is sold, redeemed, used or otherwise disposed of, or a liability incorporating a holding gain or loss is repaid. ....................................................................................................12.80 Rent is the income receivable by the owner of a natural resource (the lessor or landlord) for putting the natural resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in production. ...................7.109, 7.154 Rental The rental is the amount payable by the user of a fixed asset to its owner, under an operating lease or similar contract, for the right to use that asset in production for a specified period of time. ................................................................................6.245 Repo A repo is a securities repurchase agreement where securities are provided for cash with a commitment to repurchase the same or similar securities for cash at a fixed price on a specified future date. ............................................................................11.74 Research and development consists of the value of expenditures on creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use of this stock of knowledge to devise new applications. This does not extend to including human capital as assets within the SNA. .......................10.103 Reserve assets are those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing). Reserve assets must be denominated and settled in foreign currency. ...........................................26.95 Residence The residence of each institutional unit is the economic territory with which it has the strongest connection, in other words, its centre of predominant economic interest. .............................................................................................................4.10 Resource lease A resource lease is an agreement whereby the legal owner of a natural resource that the SNA treats as having an infinite life makes it available to a lessee in return for a regular payment recorded as property income and described as rent. ........................................................................................................................................................7.109, 17.310 Rest of the world The rest of the world consists of all non-resident institutional units that enter into transactions with resident units, or have other economic links with resident units. ...........................................................................................................4.172 Retained earnings of a corporation or quasi-corporation are equal to the distributable income less the dividends payable or withdrawal of income from the quasi-corporation respectively. ...............................................................................................7.139 S Saving represents that part of disposable income (adjusted for the change in pension entitlements) that is not spent on final consumption goods and services. ...............................................................................................................................................9.28 Secondary activity A secondary activity is an activity carried out within a single producer unit in addition to the principal activity and whose output, like that of the principal activity, must be suitable for delivery outside the producer unit. .......................5.9 Securities repurchase agreement A securities repurchase agreement is an arrangement involving the provision of securities in exchange for cash with a commitment to repurchase the same or similar securities at a fixed price either on a specified future date 631 System of National Accounts (often one or a few days hence, but also further in the future) or with an "open" maturity. ............................. 11.74 Self-employed persons are persons who are the sole or joint owners of the unincorporated enterprises in which they work, excluding those unincorporated enterprises that are classified as quasi-corporations. ................................................................ 19.25 Services are the result of a production activity that changes the conditions of the consuming units, or facilitates the exchange of products or financial assets. .................................................................................................................................................... 6.17 Social assistance benefits in cash are current transfers payable to households by government units or NPISHs to meet the same needs as social insurance benefits but which are not made under a social insurance scheme requiring participation usually by means of social contributions. ............................................................................................................................ 8.110 Social benefits are current transfers received by households intended to provide for the needs that arise from certain events or circumstances, for example, sickness, unemployment, retirement, housing, education or family circumstances. ...................... 8.17 Social contributions are actual or imputed payments to social insurance schemes to make provision for social insurance benefits to be paid. ............................................................................................................................................................................... 8.16 Social entity A legal or social entity is one whose existence is recognized by law or society independently of the persons, or other entities, that may own or control it. ..................................................................................................................................... 4.6 Social insurance benefit A social insurance benefit is a social benefit payable because the beneficiary participates in a social insurance scheme and the social risk insured against has occurred. .................................................................................. 17.89 Social insurance contribution A social insurance contribution is the amount payable to a social insurance scheme in order for a designated beneficiary to be entitled to receive the social benefits covered by the scheme. ............................................... 17.89 Social insurance scheme A social insurance scheme is an insurance scheme where the following two conditions are satisfied, (a) the benefits received are conditional on participation in the scheme and constitute social benefits as this term is used in the SNA, and (b) at least one of the three conditions following is met. (i) Participation in the scheme is obligatory either by law or under the terms and conditions of employment of an employee, or group of employees. (ii) The scheme is a collective one operated for the benefit of a designated group of workers, whether employed or non-employed, participation being restricted to members of that group. (iii) An employer makes a contribution (actual or imputed) to the scheme on behalf of an employee, whether or not the employee also makes a contribution. ........ 8.65, 17.88 Social security benefits in cash are social insurance benefits payable in cash to households by social security funds. ......................... 8.108 Social transfers in kind consist of goods and services provided to households by government and NPISHs either free or at prices that are not economically significant. ................................................................................................................................... 8.141 Special Drawing Rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF) and allocated to its members to supplement existing reserve assets. ................................................................................................ 11.47 Stocks are a position in, or holdings of, assets and liabilities at a point in time. ........................................................................................ 3.4 Stripped securities are securities that have been transformed from a principal amount with coupon payments into a series of zero-coupon bonds, with a range of maturities matching the coupon payment date(s) and the redemption date of the principal amount(s). .......................................................................................................................................................... 11.69 Subsidies are current unrequited payments that government units, including non-resident government units, make to enterprises on the basis of the levels of their production activities or the quantities or values of the goods or services that they produce, sell or import. .............................................................................................................................................................. 7.98 Subsidy on product A subsidy on a product is a subsidy payable per unit of a good or service. ............................................................ 7.100 Supply table A supply table at purchasers' prices consists of a rectangular matrix with the rows corresponding to the same groups of products as the matching use tables and columns corresponding to the supply from domestic production valued at basic prices plus columns for imports and the valuation adjustments necessary to have total supply of each ..................... 14.13 T 632 Taxes and duties on imports consist of taxes on goods and services that become payable at the moment when those goods cross the national or customs frontiers of the economic territory or when those services are delivered by non-resident producers to resident institutional units. ....................................................................................................................................7.90 Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. ........................7.71, 8.52 Taxes less subsidies on production consist of taxes payable or subsidies receivable on goods or services produced as outputs and other taxes or subsidies on production, such as those payable on the labour, machinery, buildings or other assets used in production. ..............................................................................................................................................................7.5 Taxes on imports, excluding VAT and duties consist of all taxes (except VAT and import duties) as defined in the GFSM/OECD classifications that become payable when goods enter the economic territory or services are delivered by non- residents to residents. ............................................................................................................................................7.94 Taxes on income consist of taxes on incomes, profits and capital gains. ...................................................................................................8.61 Taxes on products A tax on a product is a tax that is payable per unit of some good or service. ..............................................................7.88 Taxes on products, excluding VAT, import and export taxes, consist of taxes on goods and services that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation. ................................................................................................................7.96 Terms of trade The terms of trade are defined as the ratio of the price of exports to the price of imports. ...........................................15.187 Total economy The total economy is defined as the entire set of resident institutional units. ...................................................................4.23 Trade margin A trade margin is defined as the difference between the actual or imputed price realized on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of. ........................................................................................................................................................................6.146 Trading gain or loss The trading gain or loss from changes in the terms of trade is the difference between real GDI and GDP in volume terms. ...........................................................................................................................................................................15.188 Transaction A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is operating in two different capacities. ........................................................................................................................................3.7, 3.51 Transaction, see also monetary transaction, non-monetary transaction Transfer 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 a direct counterpart. .........................................................8.10, 8.34 Transferable deposits comprise all deposits that are exchangeable for bank notes and coins on demand at par and without penalty or restriction and directly usable for making payments by cheque, draft, giro order, direct debit/credit, or other direct payment facility. ................................................................................................................................................11.54 Transport equipment consists of equipment for moving people and objects. ..........................................................................................10.84 Tree, crop and plant resources yielding repeat products cover plants whose natural growth and regeneration are under the direct control, responsibility and management of institutional units. ........................................................................................10.95 U Unearned premium The unearned premium is the amount of the actual premium received that relates to the period past the accounting point. .............................................................................................................................................................................6.187 Unincorporated enterprise An unincorporated enterprise represents the production activity of a government unit, NPISH or household that cannot be treated as the production activity of a quasi-corporation. ......................................................................5.1 Unlisted shares are equity securities not listed on an exchange. ..............................................................................................................11.87 633 System of National Accounts Unquoted shares see unlisted shares Unrealized holding gain An unrealized holding gain is one accruing on an asset that is still owned or a liability that is still outstanding at the end of the accounting period. ............................................................................................................................. 