Statistics for economic analysis and policy making in Europe Part 8 CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE EUROPEAN COMMISSION

National accounts - Basic concepts and definitions - Overview Domestic versus national Supply and use tables Input-output analysis as an analytical tool

Introductory remarks “The ESA 2010 is a regulation setting forth the rules, conventions, definitions and classifications to be applied in producing the national accounts in Member States” (ESA 2010 1.12). The few central concepts discussed and the few definitions presented in a very simplified manner are meant to serve two purposes: to provide information on characteristics of national accounts; and to sketch the theoretical background of some of the solutions.

Basic concepts – Flows and stocks In national accounts two basic kinds of information are recorded: flows and stocks. Flows refer to actions and effects of events that take place within a given period of time, while stocks refer to positions at a certain point in time.

Basic concepts – Flows and stocks Flows (ESA 2010 1.65) reflect the creation, transformation, exchange, transfer or extinction of economic value. They involve changes in the value of an institutional unit's assets or liabilities. Economic flows are of two kinds: transactions, and other changes in assets. Transactions appear in all accounts and tables where flows appear, except the other changes in volume of assets account and the revaluation account.

Basic concepts – Flows and stocks Stocks (ESA 2010 1.85) are the holdings of assets and liabilities at a point in time. Stocks are recorded at the beginning and end of each accounting period. The accounts that show stocks are called balance sheets. Stocks are also recorded for population and employment. However, such stocks are recorded as mean values over the accounting period. Stocks are not recorded for assets which are not owned, such as human capital and natural resources.

Basic concepts – Flows and stocks Within its boundaries, the ESA 2010 system is exhaustive in respect of both flows and stocks. This implies that all changes in stocks can be fully explained by recorded flows.

Basic concepts – Types of aggregates In national accounts two types of aggregates are distinguished: (a) aggregates which refer directly to transactions in the system, such as the output of goods and services, final consumption, gross fixed capital formation, compensation of employees, etc.; (b) aggregates which represent balancing items in the accounts, such as GDP at market prices, operating surplus of the total economy, GNI, national disposable income, saving, current external balance, and net worth of the total economy (national wealth).

Basic concepts – Market prices as the central numeraire With the exception of some variables concerning population and labour, the ESA 2010 system shows all flows and stocks in monetary terms. Flows and stocks shall be measured according to their exchange value, i.e. the value at which flows and stocks are in fact, or could be, exchanged for cash. Therefore, market prices are the ESA's reference for valuation.

Basic concepts – Time of recording Flows shall be recorded on an accrual basis; that is, when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled. Output is valued at basic prices and recorded when produced and not when paid for by a purchaser. Inputs are recorded when transformed, not when purchased. Recording on an accrual basis applies to all flows, monetary as well as non-monetary and intra-unit, as well as flows between units.

Fundamental distinctions Production – Non-production (the production boundary) Intermediate consumption – Value added Intermediate consumption – Final consumption Consumption – Gross capital formation These fundamental distinctions are closely interrelated

Fundamental distinctions

Basic conventions The ESA also lays down specific conventions, concerning: (a) valuation of government output; (b) valuation of indirectly measured output of insurance services and financial intermediation services; (c) recording of the collective services provided by government as final consumption expenditure and not as intermediate consumption.

Basic concepts – Intermediate consumption Intermediate consumption consists of goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods and services are either transformed or used up by the production process (ESA 2010 3.88).

Basic concepts – Final consumption Two concepts of final consumption are used: (a) final consumption expenditure; (b) actual final consumption. Final consumption expenditure is expenditure on goods and services used by households, NPISHs and government to satisfy individual and collective needs. Actual final consumption refers to its acquisition of consumption goods and services. The difference between these concepts lies in the treatment of certain goods and services financed by the government or NPISHs but supplied to households as social transfers in kind.

Basic concepts – Final consumption Final consumption expenditure consists of expenditure incurred by resident institutional units on goods or services that are used for the direct satisfaction of individual needs or wants or the collective needs of members of the community.

Basic concepts – Final consumption Time of recording and valuation (ESA 2010 3.111 pp): Expenditure on a good is recorded at the time of change of ownership; expenditure on a service is recorded when the delivery of the service is completed. Expenditure on goods acquired under a hire purchase or similar credit agreement, and also under a financial lease, is recorded at the time the goods are delivered even if there is no change of ownership at this point.

Basic concepts – Final consumption Time of recording and valuation (ESA 2010 3.111 pp): Own-account consumption is recorded when the output retained for own final consumption is produced. The final consumption expenditure of households is recorded at purchasers' prices. This is the price the purchaser actually pays for the products at the time of the purchase.

Basic concepts – Gross capital formation Gross capital formation consists of: (a) gross fixed capital formation: (1) consumption of fixed capital; (2) net fixed capital formation; (b) changes in inventories; (c) acquisitions minus disposals of valuables.

Basic concepts - Consumption of fixed capital Consumption of fixed capital (ESA 2010 3.139) is defined as the decline in value of fixed assets owned, as a result of normal wear and tear and obsolescence. The estimate of decline in value includes a provision for losses of fixed assets as a result of accidental damage which can be insured against. Consumption of fixed capital covers anticipated terminal costs, such as the decommissioning costs of nuclear power stations or oil rigs or the cleanup costs of landfill sites.

