Global balancing THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Introduction The national accounts are primarily a macroeconomic analysis tool. To compile them, the national accountants use many data from various sources, especially administrative sources and statistical surveys. The basic data are never perfect, they may be insufficient, unreliable or even completely false. The work of national accountants therefore includes a great deal of data analysis and an important synthesis work to achieve a consistent and reliable set of data.

Compilation process (1) It is possible to describe the compilation process of national accounts by breaking it down into six main phases: collection of basic data; quality control of such data; additional corrections and estimates; transition to national accounts, that is to say, calculation of aggregates for the national accounts from the basic data; synthesis in the central framework of accounts, that is to say, analysis and alignment of results by arbitration; publication of final results by the required international standards.

Compilation process (2)

Consistency and balancing (1) One of the main qualities of the national accounts is their overall consistency. This consistency is achieved by two summary tables: the SUT the integrated economic accounts In each of these tables, consistency is expressed in particular by the strict equality between the total of resources and the total of uses. The two summary tables should also be consistent with each other because they contain common estimates.

Consistency and balancing (2) The problem is that the first estimates are imprecise and lead to unbalanced accounts For example, this simplified goods and services account is not balanced: Resources Uses Output Import 1000 500 Final consumption Change in inventories Exports 800 100 700 Total 1500 1600

Consistency and balancing (3) To solve this problem there are two possible approaches: change only the least reliable item to restore balance modify all items in a rational way The problem with the first approach is that it puts all the uncertainty on a single item that is no longer credible. For example, in our account, assume that the least reliable item is the change in inventories. Also assume that all other data is accurate within 10%.

Consistency and balancing (4) Two accounts are possible:

Consistency and balancing (5) One can see that while remaining within the confidence interval of the basic data, we get two very different results for the change in inventories. However, change in inventories is an important variable for economic analysis Users generally do not need a high precision on this item but they want at least to know if companies have increased or decreased their stocks. It is best to modify all items in a rational way rather than using one item for the adjustment.

Current and benchmark year National accountants generally proceed in two steps: For a benchmark year, they collect all available data and produce estimates for missing data. For current years, they mainly estimate trends and they use assumptions of stability of structures. The balancing work is much more difficult for the benchmark years.

Balancing supply and use tables (1) The SUT are presented in the form of 4 blocks:

Balancing supply and use tables (2) In the SUT, for each product, that is to say for each row, total supply is equal to total use. The SUT are developed from many and varied sources. The estimates derived directly from these sources never lead to equality between total supply and use. Initial data must be modified to achieve balanced accounts For this, two main approaches are used, the commodity flow approach and the input approach, both focus on evaluation of use.

The commodity flow approach It involves working product by product, that is to say, row by row, disaggregating total supply between different uses. It assumes a certain stability over time in the structure of the uses of a product.

The input approach It involves working column by column, by breaking down by product the total of each use. It assumes a certain stability over time of the structure by product of each use.

Combination of the two approaches Both approaches give different results because they are based on different sources. The combination of both approaches is the best solution for two reasons: the structure of the SUT must be credible both in rows and in columns all available information is mobilized Balancing is much more difficult because: there is a link between the output of an industry and its intermediate consumption by product the elements of a column are connected by the structure Any amendment to any of these elements affects all rows, which induces an iterative process

An overall view (1) The large number of balancing to achieve must not prevent an overall view. For example, suppose the basic data lead to the following SUT:

An overall view (2) Suppose that the sector accounts suggest that the value added is underestimated The balancing row by row in an independent way may lead to the following SUT:

An overall view(3) Balancing here leads to a worsening of the underestimation of the value added. In the example, this comes from two decisions: when supply is greater than use, production was reduced or the intermediate consumption was increased. when supply is lower than use, imports were increased or final consumption was decreased These decisions both have the effect of reducing value added. Balancing the SUT therefore requires a comprehensive view and coordination between the different persons in charge of balancing a row. The overall view is derived largely from the analysis of sector accounts.

Integrated economic accounts (1) Very simplified version:

Integrated economic accounts (2) The integrated economic accounts give a concise overview of an economy, namely the current accounts, accumulation accounts and balance sheets. They bring together in the same table the accounts of all the institutional sectors. The columns in the table represent the institutional sectors: non-financial corporations, financial corporations, general government, NPISH and households. There are also columns for the total economy, the rest of the world and the goods and services account. For each column and each row the total of resources equals the total of uses.

Resources and uses The resources of an economic agent are: output income received debt The agent can use its resources to: consume pay income acquire non-financial assets acquire financial assets For each economic agent, the amount of resources is equal to the sum of uses.

Net lending/net borrowing (1) The resources and uses of an economic agent can be presented in a balanced account:

Net lending / net borrowing (2) This account can be broken down into two sub-accounts, one corresponding to the non-financial transactions, the other to financial transactions:

Net lending / net borrowing (3) Non-financial accounts and financial accounts therefore have the same balancing item: net lending / net borrowing. This is extremely important in practice since non-financial accounts and financial accounts are usually made by two different teams. These two teams always reach different balancing items and they must work together to reduce the gap between non-financial accounts and financial accounts. A significant difference is a sign of poor quality accounts.

GFCF and financial accounts (1) In corporate accounts, the GFCF is usually one of the most difficult items to estimate. Good financial accounts can improve its estimate. Indeed, the net lending / net borrowing can be derived from the financial accounts and transferred to the non-financial accounts. We then obtain an estimate of the GFCF as the balancing item of the non-financial account. This estimate can then be compared to the estimate derived from the basic data.

GFCF and financial accounts (2) Simplified presentation:

Sector accounts and SUT The sector accounts and SUT have in common transactions in goods and services and value added. Our previous example shows that the SUT does not always provide a very good estimate of value added. Therefore, the best solution is usually to estimate the value added and GDP from the sector accounts. On the other hand, the SUT provides an additional information: the nature of products. This information facilitates the breakdown of final use. For example, milk is never GFCF; a truck is never an intermediate consumption.

Global balancing (1) National accountants produce three summary tables: Non-financial integrated economic accounts Financial integrated economic accounts Supply and use tables These three tables are generally compiled by independent teams but they are interdependent: Non-financial accounts and financial accounts have in common the net lending / net borrowing item non-financial integrated economic accounts and SUT have in common transactions in goods and services and value added

Global balancing (2) Initial estimates lead to inconsistencies between the three summary tables. To remove the inconsistencies, two methods are possible: sequential balancing, for example non-financial sector accounts are balanced first and their results are imposed on two other tables simultaneous balancing, each change to a table affects the other two. This generates an iterative process that requires permanent cooperation between the three teams The second method is potentially the best because each table takes into account all available information but is more difficult and requires more work and therefore more resources.

Conclusion The work of national accountants is to achieve a comprehensive and coherent presentation of the economy from inconsistent and incomplete basic data. This work requires many assumptions to estimate missing data and balancing to ensure overall consistency. Arbitration clearly improves the quality of the accounts but it has a drawback: it is mainly based on reasoning, that is to say, it has a great degree of subjectivity. This subjectivity is not easily accepted by users who request objectivity and accuracy. National accountants should therefore explain the rationale of their work.

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