12.80 Use table A use table at purchasers' prices consists of a set of product balances covering all products available in an economy arranged in the form of a rectangular matrix with the products, valued at purchasers' prices, appearing in the rows and the columns indicating the disposition of the products to various types of uses. .................................................... 14.13 V Valuables are produced goods of considerable value that are not used primarily for purposes of production or consumption but are held as stores of value over time. ................................................................................................................................... 10.13 Value added tax A value added type tax (VAT) is a tax on goods or services collected in stages by enterprises but that is ultimately charged in full to the final purchasers. .............................................................................................................................. 7.89 Vertical integration A vertically integrated enterprise is one in which different stages of production, which are usually carried out by different enterprises, are carried out in succession by different parts of the same enterprise. ........................................... 5.23 Volume index A volume index is an average of the proportionate changes in the quantities of a specified set of goods or services between two periods of time. ........................................................................................................................................... 15.13 W Warrants are tradable instruments giving the holder the right to buy, under specified terms for a specified period of time, from the issuer of the warrant (usually a corporation) a certain number of shares or bonds. ....................................................... 11.119 Water resources consist of surface and groundwater resources used for extraction to the extent that their scarcity leads to the enforcement of ownership and/or use rights, market valuation and some measure of economic control. ............................... 10.184 Weapons systems include vehicles and other equipment such as warships, submarines, military aircraft, tanks, missile carriers and launchers, etc. ...................................................................................................................................................................... 10.87 Withdrawal of income from a quasi-corporation consists of that part of distributable income that the owner withdraws from the quasi- corporation. ........................................................................................................................................................ 7.133 Work-in-progress consists of output produced by an enterprise that is not yet sufficiently processed to be in a state in which it is normally supplied to other institutional units. ................................................................................................................. 10.134 Work-in-progress on cultivated biological resources consists of output that is not yet sufficiently mature to be in a state in which it is normally supplied to other institutional units. ................................................................................................. 10.140 634 Index A adjusted disposable income 2.100, 8.32, 8.144, 9.7 abnormal flooding 12.46 adjustment for seasonality 18.37 absorption matrix 14.87 adjustment for the change in pension entitlements 9.9, 9.13, accidental damage 6.147, 6.243 16.15, 17.141 accounting concepts 18.1 adjustment for working days 18.38 accounting framework 1.1 administrative data 19.77, 19.80 accounting period 3.15 administrators of pension funds 8.86 accounting rules 2.4, 3.3, 3.16, 3.111 advances 17.294, 27.35 financial statistics 27.7 advocacy groups 23.19 accounts in volume terms 18.2, 18.63 aerial and other surveys 10.106 accounts receivable or payable 3.174, 11.73, 11.127, 22.93 after-tax rent 7.157 accounts, articulation 1.14 age-efficiency profile 20.17 accrual accounting 3.166 agencies of central government 4.138 accrual adjustments 11.105 age-price profile 20.17 accrual recording 2.55, 7.41, 7.84, 18.34 aggregate real income measures 15.192 interest 7.115 aggregate statistics 1.3 taxes 8.58, 22.91 aggregation 3.191 accrued benefit obligation (ABO) 17.181 aggregation of quarterly estimates preferable to an annual estimate accumulation 1.6, 3.20, 14.11 12.99 accumulation accounts 1.20, 2.84, 2.107, 3.2 agricultural activities 25.46 accuracy 18.3, 18.12 agricultural output 6.137 acid rain 12.52 agricultural production 25.72 acquisition 21.22 agricultural products for own use - valuation 6.124 acquisition of consumption goods and services 9.17 agriculture, subsistence 1.41 acquisition of goods and services 9.36 aid agencies 4.169 acquisition of non-financial assets 10.22, 16.20 allocated gold 11.60 time of recording 10.53 allocated gold accounts 11.45, 17.240 acquisition vs. expenditure 9.31 allocation of other primary income account 7.22 activation of a one-off guarantee 22.129 allocation of primary income account 2.92, 7.16, 11.90, 16.8, Activities of Multinational Enterprises (AMNE statistics) 26.90 26.4, 28.72 activity 15.120 allowances for dependents 7.45 deliberately concealed 6.40 alternative method of sub-sectoring the general government sector facilitating financial intermediation 4.29 4.148 illegal 6.39 analytic presentation of the balance of payments 26.101 informal 6.39 analytical functions 28.63 non-economic 6.25 analytical purposes 28.2 not treated as ancillary 5.37 analytical unit 5.53 acts of war 12.46 ancillary activity 4.66, 5.3, 5.10, 6.207, 14.33, 29.34, 29.65 actual consumption 1.76 characteristics 5.36 actual final consumption 9.6 definition 5.36 general government 9.103, 9.117 exclusions 5.37 households 2.104, 9.116 portrayal in a satellite account 5.45 NPISHs 9.111, 9.118 treatment as a separate establishment 5.41 actual hours worked 19.42 treatment as secondary activity 5.44 actual premiums 17.14, 17.35 value added 5.39 definition 6.186, 17.4 ancillary services 6.215 actuarial estimates 7.150, 17.7, 17.144 animal resources yielding repeat products 10.92 actuarial reserves for life insurance 17.17 annual chain volume series vs. quarterly 15.48 ad valorem taxes 7.88, 7.100, 7.105, 15.175 annual chained indices 15.53 additions to equity 7.135 annual overlaps 15.46 additivity and chaining 15.58 annuitant 17.66 adjusted claims 6.189, 17.21 annuity 6.179, 7.144, 8.139, 12.59, 17.6, 17.55, 17.66, 17.158, 17.217, 24.79 635 System of National Accounts initiation 17.74 price and volume dimensions 18.27 purchase of 17.74 production account 6.8 appearance and disappearance of assets 3.102, 12.12 public sector 22.168 appearance of new products 15.4 balancing supply and use tables 25.33 appraisal costs 10.106 bank 11.56 appropriation 22.142 bank interest 6.164, 7.116, 8.24, 9.62, 13.62, 17.250 approximation to market prices 3.123 banker's acceptance 11.25, 11.68 arbitrage 11.112 bankruptcy 21.13 arm's-length prices 21.50 barges 10.83 armed forces 19.21, 19.32, 19.33, 19.34 barter 1.36, 2.24, 3.77, 3.79, 6.102, 8.22, 9.45, 9.75, 10.62, articulation of the accounts 2.14, 27.2 10.146, 17.226 artificial subsidiaries 4.63, 26.28 barter transaction arts and culture organizations 23.19 definition 9.49 asset 2.33, 2.44, 10.8, 11.3 valuation 9.50 cross-classified by debtor 2.151 basic heading 15.206, 15.229 definition 3.5, 3.30 basic prices 2.63, 2.87, 3.146, 7.7, 14.45, 14.139, 16.49 denominated in foreign currency, holding gains 12.120 definition 6.51 developed under a contract of sale 10.55 behaviour of economic agents 17.208 entry into balance sheet 3.42 bench-marking 18.33, 18.39 exit from balance sheet 3.42 quarterly series 15.48 expected life length 20.55 benefit, social insurance see also insurance claim infinite life 7.109 benefits 3.27, 6.198, 11.4, 17.4 produced by communal effort 10.56 bills 11.64 produced for own communal use 10.58 increase in value treated as interest 17.231 produced on own account 10.54, 10.89 interest 7.118 relation to residence 3.39 binary method, ICP 15.217 residual value 20.51 Black-Scholes 13.83 shared ownership 17.344 block method, ICP 15.213 with long production periods 10.54 advantages 15.215 asset account 13.1, 13.8, 29.116 bonds 11.64 asset boundary 3.31, 3.37, 10.33 deep-discounted 12.109 services 10.37 dirty price 13.59 asset valuation, effect of changes in the interest rate 12.40 discounted 17.258 asset-backed securities 11.64, 11.67 holding gains and losses vs. interest 12.108 associate of corporation 26.85 bonus shares 7.129, 11.89 definition 4.75 bonuses 7.44 autonomous pension fund 8.78 insurance 17.18 autonomy 4.6, 4.69, 4.138, 22.20 book value 3.157 auto-pilot 4.61 border workers 16.53, 19.32, 19.33, 19.81, 26.68 average service lives 6.253 residence 26.38 average-year prices 20.34 borderline between individual and collective services 9.98 B borrowed funds 7.12 bad debts 21.56 BPM6 16.28, 29.86 bailout 21.54, 22.128, 22.143 Branch balance of goods and services 16.29 undertakes production for one year or more 26.30 balance of goods, services and primary income 26.70 branch balance of payments 16.22, 26.12, 26.46 BPM6 definition 26.30 balance of primary incomes 2.93, 7.18, 7.25, 8.10, 16.10, characteristics 4.47 16.29, 26.70, 28.73 complete set of accounts, with a balance sheet, exists 26.30 balance sheet 1.14, 1.20, 1.22, 2.33, 2.85, 2.121, 3.2, 3.42, recognized as being subject to the income tax system of the 3.155, 12.1, 13.1, 15.168, 26.8, 28.75 economy where located 26.30 analytical uses 13.6 subject to the income tax system where located 26.30 definition 13.2 undertakes production for one year or more 26.30 integral part of the SNA 16.31 branches 4.13, 4.43, 11.88 balancing item 1.14, 2.73, 2.83, 2.117, 3.10, 6.6, 16.29 brass plate company 4.56 definition 3.9, 3.107 breakdown by currency 27.16 financial account 11.1 bridge country 15.222 gross and net 2.80, 6.9, 6.72 broad money 27.11 of a current account 6.70 national measures 11.75 of multi-regional units 18.49 budget surplus or deficit 1.29 636 build, own, operate, transfer (BOOT) scheme 10.59 Paasche volume 15.40 buildings and structures 15.145 volume series not additive 15.59 business accounting 1.63, 2.56, 2.94, 3.112, 3.139, 7.24 chain of ownership 21.37 business and professional licences 7.97 chaining 15.37, 15.97 business register 21.8 quarterly accounts 18.43 business surveys 19.54, 19.77, 19.79, 19.82, 24.21 seasonal data 15.44 business travel expenses 8.99 chambers of commerce 8.132 by-products 5.8, 5.49, 28.46 change in life insurance and annuities entitlements 17.53 C change of economic ownership 9.73, 11.78 call option 11.117 goods for processing 14.38 calls under standardized guarantee schemes 17.220 imports and exports of goods 26.20 Canberra group report 24.22 no exceptions in BPM6 26.21 cancellation of debt by mutual agreement 10.210 change-effecting services 6.17, 6.18 capital account 1.20, 2.110, 8.25, 10.1, 16.18, 16.33, 28.71 changes in assets 2.45 capital formation by type of producing unit 14.160 changes in classification capital gains see holding gains assets 3.104 capital injections 11.90, 11.91, 21.54, 22.47, 22.138 institutional units 12.10 capital productivity 19.63 natural resources 12.29 capital services 6.245, 7.13, 14.157, 18.67, 20.1, 20.5, 21.51 changes in classification and structure 2.114 as data quality check 20.29 changes in inventories 1.67, 2.32, 10.118, 15.156, 18.42 capital stock 6.249, 18.31, 20.1 by product type 14.110 fixed assets 13.9 deflation of 15.62 valuation 20.8 changes in liabilities and net worth 2.45 capital taxes, definition 10.207 changes in life insurance and annuities entitlements 8.36 capital transfer 2.110, 3.60, 8.10, 8.25, 8.126, 8.128, 10.19, changes in net worth 10.200, 11.91, 16.18, 22.105, 22.129, 22.134, due to neutral holding gains 2.120, 12.77 22.145, 22.162, 26.7, 26.71 due to nominal holding gains 2.117, 2.120, 12.77, 16.38 acquisition of equity 22.138 due to other changes in the volume of assets 2.114, 12.5, government guarantees 17.222 16.38 in kind 19.41 due to real holding gains 2.120, 12.77 one-off guarantee 17.212 due to saving and capital transfers 2.110, 13.12, 16.19, transfer of pension entitlements 17.188 16.38 captive financial institution 4.59, 22.23 definition 10.21 definition 4.113 changes in prices 2.146 car parking, subsidized 7.51 changes in tax regimes 14.151 car tax 7.83 changes in the terms of trade 2.146 caravans 10.83 changes in the values of assets and liabilities 12.1 cars, company 8.100 characteristic products 29.59, 29.62 cash accounting 2.56, 3.164 health care 29.140 cash flow problem 21.52 characteristics casino licences 17.350 ancillary activities 5.36 catastrophic losses 12.46 of an institutional unit 1.9 cattle, dairy 10.92 of production activities 5.5 central bank 7.122, 22.150 charitable contributions 3.82 as a financial institution 6.155 charities 4.88, 4.169, 8.132 definition 4.104 child-care 7.51 dividends 22.152 children, payments to 24.60 exceptional payments 22.152 CIF 3.149, 14.70 interest paid 22.153 CIF-to-FOB adjustment 14.77 of a currency union 4.176 CIF-type valuation 26.52 central government 4.30, 4.118 civil engineering works 10.77 central government agencies 4.138 civil servants 19.21 central government sub-sector 4.134 civil society 4.35, 23.11 centre of decision-making 2.16 claims on the IMF 11.59, 11.73 centre of predominant economic interest 1.48, 2.19, 4.10, 19.10 claims outstanding 11.105, 17.16 certificates of deposit 11.99 definition 6.187, 17.5 chain indices 15.36 claims treated as capital transfers advantages and disadvantages 15.41 non-life insurance 17.47 Laspeyres volume 15.40 claims, insurance 17.1 Laspeyres vs. chain superlative 15.51 definition 6.187, 17.5 637 System of National Accounts incurred 17.5 classification 3.16 non-life insurance 17.47 of SNA 1.1 reinsurance 17.64 of the central