National Accounts
Jakub Boraty´nski
Institute of Econometrics University of L´od´z jakub.boratynski@uni.lodz.pl
Room F225
Course details
Contents
Selection of basic and advanced topics Practical exercises
Textbook: F.Lequiller, D.Blades Understanding National Accounts (UNA), https://www.oecd.org/std/UNA-2014.pdf
Assessment criteria
Necessary condition 1: attendance minimum 60%
Necessary condition 2: 10 minute presentation of exercise solution Written exam during last lecture
What are national accounts? (1)
“National accounts are a coherent, consistent and integrated set of macroeconomic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules.”
“National accounts provide a comprehensive accounting framework within which economic data can be compiled and presented in a format that is designed for purposes of economic analysis, decision-taking and
policy-making.”
Source: OECD Glossary of Statistical Terms
What are national accounts? (2)
“National accounts, often called macroeconomic accounts, are statistics focusing on the structure and evolution of economies. They provide a framework for numerically describing and analysing, in an accessible and reliable way, the almost unimaginably large number of economic
interactions within an economy.”
Source: Eurostat, Statistics Explained
Quick history and standards
Concepts of national accounts emerged from 1930s, along with advances in macroeconomic theory and notions
Modern structure of national accounts developed in the 1950s (Richard Stone and collaborators)
Intergovernmental organizations (UN, OECD etc.) coordinating international standards
System of National Accounts 2008 (SNA 2008)
International reference manual signed by UN, OECD, IMF, World Bank, European Commission
In Europe, based on EU legislation, national accounts follow European System of National and Regional Accounts (ESA 2010)
Lecture 1 contents
Essential macroeconomic aggregates Topics from UNA Chapter 1
Essential macroeconomic aggregates inlc. GDP Fundamental relationships
Decomposition of GDP growth
GDP
Gross Domestic Product (GDP) – perhaps most widely used indicator in national accounts
“GDP combines in a single figure, and with no double counting, all the output (or production) carried out by all the firms, non-profit, institutions, government bodies and households in a given country”
Output at firm level
Output = Intermediate consumption + Value added
Adding up values added
GDP =P Values Added More precisely:
GDP =P Gross Values Added + Taxes minus subsidies on products Adding up values added rather than outputs (by firms) avoids double counting
GDP =P Outputs − P Intermediate Consumptions
Example
Taxi ride: 30 z l, incl. fuel cost 10 z l
Fuel production 10 z l, incl. crude oil cost 6 z l GDP=?
Three fundamental equations
Deriving GDP in volume
Reconciling global output and demand Reconciling global output and income
Separating quantity and price changes
Economists mostly interested in changes of “real” GDP
Change in “nominal” GDP (GDP “in value”, or “in current prices”) split into:
1 indicator of change in quantity (“real GDP”, or “GDP in volume”)
2 indicator of change in prices (“GDP deflator”)
Fundamental equation 1
[1 + the growth rate (divided by 100) of GDP at current prices] = [1 + the growth rate (divided by 100) of GDP in volume]×
[1 + the growth rate (divided by 100) of the GDP deflator]
[1 + the growth rate (divided by 100) of GDP in volume] = [1 + the growth rate (divided by 100) of GDP at current prices]/
[1 + the growth rate (divided by 100) of the GDP deflator]
Example
Nominal GDP growth 8%
Price growth 3%
Real GDP growth=?
Final demand
Final consumption expenditure Household consumption Government consumption
Consumption by non-profit institutions serving households (NPISH) Gross capital formation (GCF)
Gross fixed capital formation (GFCF) Changes in inventories
Exports
Fundamental equation 2
GDP + Imports = Final consumption + GCF + Exports GDP = Final consumption + GCF + Net exports
Contributions to GDP growth
∆GDPt GDPt−1
= ∆FCt GDPt−1
+ ∆GCFt GDPt−1
+ ∆NEt GDPt−1
where ∆GDPt ≡ GDPt− GDPt−1 etc.
