COMMENTS ON THE NBS PAPER
“Accounting Methods of China’s Annual Expenditure-Based GDP”
Ramesh Kolli1
Additional Director General
Ministry of Statistics and Programme Implementation, India
Introduction
The expenditure based GDP estimates are compiled in China both at national and
regional levels. These follow largely the 1993 SNA concepts. A long-term data
series on expenditure based GDP is apparently available from 1978 for China.
It is important that GDP is compiled by all the three approaches, namely,
production, income and expenditure and preferably through supply-use
framework. The expenditure GDP assumes more importance as it depicts the
final uses of output in terms of consumption, capital formation and net exports. In
this context, the compilation of expenditure GDP estimates by the NBS is in line
with the best practices of compiling national accounts.
At regional level, it is generally difficult to compile expenditure based domestic
product estimates, due to the problems in the availability of data on exports and
imports, as also on the inter-region movement of goods and services within the
country. It will be interesting to know the procedures adopted by the NBS to
overcome these data issues in compiling regional level expenditure based GDP
estimates.
In India, regional domestic product estimates (known as state domestic product or
SDP), are compiled by following the income originating approach, which is similar
to the production approach GDP at the national level. This method provides
estimates of domestic product at regional level by economic activity.
Consequently, since expenditure based GDP is not compiled at regional level in
India due to the lack of data on imports and exports, estimates of consumption
expenditure, capital formation and net exports are not available at regional level
from the national/regional accounts.
I. The frame and classification of expenditure-based GDP accounting
The framework and classification adopted to compile the annual GDP by
expenditure approach in the NBS is as per the standard procedures. However,
under the final consumption expenditure, the NPISH part has not been shown.
Apparently, the NBS considers that most of the NPIs in China are either serving
government or businesses and the actual contribution of NPISHs is relatively
insignificant. However, in most developing countries, the NPISH is an important
institution. A small sample survey of few registered charity units could provide
some base line estimates. India is presently conducting a census of all NPIs,
which includes preparation of a register of all the NPIs in India and collecting
financial data from the functioning NPIs. The overall objective of this census is to
implement the UN Handbook on NPIs, and provide separate accounts of NPISHs
1
Views expressed are the personal views of author
2
in the national accounts. These objectives are expected to be achieved by
December 2010.
The third-class classification adopted for household consumption expenditure by
the NBS broadly conforms to COICOP classification. It is not clear from the paper
whether the NBS is adopting the COFOG classification for the government final
consumption expenditure or not. Presenting general government expenditures by
COFOG is important for understanding the purposes for which the expenditures
are incurred. In India, a two-way classification of government expenditures is
presented, namely, by purpose and by economic.
The manner in which the estimates of GFCF are prepared by the NBS is quite
elaborate and takes care of all conceptual issues. Few areas of improvement
could be (i) the procedures to estimate construction appear to be a bit
complicated; (ii) the repair and maintenance part of output of construction should
be subtracted from the output to get to GFCF, the NBS might be doing this, but it
is not clear from the paper, (iii) under Gross fixed capital formation, the number
of assets appeared to be too broad, particularly for the machinery and equipment
part. Perhaps, it is desirable to attempt to break this item into few important
assets, such as transport equipment, and (iv) at some stage, the NBS could also
contemplate on including R&D expenditures and military capital expenditures
which can be used by civilians under GFCF and valuables in the GCF.
In respect of change in inventories, the methods followed by the NBS are
apparently to inflate the current year’s opening stock to the level of current year’s
closing stock and then to take the difference. The practice followed in India is to
bring all inventories of various years to constant prices, then take the difference to
get to the change in inventories at constant prices and then inflate this to obtain
the estimated change in stocks at current prices. However, this procedure needs
adjustment to the data on inventories provided by the businesses to the prevailing
market values, as businesses normally provide data on inventories normally at
costs or at realisable values, rather than at the prevailing market value.
The data on imports and exports appear to be single entries in the expenditure
GDP. These could be considered for presentation in terms of goods and services
separately.