framework 2.2 classification hierarchy 3.12 quadruple accounting 3.16 classification of expenditure by purpose 9.14 timing 3.16 classification of financial instruments 11.29 valuation 3.16 classification of products 5.4 consolidation 2.68, 2.162, 3.197, 11.43, 16.40, 21.21, 22.14, clean-up costs 20.56 22.79, 22.82 closed economy 11.21 exceptions 22.83 closing balance sheet 13.13 insurance 17.57 closing stock 13.1 only within a single account 22.80 clubs, social, cultural, recreational and sports 4.167 practical difficulties 22.84 COFOG 9.85, 9.99, 14.96, 22.86, 29.9, 29.15 constant prices vs. volume terms 15.29, 15.98 COICOP 9.71, 14.94, 24.67, 28.79, 29.9, 29.13 constant purchasing power 2.66, 2.146 collateral 11.123, 22.132 construction 14.27 collateralized debt obligations 11.67 in BPM6 26.57 collective consumption 2.104 construction projects, non-resident 4.48 collective consumption expenditure 14.97 constructive liability 3.34, 3.40 collective consumption service 9.4 consumer durables 2.34, 2.167, 3.46, 3.47, 9.42, 9.60, 10.34, collective services 4.117, 8.33, 8.142, 9.85, 9.96, 22.7, 22.17 13.93, 14.109, 24.83, 29.12, 29.45, 29.152 examples 9.97 definition 9.42 NPISHs 9.107 repair and maintenance 9.69 commercial accounting 17.58 consumer price index 12.87, 14.16, 14.145, 24.67 commercial paper 11.64, 11.99 for different groups of households 24.67 commissions 3.122, 3.141, 7.44, 11.114, 17.33, 20.60 consumer prices 1.29 payable by reinsurers 17.64 consumer subsidies 7.99 commodity balance 14.2 consumer utility 15.23 commodity futures 11.114 consumers' associations 4.167 commodity gold 17.241 consumption 1.6, 3.20, 14.11 trade margin 17.242 definition 9.39 communal construction 6.127, 10.212, 19.26, 19.41, 23.43 enlarged 9.17 community-based or grass-roots associations 23.19 consumption expenditure 1.76 commuting time 19.52 collective 14.97 company cars 7.51, 8.100 in kind 24.65 comparability 15.204 individual 14.97 comparative price level indices 15.225 NPISHs 9.105, 14.95 comparator cost 29.150 time of recording 9.72 comparisons, inter-spatial 2.66 valuation 9.74 compensation for damages or injury 10.212 consumption good or service 9.2 compensation for injury 8.101, 8.140 consumption of fixed capital 1.17, 1.60, 2.24, 2.86, 2.110, compensation in kind 6.103 3.75, 6.9, 6.71, 6.73, 6.214, 6.241, 6.247, 6.256, compensation index 19.60 7.4, 8.21, 8.32, 9.10, 9.60, 10.3, 10.25, 12.94, compensation of employees 7.2, 7.5, 7.17, 7.39, 15.174, 16.7, 13.28, 15.168, 16.51, 18.31, 20.5, 20.28, 20.34, 17.104, 19.20, 26.58 28.75 ESO 17.389 animals 10.94 in volume terms 14.155 basis of valuation 6.248 social contributions 17.155 definition 6.240 to or from abroad 8.133 detailed discussion 10.155 complete set of accounts 4.2 effect of not estimating 10.26 requirement for quasi-corporation 4.44 reduction in asset value 13.23 comprehensiveness of SNA 1.1 relation to capital stock 6.257 computer software and databases 10.109, 10.110 revised estimates 12.50 conceptual elements 2.15 consumption of goods and services 9.39 concessional lending 3.134, 21.59 consumption of natural capital 20.48, 29.118 conferences 29.89 consumption possibilities 8.33 confiscation 22.142 consumption subsidies 29.69 conglomerates 4.51, 4.74 consumption vs.investment 1.52 connected products 29.59 contingencies 8.65, 11.22, 17.15, 17.87, 17.212 consistency 2.14, 2.160 contingent commitment 3.184 between different statistical systems 1.58 contingent future benefits 8.34 638 contingent liability 2.29, 3.40, 11.23, 21.65, 29.49 costs of operating a social insurance scheme 7.64 contingent positions 11.24 costs of ownership transfer 3.122, 10.39, 10.51, 10.158, 13.16, contract 17.296 14.101, 14.104, 15.145, 20.2 as an asset 17.299 land 10.81 transferable 17.370 non-produced assets 10.97 contract of employment 19.21 on acquisition 20.54 contract of sale 6.140 on disposal 20.60 implications for capital formation 6.112 time of writing off 10.52 contract price 3.129 valuables 10.150 contracts for sports players 17.368 writing off 12.55 contracts, leases and licences 3.44, 10.16, 10.186, 12.31, 22.90 costs of storage 6.149 changes due to the expiration of the advantage given by the as- counterpart reporting 26.18 set 12.32 counterparts of non-financial transactions 2.29 costs of ownership transfer 10.188 country's relative spending power 15.198 contributing family workers 7.30, 19.26, 19.27 coupon payments 11.70 contribution holiday 7.66, 17.153, 17.166 coupons 17.258 contribution supplements 17.112, 17.123, 17.135, 17.136 coverage of labour data 19.67 contribution to growth 15.63 CPC 2.37, 5.50, 9.71, 9.85, 9.108, 10.85, 10.86, 29.24 contributions to international organizations 8.128 credit card 6.159, 6.161, 17.294 contributions, social security 17.124 credit card loans 11.67 control credit derivatives 11.123 by government 4.26, 4.34 creditor approach 17.261 by non-residents 26.85 crews 19.32, 19.33 from abroad 4.34 residence 26.38 of a corporation by a non-resident unit 4.81 cross-border personal transfers 26.67 of an NPI by government 22.26 cross-currency interest rate swaps 11.121 public, national private and foreign 2.18 cultivated biological resources 10.88 convenience services 6.157 currency and deposits 27.31 convention on licences and fees 9.70 currency authorities 22.150 convertibility 27.19 currency boards 22.150 cooperatives 4.41, 7.129, 21.11, 23.21 currency under pressure 7.122 coordinating framework for economic statistics 1.57 currency union 4.176, 26.25 copies 6.208 currency and deposits distributed by the owner free of charge 10.101 definition 11.52 master 10.99 current accounts 2.83 valuation 6.210 current cost accounting 1.65 vs.originals 10.99 current external balance 16.18, 16.29, 26.6, 26.70 COPNI 9.108, 14.95, 23.30, 29.9, 29.17 current international cooperation 8.27, 8.128, 26.66 COPP 14.89, 29.9, 29.19 current taxes on capital 8.63 corporate migration 26.42 current taxes on income, wealth, etc. 7.2, 8.15, 8.27, 16.12 corporate restructuring 12.66 current transfer 2.95, 3.60, 8.1, 8.10, 8.39, 15.194, 16.12, corporate sell-off 21.23 18.65, 26.66 corporate spin-off 21.23 between households 8.133 corporation in respect of central bank activity 6.155 associate, definition 4.75 pensions seen as 9.21 characteristics of 4.38 to NPISHs 8.132 control by non-residents 4.33, 4.81 within general government, definition 8.126 coverage 4.38 current transfer in cash 8.42 coverage by type of unit 4.7 current transfer vs. capital transfer 10.201 creation 21.9 customs declarations 7.84 definition 4.7 customs tariff schedules 7.93 economic objectives, functions and behaviour 4.18 customs unions 26.109 indicators of control 4.80 D ownership 4.68 dairy cattle 10.92 sub-sectors 29.29 damage-based measures 29.126 subsidiary, definition 4.73 data extrapolation 18.33 winding up 21.13 data interpolation 18.41 correspondence between products and producing units 14.17 data projections 18.11, 18.41 cost benefit analyses 20.68 data sources for employment data 19.76 cost of living indices (COLIs) 15.23 databases 10.112 639 System of National Accounts valuation 10.113 three sub-sectors 27.14 death benefits 8.39, 8.68 depository receipts 11.84 death duties 8.63, 10.207 deposits and loans, holding gains and losses 12.106 debentures 11.64 deposits, lost 17.383 debt 22.7, 22.78 deposit-taking corporations, definition 4.105 arrears 22.120 depreciation 1.60, 2.142, 6.240, 6.247, 6.249, 20.32 assumption 22.117, 22.118, 26.107 details for publication 18.2 cancellation 10.205 deterioration of assets 12.94 cancellation, by mutual agreement 10.210 development aid 29.72 concessional 22.123 diamonds 10.133 conversion 26.107 differences in quality 9.77, 12.23 debt-for-equity swap 22.116 different kinds of goods or services. 15.65 defeasance 12.42, 22.122 diplomatic personnel 19.11 definition 22.104 diplomats, military personnel, etc., residence 26.38 forgiveness 10.205, 12.39, 22.107, 26.107 direct effect of a change in demand 28.39 instruments 11.112 direct hours 19.51 definition 26.103 direct insurance 6.180, 8.115, 17.2, 26.69 payments on behalf of others 22.119 direct insurer 8.122, 17.57 refinancing 22.114, 26.107 direct investment 21.41, 21.42, 26.87 reorganization 26.106 definition 26.84 repudiation 12.41, 26.108 direct investment enterprise 21.34, 26.61 rescheduling 21.59, 22.111, 26.107 direct investment, inward 26.89 restructuring 26.106 direct investment, outward 26.89 write-downs 26.108 direct investor 21.34, 26.81 write-offs 22.116, 26.108 direct subsidies 7.103 debt securities 6.170, 17.258, 27.32 direct taxes 7.75, 8.52 definition 11.64 disabled workers 19.21 holding gains and losses vs. interest 12.107 disaggregation into sectors and sub-sectors 1.10 long-term 11.71 disaggregation of households 28.82 debtor approach 17.261 disassembly 20.60 decision tree 4.25, 22.37 disasters see natural disasters decision-taking 1.1 discontinuities 18.11 decline in value of a mineral deposit 20.48 discount factor 17.69, 20.27, 24.79 decommissioning costs 20.56 discount rate 20.27 deductible tax 7.6 discounted bonds 17.258 deductible VAT 6.58, 14.45 discounted present value 3.137 deep discounted bonds 12.109 discounting 6.246 defensive expenditure 29.119 discovery of new exploitable deposits 12.18 defined benefit pension scheme 7.59, 7.147, 7.149, 13.78, discrepancies 18.2, 18.15 17.144 net lending or borrowing 18.20 definition 17.129 discretionary income 2.161 notional fund 17.131 disposable income 2.97, 8.2, 8.10, 8.20, 9.7, 16.14 defined contribution pension scheme 7.59, 7.147, 13.78, 17.176 distinction between goods and services 26.51 definition 17.128 distributable income of corporations 7.131 definition 6.89 distributed income of corporations 7.25 deflation of flows 15.194 distributed profits 7.127 degradation distribution and redistribution of income 2.90 of land, water resources and other natural assets 12.30 distribution margins 14.47 of natural resources 2.167 distribution of expenditure 14.16 valuation of 29.120 distribution of income 1.14 Delhi Group 25.14, 25.60 tertiary 2.99 deliveries between establishments 18.48 distribution of wealth 24.77 de-merger 21.23 distributive transactions 2.28 dependants divestment 21.23 support for 8.68 dividends 7.23, 7.128, 7.151, 11.90, 22.136 depletion of natural resources 1.47, 2.167, 10.180, 12.26, from central bank 22.152 29.118 dividends vs. withdrawal of equity 17.284 forests, fish stocks etc. 12.27 division of labour 6.10, 6.22 depository corporations do-it-yourself activities 1.45, 9.66 link to broad money 27.12 do-it-yourself repairs and maintenance 6.36 640 domestic and personal services 1.39 economically significant prices 2.40, 4.18, 22.28, 23.4 domestic currency, holding gains and losses 12.105 definition 6.95 domestic final expenditures 15.185 ecosystem inputs 29.106 domestic services 2.167 education 19.52, 29.50 domestic staff 4.151, 6.26, 6.35, 6.116, 9.54, 24.14, 25.46, education benefits 8.68 25.64, 25.72 education services 4.119, 22.20 domestic tourism 29.92 effects of depletion and degradation 29.105 donations 23.33 efficiency 6.254, 6.256 double deflation 14.154, 15.2, 15.133 losses 15.169 double-entry book-keeping 1.63, 3.112 of an asset 20.2 down time 19.51 of economic production 19.4 drought 12.46 of fixed assets 6.249 due-for-payment recording 3.165 profiles 6.255 durable goods 9.42 EKS method 15.206, 15.218 split between capital formation and consumption 10.41 advantages 15.220 durable military goods 6.232 eligibility for loans 1.34 durable vs. non-durable goods 9.42 embassies 4.11, 4.49 duties emergence of markets 6.22 excise 7.83, 7.94, 7.96, 8.57 emission permits 17.363 export 7.95 employed persons 7.29 import 7.93 employee dwellings 2.3, 9.57, 15.145 definition 19.20 definition 10.68 of foreign government agencies 19.33 maintenance 24.51 temporarily not at work 19.23 owner-occupied services 6.34 vs. self-employed person 7.28 rented by their owners 9.57 employee stock option, see ESO E employees, number of 14.121 earmarked taxes 4.138 employer's contribution 17.133, 17.149 earnings, reinvestment of 11.92 employer's imputed social contribution 8.84, 17.146 earnings, retained 13.90 employer's social contribution 7.56, 8.80, 17.152 earthquakes 12.46 employer's social security contribution 17.102 econometric methods 1.30 employers' actual social contribution 8.83 economic analysis 1.1, 27.37 employers' actual social contributions 17.114 economic appearance 12.8, 12.15 employment 6.31 natural resources 12.18 definition 19.19 valuables 12.16 employment agencies 19.21 economic benefit 2.34, 3.19 employment by industry 14.160 economic flows 2.23, 3.6 employment in informal enterprises 25.59 definition 3.6 employment relationship 8.76 economic functions 2.21 employment-related social benefits other than pensions 17.114 economic growth 1.26 encumbered lease 17.371 economic objectives endowment policy 17.6 functions and behaviour of corporations 4.18 enlarged consumption 9.17 functions and behaviour of government units 4.20 enterprise functions and behaviour of households 4.21 change of economy of residence 26.42 functions and behaviour of NPIs 4.22 definition 5.1 economic or currency unions 26.44 horizontally integrated 5.21 economic owner 2.47, 3.21, 10.5, 11.76, 13.3, 17.300, 20.38 informal vs. SNA usage 25.48 change of 3.169 little physical presence 26.41 definition 3.26 vertically integrated 5.23 economic policy 1.31 enterprises of informal employers 25.44 economic principles 1.1 entertainment, literary and artistic originals 10.115 economic production 6.24 entitlement to future goods and services on an exclusive basis, economic rent 20.45 definition 10.195 economic territory 4.10, 4.11, 4.12, 26.26 entrepreneurial income 1.68, 2.94, 7.22 economic theoretical concept of income 16.14 entrepreneurial income account 7.13, 7.22 economic theory 1.64 environment industry 29.115 economic unions 4.176, 26.25, 26.109 environmental accounting 2.167, 13.9 economic value 2.21, 3.1 environmental accounts 29.102 economically active population 6.31, 19.5, 19.29 environmental protection 29.110 641 System of National Accounts environmental protection accounts 29.114 expenditure vs. acquisition 9.31 environmental protection activities 29.37 expenditure, in volume terms 18.25 environmental protection expenditure 29.12, 29.85 expense, GFS definition 22.70 environmental