Example
Year 1: FC=60, GCF=30, NE=10 Year 2: FC=70, GCF=25, NE=12
Assume no changes in prices, i.e. growth of GDP in volume equals growth of GDP in current prices
Write down decomposition of the GDP growth
Fundamental equation 3
Output (sum of the values added) = Income (employees’ salaries + company profits) = Final demand (Consumption + GCF + Net exports)
Exercises for chapter 1
Exercise 3: calculation of GDP in volume
Exercise 4: calculation of contributions to growth Exercise 6: explaining different terms and synonyms
Contents of lecture 2: the volume/price breakdown
Deriving volumes for aggregates based on detailed data Interpreting volumes
Additive (constant price) volumes based on Laspeyres indices
Types of data available to national accountants
(a) statistics expressed in quantities
(b) statistics expressed in current prices (“in value”, “nominal”)
(c) Price indices
Statistics of type (a) only available for detailed classifications If (a) unavailable ( 85% cases), indicator of volume calculated as (b)/(c).
Aggregating volumes: example
50 large cars and 50 small cars produced (consumed) in year 0 80 large cars and 20 small cars produced (consumed) in year 1 Price of large car is twice the price of small car
What is the change in volume of car production (consumption) between year 0 and 1?
Interpreting volumes
Changes in volume involve changes in both quantity and “quality”
Quality not clearly defined - related to utility, productivity etc.
Prices used as weights of individual volumes (quantities) Not perfect: prices not always set by relative costs or utilities (monopolistic behavior, tax distortions)
Relative prices not constant which gives rise to different types of volume indices (Laspeyres, Paasche, Fischer)
Extending the car example
t = 0 t = 1 t = 2
i q p q p q p
Large 50 80 80 100 90 120
Small 50 40 20 40 30 40
Where q is number of cars, p is price of a car in thousand zlotys.
Laspeyres volume index
ItQ = P
ipi 0· qit P
ipi 0· qi 0 or shorter:
ItQ = P p0· qt P p0· q0
Exercise
Based on the extended car example calculate the series of volume indices:
P p0· q0
P p0· q0, P p0· q1
P p0· q0, P p0· q2 P p0· q0 and the series of constant price values:
Xp0· q0, X
p0· q1, X p0· q2
What are the changes in volume of car production (consumption) compared to year 0?
Task for the next lecture
Explain hedonic price index, with a simple numerical example
Contents of lecture 3: the volume/price breakdown
Difficulties of price measurment
Chained volume indices and loss of additivity
Assessment of price changes
Price measurement straightforward with homogenous goods (think of electricity, apples etc.)
Now think of a smartphone:
costing 1000 z l in year 1
costing 900 z l in year 2 for the same model, except for an addition od 4K (versus Full HD) video
Full HD variant no more available in year 2; 4K not yet existing in year 1
What is the change in the smartphone price? −10%?
Shows that price-volume breakdown is a non-trivial problem
Hedonic price index example
We could carry out an econometric study in year 2, relating smartphone price to a multitude of smartphone characteristics Why econometric study needed? Characteristics not sold separately, so their prices not observed
We could learn from the studythat, for example, 4K adds 4% to smartphone price over Full HD
Than what would, hypothetically, the specific smartphone variant from year 1 cost in year 2?
Since we considered the same model (except for video), we can caluclate ...
So what is the “true” price change? ...
Issues in price and volume measurement
What is the change in smartphone price between 1995 and 2015?
Hedonic price indices.
How to measure volume of supply of services (computer maintenance, education, public administration)?
Issues in aggregation with price changes over time
Chain-linked aggregate volumes
Laspeyres volume index convenient but not always appropriate With significant relative price changes weighting of individual quantities will not be appropriate
Example - the price of first cell phones in Poland was comparable with the price of a small car
Chain-linked volumes example
Based on the extended car exmple
Calculate Laspeyres volume indices based on previous year’s (rather than year 1) prices
Derive aggregate car production/consumption “at previous year’s prices, chained, reference year 1”
Sometimes confusingly called “at constant prices”, which is not exact Show non-additivity of the chained accounts
More exercises based on the extended car example
1 Calculate Paasche price index of aggregate production (consumption) and show that IV = IP · IQ
2 Calculate series of aggregate values in constant prices of year 2.
What are the changes in volume of car production (consumption) compared to year 1?
