SNA- basic concepts Clementina Ivan-Ungureanu Training: Essential SNA: Building the basics Addis Ababa, February 2012

SNA The SNA is a system of macroeconomic accounts based on a set of concepts, definitions, classifications and registration rules. It provides a framework within which economic data can be collected and analysed to assist decision-makers and provide guidance on economic policies.

SNA answers Who takes action in the economy? What do they do? Why do they take action? How are the actions known?

WHO? Institutional units and sectors  Classification by industry, called ‘functional classification’ represents the production process and the flows experienced by goods and services produced in the economy  Classification by institutional sector where the units are defined according to their economic behavior, economic function and economic objectives

WHO? Institutional units and sectors Characteristics -It is entitled to own goods or assets in its own right; it is therefore able to exchange ownership of goods or assets in transactions with other institutional units; -It is able to take economic decisions and engage in economic activities for which it is itself held directly responsible and accountable at law; -It is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts; -It has a complete set of accounts, including a balance sheet of assets and liabilities, or it would be possible and meaningful, from an economic viewpoint, to compile a complete set of accounts if required

WHO? Types of institutional units Types of institutional units: 1. Persons or a household A household is defined as a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food

WHO? Types of institutional units 2. Legal or social entities A legal or social entity is one whose existence is recognized by law or society independently of the persons or other entities that may own or control it.

WHO? : Categories of units Corporations (financial and non- financial) Non-profit institutions (NPIs) Government units Classified in institutional sectors based on: -Type of producers -The principal activity and function

Who ?: Institutional sectors-cont The SNA includes five main institutional sectors: Non-financial corporations; Financial corporations; General government; Households; Non-profit institutions serving households (NPISHs).

WHO? : Institutional sectors The allocation of a unit to an institutional sector is based on the following questions: Is the unit resident? Is it a household, institutional household (ex. a hospital) or a legal unit? Is the unit a non-market or market producer? Is the unit controlled by the government? Does the unit provide financial services? Is the unit foreign-controlled?

WHO? : Residence concept The residence of each institutional unit is the economic territory with which it has the strongest connection, in other words, its centre of predominant economic interest. The term economic territory refers to: The area (geographic territory) under the effective administration and economic control of a single government; Any free zones, including bonded warehouses and factories under customs control;

WHO? : Residence concept - cont The national air-space, territorial waters and the continental shelf lying in international waters, over which the country enjoys exclusive rights; Territorial enclaves (i.e. geographic territories situated in the rest of the world and used, under international treaties or agreements between States, by general government agencies of the country (embassies, consulates, military bases, scientific bases, etc.)); 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 the preceding sub-paragraphs.

Who ?: Residence concept - cont 1. A corporation or quasi-corporation is considered as resident if it maintains at least one establishment where it plans to operate over a long period of time, e.g. at least one year 2. A household is resident when it maintains a dwelling that the members of the household treat and use as their principal residence.

Who ?: Residence concept - cont Special cases for considering households still resident: - Students continue to be resident in the territory in which they were resident prior to studying abroad; - Patients going abroad for the purpose of medical treatment; - Crews of ships, aircraft, oil rigs, space stations etc. that operate outside a territory or across several territories; - Diplomats, military personnel and other civil servants employed abroad in government enclaves; - Cross-border workers, who maintain their principal dwelling in the national territory; - Refugees, when they do not change their home territory regardless of their legal status or intention to return.

Who ?: Enterprise An enterprise is the view of an institutional unit as a producer of goods and services. It can be a : -corporation, -a quasi-corporation, -a non-profit institution or -an unincorporated enterprise

Who ?: Enterprise Enterprise -With different activities : kind of activity unit (KAU) -With different locations : local unit (LU) -Establishment : combination of KAU and Lu is LKAU

WHO ?: Industry A group of establishments engaged in the same, or similar, kinds of activity are classified into one industry according to ISIC, Rev. 4. The enterprise is the main unit for NA because it represents the institutional unit for which production accounts are prepared and value added is estimated. Classified based on their main activity