resources experimentation 29.8 exclusions from the SNA asset boundary 3.49 explicit fees environmental tax 29.111 financial services 17.234, 17.239, 17.256 equalization provision 6.189, 6.190, 17.23 export duties 7.95 equipment integral to buildings 10.82 export prices, differences from PPIs 14.146 equipment prices 15.147 export subsidies 7.103 equity 12.114, 27.33 export taxes 7.95 definition 11.83 exports 1.50, 3.149, 14.114, 16.5, 26.3 equity and investment fund shares 11.81 exports and imports 15.160 holding gains 17.238 exposure draft (ED) 21.62 equity capital 7.128, 22.135 external account 1.2 equity carve-out 21.23 external balance on goods and services 26.6 equity investment 22.135 external balance on primary income 26.70 return 22.136 External Debt Guide 26.104 errors and omissions 22.77 external satellite 29.85 ESO 7.55, 17.384, 17.396 external transactions of the economy 2.20 cost of administering 17.390 externalities 1.82, 3.92, 3.103, 6.47, 10.102, 29.42 definition 11.125 extra-budgetary units 22.20 other volume changes 12.43 extraction 7.160 recording of exercise 17.394 extraction of mineral resources 17.342 establishment 2.38, 3.13, 7.3, 14.17, 28.44 extraction of water 17.339 definition 5.2, 5.14 extrapolated GDP series vs.PPP benchmark 15.235 extent of accounting for 5.18 extrapolation establishment data 14.3 chained indices 15.55 establishment survey 25.85 PPPs 15.231 exceptional events 2.114, 12.9 extraterritorial enclaves 4.49 exceptional financing 26.100 F exceptional losses face value 3.157 animals 10.94 facilitation services 3.69 due to climatic extremes 10.96 factor reversal test 15.31 inventories 12.58 fair value 3.157, 21.58 exceptional payments from central bank 22.152 family members, as employees 19.40 excess of loss reinsurance 17.11, 17.22 farm-gate price 3.124, 6.124, 24.48 exchange of equity and investment fund shares between institutional FDI units 17.288 immediate direct investor 21.46 exchange rates 26.110 ultimate investing country 21.45, 21.46 conversion of GDP 15.198 ultimate investor 21.44 exchange value 3.121 fee supplement, standardized guarantee schemes 17.211 excise duties 7.83, 7.94, 7.96, 8.57 fees 3.122 excursionists standardized guarantees 8.124 definition 29.92 fees, commissions or royalties 6.211, 6.214 ex-dividend quotation of shares 17.284 fellow enterprise 21.36, 26.86 exercise date 17.385 films 10.115 exercise period, ESO 11.125 final consumption 1.52 exercise price 17.385 final consumption expenditure 2.103, 9.6 exhaustiveness 19.35, 25.2, 25.28 corporations 9.11 existing assets 14.107 enterprises 8.18 existing fixed assets 10.36, 10.38 general government 9.85, 15.142 existing good 9.49, 14.102 government, derivation 9.90 sales 10.39 NPISHs 9.115, 15.142 expected claim see adjusted claim classification 9.108 expenditure by government on market goods and services 9.89 service charges for social insurance schemes 17.159 expenditure by tourists 24.66 final demand 14.84 expenditure measure of GDP 16.41, 18.60 final salary scheme 7.149 expenditure on financial services 9.61 financial account 1.20, 2.112, 10.1, 11.1, 16.21, 16.33, 26.8, expenditure on goods and services 9.32 26.73, 27.24 time of recording 9.33 no balancing item 11.1 expenditure taxes 8.64 642 financial account entries fish farms 10.76 counterpart to entries in other accounts 11.10 Fisher index 15.27, 15.32, 15.53 exchange of financial assets and liabilities 11.10 fishing financial activities quota 17.334 secondary 4.95 recreational licence 17.336 financial asset 1.46, 2.35, 3.37 FISIM 3.67, 3.141, 6.163, 8.24, 11.56, 15.114, 17.239, creation 11.15 17.304, 17.309, 22.71, 24.58, 26.60 definition 3.36, 11.8 fixed asset 1.46 financial assets and liabilities, transformation of risk 3.29 distinguishing features 10.11 financial auxiliaries 4.98, 4.101, 6.157, 6.158, 22.150 owned vs. rented 14.43 definition 4.111 fixed industry sales structure 28.57 financial claim 11.4 fixed interest loans 6.167 definition 3.35, 11.7 fixed product sales structure 28.57 time of recording 11.37 fixed-rate marketable bonds financial corporations 1.10, 2.17, 4.19, 17.226, 28.27 effect on value of changing interest rates 12.110 definition 4.98 fixed-term deposits 11.59 sub-sectors according to control 4.103 flexibility 2.160, 11.25, 18.66, 27.36, 28.1, 28.68, 29.1 sub-sectors according to type of activity 4.102 in classification of financial instruments 11.32 types of units 4.98 recording of taxes 8.61 vs. financial institutions 17.227 use of classifications 1.71 financial derivatives 7.115, 11.23, 11.33, 27.34 flexibility of SNA 18.7 and employee stock options 26.93 float 3.173, 11.39 associated with reserve asset management 26.93 flow-of-funds 11.56, 11.95, 27.9, 27.23 contracts 11.59 analysis 17.252 definition 11.111 matrix 2.150 holding gains and losses 12.118 use 27.37 not debt instruments 26.103 flows 3.2 other volume changes 12.43 flows between different groups of households 24.69 service charge component 11.114 FOB 3.149, 14.70, 26.52 financial distress 17.212, 21.52 foreclosures 12.49 financial institutions vs. financial corporations 17.227 foreign affiliates 21.48 financial instruments 11.27 Foreign AffiliaTes Statistics (FATS) 21.48, 26.90 classification of 11.29 foreign controlled corporations 21.29 giving rise to dividends 17.236 foreign currency 3.139, 3.141 giving rise to interest 17.236 foreign direct investment 11.129, 13.95, 21.20, 21.32, 27.21 giving rise to investment income 17.236 foreign direct investment enterprise 4.82, 11.92, 12.113 financial intermediaries 1.21, 4.98, 4.101, 11.18, 17.227 foreign exchange bureaux 17.229 financial intermediation 4.29, 6.151, 6.157 foreign exchange margins 9.63 definition 17.228 foreign exchange swaps 11.121 financial lease 2.47, 3.66, 6.168, 6.239, 9.73, 10.56, 10.57, foreign reserves 17.244 10.82, 11.73, 17.345, 20.38, 20.67, 21.51, 22.163 foreign-controlled enterprises 26.89 definition 17.304 forested land 17.329 financial liabilities 3.20 formal employment 25.55 financial production, flows and stocks in the SNA 27.4 formal job attachment 19.23 financial regulation 6.190 forward contract financial risk management 6.158, 17.228 definition 11.120 financial services 3.67, 4.29, 14.29 foreign exchange 11.121 not incorporated into the value of any financial asset 17.234 forward markets 11.112 financial statistics 27.18 forward rate agreement 7.115, 11.121 coverage 27.6 forward-type financial derivative 17.290 financing of transfers 29.81 foundations 23.19 fines and penalties 8.135 framework for direct investment relationships 21.37 finished goods 10.142 free banking 17.230 conversion from work-in-progress 6.112 free housing 8.68 definition 10.142 free trade zones 26.26 valuation 10.143 freight and insurance 3.150, 26.52 firewood 12.22 fringe benefit 7.53 fiscal activities of SPEs 22.54 from-whom-to-whom recording 2.10, 2.52, 2.76, 2.150, 2.153, fiscal operations 22.3 11.95, 27.27, 28.80, 29.30 fish 17.333 full-time equivalent employment 643 System of National Accounts definition 19.43 goods procured in ports by carriers 26.53 full-time equivalent workers 19.42 goods produced by households 6.115 function 2.42 goods produced on own account 9.75 functional categories 26.73, 27.21 goods sent abroad for processing 2.48, 14.37, 14.62, 26.50, purposes 26.74 26.53, 28.21 functional classification 2.154, 29.2, 29.9 transport costs 14.75 functional classification of financial transactions 26.48 goods sent on consignment 26.20, 26.53 funds in transit 21.41 goods used partly for business purposes and partly for personal future obligations 7.150 benefit 9.60 futures 11.114 goodwill see purchased goodwill G government gains from trading 6.10 enclaves in the rest of the world, 22.51 GDP 1.3, 6.1, 6.70, 6.221, 7.10, 7.21, 16.1 final consumption expenditure 8.104 definition 2.134 final consumption expenditure benefitting enterprises 9.101 derived from value added 2.138 final consumption expenditure, relation to government expenditure measure 16.41, 18.60 output 9.88 income measure 16.41, 18.61 role in key sectors 29.28 per capita 1.28, 19.1 government control 4.26 production measure 16.41, 18.57 corporations 4.80, 21.28 three identities 6.83 government establishment vs. GNI 7.21 treated as quasi-corporation 4.121, 4.123 vs. NDP 2.142 when treated as public corporation 4.121 Geary Khamis (GK) method 15.214 government finance analysts 22.7 Geary method of calculating terms of trade 15.191 government finance presentation 22.8, 22.62 general corporate policy 4.77 government goods and services n.i.e. general equilibrium system 1.15 BPM6 26.57 general government 2.17, 28.28 government guarantees 17.222, 21.55, 22.32, 22.118 alternative methods of sub-sectoring 4.148 government issued permits 22.88 as administrator of social insurance scheme 8.76 government ownership 3.22 consumption expenditure 14.96 government specialized agencies 5.43 final consumption expenditure 9.114 government units general government sector 4.30 definition 4.9, 22.17 composition by type of units 4.127 economic objectives, functions and behaviour 4.20 sub-sectors 22.39 government units with market production 4.123 general sales taxes 7.94, 7.96 government units, including social security funds 1.10 generation of income 1.14 government with less than or more than three levels of generation of income account 7.3, 14.86, 14.120, 14.160, 16.7 government 4.133 geometrically declining prices 20.22 grant date 17.385 GFSM2001 22.96, 29.86 ESO 11.125 gift taxes 10.207 gratuities 7.44 gifts 8.101 green accounting 20.48 global imbalances 26.99 greened economy modelling 29.124 globalization 14.39, 21.38, 21.39, 24.17, 26.36 gross and net recording of VAT 6.59 GNI 7.20, 16.1 gross capital formation 10.24, 10.31 gold 10.133 gross capital stock 6.253 gold bullion 11.28, 11.45, 17.240, 17.242, 26.75 gross fixed capital formation 10.32, 14.101, 15.144 gold swaps 11.73, 11.77 borderline with inventories 6.112 golden share 4.69, 4.80 by establishment 14.121 goods definition 10.64 definition 6.15 negative 10.39 value at the customs frontier 26.19 vs. purchases of fixed assets 2.31 goods and services account 2.134, 14.1, 15.1, 16.23, 18.22, gross national disposable income 2.145 26.46, 28.4 gross national income 1.34, 2.143, 16.54 definition 14.10, 16.27 definition 16.54 goods and services delivered in different locations 15.66 gross operating surplus 20.28 goods and services needed for work 9.52 gross value added 1.17 goods and services, synonym for products 2.36 as a production measure 7.21 goods entering or leaving the territory illegally 26.53 at basic prices, definition 6.77 goods for resale 10.145, 14.110 at factor cost 6.80 definition 10.145 at market prices 6.78 644 at producers' prices, definition 6.78 connection with families 4.150, 24.13 definition 6.8 consumption 14.94 gross vs. net 2.141 definition 4.4, 4.149 groups of corporations 4.51 economic objectives, functions and behaviour 4.21 growth rate 18.21, 18.63, 19.12 expenditures abroad 9.79 growth, volume of GDP 1.26 final consumption expenditure 8.104, 9.56, 9.113 guarantee 17.207, 22.47 moves from one economy to another 12.65 financial derivative 17.210 residence 26.37 financial derivatives 22.127 sub-sectored by income 4.160 multi-year period. 17.217 sub-sectoring according to attributes of a reference one-off 17.212 person 4.163 H household activity hand tools 10.82 valuation 29.149 harmonization between the SNA and other major systems 1.58 household composition 24.35 head office see also holding company household maintenance, cost of labour 9.67 health care household production 1.41 activities 29.130 agricultural products 6.32 expenditure 29.129, 29.136 collection of firewood 6.32 functional classification 29.129 pragmatic exclusions 6.33 funding 29.129, 29.138 services for own use, exclusion from the production providers 29.129, 29.133 boundary 6.26 health expenditure 29.50 supply of water 6.32 health satellite accounts 29.128 types of excluded activities 6.28 health services 4.119, 22.20 household sector 2.161 hedging 11.112 household sub-sectoring hedonic demographic characteristics 24.43 indices 15.91 income levels 24.32 regression equations 15.83 reference person 24.40 hidden economy 19.35, 25.30 type of income 24.36 high inflation 3.160, 7.120, 12.95, 13.58, 18.22, 29.39 household surveys 1.61, 14.94, 19.69, 19.77, 19.78, 19.82, high technology goods 15.84 24.21, 25.83, 28.82, 29.14 higher frequency national accounts 18.5 exclusions 14.145 highly mobile individuals, residence 26.38 household unincorporated market enterprises 4.155 high-value capital goods 26.22 households sector 4.32 hire-purchase agreement 9.73 difficulty of sub-sectoring 24.10 hire-purchase credit 11.73 households sub-sectoring historic cost accounting 1.60, 1.65, 3.157, 6.107, 6.240, 6.248, link to surveys 24.26 6.249, 7.24 households' actual social contributions, definition 8.85 historical monuments 3.43 households' social contribution supplements, definition 8.86 holding company 4.54, 21.41, 22.49, 22.140 households' social contributions 8.80 holding gains 2.30, 3.105, 3.153, 11.98, 12.79, 17.18, 17.134, housing allowances 7.44 17.238, 21.65 housing services 2.3 as part of income 29.43 owner-occupiers 6.34, 9.54 excluded from measure of output 6.107 HS 14.36, 14.114 neutral 16.34 human capital 1.54, 2.34, 2.167, 3.46, 3.48, 17.368, 29.12, nominal 16.34 29.45 realized 12.80, 16.36 human needs 9.39, 28.79 unrealized 12.80, 16.36 hurricanes 12.46 holding losses see holding gains hybrid approaches to input-output conversion 28.64 holiday pay 7.44 hybrid supply and use or input-output tables 29.108 homogeneity of products in the rows in the use table 14.142 hyperbolic rate of decline 6.254 horizontally integrated enterprise 5.21 hypothecated taxes 4.138 hospitals 23.28 I hours actually worked 19.51 IASB 13.83, 17.386 hours worked 19.78 ICLS 19.50 houseboats 10.83 ICP 15.8, 15.200, 15.202, 19.15 household 1.9, 1.10, 2.17, 4.3, 4.4, 28.29 ICP aggregation actual final consumption 9.81 binary method 15.217 assets 24.73 block approach 15.213 change of economy of residence 26.39 Country Product Dummy (CPD) method 15.206 645 System of National Accounts ring approach 15.222 individual consumption good or service 9.3 identity linking balance sheets, transactions, other volume changes individual consumption of general government treated as social and nominal