Tasks for the next lecture
How do we measure changes in prices of non-market goods (e.g.
public administration)?
Exercise 5
Topics for lecture 4
Contents of chapter 4
Scope of production in national accounts
Production frontier
What to include in GDP, what to exclude Output includes goods and services
that households buy for their needs
that firms buy to be able to produce goods and services that foreigners buy (exports)
But not all of goods and services are subject to market transactions – the so called non-market (non-traded) goods
Non-market services produced by general government (typically 15%-20% of GDP)
Goods and services produced by households for their needs Goods and services produced by firms for internal use
Production decision tree
Imputation
Applied when no actual transaction is observed
For example when a household grows carrots for own use,
consumption may be evaluated based on current prices of carrot in the market
Cannot be applied to some government services for which no market exists
Examples of imputation
imputed rents for own-occupied dwellings food produced for own use
Imputed rents
What are housing services?
Actual rents: there is a money transaction
Imputed rents: dwelling owners provide housing services for themselves
Typically a substantial part of dwellings owned by their occupiers In Poland, 2015:
imputed rents approx. 52 PLN billions
value added in Real estate activities: 78 PLN bln, in “imputed rents sector”: 43 PLN bln
Imputed rents are included in production (GDP)
Why are imputed rents included in GDP?
Example 1: Adam rents a room in an apartment owned by Anna, for 500 PLN a month. When Adam and Anna marry, they decide to live together in Anna’s apartment. Then if imputed rents were not
included in production, 500 PLN would disappear from the GDP, even though housing services are provided as previously.
Example 2: Adam rents an apartment from Anna for 1000 PLN. Anna rents an apartment from Adam for 1000 PLN. Finally they decide to exchange apartments ...
Example 3: Anna rents an apartment from the owner. Then decides to buy that apartment ...
Own goods and services consumed by households
Goods included, services (also services provided to other households free of charge) not included.
Exception: housing services Why goods included?
In developing countries farmers consume much of their own production...
...as well as produce their own tools, houses, clothes Why services not included?
Avoid too many imputations, some of them difficult
Household services: difficulties of imputation
What imputed price of meal preparation for the family?
Based on fast-food worker salary?
Based on top-chef salary?
Replacement cost versus opportunity cost approach. E.g. cleaning the house:
Replacement cost: what would be the cost if I hired someone to clean my house?
Opportunity cost: what would I earn if I devoted the same time for my regular job?
Joint production problem: e.g. cooking and babysitting simultaneously
In conclusion - including services would lead to too many ’invented’
Illustration of the valuation issue
General government services
Government services provided on collective (e.g. defence,
administration, scientific research) or individual basis (e.g. education, health care)
Most provided free of charge
Value of non-market output conventionally measured as sum of production costs, including:
intermediate consumption compensation of employees
consumption of fixed capital (utilization cost of equipment)
Illegal and underground economy
In principle, both illegal, and legal but illegally conducted activities are within the production frontier
In practice, often there are no estimates of illegal activities – but increasingly being included in GDP
Underground (‘black’, ‘grey’, ‘hidden’, ‘unofficial’, ‘shadow’) economy included in GDP
How is underground economy assessed? Official investigations and socio-economic research
Official GUS estimates for Poland, 2015:
Total unobserved economy: 13.5% of GDP Grey economy: 13.2% of GDP
Shadow economy estimates by Friedrich Schneider
Classification of activities
ISIC: International Standard Industrial Classification of All Economic Activities
NACE (Nomenclature statistique des activit´es ´economiques dans la Communaut´e europ´eenne): Statistical Classification of Economic Activities in the European Community
Currently ISIC Rev. 4, NACE Rev. 2
Poland: PKD (Polska Klasyfikacja Dzia lalno´sci) 2007
Value added by industry
Value added by industry cont.