WHO? : Main activity of the enterprise Establishing the principal activity of one enterprise engaged in two or more activities for which the output serves a market is based on the so called “top-down” method. The method operates according to the following rules: In case one activity accounts for more than 50% of value added, this activity determines the classification Activity is determined according to the ISIC class with the largest share of value added from top to bottom: –First determine the highest classification level (1- digit) –Then the lower (2- and 3-digit) levels – Finally the class (4-digit level)

WHO?: Main activity of the enterprise - example The enterprise A has 5 activities A1, A2, A3, A4, A5, classified (fictitiously) as: A1: ISIC4 code = 310 ( manufacture of furniture), value added = 1450 A2: ISIC4 code = 322(manufacture of musical instruments), value added = 1200 A3: ISIC4 code = 324 (manufacture of game and toys), value added = 1330 A4: ISIC4 code = 476 (retail sale of cultural and recreation goods in specialized stores), value added = 350 A5: ISIC code = 477 ( retail sale of other goods in specialized stores), value added = 750

WHO? : Main activity of the enterprise - example

WHAY? : Flows and Stocks The aim of SNA accounts, tables and is to register in monetary terms the economic actions or events that take place within a given period of time and the effect of these events on the stocks of assets and liabilities at the beginning and end of that period.

WHAY ?: Flows There are in SNA two broad categories of economic flows: 1.Tranzactions 2.Other economic flows Transactions = economic flows that result from interaction between institutional units by mutual agreement and can take place within institutional units or between establishments belonging to the same enterprise.

WHAY ?: Flows-tranzactions 1. Transactions = economic flows that result from interaction between institutional units by mutual agreement and can take place within institutional units or between establishments belonging to the same enterprise. Include: Transactions in goods and services Distributive transactions : -the income generated in production (value added) is distributed -generated income is redistributed Transactions in financial instruments Other accumulation entries,

WHAY ?: Flows- other economic flows 2. Other economic flows arise from non- economic phenomena, recorded only in accumulation accounts. They include consumption of fixed capital, revaluation of assets and liabilities, economic appearance and disappearance of assets, natural growth of non-cultivated biological assets, uncompensated seizure and catastrophic losses of assets

WHAY ? : Flows- other economic flows They include: Acquisitions less disposals of non-produced non-financial assets; Other economic flows of non-produced assets The effects of non-economic phenomena such as natural disasters and political events (for example, wars) and finally, they include holding gains or losses, due to changes in prices

WHAY ? : Stocks Stocks are a position in, or holdings of, non- financial (produced or non-produced) assets and the financial assets and liabilities at a point in time. They are: -Subject to ownership rights (economic ownership prevailing over legal ownership) -are used in some kind of economic activity. Consumer durables are excluded, as are natural resources that are not owned.

WHY? :Purposes For what purpose ? The aim of a transaction or group of transactions - to satisfy a certain need. SNA recommends using the following classifications for functional analysis : COICOP COFOG COPNI COPP

HOW? Accounting Rules Rules (how) of what, for whom to record and why to record

How ?: The accounting model 1.Two- side presentation The left side of a ‘T’ business account is called debit and the right side credit; In NA, the following terms are used: Resources for transactions which add to the amount of economic value of a unit or a sector are presented on the right side of the account; Uses for transactions that reduce the amount of economic value of a unit or sector are shown on the left side of the current account.

How?: The accounting model 2. Double - entry principle -‘horizontal’ double entry -‘vertical’ double – entry. -Example IEA

HOW?: Time of recording Flows are recorded over a certain period of time; Stocks are recorded at a certain point of time, namely at the beginning (opening balance) and at the end of the accounting period (closing balance).

HOW ?: Time of recording- cont. There are three moments when flows can take place, each of them defining a basis for the timing: ‘Cash basis’ records cash flows at the time these payments occur; ‘Due for payment basis’ records flows at the time they are due to be paid; ‘Accrual basis’ records flows at the time economic value is created, transformed, exchanged, transferred or extinguished.