Basic concepts - Consumption of fixed capital Consumption of fixed capital is estimated on the basis of the stock of fixed assets and the expected average economic life of the different categories of those goods. For the calculation of the stock of fixed assets, the perpetual inventory method (PIM) is applied whenever direct information on the stock of fixed assets is missing. The stock of fixed assets is valued at the purchasers' prices for the current period.

Basic concepts - Consumption of fixed capital Consumption of fixed capital shall be calculated according to the 'straight line' method, by which the value of a fixed asset is written off at a constant rate over the whole lifetime of the good. In some cases, the geometric depreciation method is used when the pattern of decline in the efficiency of a fixed asset requires it. Consumption of fixed capital, which is recorded as a cost by the ESA 2010 system, is an intra-unit transaction.

Basic concepts – Total economy The total economy is defined in terms of resident units. A unit is a resident unit of a country when it has a centre of predominant economic interest on the economic territory of that country. Such units are known as resident units, irrespective of nationality, legal form or presence on the economic territory at the time they carry out a transaction. The institutional sectors are groups of resident institutional units (ESA 2010 1.61).

Basic concepts – Total economy Resident units engage in transactions with non-resident units (that is, units which are resident in other economies). These transactions are the external transactions of the economy and are grouped in the ‘rest of the world’ account.

Basic concepts – Total economy Economic territory according ESA 2010 (2.05): (a) the area (geographic territory) under the effective administration and economic control of a single government; (b) any free zones, including bonded warehouses and factories under customs control; (c) the national air-space, territorial waters and the continental shelf lying in international waters, over which the country enjoys exclusive rights;

Basic concepts – Total economy Economic territory according ESA 2010 (2.05): (d) territorial enclaves, these being geographic territories located in the rest of the world and used, under international treaties or agreements between states, by general government agencies of the country (such as embassies, consulates, military bases, scientific bases, etc.); (e) deposits of oil, natural gas, etc. in international waters outside the continental shelf of the country, worked by units resident in the territory as defined in points (a) to (d).

Basic concepts – Total economy Economic territory excludes extraterritorial enclaves and the parts of the country's own geographic territory used by the following organisations: (a) general government agencies of other countries; (b) institutions and bodies of the European Union; and (c) international organisations under international treaties between states. The territories used by the institutions and bodies of the EU and international organisations are separate economic territories. A feature of such territories is that the only residents are the institutions.

Basic concepts – Exports and imports Exports of goods and services consist of transactions in goods and services (sales, barter, and gifts) from residents to non-residents (ESA 2010 3.158). Imports of goods and services consist of transactions in goods and services (purchases, barter, and gifts) from non-residents to residents (ESA 2010 3.159). Imports and exports of goods and services are distinguished into: (a) intra-EU deliveries; (b) imports and exports outside the EU.

Basic concepts – Exports and imports Exports and imports of goods and services do not include: (a) establishment trade; (b) primary income flows to or from the rest of the world, such as compensation of employees, interest and revenues from direct investment; (c) the cross-border sale or purchase of financial assets or non-produced assets, such as land.

Domestic versus national Gross domestic product (at market prices) - primary income payable by resident institutional units to non-resident institutional units + primary income receivable by resident institutional units from the rest of the world Gross national income (at market prices) National income is not a production concept but an income concept.

Domestic versus national The ‘domestic’ concept is adequate for the measurement and analysis of production. The ‘national’ concept is adequate for the measurement and analysis of income. 'Primary income' is the income which resident units receive by virtue of their direct participation in the production process, and the income receivable by the owner of a financial asset or a natural resource in return for providing funds to, or putting the natural resource at the disposal of, another institutional unit.

Supply and use tables Supply and use table are an integral part of national accounts. The ‘supply table’ provides information on domestic production in a cross-classification by industries and products. The ‘use tables’ describes the use of products by the different industries and in the categories of final demand.

Supply and use tables In the columns under the intermediate consumption by industry, the table shows the components of gross value-added, as follows: (a) compensation of employees; (b) other taxes less subsidies on production; (c) net mixed income, net operating surplus and consumption of fixed capital.

Supply and use tables For each product, supply equals the sum of all uses, shown in balanced rows in the supply and use framework. This identity is valid only when supply and use are on the same valuation basis. This identity is of crucial importance for achieving numerical consistency in the system of national accounts.

Supply and use tables The process of arriving at a use matrix at basic prices as needed for analytical purposes usually starts from a use matrix at purchasers’ prices. In order to transform the use table to basic prices, each element of the table must be decomposed. This can be seen as estimating similarly sized tables of the format products by uses, each of which contains all the items for one of the components.

Supply and use tables The use table at purchasers’ prices has to be decomposed in a number of matrices: Matrix of domestic production at basic prices, Matrix of imports, Matrix of trade margins, Matrix of transport margins, Matrix of taxes on products, Matrix of subsidies on products. This decomposition entails a number of complex modeling exercises

Supply and use tables Supply and use tables at basic prices are the starting point for estimating symmetric technology matrices, either product by product or industry by industry. The estimation of symmetric input-output has to be based on technology assumptions. Technology matrices are a mighty tool for all kind structural analyses.

Fundamentals of input-output analysis

Fundamentals of input-output analysis

Fundamentals of input-output analysis

Fundamentals of input-output analysis

Input-output analysis as an analytical tool – a simple example Food products – domestic output and imports

Input-output analysis as an analytical tool – a simple example Food products – domestic output only

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