holding gains 12.82 transfers in kind 9.95 identity linking the opening and the closing balance sheet 16.32 individual goods and services 8.142, 9.83, 9.85, 9.92, 9.108, illegal activity 3.96, 6.39, 6.42, 19.35, 25.25, 25.31 22.7, 22.17 illegal logging 17.332 individual households 4.4 ILO 6.31 individual insurance policies 17.97 immovable assets owned by non-residents 10.56 individual services 8.103 impaired loans 12.111 industry 2.39, 7.3, 14.22 impairment test 12.34 definition 5.2, 5.46 implicit charges for financial services see FISIM industry by industry matrix 28.49 implicit interest costs 7.13 industry technology assumption 28.54 implicit subsidy 7.122 infinite life 7.109 implicit tax 7.96, 7.122, 7.123, 26.112 inflation 1.66, 7.24, 12.95, 13.58, 18.22, 29.39 import and export duties 14.69 higher nominal rates of interest 12.90 import duties 7.93 informal 24.45 import price indices 14.146 activity 4.21, 6.39, 14.8 import subsidies 7.101 criteria 25.19 imports 1.50, 3.149, 16.5, 26.3 economy 2.163 of goods at basic prices 14.77 employment 25.54 separation from domestic production in use tables 14.134 own-account enterprises 25.44 improvements to existing fixed assets 10.43 informal enterprises improvements to land 10.44 definition 25.5 imputed informal jobs 25.58 expenditure 9.48 informal sector 25.3 property income flows 8.23 comparable sub-set 25.61 rent of owner-occupied dwellings 24.22 ILO definition 25.36 social contribution 17.104 overlap with NOE 25.4 taxes and subsidies 8.55 vs. SNA usage 25.75 transactions 1.36 information, computer and telecommunications equipment 10.82, in real terms 2.66, 2.146 10.85 inbound tourism 29.92 inheritance tax 8.38, 10.202, 10.207 income 1.6 injections, capital 11.90, 11.91 deciles 24.32 inland waters 7.156 economic concept of 8.25 input method 15.119, 15.123 generation 1.18 input PPIs 15.129 not available to spend 24.81 input-output analysis 1.73, 5.16, 6.67 pre-committed as saving 24.71 input-output coefficients 14.42 primary distribution 1.18 input-output matrices 28.2 redistribution 1.18 input-output tables 1.24, 6.1, 14.15, 28.32 use 1.18 inputs 15.120 income in kind 9.51, 17.149, 24.59 labour, capital, goods and services 6.24 income measure 16.51 instalment loans 11.73 income measure of GDP 16.41, 18.61 institutional household 4.32, 4.152, 19.34, 24.15, 25.64 income taxes 7.5 vs. unincorporated enterprise 24.28 incorporation of unincorporated enterprise 21.9 institutional sectors 1.3, 2.17, 3.1, 4.16, 4.24 incurrence of arrears 26.100 institutional unit 1.3, 1.9, 2.16, 3.1, 3.52, 4.1 indexation mechanism BPM6 26.24 securities 17.275 definition 4.2 index-linked securities 11.70 special treatments of units in cross-border situations. 26.27 indicators of government control instrument classification, monetary statistics 27.16 corporation 4.80 instrument, financial 11.27 NPI 4.92 insurance 16.12, 17.1, 27.34 indices of industrial production 1.29 as a form of redistribution 6.176 indifference curves 15.28 associated service charge 8.23 indigenous or territorial groups 23.29 by line of business 9.64 indirect direct investment relationships 26.86 cover provided to the rest of the world 17.43 indirect effect of a change in demand 28.39 gross recording 17.58 indirect taxes 7.75 output, sum of costs 17.29 individual consumption expenditure 14.97 premium 6.184 646 service charge 9.64 25.13 services 22.71 international cooperation 3.82 settlements following a disaster 10.212 International Financial Reporting Standards (IFRS) 21.60 insurance and pension fund services 4.29 international investment position (IIP) 13.2, 26.11, 26.12, insurance claims see claims, insurance 26.73, 26.75 insurance corporations 4.115, 11.103 international liquidity 26.73 insurance technical reserves 6.188 international merchandise trade statistics (IMTS) 26.52 insurance, pension and standardized guarantee schemes 11.103 international organizations 26.26, 26.44 integrated economic accounts 2.75, 2.125, 2.149 characteristics 4.173 integration 2.14 International Public Sector Accounting Standards Board (IPSASB) of SNA 1.1 21.66, 22.13 of the central framework 2.2 International Recommendations for Industrial Statistics 25.88 production and generation of income accounts 1.24 international relief activities 23.41 set of price and volume indices 1.25 international trade in services 15.165 intellectual property products 15.148 international transfers 8.22 examples 10.98 inter-spatial comparisons 2.66 inter-bank positions 11.56, 11.57, 11.95, 17.252 intra-household services 29.44 classified under deposits 11.57 intra-unit deliveries 3.90, 5.27, 6.87, 6.104, 14.41, 18.48, inter-company lending 26.87 29.65 interest 3.141, 7.12, 7.113, 26.60 transfer of risk 6.86 arising from indexation 11.70 intra-unit flows 2.24 bills 17.264 intra-unit transactions see internal transactions bonds 17.268, 17.273 inventories 10.12, 10.124 credit card 17.253 borderline with gross fixed capital formation 6.112 debt securities 17.259 held abroad 14.73 deposits and loans 17.249 inventories held abroad 26.21 due for payment 7.114 inventories of finished goods implicit costs 7.13 causes 6.105 index-linked securities 17.274 entries to, valuation 6.106 interest-free loans 7.54 withdrawals from, valuation 6.106 nominal 7.120 investment fund shares on other accounts receivable or payable 13.84 supplementary classification 11.101 on overdue taxes 7.86, 8.60 investment funds 11.97, 12.113 paid by central bank 22.153 definition 11.94 real 7.120 reinvestment of investment income 17.286 reference rate 6.163 investment grant 8.98, 11.91 repurchase agreements 17.254 paid in installments 10.208 SDRs 17.246 investment in capital formation equal to saving plus net borrowing unallocated gold accounts 17.245 from the rest of the world 17.226 zero-coupon bonds 17.270 investment income 6.193, 7.17, 7.23, 7.107, 7.108, 17.136, interest rate swaps 11.121 26.59, 26.62, 26.77 interim administration 26.44 annuity 17.73 inter-industry matrix 28.37 attributable to guarantee holders 17.220 intermediate consumption 1.52, 2.86, 6.222, 8.99, 9.39, 14.84 attributable to policyholders 17.18, 17.52, 17.113, 17.114 definition 6.213 life insurance 17.53 of own production 6.120 non-life insurance 17.47 time of recording 6.216 attributable to the annuitant 17.72 vs. gross fixed capital formation 6.224 currency and deposits 17.247 vs. remuneration in kind 6.220 equity and investment fund shares 17.284 intermediate inputs financial derivative 17.292 time of recording 6.75 on pension entitlements 17.130, 17.134 valuation 6.75 receivable by reinsurance policy holders 17.64 intermediation process 2.150 investment vs. consumption 1.52 internal satellite 29.85 invitation to comment (ITC) 21.62 internal transactions 1.37, 2.22, 2.24, 3.85, 12.97, 20.4 invoiced VAT 6.58, 7.6, 7.75, 14.45 International Accounting Standards Board (IASB) 1.70, 21.60 inward direct investment 26.89 international assistance 22.101 inward investment 21.39 international comparisons 1.33 ISIC 2.39, 5.4, 5.24, 5.50, 6.12, 6.207, 14.32, 23.30, 25.46, international comparisons of productivity 19.75 28.43, 29.24 International Conference of Labour Statisticians (ICLS) 19.5, 647 System of National Accounts J legal or social entity 4.6 jewellery 9.57 legal owner 2.47, 10.5, 13.3, 17.296, 17.300 job 19.61, 19.78, 25.79 definition 3.21 definition 19.30 PPP 22.159 five ILO categories 25.57 legally constituted corporation, definition 4.39 job vacancies 19.31 leisure, valuation 29.146 Johns Hopkins Comparative Non-Profit Sector Project 23.17 lending of own funds 17.251 joint products 5.49, 28.46 Leontief 28.38 joint venture 17.347 letters of credit 11.22 definition 22.56 liabilities and net worth 2.44 liabilities, financial 3.20 K liability 2.33, 3.5, 11.4, 11.5 key aggregates cross-classified by creditor 2.151 recasting 29.12 definition 3.33 key industries 18.58 distinction from contingent liability 11.23 key sector 2.163, 29.3, 29.22 distinction from provision 11.23 role of government 29.28 non-pension benefits 17.110 kind-of-activity unit licence 8.54, 8.64, 8.135, 9.70, 17.297 definition 5.12 casino 17.350 knowledge 10.103 issued by government in strictly limited numbers 22.90 knowledge-capturing products 6.13, 6.22 mobile phones 17.316 characteristics 6.22 recorded on an accrual basis 17.351 L taxi 17.350 labour 19.1 to extract natural resources 10.172 labour accounts 28.83 to reproduce 10.100 labour force 6.31 to undertake a specific activity 9.70 definition 19.17 to use an original 6.211, 10.100 labour force statistics 1.42 licence to make copies (reproduce) 6.212 labour force survey 25.83 licences and fees, convention on treatment 9.70 labour in unincorporated enterprises 24.8 life expectancy 17.7, 17.67 labour input 2.157, 7.2, 19.71 life insurance 6.178, 8.36, 8.74 labour input of employees at constant compensation 19.59 as a form of saving 17.7 labour market questions 28.63 definition 17.6 labour productivity 15.138, 19.1, 19.4, 19.70 difference from non-life insurance 17.51 land 7.2, 7.109, 17.326, 20.41 financial transactions 17.8 costs of ownership transfer 10.160 life insurance and annuities entitlements 17.52 definition 10.175 definition 11.106 disaggregation 10.178 life insurance policy 7.144 economic appearance 12.21 qualifying as social insurance 17.51 forested 17.329 limited liability 21.15 improvements 10.44, 10.79, 12.21 limited liability and other partnerships 11.88 rent 20.65 limited liability partnerships 7.129, 21.11 land taxes 7.157 line of insurance business 17.27 landlord 9.67 lines of credit, undrawn 11.73 large operating deficits 10.212 liquidating dividends 11.90 Laspeyres index 19.56 liquidity provision 6.157 price 15.16 liquidity transformation 6.158, 17.228 volume 15.17 listed shares 11.86 Laspeyres-type index definition 11.86 price 15.207 livestock 10.94 volume 15.208 living standards 9.17 lease 17.297 loan capital 7.128 duration 17.308 loan commitments 11.22 encumbered 17.371 loans 11.72, 27.32 for less than the whole life of the asset 17.307 associated with financial lease 17.304 leave 19.52 interest-free 7.54 legacies 10.212 negotiable 11.65 legal entities 1.9, 4.3 supplementary sub-division 11.79 legal fees 20.60 loans and deposits denominated in domestic currency legal incorporation 25.21 holding gains 17.237 legal monopoly 7.96 648 loans, non-performing conditions for recognition 17.376 definition 13.66 definition 10.190 loans, non-performing see non-performing loans market-equivalent prices 26.19 local government 4.30, 4.118 marketing assets local government sub-sector 4.145 definition 10.198 local unit master copy 10.99 definition 5.13 master legal agreements 11.123 location 25.26 matched-models method 15.80 logging, illegal 17.332 materials and supplies 10.131, 14.110 long-term debt securities 11.71 maternity benefits 8.39 long-term lease mathematical techniques, for interpolation and extrapolation 18.41 held by non-resident 26.34 matrix losses of government trading organizations 7.103, 7.105 industry by industry 28.49 lost deposits 17.383 product by product 28.48 lotteries 8.101, 8.136 symmetric 28.32 participation by non-resident households 8.138 matrix presentation 2.12, 28.1, 28.81 supporting charities 8.137 maturity 12.40, 27.20 Lowe index 15.35 meal breaks 19.52 loyalty programmes 6.148 means-tested benefits 8.70 M means-testing 8.92, 17.116 machinery and equipment 10.82 measures of economic activity 1.1 macro-economic aggregates 2.135 Measuring the Non-Observed Economy 25.2, 25.81 modification of 29.51 medical service at the workplace 8.102 macro-economic models 1.30, 18.9 medical treatment 8.68 main budget account 22.19 members of a household resident in the same economy 26.29 maintenance 6.228, 24.53 members of a producers' cooperative 7.30, 19.28 as done by a landlord 9.67 membership dues 8.132, 22.100, 23.4 as done by a tenant 9.66 memorandum items 11.22 vs. gross fixed capital formation 6.226 consumer durables 13.93 maintenance cost 29.122 financial account 11.129 major repairs 6.37, 6.229, 20.61, 24.53 foreign direct investment 13.95, 27.21 management buy-outs and buy-ins 21.23 non-performing loans 13.67 managers of corporations 19.24 supply and use table 14.121 manuscripts 10.115 merchandise trade figures 28.22 mapping individuals to households 28.82 merchanted goods 14.62 margin merchanting 14.73, 26.21, 26.49, 26.53 financial derivatives 11.124 purchases recording as negative exports 26.21 negative 6.150 merger 21.16, 21.20, 21.21, 22.148 non-repayable 11.124 MFP Multi-factor productivity 19.4 repayable 11.124 MFSM 27.4, 27.7, 27.12, 29.86 see trade margins micro-finance schemes 17.251, 23.46 see transport margins mid-price margin services 6.17, 6.21, 14.126 equities and investment fund shares or units 6.173 marginal price of labour 19.56 foreign currencies 6.174 marginal revenue 19.56 securities 6.171 market emergence 6.22 military market failure 6.129 bases 4.49 market imperfections 9.76 equipment 6.232 market maker 11.65, 17.289 forces 26.44 market output inventories, definition 10.144 components 6.99 mineral exploration and evaluation 6.231, 10.106 definition 6.99 mineral resources 10.179, 17.340 made available at nominal cost, 6.131 depletion 17.343 market prices 2.59, 3.119, 6.60, 6.68 extraction of 17.342 market producer 2.40, 4.25, 9.85, 14.32, 22.28 owned by resident units 17.341 definition 6.133 ministers of religion 19.21 market production, informal vs. SNA usage 25.51, 25.65 ministry of finance 22.19 market vs. non-market producers 9.108 miscellaneous current taxes 8.64 marketability 27.19 miscellaneous current transfers 8.129 marketable operating lease 17.375 mis-reporting 19.76, 25.5 649 System of National Accounts mixed household-enterprise survey 25.87 natural disaster 1.47, 1.69, 2.23, 2.30, 2.109, 4.169, 6.244, mixed income 6.126, 7.9, 7.17, 7.30, 16.7, 19.25, 20.49, 8.22, 8.25, 8.111, 8.128, 8.140, 12.9, 22.101, 23.40 28.29 natural growth mobile homes 10.83 recording gross or net 12.20 mobile phone criteria for distinction between lease and ownership of uncultivated biological resources 12.19 an asset 17.318 natural process 1.43, 6.24, 6.136 mobile phone licences 17.316 natural resources 1.46, 2.34, 3.44, 7.2, 7.107, 10.15, 20.46, model pricing 15.82 29.102, 29.106 modelling 27.37, 28.2 costs of ownership transfer 10.159 monetary and currency unions 26.109 depletion 1.47 monetary