Other special cases of output measurement
Banking Insurance
Tasks for next lecture
Explain FISIM + exercise 5
Exercise 3 & 4 (+ explaining terms) Exercise 6 & 7 (+ explaining terms)
Final uses of the GDP
Final demand consists of:
Domestic final demand
Household consumption expenditure
General government consumption expenditure (NPISH consumption expenditure)
Gross fixed capital formation (investment) External demand (exports)
Final uses of the GDP cont.
Economists concerned with changes in final demand components (in real terms) when preparing short term GDP forecasts and explaining short term GDP changes
Net exports = Exports - imports
Chapter 5 looks at what is contained in each of the components of final uses
“Final uses”
“Uses” – uses of resources placed on the market output
imports
withdrawals from inventories
“Final”
Uses of resources either intermediate or final
Intermediate – goods and services consumed (used-up, transformed) in a production process during the accounting period (a year)
Final uses – all other goods and services
Not the nature of a good or service determines whether it is intermediate or final
Consumption – some points
Household consumption treated as final (except dwellings) because large part used-up during accounting period
even if not – still not used in production process
by convention even durable goods treated as consumption Government consumption
in many cases it is justified to treat it as final (education, health services)
but some services – defence, road maintanence, administration – in fact has some features of intermediate consumption – in some way it contributes to production process of the economy
but it would be difficult to allocate such uses among producers therefore treated as final by convention
Further points – investment and exports
Gross fixed captal formation used in production
but not being used-up in one year – therefore final Exports
Final – from the point of view of exporting country
Conclusion: to some extent conventions are used when distinguishing between final and intermediate uses
Household final consumption expenditure
1 Purchases of goods and services used by households to meet their everyday needs
2 Partial payments for goods and services provided by general government
3 Payments to general government for various types of licences and permits when made in exchange for a genuine service (e.g. issueing a passport)
Household consumption expenditure – special cases
1 Purchases of dwellings treated not as consumption, but as gross fixed capital formation (investment to obtain housing services in the future)
2 Unincorporated enterprises included in the household sector – then spending intended for the use in production process treated as intermediate consumption (or investment)
3 Purchases made on credit are split – e.g. a part being a purchase of a notebook, part being a purchase of financial service, and part as interest payment – interest excluded from household consumption expenditure (relates to income distribution)
Household consumption – imputed expenditure
1 Owner-occupiers’ imputed rents
2 Own account consumption – consumption of goods produced by people for themselves
3 Income in kind – goods and services received free of charge or at very low price (e.g. railway workers travel for free etc.)
4 Consumption of financial services indirectly measured (FISIM)
5 Purchases made on credit are split – e.g. a part being a purchase of a notebook, part being a purchase of financial service, and part as interest payment – interest excluded from household consumption expenditure (relates to income distribution)
Progress so far
Lecture 1
Macro aggregates and fundamental relationships GDP meaning
GDP growth decomposition Lecture 2
Volume-price breakdown
Interpreting volume changes (quantity & quality) – the cars example Calculating constant-price values
Progress so far – cont.
Lecture 3
Measuring price changes of goods that did not exist in previous periods – hedonic price indices (example of a smartphone with 4K video) Why chained volumes preferred to constant-price
(Laspeyres-index-based) values – example of the first cell-phones costing as much as a small car
Calculating chained volumes Non-additivity of chained accounts
Progress so far – cont.
Lecture 4
Production frontier – what is treated as production, what is not in national accounts (production decision tree)
Imputation – e.g. imputet housing rents Illegal and underground economy Activity classifications
Special cases of output measurement (stocks, banking, insurance, distribution)
Lecture 5
Final uses of GDP – why “uses”, why “final”
Intermediate use versus fixed capital formation Conventions and special cases
Lectures 6-7: the household account
Household definition and economic functions
Formulating and interpreting the sequence of accounts Example case of a farmers’ household
Actual household accounts for Poland, 2016 See Chapter 6 of the UNA book
What is a household?
