National accounts:
Part 2
MEASUREMENT ECONOMICS
ECON 4700
This chapter
• Principle components of the SNA
– Income and expenditure accounts
– Input-output tables
– Financial Flows and national balance
sheet accounts
– Balance of payments
2
Common features and
concepts
• The system portrays the:
– “what we do”
– “how we do it”
– “where we’ve been”
• of economic transaction
• It unlocks the door to understanding
much about the economic standards
and lifestyles of the population.
3
Common features and
concepts
• Two key concepts dominate in the
system of accounts:
– For the I-O and IE accounts it is
production.
– For the financial flow and balance sheet
accounts it is financing and wealth
accumulation.
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Common features and concepts:
recurring concepts and themes
• Production: Production (or economic activity)
is at the heart of the of the SNA.
• It defines the production boundary of the
accounts.
• Broad view: SNA would include the value of
unpaid work
• Narrow view: Would exclude all non-monetary
transaction.
• Controversies will be dealt with later.
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Common features and concepts:
recurring concepts and themes
• Production: in the Canadian SNA
production is recognized as being
largely made up of goods and services
produced and exchanged for money
(i.e., the market or money exchange
economy).
6
Common features and concepts:
recurring concepts and themes
• Two exceptions:
– Illegal activities fall within the accepted
conceptual boundary of production. They are by
convention excluded from the Canadian CPI
because of difficulty at arriving at a reliable
statistical estimate.
• 1.4% of GDP
• 100% of GDP
– Illegal activities vs. legal money exchange
economy that has gone underground to avoid
taxes.
– Last one is not serious in Canada.
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Common features and concepts:
recurring concepts and themes
In principle, GDP includes all production, without
regard to its legality. In practice, illegal activities such
as the sale of narcotics, although deemed productive
in an economic sense in that they satisfy a demand
expressed on the market, are left out of official
statistics because there is no way of measuring them
with sufficient reliability. The official GDP thus refers,
by and large, to legal production. Other criminal
activities such as robbery or extortion are a transfer
of wealth from one person or group to another. They
are not productive and do not enter GDP at all.
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Common features and concepts:
recurring concepts and themes
• By excluding illegal activities from GDP, the
production boundary is contracted.
• In other cases, the production boundary is expanded
beyond the money exchange economy when non
market activities which parallel market activities are
included in the definition of production.
– Owner-Occupied Housing: No payment involved for the
rental of the dwelling but there is a value in the services
provided that is equivalent to the net income that could have
been derived from renting the property commercially.
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Common features and concepts:
recurring concepts and themes
• Other imputations:
– Own account production
– Food provided to employees instead of wages
– Other income in-kind: lodging provided to hotel
staff, camp workers, and domestic servants.
– Services rendered by banks and other financial
institutions for which there is no explicit charge.
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Common features and concepts:
recurring concepts and themes
• Gross and Net: Production may be measured on a
gross or net basis depending upon whether before or
after allowance for capital consumption.
• These allowances are changes against production
that cover depreciation or the using-up of fixed capital
in the process of production.
• Net production recognizes that part of current output
is required to replace depreciating fixed durable
goods.
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Common features and concepts:
recurring concepts and themes
• National and Domestic: The national concepts
relates to activities of residents of a country and the
domestic concept to activities occurring within the
geographical boundaries of a country.
• Market price and factor cost: Two levels of
valuation are are frequently referred to in the SNA:
Market price and factor cost. The two concepts are
designed to meet different needs.
12
Common features and concepts:
recurring concepts and themes
• Market price: Includes that broad spectrum of
taxes on expenditures (i.e., indirect taxes). The basic
difference between direct and indirect taxes in
national accounting is whether the tax is levied on
income received by a factor of production or whether
it is considered a cost. Indirect taxes that are
embodied in the market price are sales, property and
excise taxes, and custom duties. Market price
valuation is more appropriately applied to final
demand analysis where the relevant variable is the
final price paid by the purchaser.