and financial statistics 16.22, 26.74, 27.3 licences to use 17.313 monetary authorities 17.240, 26.96 ownership 17.313 monetary gold 17.240 permits to use 29.113 definition 11.45 reassessments of exploitability 12.25 holding gains and losses 12.103 with no established ownership 10.167 reclassified as commodity gold 17.242 NDI 8.26 monetary policy services 6.151 NDP 16.1 monetary statistics 27.14 negative monetary transactions 1.36, 2.25 capital formation 10.39, 14.104, 14.108 examples 3.56 change in assets 10.25 money lender 6.165, 9.62, 17.251 consumption expenditure 10.41 definition 4.113 entries in input-output tables 28.61 money market funds 11.97 exports, recorded in connection with merchanting 14.73 definition 4.107, 11.99 negotiability 11.33, 26.91 money market funds shares or units negotiable certificates of deposit 11.64 definition 11.99 net money purchase scheme 7.147 use of term in the SNA 3.195 monitoring services 6.157 net borrowing see net lending monopoly 7.96 net domestic product 16.52 legal 7.96 net errors and omissions 26.17 monopoly profits 7.96, 10.98, 10.193, 17.350 net fees, standardized guarantees 17.220 mortality data 12.59 net fixed capital formation 2.110, 10.156 mortgage 11.67, 24.58 net IIP, balancing item 26.76 mortgage broker 17.229 net lending 2.108, 2.111, 2.113, 10.3, 11.1, 16.20, 26.72, multiemployer scheme 6.201, 6.205, 17.92, 17.122, 17.129, 27.23 17.131, 17.151, 17.164 definition 10.28 multifactor productivity 19.4, 19.64, 21.51 GFSM definition 22.76 multilateral international comparisons 15.210 net national income 16.55 multinational enterprises 1.32, 21.47, 21.64 net operating surplus 20.28 multiple exchange rates 8.55, 26.112 net premiums 8.116 multiregional units 18.47 definition 17.35 multiterritory enterprises 4.13, 26.35, 26.40 non-life insurance 17.47 museum exhibits 10.153 reinsurance 8.123, 17.64 musical performances 10.115 net recordings 3.193 mutual agreement 2.22 net return to capital 6.93, 6.94 mutual funds 11.96 net social contributions 8.82, 17.114 mutual societies 23.22 net value added, definition 6.8 N net worth 2.114, 2.122, 3.109, 12.1, 13.1, 13.10, 13.11, narcotics 6.44 16.38 national accounts, integral to PPP estimates 15.224 definition 13.4 national expenditure on specific products 29.64 public sector 22.170 national government 22.19 quasi-corporations 13.86 national income 7.18, 7.20, 16.11, 16.53 netting 2.71, 11.40 national measures of broad money 11.75 BPM6 26.23 national net worth 26.76 neutral holding gains 2.118, 3.142, 12.75, 12.87, 16.34 national tourism 29.92 new products, appearance 15.4 national units 18.47 new products, in the context of chain indices 15.56 national wealth 13.4 NNI 7.20 nationalization 12.66, 21.17, 21.54, 22.142 NOE by purchase of shares 22.142 informal sector overlap 25.4 650 nominal holding gains 2.115, 2.118, 7.24, 12.74, 12.94, 16.34 non-resident SPEs 22.53 currency and deposits 17.247 non-response 19.76, 24.25 deposits and loans 17.255 normal margins 6.150 foreign currency 17.248 not economically significant prices 8.103 inventories 12.97 note issuance facilities 11.22 on domestic currency, always zero 12.90 notional resident unit 4.49, 10.40, 10.170, 11.93, 24.56, 26.33 other accounts receivable or payable 17.295 NPIs 21.27 SDRs 17.246 analysis by kind of revenue 23.37 unallocated gold accounts 17.245 as corporations 23.1 nominal value 3.155, 3.157 assigned to different sectors 4.35 non-competing imports 28.69 categorization of 23.7 non-consolidated recording 3.193, 3.194 characteristics of 4.85 non-contributory pension scheme 7.67 control by government 4.92, 22.26 non-cultivated biological resources 10.182 definition 4.8 non-deductible VAT 6.58, 14.45, 14.131 economic objectives, functions and behaviour 4.22 non-financial asset 2.35, 3.37, 10.2 engaged in market production 4.28 non-financial corporations 1.10, 2.17, 4.19, 4.94, 28.29 essential distinguishing feature 23.3 definition 4.94 illustrative examples 23.19 non-financial lenders 11.18 information in physical units 23.38 non-financial liabilities 11.4 market output with negative operating surplus 23.10 non-governmental organizations 23.19 non-market output of market unit 23.32 non-homogeneity of products due to aggregation 14.144 satellite account 23.12 non-life insurance 6.176, 6.177, 8.35, 8.74 serving enterprises 4.89 claims 8.118 sub-sectors 23.9 definition 17.6 valuation of output 23.10 policies 8.117 NPIs as part of government 23.1 premiums and claims 8.27 NPIs engaged in market production 4.29 technical reserves, definition 11.105 NPIs engaged in non-market production 4.30, 4.31 non-market establishment, possibility of some market output 6.132 NPIs serving households (NPISHs) 1.10 non-market output 6.97 NPIs within the government sector 22.22 definition 6.128 NPISH 2.17, 4.93, 23.1 distinction from output for own use 6.128 definition 4.93 rationale 6.98 NPISHs 4.22, 4.166, 4.167, 9.5, 25.67, 28.28 valuation 6.94 centre of economic interest 26.45 non-market producer 2.40, 4.25, 9.85, 14.32, 28.28 collective services 9.107, 23.48 establishments within 5.33 deflating output to volume terms 23.49 non-market production by government and NPISHs 2.98 source of finance 16.12 non-market services 15.137 sub-sectors 4.171 provided to market producers 29.41 nuclear power plant 12.57 non-MMF investment funds 11.97 number of employees 14.121 definition 4.108 O non-monetary figures 29.57 obsolescence 6.242 non-monetary gold 11.45, 26.53 OECD Revenue Statistics 22.96 non-monetary information on tourism 29.90 off-balance-sheet items 11.27 non-monetary transactions 2.25, 8.22 off-exchange 11.113 definition 3.75 office canteens 7.51 non-negotiable certificates of deposit 11.59 offsetability 11.112 Non-Observed Economy 6.39, 14.7, 25.2, 25.29 offshore 26.26 non-participating preferred stocks or shares 11.66 one year or more 2.19, 11.71, 11.79 non-pension benefits 7.68, 8.67, 8.94, 17.99, 17.100 requirement for residence 4.14 payable in kind 8.94 one-off guarantees 11.22, 17.212, 22.128 payable under social security 17.101 one-party political systems 4.167 non-performing loan 6.169, 11.130, 13.67, 17.257, 21.57 one-quarter overlaps 15.46 definition 13.66 on-exchange 11.113 non-produced asset 2.35, 3.37, 10.9, 10.14, 26.71 opening balance sheet 13.11 non-produced land 10.80 opening stock 13.1 non-profit service providers 23.19 operating lease 6.214, 6.238, 6.239, 7.14, 7.153, 17.345, non-repayable margin 11.124 20.36, 21.51 non-resident construction projects 4.48 characteristics 17.302 non-resident households receiving pension benefits 17.199 definition 17.301 651 System of National Accounts operating surplus 7.9, 7.17, 16.7 central bank 6.151 operation of the financial system 27.37 treated as non-market production 6.152 opportunity cost 1.65, 29.150 goods or services 6.24 of capital 7.13 insurance corporations 17.26 of money 20.32 life insurance 17.53 option price 11.117 market producers, valuation 6.93 option pricing model 13.83 non-life insurance 17.46 options 11.112, 11.114, 11.117, 17.291 reinsurance 17.61 definition 11.117 social insurance scheme 17.114 time of recording 11.118 standardized guarantee schemes 17.219 options models 13.80 time of recording 6.75 orchards 10.96 valuation 6.75 ordering of transactions and reclassifications 12.68 output for own final use 15.126 ordinary maintenance and repairs 6.228 components 6.114 original 10.99 definition 6.114 valuation 6.209 valuation 6.124 vs.copy 6.208 output volume method 15.118, 15.122 original maturity 26.105 output vs. outcome, measurement problems 15.121 other accounts receivable or payable 17.294, 17.296, 17.351 out-sourcing 6.237, 14.39 holding gains and losses 12.119 outward direct investment 26.89 interest due on 13.84 outward investment 21.39 other accumulation entries 2.30 outworkers 7.30, 7.33, 7.34, 19.22, 19.26, 25.46 other capital transfers 10.210 overdraft 11.24, 11.54, 11.73 other changes in assets accounts 3.100, 8.25, 12.3 over-the-year technique 15.46 other changes in financial assets and liabilities accounts 26.12 own account production 24.22 other changes in the volume of assets account 1.20, 2.114, 6.243, own funds 6.189, 7.12, 7.129, 17.75 6.244, 10.1, 12.3, 12.8, 14.106, 16.33, 26.9 value of 13.89 licences 17.352 own-account gross fixed capital formation 6.118 relation to balance sheets 12.72 own-account production 6.29 other current transfers 7.2, 8.19, 8.113 owner-occupied dwellings 6.26, 6.117, 7.9, 9.65, 10.34, other deposits 11.59 20.64, 24.50, 25.64, 25.71 cross-classification 11.63 rentals 14.99, 15.141 other employment-related social insurance benefits 8.109 services 6.34 other equity, definition 11.88 owners of corporations and quasi-corporations 19.21 other financial corporations 4.98, 4.101 owners of corporations as employees 7.30 other financial institutions 17.227, 17.229 ownership 2.46, 3.27 other financial intermediaries except insurance corporations and by government 3.22, 3.28 pension funds, definition 4.109 multiple owners 17.298 other financial services 6.157 of a listed corporation 4.68 other flows 3.7, 3.50, 12.1 on behalf of the community 10.7 definition 3.99 ownership principles, BPM6 26.20 other intellectual property products 10.117 ownership rights 2.34 other investment fund shares or units, definition 11.100 P other investment, definition 26.94 Paasche index other machinery and equipment 10.86 price 15.18 other natural resources 10.185 volume 15.18 other social benefits 8.67 Paasche-type price index 15.208 other structures 10.76 Paasche-type volume index 15.208 other subsidies on production 7.106 paid domestic staff 24.59 other subsidies on products 7.105 parallel (unofficial) or black market rates 26.113 other taxes on production 6.50, 6.80, 7.7, 7.97 parallel markets 15.72 licences 17.350 parent corporation 4.51, 4.74 other transferable deposits, definition 11.58 parent institutional unit 4.13 other work-in-progress 10.141 participating preferred shares 11.84 outbound tourism 29.92 participations 11.84 outcome 15.120 partitioning transactions 3.66, 3.141 outlays, GFS definition 22.74 in financial instruments 11.34 output 2.86, 6.89, 14.115, 15.120 partnerships 4.41 agriculture 6.137 passive holder of assets and liabilities 4.61 annuity 17.72 pass-through funds 21.41 652 patented entities 10.105 physical environmental data 29.107 patients, residence 26.38 physical measures of labour input 19.58 patterns of income use across sub-sectors 24.5 plantations 10.96 pay-as-you-earn taxes 8.61 policy concerns 2.18 payments by households to obtain certain licences 8.64 policy interest in informal sector 25.9 payments in kind 3.77, 3.81 policymaking 1.1, 1.10 payments to children 24.60 political parties 23.19 payments to other household members 6.35 political processes 1.9 payroll tax 7.41 poll taxes 8.52, 8.64 data 19.80 pollution 3.94, 29.42 pension benefits 17.158 population 2.156, 19.1, 19.3 pension contribution supplements 17.156 definition 19.10 pension entitlements 12.60, 17.130 population and employment 2.76 current service increase 17.145, 17.152 population census 19.9, 19.77 definition 11.107 portable pensions 17.187 other changes in 17.177 portfolio investment, definition 26.91 past service increase 17.145, 17.156 portfolio investors 26.81 present value 17.147 position, term for stock levels 13.1, 26.11 protection of 17.121 poverty line 24.68 qualifying period 17.154 PPP benchmarks 15.231 recognition in social security 17.121 PPP exercise pension fund sub-sector, definition 4.116 on a regional basis 18.52 pension fund, administration costs 17.135 PPP, legal owner 22.159 pension schemes 8.37, 9.21 precious stones and metals 9.57 administration costs 17.148 predominant economic interest, centre of 19.10 autonomous 17.131 pre-licence costs 10.106 pensions 8.67, 8.94, 8.95, 17.116 premium 17.1 as income rather than dis-saving 8.37 insurance 6.184 as part of compensation of employees 17.122 premium earned 17.14 defined benefit schemes 17.127 definition 6.187, 17.5 defined contribution schemes 17.127 premium net effects of promotion 17.180 definition 17.35 final salary scheme 17.127 premium supplement 3.65, 6.184, 6.188, 6.197, 17.13, 17.19, money purchase scheme. 17.127 17.35, 17.52, 17.59 operated by financial institution 17.131 present value 6.246, 7.150, 13.80, 20.9 portability 17.187 expected calls under existing guarantees 17.216 portable 17.119 valuation of leased asset 17.306 provision 24.43 price discrimination 9.76, 15.4, 15.71 receipt of lump sum 17.138 price index 11.70 reforms 22.134 price index manuals 15.3 self-employed persons 17.137 price indices 18.4, 28.63 to government employees 22.73 services 18.26 types of 17.98 superlative 15.29 per capita growth rates 19.12 price level indices 15.200 per capita volumes 19.3 price of a commodity 11.70 permit 9.70, 17.297 price variation 15.68 emission 17.363 price, definition 15.11 to undertake a specific activity 17.299, 17.349 price, reference 11.111 definition 10.192 prices 1.8, 6.49 issued by government 17.358 not economically significant 8.103 to use natural resources prices, basic see basic prices definition 10.191 prices, market see market prices permit to undertake a specific activity prices, producer's see producer's prices not issued by government 17.361 prices, purchasers' see purchaser's prices perpetual inventory method 3.137, 6.106, 6.107, 6.216, 6.251, primary distribution of income account 1.17, 2.91 6.253, 15.169, 20.8 primary income 7.2, 7.3, 15.194 personal remittances 8.134 primary income account 26.46, 26.58, 26.70 personal transfers 8.133, 26.67 principal 7.113, 11.70 persons 4.3, 19.1 principal activity, definition 5.8 physical deterioration 12.52 principal functions of government 22.17 653 System of National Accounts principal outstanding 7.113, 7.117 not included in customs documentation 14.63 increase from accumulated interest 12.109 vs. producing units 14.17 principal product 5.8, 14.23 professional societies 4.167 priorities 2.159 profile priorities for data collection 1.5 age-efficiency 20.17 priority industries 7.122 age-price 20.17 private equity 11.87 choice of 20.25 private finance initiative 10.59 profit 1.68, 2.94, 7.24 privatization 12.66, 21.18, 22.4, 22.134, 22.137, 22.139 of export monopolies 7.95 processing by another unit 6.12 of fiscal monopolies 7.96 processing fee, goods for processing 14.38 of import monopolies 7.94 