UNA: “a group of people collectively taking responsibility to feed and house themselves”
Mostly families
But also “institutional households”
armed forces living in barracks prisoners living in prison monks living in monastery etc.
Two roles of households
Consumers
Producers – unincorporated enterprises (small family firms) In Poland this includes civil partnerships and sole proprietorships employing up to 9 persons
In principle possible to separate the two functions, but may be difficult in practice
In some countries the NPISH (Non-Profit Institutions Serving Households) accounts are linked with household accounts
NPISH serve households and are mostly financed by households Typically a relatively small sector
Three key indicators of the household accounts according to UNA
Disposable income
Final consumption expenditure Savings
Can be understood within the sequence of accounts
The sequence of accounts
Production account
Generation of income account
Allocation (distribution) of primary income account Secondary distribution of income account
Use of disposable income account
(Use of adjusted disposable income account) Capital account
The structure of T-accounts
Uses Resources
... ...
... ...
Balancing item
Uses = Expenditure = Paid Resources = Revenue = Received
Production account
Think of a farmer’s household
Produces crops worth 3000e, 100e of which is not sold (forms stocks)
Uses fertilizers worth 500e
Consumption of fixed capital amounts to 300e
Note: distinguishing between gross and net value added (etc.)
Generation of income account
The farmer hires employees and pays them 700e Pays 40e of property tax on land
Receives 900e as subsidies to agricultural production from the EU Note: mixed income versus operating surplus – distinguishing between capital and labour income of firm owner
Allocation of primary income account
The household pays 20e of interest on loan Receive 200e from land lease
One household member additionally employed at school, receives compensation (salary) of 1200e
Other property income: dividends from stocks, 70e
Note: balance of primary income records income closely related to production
Secondary distribution of income account
The household pays income taxes of 250e Pays social contributions of 400e
Pays insurance premiums of 30e
Receives compensation from insurance for a damaged machine, 550e Other property income: dividends from stocks, 70e
One household member receives pension, 600e Receives transfers from family abroad, 180e
Note: balance of primary income records income closely related to production
Use of disposable income account
Consumption expenditure of the household amounts to 1700e The household uses public health care and sends children to public universities – the respective services are worth 750e
Consumption (and disposable income) includes imputed rents “paid”
by owner-occupiers, imputed value of own-produced-and-consumed food, goods and services received by employees as income in kind Consumption excludes i.a. purchases of dwellings
Note: social transfers in kind and parallel accounts (use of adjusted disposable income account)
Capital account
The household purchases machines for crop production, worth 810e Invests 220e in art (paintings)
Note: include change in inventories!
Example – disclaimer
The example is illustrative, but it does not include all types of possible revenue and expenditure types found in reality For a complete picture refer to:
Chapter 6 of the UNA book
The exercise below, based on Eurostat data
Task for the next lecture
Explain pension funds and social security plans. How are the respective contributions/benefits recorded in national accounts?
Provide a numerical example.
Exercise
Setting up the sequence of accounts based on Eurostat data for Poland
See the related Excel file...
ESA2010 manual
Full details on different items found in national accounts data are explained in the European System of Accounts (ESA) manual Items identified by codes http://ec.europa.eu/
eurostat/documents/
3859598/5925693/
KS-02-13-269-EN.PDF Can be used as a supplement
Gross versus Net approach
Balancing items in the sequence of accounts, such as:
value added
operating surplus and mixed income balance of primary income
disposable income savings
...can be expressed in gross or net terms
Gross (...) = Net (...) + Consumption of Fixed Capital For example consumption of fixed capital in PL in 2018 in the
household sector was 30572 PLN millions – this is an estimated value of wear and tear (use, depreciation) of fixed assets, such as buildings, machines, cars etc. utilized in production activities by households
Remarks: Production and income generation accounts
Only relate to production activity by households
Unincorporated enterprises (“small business”) included in the household sector
But also dwelling owners “produce” housing services...
some households may produce goods (e.g. food) for their own needs
Remarks: allocation of primary income account
Refer to incomes acquired from involvement in production process Direct: Work, running a business (compensation of employees, mixed income and operating surplus)
Indirect: Ownership of assets (property income: dividends, rents, interest etc.)
