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International Workshop on
Measuring GDP by Final Demand Approach
Shenzhen, China
25-27 April 2011
Measurement of GDP by final expenditure approach: an
introduction
Vu Quang Viet
Background paper
Chapter 4 of GDP by production approach: A general introduction with emphasis on an integrated economic data collection framework
DEPARTMENT OF ECONOMIC AND
SOCIAL AFFAIRS
STATISTICS DIVISION
UNITED NATIONS
NATIONAL BUREAU OF
STATISTICS OF CHINA
__________________________________________________________________________
Table of Contents
- Chapter 4. Measurement of final expenditures
- A. Final consumption expenditures
- B. Exports and imports of goods and services
- C. Gross capital formation
- D. Capitalization of own-account capital formation: an example
- E. Estimation of gross capital formation
- F. Estimation of consumption of fixed capital
- net saving and net value added G. Relationship between consumption of fixed capital, net capital formation,
i) Explicit and imputed service charges on household uses of financial intermediation services provided by banks, insurance companies, pension funds, etc.
Table 4.1. Allocation of government expenditure to government final consumption expenditure
Expenditures on current goods and services Government final expenditure
1. As non-market output of government less sales (see also table 3.6) Expenditures to produce non-market individual goods and services less sales for delivery free of charge or at insignificant prices to households such as education, health services, sports and recreation, culture, provision of housing services, collection of household refuse, operation of public transport, etc.
Government individual final consumption expenditure
Expenditure to produce non-market collective goods and services for general administration, national defense, security and other common benefits to the community as a whole.
Government collective final consumption expenditure
2. As social benefit in kind Reimbursements from government’s social security funds to households on specified goods and services bought by households on the market;
Other social security benefits in kind except reimbursements: This includes goods and services which are not produced by the government sector but bought and distributed free or almost free to households under the social security funds (any payment by household must be deducted);
Social assistance benefits in kind: This includes goods and services similar to other social security benefits but not under social security schemes.
Part of government final consumption expenditure
**3. Expenditures on of capital goods Government capital formation
- Other expenditures Uses in income and capital** accounts
- Payment for social security, foreign assistance for current expenditures, etc.
- Interest payments on debts
- Re-payment of principle on debts
- Current transfers
- Property income
- Financial transactions
4.5 Included in the final consumption expenditure of general government and non-profit institutions serving households are:
a) Non-market output other than own-account capital formation, which is measured by production costs less incidental sales of government output (own-account capital formation is treated as government output and consumed as capital formation) ;
b) Expenditure on market goods and services that are supplied without transformation and free of charge to households (called by the SNA as social transfers in kind).
4.6 Practically, the compilation of government final consumption expenditure is based on the classification of data from actual consolidated annual budgets of all levels of the government (i.e. central, state and local governments) to appropriate national accounts concepts. Data on actual government expenditures are however not normally available at the end of the year, thus government expenditures must be estimated on the basis of budgeted expenditures using some relationships (simple ratios for example) between actual and budgeted expenditures in the past. Estimates of government output and final consumption expenditure will have to be revised when actual data is available.
B. Exports and imports of goods and services
Definition
4.7 Exports and imports between the domestic economy and the rest of the world are transactions between residents and non-residents of an economic territory (see figure 2.4).
4.8 A transaction of goods and services (sales, barter, gifts) from residents to non-residents is an export and from non-residents to residents is an import. From this definition, purchases of goods and services by non-resident tourists in the country are treated as exports and purchases of goods and services by resident tourists outside of the country are treated as imports.
4.9 Exports and imports exclude all transactions in land, buildings and non- movable non- produced assets, and in financial assets (stocks, bonds, money, monetary gold, etc.) The SNA takes an exception rule on land, buildings and non- movable non-produced assets since they are still used for production purposes in the domestic economy. Financial assets are neither goods nor services.
4.10 Exports and imports occur when there are changes of ownership between residents and non-residents regardless of whether there are corresponding physical movements of goods across borders). However there are three exceptions that require imputation of changes of ownership: (i) financial leasing; (2) deliveries between affiliated enterprises; and (iii) goods sent for significant
4.17 Exports are valued f.o.b. (free on board), i.e. at the prices at the domestic customs frontier before being shipped out. They should be, by definition, equivalent to purchasers' prices since they include domestic transport, and trade costs to bring the good to the ports, and also include taxes less subsidies on products paid by the purchasers or received by the producers.
4.18 Imports must also be valued f.o.b. (free on board), but in this case they are valued at the prices at the foreign custom frontier.
4.19 Imports are normally valued c.i.f. (i.e. including insurance and freight costs) at the domestic custom frontier by customs. To derive imports f.o.b., cost of freight and insurance services between the two borders must be estimated and deducted from imports c.i.f. Freight and insurance services on imports may be provided by either residents or non-residents. Those provided by non-residents are imports but those provided by residents are domestic output. Imports f.o.b. avoid counting domestic output as imports and avoid double counting imported freight and insurance services, as they are already included in data on imports of services.