HOW?: Time of recording- cont Some issues of the time of recording for the main transactions : The acquisition of goods are recorded when the economic ownership of those goods changes hands. Imports and exports of goods are recorded when change of ownership occurs – moment when they cross the border Services are recorded when they are provided

HOW ?: Time of recording- cont Output is recorded over the period in which the process of production takes place IC of a good or service is recorded at the time when the good or service enters in the process of production, as distinct from the time it was acquired by the producer

HOW ?: Time of recording Inventories: -additions to inventories are recorded when products are purchased, produced or otherwise acquired; - deductions from inventories are recorded when products are sold, used up as intermediate consumption.

HOW?: Time of recording Taxes on products and imports are recorded at the times the products in question are produced, imported or sold, depending on the basis for taxation. Current taxes on income are recorded when the income to which they pertain is earned although taxes deducted at source may have to be recorded when they are deducted

How ?: Valuation Transactions are valued at the actual price agreed upon by the economic agents. The basic reference for valuation in the SNA is current market prices. Transaction valuation methods used in the SNA are based on more than one set of prices depending upon how taxes and subsidies on products, and also transport charges, are recorded.

How ?: Valuation BASIC PRICE + Taxes on products excluding invoiced VAT -Subsidies on products =PRODUCER’S PRICE +VAT not deductible by the purchaser +Separately invoiced transport charges +Wholesalers’ and retailers’ margins =PURCHASER’S PRICES

Accounts The sequence of accounts describes how income is generated, distributed, redistributed and used for consumption or the acquisition of assets and when assets are disposed of, or a liability is incurred, in order to acquire other assets or undertake more consumption than current income permits

Accounts - cont The goods and services account is the basic identity in the SNA. It captures the idea that all output plus imports must be accounted for in one of the two basic activities of the SNA (consumption of goods and services or accumulation of goods and services).

Accounts - cont Output + imports + taxes less subsidies on products = Intermediate consumption + final consumption + export + capital formation Presented in SUTs

Structure SUT Output Imports Trade and transport margins Net product taxes ITT Intermediate Consumption FD household consumption, government consumption, exports, gross fixed capital formation and changes in inventories VA compensation of employees, production taxes, operating surplus Supply Table Use Table Activities (ISIC) Products (CPC)

GDP compilation SUT OutputITT Intermediate Consumption FD VA Supply Table Use Table Activities Products = Product balance for each individual product row

GDP compilation SUT, cont. OutputITT Intermediate Consumption FD VA Activities Products = Activity balance for each individual activity column Balancing SUT: Making activity balances zero Making product balances zero

Output approach Output Intermediate Consumption Supply Table Use Table Activities Products = Output approach SUT: GDP = Output – Intermediate consumption Output Intermediate Consumption Activities ISIC) All products Traditional (sectoral) approach:

COICOP, COFOG, COPNI, HS Expenditure approach ITTFD Supply Table Use Table Activities Products = Expenditure approach SUT: GDP = Sum of FD - Imports FDITT HS Traditional approach:

Income approach VA Supply Table Use Table Activities Products = Income approach SUT: GDP = Sum of VA components Various categories VA Traditional approach:

Institutions System of Accounts Accounts Use System of Integrated Economic Accounts (IEA) Institutions Transactions Resource/ Supply Productive (P) Distributive (D) Capital (K) Financial (F) Balancing (B) Institutions Transactions Non-fin corp. Financial corp. Government Household NPISH ROW Example Account

System of Accounts, cont. AccountBalancing item External Account of Goods and Services external balance of goods and services Production Account value added, net Distribution and Use of Income Accounts Primary Distribution of Income Account Generation of Income Account operating surplus, net / mixed income, net Allocation of Primary Income Account balance of primary incomes, net Secondary Distribution of Income Account disposable income, net Redistribution of Income in Kind Account adjusted disposable income, net Use of Income Account Use of Disposable Income Account saving, net Use of Adjusted disposable Income Account saving, net Accumulation Accounts Capital Account net lending (+) / net borrowing (-) Financial Account budget balances