OVERVIEW OF THE SYSTEM OF NATIONAL ACCOUNTS, INCLUDING BASIC IDENTITIES Peter van de Ven Head of National Accounts OECD Short Course on National Accounts IARIW-conference, August 23 – 24, 2014

A general introduction Why national accounts? Definition and objectives The Value Added of national accounts? Circular flow of income Main subsystems of national accounts Macro-economic aggregates Production cycle and revision of national accounts 2

Why national accounts? Relevance: Monitoring the performance of an economy with a consistent set of indicators Basis for economic theory Model building Coherent policy formulation (and evaluation) Consistency and reliability: National accounts is a system with identities (definitional equations) Checking data with the help of identities (transaction identity; budget identity; and balance sheet identity Complete description of the national economy 3

Why national accounts? Efficiency: No overlaps/gaps in the statistical programme Reduce administrative burden of respondents Uniform concepts, definitions and accounting rules (SNA 2008 and ESA 2010) 4

Definition and objectives A comprehensive and consistent, quantitative description of economic phenomena in a country, related to a certain period of time Provides an overall picture of an economy Compute summary indicators for measuring performance Provide data for monitoring and forecasting the effects of socio- economic policies Provide data within an analytical framework useful to economic research Provide data for international comparison Provide data for administrative purposes 5

The Value Added of national accounts? Closed and consistent framework: Allows for systematic analysis of the economy, but … … also allows for a rigorous quality check of economic data, … … and provides an excellent tool for compiling consistent data … … by making use of the various identities! 6

The Value Added of national accounts? Transaction identity For each product: Total supply = Total demand, or P + M = C + I + E + IC For each transaction: Total payments = Total receipts Budget identity Balance of non-financial transactions = Balance of financial transactions (double bookkeeping) 7

The Value Added of national accounts? Balance sheet identity For each balance sheet item (non-financial as well as financial): change in stock between two years = transactions + holding gains/losses + other changes in volume Also true for Net Worth: change in in the balance sheet item Net Worth = changes in net worth (CNW) due to savings and capital transfers + CNW due to holding gains and losses + CNW due to other changes in volume 8

Circular flow of income 9 Commodity Expenditures Income Distribution Production Process

Circular flow of income 10 Commodity Expenditures Income Distribution Production Process

Circular flow of income 11 Commodity Expenditures Income Distribution Production Process Income Redistribution

Circular flow of income 12 Expenditures goods/services Income Distribution Production structure Income redistribution

Circular flow of income 13 Commodity Expenditures Income Distribution Production structure Income redistribution

Circular flow of income, and … Exchanges with other systems: –other countries (imports, exports, transfers) –other periods (saving, investment, depreciation) Financial transactions Other changes in assets and liabilities, such as holding gains/losses and other changes in volume Balance sheets 14

Circular flow of income, and … Depletion, degradation, Natural resource stocks Environmental taxes, transfers, and spending and asset appearance

16 Supply and use tables Sector accounts Satelite Accounts SEEA Regional Accounts KLEMS Labour accounts Main subsystems of national accounts

Sector accounts Units classified in institutional sectors Complete description of economic transactions and stocks of institutional sectors Transactions classified in accounts representing a specific economic process (e.g. production, income distribution, use of income, accumulation) Derivation of relevant balancing items (e.g. gross domestic product, net national income) 17

Main subsystems of national accounts Main institutional sectors Non-financial Corporations Financial Corporations General Government Households Non-profit Institutions serving Households Rest of the World 18

Main subsystems of national accounts Main accounts distinguished (including balancing item): 1. Production Value Added / GDP 2. Primary distribution of income Primary income / GNI 3. Secondary distribution of income Disposable income 4. Use of income Saving 5. Capital account Net lending/borrowing 6. Financial account Net lending/borrowing 7. Other changes in assets Change in net worth… 8. Balance sheets Net worth 19

Main subsystems of national accounts Example lay-out of sector accounts: 20 production account income accounts capital account Usesfinancial accountResources transactions balancing item total Stocks – assets balance sheet Stocks - liabilities outstanding assetsoutstanding liabilities bal. item (= net worth) total

Main subsystems of national accounts Supply and Use Tables Detailed description of production process Description of supply and use of goods and services Units classified in industries Supply table: row gives supply of specific product groups Supply table: column gives total production by industry Use table: row gives destination of specific product group Use table: column gives use of products in production process and resulting value added by industry 21

Main subsystems of national accounts 22 Supply matrix agricult, manufa trade, repair govern- ment servicesimporttotal food, beverages machines energy other manufacture repair services government services 750 other services total

Main subsystems of national accounts 23 Use matrix agric., manuf trade, repair govern- ment serviceexportcons priv cons gov cap. form. change invent. total food, beverages machines energy other manufacture repair services government services 750 other services labour costs operating surplus total

Main subsystems of national accounts Labour accounts: Integrated dataset on labour and wages Consistency with corresponding data in sector accounts and supply and use tables Examples: data on population and labour force, employment (hours worked, number of jobs, number of employees/self employed), compensation of employees 24

Macro-economic aggregates 1.GROSS DOMESTIC PRODUCT (GDP) = output - intermediate consumption = compensation of employees + gross operating surplus + net taxes on production = final consumption expenditure + gross fixed capital formation + exports – imports 25

Macro-economic aggregates Thus also three methods for estimating GDP: 1. Production approach 2. Income approach 3. Expenditure approach 1 and 3 combined in Supply and Use Tables 26

Macro-economic aggregates 2. NET NATIONAL INCOME (NNI) = gross domestic product (GDP) + primary income received from the rest of the world - primary income paid to the rest of the world - consumption of fixed capital 27

Macro-economic aggregates 3. NET NATIONAL DISPOSABLE INCOME = net national income (NNI) + current transfers received from the rest of the world - current transfers paid to the rest of the world 28

Macro-economic aggregates 4. NET NATIONAL SAVING = net national disposable income - final consumption expenditure 29

Macro-economic aggregates 5. NET LENDING/BORROWING = net national saving + capital transfers received from the ROW - capital transfers paid to the ROW - fixed capital formation, net 30

Macro-economic aggregates 5-7. TOTAL CHANGES IN NET NATIONAL WORTH = net national saving + capital transfers received from the ROW - capital transfers paid to the ROW + net other volume changes in national assets and liabilities + net nominal holding gains of national assets and liabilities 31

Macro-economic aggregates 8. NET NATIONAL WORTH = national non-financial assets + national financial assets - national financial liabilities 32

Production cycle and revision process Typical production cycle Quarterly data -Flash estimates for GDP (t + 30/45 days) -Regular estimates, including sector accounts (t+90 days) -Remark: quarterly data need to be adjusted to new annual data Annual data -Provisional data (t months) -Improved provisional data (t months) -Final data (t months) -May slightly differ by country 33

Production cycle and revision process Benchmark revisions -Comparability in time: growth rates versus level estimates Reasons -Changes in international standards -New/adjusted sources and methodologies -Problems with ‘reconciliation’ of the data -Consistency between national accounts subsystems Frequency - Once every 5-10 years 34

Thank you for your attention! 35