Estimation
4.20 Instructions on preparing balance of payments published by the IMF provide details on methods to prepare exports and imports. 1 Foreign trade statistics that reflects official merchandise trade across borders recorded by customs is the main source of data for exports and imports. However, in general, it does not cover:
a) Imports and exports through smuggling particularly for countries with land borders with other countries; b) Exports of fish and purchases of oil on the high seas; c) Imports and exports of military goods by government that are often not recorded; d) Imports and exports of services paid through the banking system, from postal, telephone, electricity, transport, hotels, consultancy services, electronic trade in services, financial and insurance services, etc.
4.21 Items (a) to (b) may be based on certain benchmark studies and in the absence of any additional information may be assumed to change over time in the same way exports and imports of merchandise change for years between benchmark years.
4.22 Items (c) may be obtainable only from government, even though some time they may be obtained from trade statistics of the country trade counterpart. Items in (d) can be obtainable from the Central Bank which collects data from banks under its supervision, from postal, telephone, electric, airlines, transport and shipping, insurance and financial companies that do business across borders.
C. Gross capital formation
(^1) IMF, Balance of Payments Manual. Free electronic document: http://www.imf.org/external/pubs/ft/bopman/bopman.pdf.
4.23 Gross capital formation in the SNA is the same as the concept of investment in capital goods used by economists. It includes only produced capital goods (machinery, buildings, roads, artistic originals, etc.) and improvements to non-produced assets. Gross capital formation measures the additions to the capital stock of buildings, equipment and inventories, i.e. the additions to the capacity to produce more goods and income in the future.
4.24 Non-produced assets such as land, natural resources, patented entities may also be used as capital in an establishment or enterprise or the whole economy but they are not part of the gross capital formation in the SNA.
4.25 In business accounting, investment in capital goods may include acquisitions less disposals of non-produced assets (such as land, mineral resources, etc.). At the national level, the inclusion or exclusion of non-produced assets would not affect the value of investment in capital goods, as the sale of a non-produced asset by one economic entity will be offset by a purchase of the same asset by another economic entity.
Common usage of the term “investment”
4.26 In common usage (business and households) the concept of investment is very broad. It includes:
a) Investment in produced and non-produced assets (i.e. patents, goodwill, natural resources); b) Investment in financial assets.
4.27 Gross capital formation which is a major factor in changing the values of non- financial assets in the economy includes (see table 2.3 for the classification of assets and the effects of gross capital formation on assets):
a) Gross fixed capital formation; b) Changes in inventories; c) Acquisition less disposals of valuables (like jewellery and works of art).
Gross fixed capital formation
4.28 Practically fo r the compilation of gross fixed capital formation, the worksheet that includes assets by types should be used (see table 4.2). This will be discussed later. Conceptually, gross fixed capital formation includes all goods and related services that can be used repeatedly for more than one year to produce other goods and services. It reflects the following types of transactions:
a) Acquisitions less disposals of new or existing produced assets such as dwellings, other building structures, machinery and equipment, cultivated assets (e.g. trees and livestock), mineral exploration, computer software, entertainment, literary or
Produced assets Produced fixed assets Dwellings Other buildings and structures Non-residential buildings Other structures Land improvements Machinery and equipment Transport equipment ICT equipment Other machinery and equipment Weapons systems Cultivated assets Livestock for breeding, dairy, etc. Vineyards, orchards and other plantations Intellectual property products Research and development Mineral exploration and evaluation Computer software and databases Entertainment, literary or artistic originals Other intellectual property products Inventories Materials and supplies Work in progress Finished goods Military goods Goods for resale Acquisitions less disposals of valuables Acquisitions less disposal sof non-produced assets Natural resources Land Subsoil assets Mineral and energy reserves Non-cultivated biological resources Water resources Other natural resources Acquisitions less disposals of contracts, leases and licenses Contracts, leases and licenses Purchase, sale of goodwill and marketing assets
Not applicable
D. Capitalization of own-account capital formation: an example
4.31 Many activities from own-account construction of dwellings, own-account research and development and software development are capitalized by the SNA. This means they are used as fixed assets over a time period longer a year to produce other goods and services. Without being capitalized, the goods and services used to produce them are treated as intermediate consumption and the wages and salaries paid as well as consumption of fixed capital in producing them make up gross value added. The example below will be used to show the necessary imputations in the accounts.