The NBS may also plan to building up a capital stock data series from the
available data on GFCF using the PIM. This would enable them to switch over
from ‘depreciation’ to ‘consumption of fixed capital’ There are procedures
available for building up opening stock figures prior to the year for which
estimates of GFCF are available. Alternatively, one could attempt to estimate
opening capital stock from the capital output ratios of the first year for which
GFCF data is in place and apply the same on output of the previous year.
However, this needs to be done carefully at very detailed level, by
enterprise/economic activity.
II. Household Consumption Expenditure
The household consumption expenditure is estimated separately for rural and
urban households. The scope and coverage to estimate consumption
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expenditure appear to be as per the standard norms. One comment that can be
made here is with reference to the manner in which the consumption expenditure
is estimated in the NBS, which is to compile directly from the survey results. If the
sources of data for consumption expenditure and output are different, there is a
possibility of mis-match between the data of consumption expenditure and output
in the national accounts, which could lead to a large discrepancy between
production and expenditure GDP. The ideal procedure to obtain consistent
estimates of consumption expenditure (as also other aggregates) is through the
supply-use framework.
In India, private final consumption expenditure (covering both households and
NPISHs) is estimated through commodity-flow approach, starting from the overall
output of each commodity and services and deducting from this, the intermediate
use and all other final uses. In this procedure the under-estimation in
consumption expenditure in survey results is taken care of and the PFCE
esitmates are consistent with overall output estimates.
1. Calculation at current price
Expenditure on food, etc.: The method of compiling is in order. However,
consistency between production and consumption data needs to be ensured, if
they are coming from two different sources. NPISHs consumption expenditure
could be attempted and included.
Expenditure on FISIM: The method of compilation appears to be correct, except
that the forumula of (interest of loans – interest rate of deposits)/2 may be
(interest of loans + interest rate of deposits)/2. A second observation is that
FISIM is normally allocated to industries and final users. The method followed by
NBS is different from this procedure and may give rise to discrepancy between
FISIM of industries and final users and the FISIM shown under financial
intermediation. In India, FISIM from different financial institutions is allocated on
the basis of indicators of deposits and loans, separately in respect of each
financial institution.
Expenditure on insurance services: The formula for estimating this component
appears to provide reliable estimate. However, in general, life insurance and nonlife insurance components need to be treated separately, since expenditures on
these two types of insurance have different purposes. While, premiums on nonlife insurance by households is in the form of consumption expenditure, it is only
the commissions part of life insurance premiums and premium supplements that
constitute consumption expenditure.
Expenditure of owner-occupied dwelling services: The procedure is in order.
However, the standard procedure is to adopt user cost approach if less than 25%
of all dwellings in the country are actually rented. The second observation is that
local taxes, fees if any may also be included in the cost of housing estimates.
Further, it is important to build up capital stock data to estimate consumption of
fixed capital.
Expenditure on other goods and services: NBS estimates this using per capita
expenditure. Although this procedure is appropriate, an alternative option could
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be the commodity flow approach.
2 .Calculation method at constant price
The deflators used here are appropriate. In respect of financial and insurance
services, the implicit price deflator of the output of financial intermediation
services could be an alternative. Another alternative could be the rates of interest
index of deposits and loans.
III. Government consumption expenditure
The coverage of government final consumption expenditure includes central
government, provincial governments, local bodies and autonomous government
institutions. It is presumed that the NBS takes into account the final expenditures
of these institutions of general government, otherwise all these organs of
government should be covered. Most of the local bodies and autonomous
government institutions also generate own resources, besides the current and
capital transfers they receive from the higher level of government.
1. Calculation at current price
The compilation procedure appears to be in order. However, there are two
comments on this:
(i)
pension costs are excluded from the consumption expenditure, which is
correct, as they are transfers. However, the expenditures on wages
and welfare of the government should also include the imputed pension
liabilities of present employees. In India, since this imputed pension
liabilities are not estimated, the actual pension payments are taken to
be equal to the imputed pension liabilities of present set of employees
and added to consumption expenditure of general government.