produced asset 2.35, 3.37, 10.9 profit-maximization 22.2 producer unit 5.8 profit-sharing 17.11, 17.33 producers' prices 1.29, 2.63, 2.87, 3.146, 7.6, 14.45, 16.49 projected benefit obligation (PBO) 17.181 definition 6.51 projections 27.37 indices 14.139 promotion 17.180 product balance 14.1, 14.2, 14.4 property income 2.92, 7.2, 7.16, 7.107, 11.103, 14.29, 16.9, product by product matrix 28.48 18.65, 24.3, 26.58, 28.73 product flow 14.2 proportionate reinsurance 17.11 product technology assumption 28.55 proportionate reinsurance policy 17.22 product warranties 8.125 provisions 3.41, 11.23, 21.65 product, principal 14.23 bad debt 10.211 production 1.6, 1.14, 1.40, 3.20 bonuses and rebates 13.77 definition 6.2 standardized guarantees 17.223 for own final consumption 8.22 pseudo output price index 15.117 for own final use 9.53, 19.26 public administration 9.4 for own final use, exclusion from informal sector 25.41 public benefit organizations 23.16 for own final use, valuation 9.55 public corporation 4.34, 4.77, 22.27 geographic location and resident producers 6.84 restructuring 22.147 multiple period processes 6.110, 6.138 public finance presentation 22.8, 22.62 of domestic services 2.167 public goods 9.4, 9.103 on own account 14.32 public monuments 10.78, 12.13, 12.15 process taking several years 10.128, 12.57 public sector 2.162, 22.6 production account 1.17, 2.86, 7.3, 14.86, 16.6, 28.71 sub-sectors 22.41, 22.166 by institutional sector 28.25 public sector borrowing requirement 22.169 for an institutional unit or sector, or establishment or industry, publication details 18.2 6.70 public-private partnership 10.59, 22.154 production activities purchase by government and NPISHs of goods and services for characteristics of 5.5 transfer to households 2.98 production as an economic activity 6.10 purchase, when recorded as two transactions 6.67 production boundary 1.42, 6.3, 14.11, 19.67, 25.24 purchased goodwill and marketing assets 3.44, 10.17, 10.196, definition 6.27 12.33 extension of 2.167, 29.38 definition 10.199 extension to include services from consumer durables 9.44 writing down 12.34 production by households 1.41 purchasers production costs 3.136, 22.35 freedom of choice 15.69 production for own final consumption not free to choose price 15.71 treated as market or non-market production 6.134 well informed 15.69 production measure of GDP 16.41, 18.57 purchasers' prices 2.64, 3.145, 3.147, 14.45 production risk 3.23 credit related charges 9.78 productivity 14.3, 15.116, 15.198, 16.37, 20.1, 20.6 three elements 6.217 changes 18.26 purchasing power 7.120, 11.70, 16.34 growth 19.74 purchasing power parities 1.34, 19.15, 19.74 international comparisons of 19.75 definition 15.199 non-market services 15.116 purely voluntary transfers 16.12 on an industry basis 19.68 purpose 2.42 products 14.22, 29.106 put option 11.117 connected 29.59 Q definition 6.14 quadruple-entry accounting 1.63, 3.111, 3.116, 11.9, 27.2 included in customs declarations. 14.69 vs. double-entry 26.17 654 quality adjustment procedures 15.77 re-exports 26.54 quality change 15.122 reference period 19.76 quality differences 9.77, 12.23 reference price 11.111 in price indices 15.64 reference rate 6.163, 6.164, 9.62 quality-adjusted labour inputs 19.42, 19.55 characteristics 6.166 quantities, additivity 15.11 for different currencies 6.166 quantity unit 15.10 refugees quarterly accounts 1.29, 18.33, 18.64 residence 26.38 chaining 18.43 refund of taxes on products 7.104 quarterly chain indices 15.45 regional accounts 18.2, 18.6, 18.45, 19.69, 25.46 quasi-corporation 4.65, 11.88, 11.93, 22.44, 24.6, 24.29, regional units 18.47 25.68, 26.30 regionalized approach to the compilation of PPPs 15.221 definition 4.42 registration of production units 25.20 requirement of a balance sheet 4.45 regular thefts 6.46 requires full set of accounts 4.44 regulatory, supervisory or accounting requirements 12.41 size not part of definition 4.46 reimbursement of expenses 6.222, 7.45, 8.104 quasi-fiscal activities 22.3 reinsurance 6.180, 6.200, 8.115, 8.122, 17.2, 17.10, 17.64, quasi-non-governmental organizations 23.26 26.69 quasi-region 18.50 claims 8.123 questionnaire design 25.81 commission 17.11 quid pro quo 2.24, 3.57 reinsurer 17.57 quoted shares 11.86 reinvested earnings 7.23, 13.90, 26.63, 26.88 R foreign direct investment 2.24 radio and television programming 10.115 foreign direct investment enterprises 17.285 radio spectrum 17.323 negative 26.64 rate of decline, hyperbolic 6.254 reinvestment of earnings 11.92, 21.40, 26.88 rate of inflation 1.26 reinvestment of interest, securities 17.282 rate of return 26.59, 26.77 related hours 19.51 exogenous or endogenous 20.30 relationship between institutional units and establishments 2.41 rate, reference 9.62 relationship between premiums and claims 17.7 rationing 15.72 relationship between stocks and flows 2.33 ratios of imports and exports to GDP 14.40 relative costs 15.12 real gross domestic income 15.188 relative costs of production 15.81 real holding gains 1.69, 2.119, 3.142, 8.25, 12.76, 12.89, relative utilities 15.12 16.34 relief agencies 4.169, 26.45 treatment as income 12.92 religious congregations 4.167, 23.19 real income 15.182 religious institutions 4.167 real income measures 15.192 remaining maturity 26.105, 27.20 real national income 19.14 remittances 8.27, 8.133, 16.12, 24.64 real purchasing power 15.181 from abroad 24.17, 24.70 real terms vs. volumes 14.153, 15.181 remuneration in kind 3.77, 3.80, 6.148, 7.48, 8.22, 9.45, 9.51 receipt of any reinvestment of earnings 17.288 rent 7.17, 7.107, 7.109, 7.154 reclassification after-tax 7.157 fixed capital to inventories 12.71 lease-hold land 17.327 life insurance entitlements to annuities entitlements. 17.138 on land 7.13, 7.155 of an institutional unit from one sector to another 12.64 payable by non-residents 26.59 of assets 12.3 rent vs. rental 7.153, 7.158 recording of VAT gross and net 6.59 rental 6.214, 6.238, 7.14, 7.110 recruitment agency 19.72 definition 6.245 recurrent losses 6.109, 6.147, 6.148 of owner-occupied dwellings 14.99 from inventories 10.130, 12.98 repair and maintenance recurrent taxes on land, buildings or other structures 7.97 consumer durables 9.69 redistribution current vs. capital 10.45 goods and services 9.37 do-it-yourself 6.36 income 1.14, 8.37 repairs see also maintenance real net worth 12.91 repayable margins 11.124 wealth 1.69, 2.110 repayments of debt 3.175 redistribution of income in kind account 2.95, 8.30, 8.144, 9.7, repo 11.74 9.95, 16.16 repo, reverse 11.74 re-evaluations of mineral resources 10.106 reporting date 3.155 655 System of National Accounts repossessions 12.49 reverse repo 11.74 representativity 15.204 revisions 18.2, 18.3, 18.12 repurchase agreements 11.59, 11.73 revisions analysis 18.13 re-referencing series 15.60 ring approach, ICP 15.222 re-routing 2.96, 3.62 risk 3.23, 3.27, 10.5, 11.112, 17.1, 17.7, 17.300 research agenda 7.140 over time 3.24 research and development 6.230, 10.103, 22.22, 28.15 risk assumption 6.157 research institutions 4.170 risk exposure 26.104 reserve assets 11.45, 26.74, 26.75, 26.82 risk management 11.112, 17.67 definition 26.95 risks and rewards 2.47, 28.15 reserve deposits 7.122 road construction 22.20 reserves 7.129, 17.15 roads, service lives of 6.242 reserves for non-pension benefits 17.99 royalties 7.110, 7.160 reserves for with-profit insurance 17.17 rundown of wealth post retirement 24.78 residence 1.48, 4.1, 19.6, 19.11, 19.67, 19.81 S BPM6 4.15, 26.24 salary sacrifice 7.47 confined to one economic territory 4.13 sales 6.100, 22.34 corporations 4.15 sales structure approach 28.49 definition 4.10, 26.36 sample size 19.76 households 26.37 sampling frame 21.8 immovable structures 4.15 satellite individual persons 4.15 external 29.85 land-owners 4.15 internal 29.85 leases 4.15 satellite account 1.55, 1.73, 2.155, 2.164, 2.168, 3.95, 29.4, SPEs 4.15 29.31 sub-soil extractors 4.15 ancillary activities 5.45 unincorporated enterprises 4.15 domestic services 24.62 resident 2.19, 19.10 household services 9.44, 24.83 resident SPEs 22.52 NPIs 23.12 residential schools, colleges or universities 4.153 tourism 24.66 residual value of an asset 14.106 saving 2.83, 2.106, 9.9, 9.26, 10.18, 11.1 residuals 29.102, 29.106 link between the current and accumulation accounts 9.28 resource lease 7.153, 17.345, 20.39 savings deposits 11.59 definition 17.310 savings ratio 1.29, 9.30 fishing 17.335 SDR 7.113, 26.103 land 17.327 definition 11.47 resource rent 13.50, 29.112 holding gains and losses 12.104 resources 1.14, 2.43 seasonal adjustment 18.37 response rate 19.76 quarterly accounts 18.64 rest of the world 1.11, 3.117, 4.37, 4.172, 17.10 seasonal fruits and vegetables 15.66 de facto sector 2.20, 4.37, 26.2 seasonal workers 19.18, 19.32, 19.33 definition 4.172 seasonality 18.37 perspective 26.10 second homes 24.56, 29.89 rest of the world account 2.130, 16.28, 28.71 secondary activity 29.34 resting time 19.51 definition 5.9 restructuring agencies 22.47, 22.141 secondary distribution of income account 2.95, 16.12, 26.4, retail and wholesale services 14.27 28.73 retained earnings 3.64, 7.139, 7.151, 9.11, 13.90, 26.63 secondary financial activities 4.95 retirement 8.71, 15.169 secondary income account 26.46, 26.66 retrocession 17.10 secondary jobs 19.31 return to capital 6.245, 19.25, 20.5, 20.28, 22.35 secondary production 14.23 return to fixed capital 6.245 secondary products 28.45 return to labour 19.25 second-hand assets 14.107 revaluation account 1.20, 2.115, 2.117, 3.100, 10.1, 12.3, sector, informal vs. SNA usage 25.47 16.33, 26.9 sectors, financial statistics 27.18 licences 17.352 securities 11.18, 11.33, 11.73 revaluation, exchange rate changes 26.79 reinvestment of interest 17.282 revenue securities repurchase agreement 11.74 GFS definition 22.65 securities, short-term 11.71 reverse investment 26.86 securitization 11.67, 22.131 656 of assets 22.4 small tools 6.225, 10.35 of future revenue flows 22.133 smuggling 6.44 sale of an asset 22.132 SNA interest 6.164, 7.116, 8.24, 9.62, 13.62, 17.250 SEEA 3.95, 10.178, 10.183, 20.48, 29.88, 29.103 social accounting matrix (SAM) 1.74, 2.164, 24.19, 28.4, 28.82 goals 29.103 extensions 28.5 key indicators 29.104 social assistance 8.5, 8.66, 9.20, 17.83 self-employed 7.30 benefits in cash 8.110 self-employed persons 7.30, 7.33, 19.26, 19.28, 19.79 vs. social security 8.92 definition 19.25 social benefits 7.99, 8.4, 8.17, 8.87, 8.94, 8.132, 17.79 employers 7.33 circumstances when payable 17.79 own-account workers 7.33 payable in kind 8.103 self-employed persons vs. employee 7.28 social security, social assistance or social transfers in self-help groups 23.24 kind 17.81 separating repayment of capital from interest 20.67 treated as payable in cash 8.102 sequence of accounts 1.15, 2.75, 2.78, 3.2, 4.23, 6.1, 13.5, social clubs 23.19 18.1, 28.31, 28.73, 29.21 social contributions 2.96, 7.2, 8.4, 8.16, 8.27, 9.22, 17.157 service charge 11.103 imputed 17.104 annuity 17.73 social economy 23.15 credit card 17.253 social entities 4.3 currency and deposits 17.247 social insurance benefits 9.22 debt securities 17.259 definition 17.89 deposits and loans 17.249 in kind 8.18 equity and investment fund shares 17.283 pensions and non-pensions 17.98 financial derivative 17.289 social insurance contribution 7.42 financial derivatives 11.114 actual 7.60 life insurance 17.53 definition 17.89 non-life insurance 8.117, 17.46 imputed 7.60 reinsurance 17.63 supplement 8.80 repurchase agreements 17.254 social insurance scheme 2.96, 6.201, 7.2, 8.4, 8.5, 8.65, 9.20, SDRs 17.246 16.12, 17.76 social insurance scheme 17.114 administration costs 17.105 standardized guarantee 17.219 contractual insurance scheme 17.87 unallocated gold accounts 17.245 definition 17.88 service charges 11.34 needs third party involvement 17.87 standardized guarantees 17.211 qualifying conditions 8.73 service contract 25.27 qualifying contributions 17.116 services responsibility for administering 8.76 definition 6.17 run by employer 6.203 third party criterion 6.16, 29.146 run by insurance corporation 6.204 services for own consumption within households 9.54 service fee 8.80 severance payments 7.45 unfunded 17.104 share (stock) appreciation rights 17.398 social insurance scheme, other than social security share-cropping 7.156 administration 17.91 shareholder 7.127 social safety net 17.90 shares 11.84 social security 4.124, 6.202, 7.42, 8.5, 8.37, 8.72, 8.76, ex-dividend 7.130, 17.284 8.77, 9.20, 17.82, 17.90, 17.124 shares, bonus 11.89 as multi-employer scheme 17.93 shares, listed benefits in cash 8.108, 17.102 definition 11.86 contributions 3.63 short-term contributions by households 17.102 definition 27.20 entitlements under 17.191 short-term forecasts 1.31 funded on a pay-as-you-go basis 17.121 short-term indicators 1.29, 18.3, 18.5 no imputed contributions 7.63 short-term securities 11.15, 11.71 recording 17.125 shrinkage of inventories, revised estimates 12.50 social security funds 4.20, 4.30, 4.118, 22.21 sick leave 19.46 distinction from social security schemes 4.125 single indicator method 15.135 social security funds sub-sector 4.147 SITC 14.36 social transfers in kind 2.95, 3.83, 8.5, 8.103, 8.141, 9.1, size as criterion for informal 25.22 9.16, 9.37, 9.81, 9.103, 9.110, 10.148, 17.84, 23.32, small enterprises 25.69 23.33, 23.36, 24.63, 29.13 657 System of National Accounts paid to non-residents 8.145, 9.120 households 4.158, 24.27, 24.44 paid to non-residents, 9.16 non-financial corporations 4.97 social ventures 23.25 subsidiary 4.51, 26.85 social, cultural, recreational or sports clubs 4.167 definition 4.73 software and databases 15.149 subsidiary products 28.46 sole owners of unincorporated enterprises 7.30 subsidies 7.98, 7.135, 22.138 sound recordings 10.115 consumer 7.99 source of funding vs. types of expenditure 29.79 consumption 29.69 special purpose entities 4.55, 21.41, 22.4, 22.52, 22.131, 26.28 extending concept of 29.41 resident 22.52 implicit 7.122 special purpose units of government 4.67 on payroll or workforce 7.106 specialization of production 6.10 on production and imports 7.2 specialized agencies of government 5.43 on products 14.5, 14.133, 16.7 specific capital transfers 29.68 on products used domestically 7.105 specific current transfers 29.68 resulting from multiple exchange rates 7.103 specific products 29.61 to public corporations and quasi-corporations 7.105 specific taxes 15.175 to reduce pollution 7.106 speculation 6.145, 11.112 vs. capital injections 11.91 spillovers 10.102 vs. social benefits 8.98 sports clubs 23.19 subsistence sports players, contracts 17.368 activity 4.21, 24.1 staff of scientific bases 19.32, 19.33 agriculture 1.41, 24.47 stage of economic development 1.4 economy 18.59 stage payments 6.112, 6.140 farmers 9.54 stamp taxes 7.97 farms 9.59 standard of living 19.3 income 18.62 standardized guarantee schemes 3.40, 6.206, 7.143, 8.115, subsoil assets 7.109, 7.159, 12.17 11.23, 11.110, 12.62, 17.211, 22.126, 27.34 sum of costs 6.125, 6.191 calls under 17.220 insurance output 17.29 parallel with non-life insurance 17.211 super-dividends 7.131, 7.134, 11.90 provided by government units. 