Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the System of National Accounts (SNA) Lesson 5 Final Consumption Expenditure: Household; Government; NPISH 1

Copyright 2010, The World Bank Group. All Rights Reserved. Household Final Consumption Expenditure (HFCE) “Household final consumption expenditure consists of the expenditure, including expenditure whose value must be estimated indirectly, incurred by resident households on individual consumption goods and services, including those sold at prices that are not economically significant and including consumption goods and services acquired abroad.” (SNA 2008, 9.113) Although this is the SNA 2008 definition, it is identical to the definition in earlier versions of the SNA. 2

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HFCE: Actual and Imputed Expenditures Actual expenditures Food and Beverages Clothing and Footwear Consumer durables Household goods Motor cars, bicycles, scooters Rents Health and education Other services Imputed expenditures Goods produced for own consumption Imputed rents of owner occupiers Income in kind Insurance FISIM 5

Copyright 2010, The World Bank Group. All Rights Reserved. Actual expenditures in HFCE It is generally fairly easy to measure actual expenditures on most items but here are some points to watch out for: 1.Goods bought on loans. The full price must be recorded in HFCE. 2.Goods and services bought for operating a business must be excluded from HFCE. 3.Buying a dwelling. That is GFCF not HFCE. 6

Copyright 2010, The World Bank Group. All Rights Reserved. Imputed expenditures (1) Goods produced for own consumption All goods produced for own consumption should be included, for example: – Cotton and wool thread and textiles – Beer and sprits – Ceramic pots and plates – Wooden furniture and hand tools – Livestock products – milk, cheese, eggs, honey – Crops, fruit and vegetables In most countries, only the last two are important They should be valued at purchasers prices which, in this case, are also the basic prices. 7

Copyright 2010, The World Bank Group. All Rights Reserved. Imputed expenditures (2) Imputed rents of owner occupiers People who live in their own flats or houses are considered to be operating a business. The business is an “unincorporated enterprise” which produces “dwelling services” which are sold back to the owner of the business –i.e. the person living there. This “imputed rent” for living in your own dwelling is the same as the rent actually paid by a person living in the same kind of dwelling that is owned by somebody else. 8

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Imputed expenditures (3) Income in kind and Insurance Income in kind Employees often receive income in kind as part of their compensation: – Food – Meals – Accommodation … All this must be shown both as part of value added in GDP(P) and as expenditure in GDP(E) Insurance Only the “net premium” is included in HFCE. The net premium is the difference between premiums and claims plus the property income earned on contingency funds held by insurance companies. 10

Copyright 2010, The World Bank Group. All Rights Reserved. Imputed expenditures (4) FISIM Financial Intermediation Services Indirectly Measured – FISIM for short – is another name for Imputed Bank Service Charges. FISIM is the difference between interest paid on deposits and the investment income earned by banks. The 1968 SNA said all FISIM was intermediate consumption, but the 1993 and 2003 SNAs recommend that it should be distributed among the sectors that consume it. Households consume some of that FISIM so it must be shown in HFCE. 11

Copyright 2010, The World Bank Group. All Rights Reserved. Expenditure by resident households Remember that the SNA defines HFCE as “…expenditure incurred by resident households on individual consumption goods and services.” That means that expenditures by resident households when they travel abroad must be included in HFCE and purchases by non-residents must be excluded. Whether an adjustment is required depends on the data sources for HFCE. 12

Copyright 2010, The World Bank Group. All Rights Reserved. What have we learned? HFCE is a key aggregate in the national accounts. HFCE excludes purchases of dwellings and business expenses. Actual expenditures are the largest part. But Imputed expenditures on goods produced for own consumption and on rents of owner occupiers must be properly estimated. If HFCE is estimated from data on retail sales, you will need to add purchases by households abroad and subtract sales to non-residents. 13

Copyright 2010, The World Bank Group. All Rights Reserved. Government Final Consumption Expenditure (GFCE) General government final consumption expenditure consists of expenditure, including expenditure whose value must be estimated indirectly, incurred by general government on both individual consumption goods and services and collective consumption services. (SNA 2008, 9.114) This definition is from the 2008 SNA but it is the same as in earlier versions 14

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Copyright 2010, The World Bank Group. All Rights Reserved. Individual and Collective Expenditures Individual expenditures These are services produced by government that are consumed by individual households. Some households consume more than others. The main examples are education and health services. Others are culture, recreation, religious, housing and social services Collective expenditures These are services produced by government for the nation as a whole. No-one can consume more of them than anyone else. They include tax collecting, statistics, police and defense, ministries of finance, trade, agriculture, …. 16

Copyright 2010, The World Bank Group. All Rights Reserved. Measuring GFCE In compiling GDP(P), we said that the output of government is the sum of the costs of producing government services: – Compensation of employees – Intermediate consumption – Consumption of fixed capital, – Operating surplus – Taxes on production This same amount is now transferred to GDP(E) as Government Final Consumption Expenditure, except that sales by government have to be deducted. 17

Copyright 2010, The World Bank Group. All Rights Reserved. Final Consumption of Non-Profit Institutions Serving Households Final consumption expenditure of NPISHs consists of the expenditure, including expenditure whose value must be estimated indirectly, incurred by resident NPISHs on individual consumption goods and services and possibly on collective consumption services. (SNA 2008, 9.115) This definition differs from that of the SNA 1993 because in the 1993 version all consumption expenditure of NPISH was assumed to be individual. In the 2008 version, some NPISH expenditures can be treated as collective. 18

Copyright 2010, The World Bank Group. All Rights Reserved. Estimating final expenditure of NPISH NPISH do not sell their services and so we have to estimate their output in exactly the same way as for government. This output which was estimated for GDP(P) is now shown in GDP(E) as final expenditure of NPISH after deducting the value of any sales by enpish. According to the 1993 SNA all NPISH expenditure is considered to be for the provision of individual services but the 2008 SNA allows for the possibility that some NPISH expenditure might be collective. 19

Copyright 2010, The World Bank Group. All Rights Reserved. Actual Household Consumption Actual Household Consumption is made up by combining individual services provided by government and by NPISH with Household Final Expenditure. Actual Household Consumption is a better measure of what households actually consume than HFCE. Actual Household Consumption is more comparable between countries. 20

Copyright 2010, The World Bank Group. All Rights Reserved. Key Messages Consumption expenditures are the biggest component of GDP(E). Household Final Consumption Expenditure includes imputations for consumption of “own-production” that may be difficult to make but which must be included. Final consumption expenditures of government and NPISH are equal to their output as estimated in deriving GDP(P) 21