(ii)
Depreciation estimates need to be in terms of consumption of fixed
capital.
2. Calculation at constant price
The deflator for depreciation is taken to be the Producers’ Prices of Industrial
Products. An alternative to this could be the implicit deflator of GFCF. Similarly,
CPI is used to deflate the other component of GFCE. In India, different price
indices (producer, consumer and implicit industry-wise GDP deflators) are applied
on each component of the GFCE, namely, the compensation of employees and
purchase of goods and services, as also in respect of different Ministries. The
consumer price index is also the wage index in India and is, therefore, applied on
the compensation of employees.
IV. Gross Fixed Capital Formation
The procedure followed for estimating GFCF for construction though conceptually
correct, appears to be somewhat complicated. The GFCF of construction is the
output of construction, minus, repairs and maintenance. The output of
construction is the value of material inputs+value of factor inputs (the gross value
added is the value of factor inputs). The NBS is estimating the value of output in
terms of sales of units, while in India, it is estimated on the basis of value of
available of basic construction materials, other construction materials and the
factor inputs. It is not clear from the paper whether the NBS removes the repair
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and maintenance part of construction output to arrive at GFCF of construction.
The machinery and equipment part of GFCF is estimated by NBS as sum of fixedasset investment (units above 500 thousand RMB Yuan) and investment in fixed
asset below this limit, besides the associated costs. Conceptually and in terms of
coverage, the procedure followed by the NBS is correct. Data is also available
from the sources directly (from enterprises). In India, due to the limitation of
industry-wise data on net acquisition of fixed assets (quality of available data is
poor), the commodity-flow approach is adopted whereby the machinery and
equipment produced and imported (exports and other uses, particularly consumer
durables, subtracted) is taken into account to estimate the GFCF of machinery
and equipment.
In the NBS procedure, two improvements could be suggested, (i) the segregation
of machinery and equipment to few more assets such as transport equipment and
(ii) inclusion of valuables in the GCF. It appears that NBS does not take into
account any part of military capital expenditures (used by civilians) as GFCF,
which could be considered for inclusion in future, though 2008 SNA suggests
capitalising weapons expenditures also. Also, the 2008 SNA treatment of R&D
expenditures as GFCF could also be considered for implementation.
For the constant price estimates, different deflators are used by the NBS, which
seem to be appropriate. In India, a number of specific price indices are compiled
at industry/asset level and used as deflators.
V. Increase in inventories
The title of this section could be change rather than increase in inventories, as it
is change in stocks (could be positive or negative) which is a component of
expenditure GDP.
The definition provided in the paper is conceptually correct, except that when
output is estimated as production*price, finished goods do not form part of
inventories. They become part of inventories when output is estimated as
sales+change in inventories.
NBS updates the inventories at the beginning of the year with relevant price
indexes to bring them to the price levels of the reference year and when this
estimate is subtracted from the inventories at the close of the year, the change in
inventories data is obtained. This is done by industries (and by broad three
groups of institutions, state-owned enterprises, large enterprises and others; it is
presumed that inventories with government and government commercial
undertakings are also taken into account). In India, the inventories of different
years are first brought to the base year prices using relevant price indexes
(generally the producer price indices at detailed level) and the difference between
two successive years’ inventories is estimated as the change in stocks at constant
prices. These estimates are then revalued to the current prices using the same
price indexes. This procedure is followed at each industry/institution level.
In most developing countries, estimating inventories is a problem area,
particularly for the household/informal segment of the economy. Generally,
benchmark estimates are prepared based on benchmark enterprise surveys or
economic census and proxy indicators are used to extrapolate base year
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inventories to other years for the informal sector.
The NBS paper mentions that economic census data is used to estimate the
inventories for smaller enterprises. Apparently the extrapolator for the benchmark
estimates is the retail price indices. In India, the data on short-term credits to the
household industries is used in some cases.