17.215 superlative indices 15.29 recoveries 17.216 supervisory authorities 22.150 state government 4.30, 4.118 supervisory services 6.151, 6.153 sub-sector 4.140 supplementary table 11.24, 11.31 statistical discrepancies 11.128, 22.77 capital services 20.69 statistical surveys, coverage 25.23 capital stocks 20.1 stock 3.2, 3.4, 3.18, 6.253, 11.84, 13.1, 27.41 informal production and employment 25.75 stock appreciation 12.79 pass-through funds 21.43 stock options pricing model 17.387 pensions 9.20, 17.124 stock ownership plan 17.396 personal remittances 26.68 storage 6.105, 6.142, 6.149, 10.120, 12.97, 24.47 supply and use tables 1.24, 2.76, 2.148, 6.1, 14.3, 18.17, distinguished from holding gains 6.142 18.23, 25.49, 28.1, 29.21 see also annex 6 as a means of checking data consistency 14.116 store of economic value 2.35, 2.122 consistency of prices within 18.23 stream of future earnings not recognized as a financial asset 11.26 in volume terms 14.136, 15.110 strike price 11.117, 11.120, 17.385 simultaneous compilation of value and volume estimates 18.30 ESO 11.125 supply at purchasers' prices 14.44 stripped securities 11.69 supply table at purchasers' prices structured product descriptions 15.202 definition 14.13 students 19.21, 19.32 supranational authority 22.60 employment status 7.32 surface water, regular extraction from 12.22 residence 26.38 surveys study of industrial activity 6.1 businesses 19.69 sub-annual accounts 18.2 design 19.76 sub-annual estimates 18.33 frame 19.79 sub-contracting 28.14 household wealth 24.76 subscriptions 8.132, 23.4 methodology 25.81 sub-sectors 2.18, 4.1, 4.33 survival functions 6.253 financial corporations 4.102 sustainability of government operations 22.79 general government 4.128 sustainable use of natural resources 658 timber 17.330 than the market rate 7.96 swaps 7.115, 11.114, 11.121 specific 15.175 gold 11.73, 11.77 turnover 7.96 interest rate 11.121 unpaid liabilities 7.85 symmetric input-output matrix 28.7 vs. fees 7.80, 22.89 System of Health Accounts (SHA) 29.128 taxes and duties on imports 7.90 T inclusion of taxes levied on goods not changing T account 16.3 ownership 7.92 takeover 21.22 taxi licence 17.350 takeover bid 21.52 technical assistance staff 8.128 tax allowance 8.62, 22.95 technical progress 6.242, 12.96 tax assessments 7.84, 8.58 technical reserves 6.188, 6.190, 6.194 tax benefits 29.41 technological change 6.244, 18.25 tax burden 22.7 technological coefficients 28.42 tax collection, on behalf of another government unit 3.70 technological process of production 14.37 tax credit 8.62, 22.95 technology 28.63 non-payable 22.95 technology approach 28.48 payable 22.95 technology of production 5.2, 5.16, 6.238 recording in SNA 22.97 tenant 6.117, 9.66 wastable 22.95 tenant farmer 20.45 tax regimes, changes in 14.151 term insurance 17.6 tax relief 22.95 terminal costs 10.50, 10.157, 10.161, 20.56, 20.57, 20.60 taxes 7.71, 29.56 terms of employment 25.27 ad valorem 15.175 terms of trade 2.146, 15.5, 15.185 as unrequited payments 8.52 definition 15.187 categories 7.82 terms of trade, Geary method of calculation 15.191 collection on behalf of a second government unit 8.127 territorial enclaves 4.11, 26.26, 26.43 gambling 8.61, 8.136 tertiary distribution of income 2.99 general sales 7.96 theft 6.147 hypothecated 4.138 three economic activities 3.19, 4.17 implicit 7.122 three measures of GDP 18.14, 18.56 in volume terms 14.148 tidal waves 12.46 income 7.5 time of recording 2.54, 3.159, 3.169, 18.34 indirect 7.75 BPM6 26.20 land 7.157 BPM6 vs. IMTS 26.53 on assets used in production 7.41 financial claims 11.37 on automobiles 8.57 intermediate inputs 6.75 on capital gains 8.61 output 6.75 on financial and capital transactions 7.96 work-in-progress 6.90 on imports 7.10, 7.77, 7.94 time reversal test 15.31 on income 8.61 time series 18.3, 18.9 on individual or household income 8.61 time use surveys 29.147 on international transactions 7.97, 8.64 timeliness 18.3, 18.12 on payroll or work force 7.97 time-share arrangement 17.378 on pollution 7.97 tips 7.44 on production 7.5, 26.58 Törnqvist index 15.29, 19.56 on production and imports 7.2 total economy 4.23 on production and imports, classification 7.72 total expense 22.7 on production or imports 7.17 total factor productivity see multifactor productivity on production, deflation of 14.156 total hours actually worked 19.47 on products 3.145, 6.49, 6.50, 7.88, 14.5, 14.158, 15.175, total hours worked 2.157 16.7 total outlays 22.7 on products payable by the rest of the world 7.87 total remittances 8.134 on products, excluding VAT, import and export taxes 7.96 total revenue 22.7, 22.8 on specific services 7.94, 7.96 total supply at basic prices 14.158 on the income of corporations 8.61 total supply at purchasers' prices 14.158 on the use of fixed assets or other activities 7.97 tourism 2.166, 29.92 pay-as-you-earn 8.61 aggregates 29.100 resulting from multiple exchange rates 7.94, 7.95 characteristic products 29.97 resulting from the central bank imposing a higher rate of interest connected products 29.97 659 System of National Accounts consumption 29.90 travel, BPM6 term 26.57 consumption, definition and scope 29.95 travellers 29.91 expenditure 29.94 travelling for business 29.93 inbound 29.92 treasury bills 11.99 industries 29.90 tree, crop and plant resources yielding repeat products 10.95 industries, definition 29.98 trust account, use in defeasance 12.42 key sector 29.37 trusts 11.88 outbound 29.92 U satellite account 24.66, 29.85, 29.89, 29.99 ultimate bearer of the expense 2.103 tourism direct gross domestic product (TDGDP) 29.90 unallocated and allocated accounts, precious metals other than gold tourism direct gross value added (TDGVA) 29.90 11.61 toxic spills 12.46 unallocated gold accounts 11.45, 11.60, 17.240, 17.244 trade and transport margins 3.145, 14.5, 14.50, 14.54, 14.130, uncompensated seizure 12.48, 29.43 14.158, 28.9 fish 17.333 definition 6.146 timber 17.332 in volume terms 14.147 underground economy 19.35, 25.30 provided by residents and non-residents 14.52 underlying economic reality 7.57 see also transport underwriting 6.157 trade and transport services 14.9 undistributed income 9.11 trade associations 8.132 undistributed profits 7.129 trade credit 11.13, 11.126, 17.294, 27.35 undrawn lines of credit 11.73 tradeable permits 17.363 unearned premium 11.105, 17.16 trades unions 4.167 definition 6.187 trading gains 1.26, 15.188 unemployed person from changes in the terms of trade. 15.185 definition 19.29 trading in securities 12.67 unemployment 19.29 transaction 1.7, 2.22, 3.50 unemployment benefits 8.68 between government and international or supranational organi- unexpired risks 17.25 zations 22.99 unforeseen environmental degradation 12.52 definition 3.7, 3.51 unforeseen obsolescence 6.244, 12.53 in financial instruments 2.29 unilateral cancellation of debt 12.41 in goods and services 2.27 unilateral economic actions 2.23 intra-unit or internal 2.22 unincorporated enterprise 1.61, 2.17, 4.6, 4.21, 4.32, 8.16, mutual agreement 3.53 24.6 on unofficial markets 6.42 definition 5.1 prices 6.54 of government, treatment as a quasi-corporation 5.30 valuation 2.59 output 9.54 transfer 3.58, 8.10, 22.17 with employees 25.44 current vs. capital 8.38 with some market production 4.123 impact of classification on saving 10.203 without employees 25.44 in kind 1.36, 3.77, 3.82 unincorporated joint ventures (UJVs) 17.347 in kind between households 24.64 unincorporated partnership 4.156 recording of 8.41 unions, business and professional associations 23.19 redistributing income 24.2 unit of account 3.14 transfer pricing 3.131, 3.143, 21.50 unit of homogeneous production 5.16, 5.52 transferability 27.19 unit trusts 11.96 transferable contract 17.370, 17.375 unit value indices 14.146, 15.14 transferable deposits units that ultimately bear the expenses 29.77 cross-classification 11.55 universities 23.27 definition 11.54 unlisted corporation 21.15 transferable pensions 17.119 unlisted shares, definition 11.87 transitivity 15.211 unpaid hours 19.67 transport 6.141, 20.60 unpaid household services, valuation 29.145 as key sector 29.35 unpaid labour 6.127, 19.27 on imports provided by residents 14.72 unrequited 7.71 transport charges 3.145, 3.146, 3.147, 6.49, 6.148 use of adjusted disposable income account 2.101, 9.7, 9.95, international 14.61 16.16 transport equipment 10.82, 10.84 use of disposable income account 2.101, 9.7, 16.15 transport services 14.27, 15.166 use of income 1.14, 24.5 transport services see also trade and transport margins use of income account 2.101, 26.4, 28.71 660 use table 14.84 other equity 13.74 basic prices 14.44, 14.123, 14.164, 28.67 output 6.75 imports only 14.165 own funds 13.88 purchasers' prices, definition 14.13 pension entitlements 13.78 user cost 20.31, 20.32 principal outstanding 13.57 users vs. beneficiaries 29.74 principles 26.19 uses 1.14, 2.43 provisions for calls under standardized guarantees 13.79 uses of the SNA 1.27 purchased goodwill and marketing assets 13.53 utility 9.43 research and development 13.33 V reserves for non-life insurance 13.76 vacation homes 26.33 rules 3.118 valuables 3.43, 6.214, 9.57, 10.13, 10.133, 10.149, 11.45, SDRs 13.56 12.13, 14.112, 15.159 second best procedure 6.125 holding gains and losses 12.100 shareholders' equity in a direct investment enterprise 13.71 valuation shares (or units) in money market funds 13.75 assets and liabilities 2.60 short-term securities 13.58 bonds 13.59 trade credit and advances 13.84 by total production costs 6.93 tradeable loan 13.64 contracts, leases and licences 13.52 unlisted shares 13.70 costs of ownership transfer on non-produced assets 13.34 vehicles and equipment 13.31 currency 13.57 value added 2.65, 2.86, 7.2, 7.4, 14.84, 14.115, 14.153, currency and deposits in foreign currency 13.57 14.160, 16.6, 28.72 deep-discounted or zero-coupon bonds 13.59 charges against 6.75 dwellings 13.29 contribution of labour and capital to the production employee stock options 13.83 process 6.71 fair value 13.67 definition 6.8 financial assets and liabilities 13.54 from leasing dwellings 24.55 financial claims 13.54 value added tax, see VAT 6.49 financial derivatives 13.80 value of capital services 20.28 fixed assets 13.27 value of output vs. value of sales 6.91 forwards 13.82 VAT 6.49, 6.55, 7.6, 7.10, 7.89, 14.131, 16.49 index-linked debt security 13.60 deductible 14.45 intellectual property products 13.36 invoiced 7.6, 7.75, 14.45 intermediate inputs 6.75 non-deductible 14.45 inventories 13.38 recording gross and net 6.59 land 13.44 same treatment for any similar deductible tax scheme 6.57 land improvements 13.30 to be recorded net 6.61 life insurance and annuities entitlement 13.77 VAT type tax 2.87, 7.89, 14.79 listed shares 13.69 venture capital 11.87 livestock 13.32 vertically integrated activities, recommendation for defining estab- loans 13.62 lishments 5.26 long-term securities 13.59 vertically integrated enterprise 5.23 mineral and energy resources 13.49 vesting date 17.385 mineral exploration and evaluation 13.35 ESO 11.125 monetary gold 13.55 virtual manufacturing 26.41 net worth 13.85 visitor, definition 29.91 non-cultivated biological resources, 13.51 volcanic eruptions 12.46 of assets 12.34 volume index, definition 15.13 approximated by accumulating and revaluing acquisitions volume measures 18.22 less disposals of asset 13.19 volume of collective services 15.124 present value of the expected future returns 13.24 volume terms 2.146 the present, or discounted, value of future economic benefits volume vs. quantity as terminology 15.13 13.19 volumes in the ICP 15.228 when no observable prices 13.18 voluntary donations 8.132 written-down replacement cost 13.23 voluntary sector 23.11 of financial assets, alternatives 29.49 voluntary workers 7.41, 19.27 of non-monetary flows 3.135 volunteer labour 19.37, 23.34, 23.42, 29.85, 29.156 of transactions 2.59 valuation 29.160 of transfers in kind 3.129 vulnerability 26.73 options 13.81 661 System of National Accounts W workers under the age limit 19.34 wage index 19.60 workers' remittances 16.12 wages and salaries 7.42, 7.43 working days adjustment 18.38 in cash 7.44 working time, definition 19.50 items withheld by employers 7.43 work-in-progress 10.90, 10.126, 10.134 warrants 11.33, 11.119 agricultural products 10.127 wastage 6.147 conversion to finished goods 6.112 water 17.337 cultivated biological resources, definition 10.140 extraction 12.22 entries to and withdrawals from 6.113 extraction of 17.339 in service industries 6.111 inland 7.156 long-term projects 20.63 leased for recreational purposes 17.338 reclassification to finished goods 12.71 resources 10.175 reclassified as a finished product 10.136 resources, definition 10.184 structures intended for own use 6.119 wealth 1.2 transformed to finished goods 3.176 weapons systems 6.232, 10.82 valuation at basic prices 6.113 weights 15.229 works of art 9.57 welfare 1.75, 19.14 write-downs 12.40 welfare indices 29.127 write-offs 12.40 who pays vs. who consumes 29.55 writing-off of financial instruments 3.152 wholesalers and retailers 3.68 written down current acquisition values 3.136 willing buyers and willing sellers 3.119, 6.124, 26.97 Y wind damage 12.46 Young index 15.34 withdrawal of equity 7.131, 11.90, 22.136, 22.140, 26.64 Z withdrawal of income from a quasi-corporation 7.23, 7.133, zero-coupon bonds 11.69, 12.109 22.136, 24.71 interest 7.118 with-profits life insurance 17.6 662 USD 150 ISBN 978-92-1-161522-7 Printed at the United Nations, New York 08-44065 -- December 2009 -- 6,750