Table 4.1. Account without imputation of own-account capital goods: an example
Output at basic prices 120
Goods and services used in production (^40)
Gross value added at basic prices 80
Other taxes on production 0 Compensation of employees (COE) 60 Consumption of fixed capital (CFC) 10
Net operating surplus 10
Table 4.2. Account with imputation of own -account capital goods: an example
Output after capitalization Original output before capitalization Primary output
Secondary output Output at basic prices 120 120 11 Goods and services used in production 40 38 2
Gross value added at basic prices 80 82 9 Other taxes on production 0 0 0 Compensation of employees (COE) 60 52 8 Consumption of fixed capital (CFC) 10 9 1 Net operating surplus (^) 10 21 0
Cost of own-account R&D: 11
- Goods and services: 2
- COE: 8
- CFC: 1
Domestic production Imports^ Exports^
Gross capital Types of non-financial assets formation (1) (2) (3) (4) = (1) + (2) – (3) Produced assets Produced fixed assets Dwellings Other buildings and structures Non-residential buildings Other structures Land improvements Machinery and equipment Transport equipment ICT equipment Other machinery and equipment Weapons systems Cultivated assets Livestock for breeding, dairy, etc. Vineyards, orchards and other plantations Intellectual property products Research and development Mineral exploration and evaluation Computer software and databases Entertainment, literary or artistic originals Other intellectual property products Inventories Materials and supplies Work in progress Finished goods Military goods Goods for resale Acquisitions less disposal of valuables Acquisitions less disposal of non-produced assets Natural resources Land Subsoil assets Mineral and energy reserves Non-cultivated biological resources Water resources Other natural resources Acquisitions less disposals of contracts, leases and licenses Contracts, leases and licenses Purchase, sale of goodwill and marketing assets
4.37 Machinery and equipment are obtained from domestic production, which after deducting exports is an important source of data on GCF. Merchandise imports of machinery and equipment would normally identify another important source of supply.
4.38 Weapons system must be based on government sources.
Not applicable
4.39 Cultivated assets are derived from agricultural statistics and the work of national accountants on agriculture.
4.40 Intellectual property relies on industrial surveys and imputation of data by national accountants particularly with data on employment to be used for estimation or extrapolation.
4.41 Data on inventories must rely on industrial and distributive trade surveys. Most countries focus mainly on inventories kept by major industrial producers and enterprises involved in distributive trade, and national strategic inventories of important commodities such as petroleum, rice, and wheat that are kept by government.
F. Estimation of consumption of fixed capital
4.42 Special characteristics of consumption of fixed capital include:
a) Consumption of fixed capital is a cost of production. It measures the decline in the current values of the stock of fixed assets owned and used by producers as a result of physical deterioration, normal obsolescence and normal accidental damages during the accounting period;
b) Thus, consumption of fixed capital can be measured directly or indirectly. The direct method is through surveys of produced fixed assets at market at two consecutive periods and then calculating the decline in the market values of the stock of fixed assets. The indirect method recommended by the SNA is the perpetual inventory method, which is an approximation of market valuation and less costly to implement. Depreciation in business accounting is not acceptable in national accounting since it is based on historical book values;
c) The example below shows the difference between depreciation used in business accounting and consumption of fixed capital, which is the economic concept adopted by the SNA.
o The next step is to derive consumption of fixed capital and net capital stock at current market values by using the price ind ices.
- As can be seen in table 4.4.(2), the calculation of the consumption of fixed capital of one fixed asset with a 4-year lifetime at time T requires data on gross capital formation of that kind of asset from year T-3 on. The consumption of fixed capital of buildings with 30- year lifetime at the present time will require data on annual gross capital formation of buildings of the same kind for 30 years before that. Thus, the calculation of consumption of fixed capital requires long time-series of data on gross capital formation, their average service life and their probability of retirement. In practice, the compilation of net capital stock and the calculation of consumption of fixed capital require a combination of obtaining an initial benchmark estimate of capital stock (by survey) and series of gross capital formation statistics.
- The simple method shown in table 4.4 omits the effects of asset mortality, i.e. how assets are retired around the average service life especially when there is more than one fixed asset of the same kind. The assumption of a straight- line depreciation may need to be replaced by a more realistic assumption that is appropriate for each kind of assets as some depreciate quickly at the beginning and slowly at the end of its service life, while the opposite is true for others.
- For more detailed information on the perpetual inventory method, readers are advised to read chapter 8 of the handbook, Links Between National Accounting and Business Accounting (United Nations, ST/ESA/STAT/SER.F/F76) or Measuring of Capital: A Manual on the Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services (OECD).
G. Relationship between consumption of fixed capital, net capital
formation, net saving and net value added
4.43. Gross capital formation is the actual investment expense to increase stocks of non- financial assets. However, part of it is to replace the fixed assets that are used up in production. The using up of fixed assets is reflected in physical deterioration, normal obsolescence or normal accidental damages. Thus the economic increase in fixed assets is net capital formation, which equals gross capital formation less consumption of fixed capital. Correspondingly, net value added and net saving are calculated by subtracting consumption of fixed capital from gross value added and gross saving. .
