METAC Workshop December 14-17, 2015 Beirut, Lebanon National Accounts Compilation Issues Session 1: System of National accounts, Overview

System of National Accounts, an Overview Main features/characteristics Framework for analyses and policy decisions Relations with Business accounting Main concepts – Institutional units and sectors – Products, Production units, and Production activity – Transactions and other flows – Sequence of the accounts and balancing items Methodological reference

Features The System of National Accounts (SNA) is the internationally agreed standard set of recommendations on how to compile measures of economic activity in accordance with strict and stable accounting conventions based on economic principles

Features/Characteristics Internationally comparable: – accumulated countries experience over the world; – essential for comparing statistics for different countries Harmonized with other social and economic statistics – employs concepts and classifications used for other social and economic statistics; – helps the linkage to and comparison with these figures

Features/Characteristics Comprehensive – all agents in an economy and performed transactions are covered; Consistent – the same rules are used to describe the consequences of a single action on all parties involved ; Operational – measurable in practice; Different from most administrative concepts

A framework for analysis and policy To analyze and evaluate the structure of a total economy: – value added and employment by industry; – value added and employment by region; – income distributed by sector; – imports and exports by product group; – final consumption expenditure by functional heading and product group; – fixed capital formation and fixed capital stock by industry; – the composition of the stocks and flows of financial – assets by type of asset and by sector…

A framework for analysis and policy To analyze and evaluate specific parts or aspects of an economy: – banking and finance in the national economy; – the role of government and its financial position; – the economy of a specific region (in comparison to – that of the nation as a whole); – household saving and debt levels…

A framework for analysis and policy To analyze and evaluate the development of an economy over time: – the analysis of GDP growth rates; – the analysis of inflation; – the analysis of seasonal patterns in household expenditure on the basis of quarterly accounts; – the comparison of the industrial structures of the national economy over the long term …

A framework for analysis and policy To analyze and evaluate a total economy in relation to other economies – GDP per capita and PPP – the comparison of the roles and size of government; – the analysis of the interdependencies between the economies; – the analysis of the composition and destination of the exports

SNA and business accounting The SNA accounting rules and procedures are based on those used in business accounting: – double-entry bookkeeping; – quadruple entry accounting… … but the SNA concepts usually differ from their administrative counterparts: – Valuation: Historic cost vs Opportunity costs (current /replacement costs) accounting – changes in inventories; – Profits vs operating surplus; – Depreciation vs Consumption of fixed capital – Reported period: Calendar vs financial year

SNA and business accounting Administrative sources for national accounts: – Business accounts, balance sheets and financial statements; – Records for various types of taxes VAT, personal income tax, import levies – Social security data; – Data from supervisory boards on banking and insurance… … but required editing according to SNA concepts, access to the administrative sources is an issue

SNA concepts Statistical units and their groupings; – Institutional units and sectors – Products, Production units, Production activities Flows and stocks; The system of accounts and the aggregates

Total economy/residence Total economy - all the institutional units which are resident in the economic territory of a country The concept of residence in the SNA: – An unit is said to be a resident a country when it has a center of predominant economic interest in the economic territory of that country - when it engages for an extended period (one year or more) in economic activities on this territory. – Economic territory: is the geographic area under the effective control of a single government.

Statistical units and their groupings Two types of unit and two corresponding ways of subdividing the economy: – institutional units grouped into sectors on the basis of their principal functions, behavior and objectives- for describing income, expenditure and financial flows, and balance sheet; – establishments grouped into industries on the basis of their type of activity, for describing the process of production, and input-output analyses

Institutional units and sectors Institutional unit - an economic unit that can engage in the full range of transactions and is capable of owning assets and incurring liabilities on its own behalf Institutional sectors – groupings of institutional units on the basis of their principal functions, behavior and objectives

Institutional delineation of the economy Institutional sectors: – Non financial corporations (enterprises) Producers of goods and non-financial services for the market – Financial corporations (enterprises) Producers of financial services – Households Entrepreneurs, suppliers of labor, consumers – Non- profit institutions serving households Providers of non-market services to households – Government Producers of individual and collective services on non-market basis, including redistribution of income and wealth – Rest of the world

Institutional delineation of the economy

Institutional delineation: Government and Public enterprises The public sector consists of all institutional units resident in the economy that are controlled by government. – Control: the ability to determine the general policy or program of an institutional unit

