Market vs non-market distinction Martin Kellaway National Accounts in Practice – Advanced course Luxembourg, 2-11 October 2017 THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Contents The national economy Institutional units Definition of units

Market and non-market The two main types of output in ESA are market output (P.11) and non-market output (P.13) Important for two main reasons: (i) breakdown of public sector entities into corporations (S.11, S.12) or general government (S.13) helps define the general government boundary; (ii) market output is valued at basic prices (sale price receivable minus taxes less subsidies on products; non-market output is valued using production costs (P.2+D.1+P.51c+D.29-D.39r)

Market / non-market borderline The first relevant mention in ESA is 1.37: “Differentiating between market and non-market, and so for public sector entities classifying them into the general government sector or the corporations sector, is decided by the following rule …

Market / non-market borderline “An activity shall be considered as a market activity when the corresponding goods & services are traded under the following conditions if: (1) Sellers act to maximise their profits in the long-term, and do so by selling goods and services freely on the market to whoever is prepared to pay the asking price; (2) Buyers act to maximise their utility given their limited resources, by buying according to which products best meet their needs at the offered price; …”

Market output Market output mainly includes products sold at economically significant prices Non-market output may also be sold (to raise some revenue or attempt to reduce demand). The prices are described as ‘not economically significant prices’

ESPs ESA 3.19 defines economically significant prices Economically significant prices are prices which have a substantial influence on the amounts of products producers are willing to supply and on the amounts of products that purchasers wish to acquire. Such prices arise when both of the following conditions apply: 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.

Market producers Private sector NPIs can be predominantly market or non-market producers All other private sector producers considered as market (or for own final use) Market private NPIs classified as S.11 or S.12 Non-market private NPIs (except NPISBs) classified as S.15 (NPISH) Private NPIs divided up using the quantitative market test

Market test Quantitative market test applied over “a range of years” Minor fluctuations do not lead to reclassification To be a market producer: “Products sold at economically significant prices should cover at least a majority of the production costs” [ESA 3.32] Definitions of sales and production costs follow

Sales Definition of sales (ESA 2010 3.32b): revenue from sale of goods & services excludes any D.21 tax inherent in price includes effect of any D.31 subsidy on products as long as provided to all producers of this activity excludes D.319c & D.39 subsidies (e.g. payments to cover an enterprise’s deficits) excludes holding gains careful with some sales linked to volume (e.g. payments by government to schools based on pupil numbers but subject to negotiation not considered as sales)

Costs Definition of production costs (ESA 2010 3.33b): intermediate consumption compensation of employees consumption of fixed capital D.29 taxes on production payable “costs of capital” = net interest payable

Market test for public enterprises SNA explains that when there is public control a unit’s prices may be modified for public policy purposes making those prices not economically significant Public enterprises often created to provide goods that the market would not provide in desired quantities or prices Even when they have large sales, they will respond to market forces quite differently to private corporations

Market test for public enterprises Enterprises receiving government financial support, or having risk-reducing factors such as guarantees, will have softer budget constraints than private corporations, so will respond to changes to economic conditions differently Quantitative test only establishes the “ability to undertake a market activity at economically significant prices” Also a qualitative test Explained more in session 10.2