“Distributed income of corporations”: firms run by households that employ more than 9 workers, are included in the corporate (rather than household) sector; this item shows the owner’s income (which for firms employing 9 and less workers is reported under gross operating surplus and mixed income)
“Rents”: “rent is the income receivable by the owner of a natural resource for putting the natural resource at the disposal of another
Remarks: secondary distribution of income account
Shows different types of current transfers
“Miscellaneous current transfers” include, among other things
Remarks: capital account
“Capital transfers” include capital taxes, investment grants and other capital transfers
GFCF includes purchases of fixed assets by households for business uses; the exception is investment in dwellings which also includes private dwellings
Valuables: e.g. precious metals, antiques, works of art
Non-produced, non-financial assets: e.g. land, mineral deposits, patents, copyrights
“Net lending(+)/net borrowing(-)” – also called “financial saving”
Task for the next lecture
Calculate, present (in graphs) and discuss the following indicators for Poland and the EU (as a whole), for the last 10 available years, based on Eurostat data:
Household net savings ratio
Share of household net savings in total savings of the economy Net lending(+)/net borrowing(-) of households as a share of GDP
General government subsectors
Central government
(State government: Belgium, Germany, Spain, Austria, Switzerland) Local government
Social security funds
General government accounts: main indicators
Authors of “Understanding National Accounts...” point to four major public finance indicators:
Taxes and compulsory social contributions General government expenditure
General government deficit General government debt
Taxes on products
Value added tax (VAT) Import duty
Excise duties
fuels, spirits, beer, wine, tobacco, electricity, cars, lubricants, coal products, gas products, fuel fee etc.
Stamp duty
Taxes on financial and capital transactions Taxes on civil-law transactions
Transportation levy
Taxes on lotteries, gambling and betting Sugar levy
Other taxes on production
Real estate tax
Tax on means of transport
Payments made by companies to the National Fund for Rehabilitation of Disabled Persons
Payments to the Fund of Guaranteed Employees’ Benefits Business and professional licences
permissions on sale of alcohol, licences on energy production, permissions to use frequencies in broadcasting, payments to Bank Guarantee Fund and Insurance Guarantee Fund, payments for public broadcasting, and other
Other taxes on production - continued
Levies on environmental exploitation Emission allowances
Fees for removal of trees and shrubs
Payments to the National Fund for Environmental Protection and Water Management
Payments to Film Art Institute
Payments made by lenders to the Borrower Support Fund (from 2016) Tax from certain financial institutions (from 2016)
Taxes on income
Personal Income Tax (PIT)
from employed labour, from self-employed labour, from social transfers and social benefits, from capital
Corporate Income Tax (CIT)
Tax on winnings from lottery, gambling and mutual bets
Capital taxes
Inheritance and donation tax
Taxes and social contributions
Taxes and compulsory social contributions make the majority of revenue of the general government sector
Relative shares based on 2016 data for Poland:
60%: taxes
40%: social contributions
Structure of tax revenues, Poland, 2016
Structure government expenditure, Poland, 2016
GG by function (COFOG), Poland, 2016
General government deficit
Deficit = Total expenditure - Total revenue
Equals the negative of “Net lending/borrowing” item in the general government sector account
GG deficit as % of GDP:
Public debt
Debt(t) = Debt(t-1) + Deficit(t) [+ revaluations - cancellations]
where Debt(t) is end of year public debt in time t
So if a country constantly runs deficits, the public debt is always increasing
Public debt implies a cost – interest on debt (PLN 31.7 billions in 2016)
Interest on public debt as % of GDP:
How is constant borrowing sustainable?
Debt servicing possible thanks to economic growth and inflation Public debt as % of GDP:
Source: Own calculations based on AMECO
However, a slowdown might lead to snowball effect