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Common features and concepts:
recurring concepts and themes
• Factor cost: represents the sum of
incomes of factors of production as measured
by the cost of labour and capital inputs in the
production process. Direct taxes levied on
incomes are a part of the factor cost valuation
as incomes are measured before tax
deductions. The factor cost concept is is
regarded as most useful for the analysis of
production.
14
Important definition
• Gross Domestic Product or GDP can
be defined as the market value of all
production for final demand within a
given country for a given period. GDP is
the most comprehensive of output
measures.
15
Important definition (cont’d)
• Production for final demand means production of
goods and services that will not be used for further
production in the same country and during the same
time period. Thus spending by households for the
goods they will use at home is final demand i.e. the
goods the household buys will not be used to
produce other goods and services. Similarly,
investment by business is part of final demand as
investment goods are durable and will not be used up
within the same time period.
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Income and expenditure
accounts
• Income and expenditure accounts, as the name
suggests focus on income generated by productive
activity and final consumption on that production.
• The main tables are designed to show the principal
components of final demand and the main types of
income arising from production.
• They yield the same GDP.
• IEA are the most widely used component of the SNA
• First published in the latter half of the 40s.
• In 1952, historical period, 1926-50 were published.
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Income and expenditure
accounts
• The major contribution of the IEA is in tracing
the impact of production through four broad
sectors of the economy:
–
–
–
–
Persons and unincorporated businesses
Government
Corporate and government business enterprises
Non-residents
• Grouped in such a way that each entity is
expected to behave in a similar way.
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Aggregates associated with IEA
•
GDP Income based
•
GDP Expenditure based
•
Wages, salaries, and supplementary
labour income
Corporation profit before taxes
Interest and miscellaneous investment
income
Accrued net income of farm operators
Net income of non-farm
unincorporated businesses
Inventory valuation adjustment
Net domestic income at factor cost
Indirect taxes less subsidies
Capital consumption allowance
Statistical discrepancy
GDP at market price
•
Personal expenditure on goods and
services
Government current expenditure on
goods and services
Government investment
– Fixed capital
– Inventories
Exports of goods and services
Deduct: Imports of goods and services
Statistical discrepancy
GDP at market price
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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Aggregates associated with IEA
• Net national and domestic income: National
income is defined as the sum of all incomes of
residents in a country arising as a result of the
current production of goods and services; some of
the income is generated abroad. Domestic income is
defined as the sum of all incomes derived from the
economic activity taking place within the geographical
boundary of the country; some of that income is
generated by non-residents.
20
Aggregates associated with IEA
• Personal income: Sum of all income of resident persons from
productive services rendered plus all transfer incomes from
government, business and non resident sector. The main
component is labour income. The other components are:
–
–
–
–
net income of unincorporated business
Interest
Dividends
Other investment income.
• Personal income is measured before tax deductions and
contributions to social security schemes paid by employees.
• Included are incomes of Universities, Labour Unions
Professional organizations, etc.
21
Aggregates associated with IEA
• Personal disposable income: Personal income
minus :
– Direct taxes
– Licences and permit costs paid to government including
hospital and medical insurance premiums paid under
publicly operated plans.
• Personal disposable income is equal personal
expenditure on goods and services and transfers to
business and non-residents plus personal savings.
22
Aggregates associated with IEA
• Final Domestic Demand: Measures personal
expenditure on goods and services, government
current expenditure on goods and services, and
business and government investment in fixed capital.
• It differs from GDP by excluding investment in
inventories and exports of goods and services. It
includes the import content of the measured
variables.
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Definitions of the sectors
• Persons and unincorporated businesses: Includes
– Net income of self-employed or unincorporated businesses
– Private non commercial institutions serving persons
•
•
•
•
•
•
Labour unions
Universities
Religious institutions
Charities
Professional associations
Social clubs
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Definitions of the sectors
• Government Sector: The sector covers a broad range of
activities carried out directly by the various levels of government
or their agencies. The essential characteristic of these activities
is that are non commercial in nature. It covers three main group
of activities:
– The departments of the three levels of government
• Defence, national security, provision of health, education, etc.
