Integrated compilation of data in current and constant prices THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Supply Use Tables (SUTs) GDP and its components in terms of production, income and expenditure is the first key balancing item of the national accounts It is possible to measure GDP through three different approaches Production, income, and expenditure

Production approach to measuring GDP Each industry/ activity in an economy contributes to economic growth through the value added to the inputs it uses’ to generate output For each activity, value added = Sales less purchases of goods and services Sales and purchases can be measured through business survey, supplemented by administrative records

Income approach to measuring GDP The income generated through the production activity consists of compensation of employees and the profits (operating surplus) Compensation of employees and profits can be measured through survey, or tax and other administrative records

Expenditure approach GDP can be measured by aggregating over all the final demands in the economy – omitting sales used by other activities. GDP E = Household spending + NPISH spending, plus government spending + Capital formation + exports less imports These categories can be measured through survey (HH & NPISH, Capital formation, International trade in services) and administrative records International Trade in Merchandised Goods)

Expenditure approach These categories can be measured through Survey: Household spending, NPISH spending, capital formation, international trade in services and administrative records International Trade in Merchandised Goods) Administrative records: Government spending and international trade in merchandised goods

Best measure of GDP It can be shown that GDP P = GDP I = GDP E for the whole economy But when three such large aggregates are measured and are different, it is not easy to determine which is the most reliable The final estimate was once estimated as the average of the three independent estimates

Supply Use Tables (SUTs) But laying out the transactions in goods and services in terms of individual production activities, product supply and product enables a reconciliation to be struck at an individual activity and product level This is achieved through the Supply Use Tables The reconciliation at detailed level enables a unique estimate of GDP to be struck, using all the information from the three approaches

Supply Use Tables (SUTs) - Example To demonstrate the principles involved, an economy with no taxes, and three industries with three unique products is set out below

Supply Supply Total supply Products imps dom Adj Manuf 20 15 55 Dist'n -15 Services 5 30 35 Totals 25 60

Use Use by activities Final demand Final dem. Total dem. Manuf Dist'n Servs Final Cons Cap form exps Manuf. 10 5 30 55 Dist’n 20 35 GDP= P= I 15 imps -25 GDP E 25

Supply Use Tables (SUTs) The supply and use tables show that for each product supply=demand (once on same price basis – in this case purchasers’ prices) For each activity, output less intermediate cons = value added = income generated

Supply Use Tables (SUTs) So by striking the best reconciliation possible at individual activity and product level, we can produce an estimate of GDP which reflects a coherent picture of production, income and expenditure

Supply Use Tables (SUTs) The problem here is how to produce robust estimates of the input structures of activities and final demand in terms of products, Business will not necessarily keep up-to-date and detailed records of their purchases Spending by households will be by broad category (COICOIP) not by detailed products

Supply Use Tables (SUTs) So how do we keep an annual and quarterly coherent picture of the economy for more recent periods, beyond a “benchmark year”?

Supply Use Tables (SUTs) We assume that where we have no recent reliable information, input structures remain the same This is equivalent to the kind of assumption we make when using sales data to project forward estimates of value added by industry, to create an index of Production, or an Index of Services

Supply Use Tables (SUTs) How do we generate estimates of volume growth using this coherent framework based on current prices?

Supply Use Tables (SUTs) We create an equivalent database of price indices in the SUT form These prices are expressed as indices in terms of the previous year prices So for each year, we can express the SUT elements in the prices of the previous year, using the previous year weights to aggregate individual prices

Supply Use Tables (SUTs) These generate individual estimates of volume growth from the previous year to the current year Using Paasche style price indices generates Laplaces style volume growth estimates in constant price form, which are additive So we can produce versions of the supply-use tables in the prices of the previous year to enable reconciliation at constant as well as current prices

Supply Use Tables CP and KP Exercise!