Another problem area in the estimation of inventories is that the businesses report
inventories at ‘cost’ or at realizable value. It is very difficult to estimate these
inventories at current market prices. Only after this, one should apply relevant
deflators to get to the inventories at constant prices
The NBS uses different price indexes to deflate the current price estimates of
change in inventories in respect of different industry groups. The inventories in
some industries (such as industry and trade) are further segmented broadly under
three commodity groups, so that more appropriate deflators could be applied at
commodity/industry level. The procedure is elaborate and in order, but NBS may
consider using deflators on each year’s inventories (at
industry/institution/commodity group) rather than applying deflators directly on
change in inventories.
VI. Net Export of Goods and Services
Current prices: The method of compilation is as per the standards. It appears
that foreign trade data is available only in terms of US dollars, which is converted
into local currency with annual average exchange rate. It is better if the data from
source is available in terms of CNY, rather than in terms of US dollars. Secondly,
NBS compiles import data on FOB basis, which is the standard procedure. Most
countries could present import data on CIF basis only. The sources for goods
and services are respectively the Customs and BOP statistics. There could be
discrepancy in the two sources of data in respect of goods.
Constant prices: The way NBS compiles net exports of goods and services at
constant prices is quite interesting. All the four components of imports/exports
and goods/services are deflated by the respective price indices (presumably the
unit value indices for goods), and then the additions and subtractions are carried
out to obtain net exports of goods and services. These are in terms of US dollars.
The constant price estimates in terms of US dollars are then converted to CNY
using base year annual average exchange rate. The price indices for services
are the services part of CPI for exports and export of services price index for
select countries for import of services. The procedure appears to be in order.
Some questions about expenditure-based GDP raised in NBS paper:
1. Which Deflator should be applied to government consumption
expenditure at constant price?
The government consumption expenditure consists of three components,
compensation of employees, net (receipts netted) purchase of goods and
services and consumption of fixed capital. The three components are needed to
be separately deflated. For compensation of employees in respect of non-market
production, the ideal deflator is the wage index. If this is not available, the CPI
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which is linked to the wages of government employees may be used. For the
goods and services component, the deflators could be the price indices of
different commodities and services to be applied to different Ministries of
government. The CFC is to be estimated ideally through the PIM. Otherwise, the
price indices of fixed assets could be considered.
2. What is the data source to compute gross fixed capital formation
(whether to use the Balance Sheet of government and enterprises)? How to
get and process these data?
The government accounts show normally the acquisition of fixed assets, while the
accounts of enterprises show normally (i) opening stock, purchases, disposals
and closing stock. The GFCF is purchases minus disposals of fixed assets.
However, the value of disposals of fixed assets is generally in terms of book
values. The correct procedure is to take the depreciated value or the realised
value of disposed assets. Normally, the books of accounts of enterprises have
these data. The problem is in respect of smaller enterprises. In order to estimate
their GFCF, in India, we compile the total estimates of GFCF from the supply side
through commodity flow approach and subtract from this the GFCF of
government, government enterprises and corporations.
3. How to compute the change of inventories exactly and comprehensively?
How to estimate the value of inventories at the beginning and the end of the
period?
Normally, the books of accounts show value of inventories at the beginning and
closing of the year. The ideal way to measure the change of inventories is to
bring both these values to the current market values, since the books of accounts
normally show these at ‘costs’ or realisable value, and also since these
inventories enter the production process at current market values. Once the
opening and closing stock figures are brought to the current market values, the
difference of these two would give the ‘change in inventories’ Another alternative
to this is to bring these two values to the constant prices using appropriate price
indexes. The difference between the inventories of two successive years gives
the ‘change in inventories’ at constant prices. This change in inventories is again
inflated with the same price indexes, to get the estimates of change in inventories
at current prices.
For the smaller enterprises, which do not maintain accounts, compiling change in
inventories data is a problem. Normally, using data from economic census or
periodic enterprise surveys, the data on inventories is prepared for a benchmark
year. For other years, indicators (such as output or short term credits or the ratios
of large businesses) are used to extrapolate the inventories. Once a data series
of inventories is prepared, the change in inventories could be estimated both at
current and constant prices.