– Schemes administered by public authorities for the purpose of
providing social security services.
• Canada pension plan, workers’ compensation.
– Agencies, commissions, and boards financed from public funds
• National research council, National Film Board, NCC
25
Definitions of the sectors
• Corporate and government business sector: The
sector covers privately controlled corporate
enterprises together with government business
enterprises
• Non-resident sector: The sector includes all
transactions of non-residents with Canadian
residents.
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Definitions of main transaction
categories
•
•
What we find here are income flows and other charges against production, as
well as the major demand components of GDP.
A) Wages, salaries and, and supplementary labour income: all earnings from
employment of Canadian residents including payments in kind such as free
board and lodging.
–
–
–
–
–
–
Commissions
Bonuses
Tips, vacation and sick leave
Does not include: income from self employment, income from independent professional
practice or income from farmers
They are estimated before deductions such as taxes, and contributions to EI, and
pensions.
Supplementary income = expenditures by employers that can be regarded as peyment
for an employee’s services: employers’ contribution to pension fund, EI, and workers
compensation.
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Definitions of main transaction
categories
•
B) Corporation profit before taxes: Net earning from economic activity from privately
held corporations.
•
•
•
Represents the share of these corporations in GDP
Measured after deducting for depreciation
Includes gains or losses that arise from the effects of price changes on inventory values.
•
•
•
•
International rules state that given that these gains or losses do not arise as a result of current economic
production and therefore should not influence profits. In Canada, these adjustments are not made directly to
profits but as a separate inventory valuation entry.
Does not include capital gains
Dividends included
C) Interest and miscellaneous income: Measures interest income of persons and
government investment income before deduction of direct taxes.
•
•
•
Bond and mortgage interest
Paid and imputed interest on deposits with banks.
Excludes interest on public dept since it is regarded as a transfer and not a productive service.
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Definitions of main transaction
categories
•
•
Demand components of the expenditure based estimates of GDP
A) Personal expenditure on consumer goods and services (C) includes:
•
•
•
•
•
•
•
Outlays on all new goods and services except the purchase of a dwelling.
Commissions of dealers’ margins on used goods.
Purchases of used imports and from the business sector
Imputed rents
Spending by Canadians temporarily abroad but excluded are expenditures by foreign residents
temporarily in Canada are excluded.
Expenditures considered business costs
B) Government current expenditure on goods and services includes:
•
•
•
•
•
Outlays of all three levels of government
Locally administered elementary and secondary school systems and government administered
hospital care services.
All general operating expenses including wages and salaries, office supplies and repair and
maintenance costs.
Expenditures for military equipment and defence installations are not capitalized but appear as
current outlays.
Total government outlays much larger than this component because of transfers such as interest
on public debt, subsidies to producers, etc.
29
Definitions of main transaction
categories
•
•
Demand components of the expenditure based estimates of GDP
C) Investment in fixed capital: Business and government investment in fixed
capital is defined in broad terms to include the production of physical
productive assets that yield a service in the future (e.g., factories, dwellings
and machinery), i.e.,it is that part of final expenditure not consumed, exported
or added to inventories during the accounting period. Included:
•
•
•
•
•
New durable tangible assets with a life time use of one year or more.
Alterations and improvements to existing stock which extend the life of the asset
beyond that originally anticipated are treated as fixed capital but not regular repairs
and maintenance.
Consumer durable goods not investment.
D) Inventories
E) Imports and Exports
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Uses of IEA
• Uses fall into three categories:
– Analysis: discover key variables and relationships suggested
by theory
– Forecasting: short term and long term projections of the
growth of the Canadian economy.
– Policy: Implications of policy change such a change in farm
subsidies on farm income or a change in interest rates on
GDP and C.
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end
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