Institutional delineation: Government and Public enterprises Market/Non-market criteria Market conditions: – Seller, aiming at maximum profit, sells products freely on the market to whoever is ready to pay the asking price – Buyer, acting to maximize its utility given its limited resources, buys products best meet his needs at the offered price

Products and production units Products – goods and services as a result of production activity – Market – Own final use – Non-market Product classification: – the Central Product Classification Version 2 (CPC) 2 (United Nations 2008b)

Production units Enterprise - an institutional unit as a producer of goods and services – Big corporations with many different kinds of production – small number carrying out majority of production; – Medium and small enterprises engaged in only one sort of production – the majority by number. Establishment, considered as a basic unit for measuring production activity: – an enterprise, or a part of an enterprise, – situated in a single location, – in which only a single productive activity is carried out or… – … in which the principal productive activity accounts for most of the value added.

Production units Available data and accounts for establishments - related to its production activities, 2008 SNA p>… – The items included in the production and generation of income account; – Statistics of numbers of employees, types of employees and hours worked; – Estimates of the stock of non-financial capital and natural resources used; – Estimates of changes in inventories and gross fixed capital formation undertaken.

Production activity The classification of production activities used in the SNA is ISIC (Rev.4) Principal activity - the activity whose value added exceeds that of any other activity carried out within the same unit – The classification of the principal activity is determined by reference to ISIC, first at the highest level of the classification and then at more detailed levels.

Production activity Secondary activity – carried out within a single production unit in addition to the principal activity – whose output, like that of the principal activity, must be suitable for delivery outside that production unit Ancillary activity – a supporting activity – in order to create conditions for the principal or secondary activities to be carried out

The sequence of accounts The accounts are grouped into three categories: – current accounts – production, generation, distribution and use of income; – accumulation accounts – measuring capital and financial assets and liabilities, other changes in volume and revaluation of the assets; – balance sheets - stocks of assets and liabilities and net worth.

The sequence of accounts Current accounts:

The sequence of accounts Accumulation account and balance sheet

The sequence of accounts The Production account – designed to show how the value added is generated in the process of production – … compiled by industry and institutional sectors, at current prices and volume terms

The sequence of accounts The Generation of income account: – … decomposing value added into labor, capital and government (taxes, less subsidies on production); – … balancing item: operating surplus (formal economic activities) and mixed income (for informal activities)

The sequence of accounts The Allocation of primary income records: – property income receivable and payable, – compensation of employees receivable by households – taxes, less subsidies, on production and imports receivable by government – balancing item: balance of primary income

The sequence of accounts The Secondary distribution of income account – redistribution of income through current transfers other than social transfers in kind made by government and NPISHs to households – social contributions – rerouted from the generation of income trough allocation of primary income – Balancing item: Disposable income

The sequence of accounts The redistribution of income in kind account – … records social transfers in kind from government and NPISHs to households –... deriving the adjusted disposable income for actual final consumption of households On aggregate: disposable income = adjusted disposable income

The sequence of accounts The capital account – … records transactions linked to acquisitions of non-financial assets and capital transfers – balancing item: Net lending (ability to)/borrowing (need for) financing

The sequence of accounts The financial account... shows net acquisition of financial assets or net incurrence of liabilities... by type of financial instruments. balancing item: – Net lending (ability to)/borrowing (need for) financing

The sequence of accounts The other changes in the volume of assets account –... records the effect of exceptional events that cause changes in the value and also in the volume of assets and liabilities such as: the consequences of war or earthquakes –... and also include changes in classification and structure – balancing item: changes in net worth due to other changes in the volume of assets

The sequence of accounts The revaluation account –... records holding gains or losses Nominal holding gains or losses - the full change in value of the various assets or liabilities due to the change in the prices neutral holding gains and losses - shows the revaluation in proportion to the general price level; real holding gains and losses - the difference between nominal holding gains and losses and neutral holding gains and losses – Real holding gain – when the actual prices increased more (or decreases less) than the general price levels – Real holding loss – when the actual prices increases less (or decreases more) than the general price level

The sequence of accounts

SNA Overview Methodological references – 2008 SNA, EC, IMF, OECD, UN, WB – ESA 2010, Eurostat – Essential SNA: building the tables, Eurostat – The 2008 SNA – compilation in brief, WB – A system approach for national accounts compilation, UNSD, 1999

Thank you