National accounts: Part 1

1. National accounts:Part 1 Marc Prud’Homme University of Ottawa Last update: 14/09/12

2. Definition • National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. • These include detailed underlying measures that rely on double-entry accounting. • By construction such accounting makes the totals on both sides of an account equal even though they each measure different characteristics, for example production and the income from it.

3. Definition • As a method, the subject is termed national accounting or, more generally, social accounting. • Stated otherwise, national accounts as systems may be distinguished from the economic data associated with those systems. • While sharing many common principles with business accounting, national accounts are based on economic concepts.

4. Definition • National accounting has developed in tandem with macroeconomics from the 1930s with its relation of aggregate demand to total output through interaction of such broad expenditure categories as consumption and investment. • Two of the most important aggregate measures are GDP and GNP. • Estimates of the main aggregates of GDP and GNP are also produced quarterly.

5. Uses • Originating from 17th century war economics and set into its modern framework of the Keynesian macro-economic theory by Richard Stone and Simon Kuznets in the 1930s, the measurement of a country’s income and expenditure has a long history before it was formalized in the present System of National Accounts.

6. Uses • Government, businesses and civil society need to know what progress is being made with specific economic agenda and policies. • This gives rise to the need, not only to monitor progress but also to evaluate whether or not goals are being achieved.

7. Uses • The essence of national accounting is integration: bringing together data on all economic activities from different sources and arranging them in such a way that they present a coherent picture of the whole economy. • This requires the persistent review of basic data sources and their adaptation in using them. • National accounting, to a greater degree than in other branches of statistics, is an art, not a science. • In this regard, it is important to develop a "feel" for the resources and statistics as well as their use under specific circumstances.

8. Uses • National accounts are the source for a multitude of well-known economic indicators. • Gross domestic product (GDP) is the most frequently used measure for the overall size of an economy, while derived indicators such as GDP per capita – for example, in dollars or adjusted for differences in price levels – are widely used for a comparison of living standards. • In Europe, national accounts information is used to monitor the process of convergence across the European Union (EU).

9. Uses • Moreover, the development of specific GDP components and related indicators, such as those for economic output, imports and exports, domestic (private and public) consumption or investments, as well as data on the distribution of income and savings, can give valuable insights into the driving forces in an economy and thus be the basis for the design, monitoring and evaluation of specific economic and social policies.

10. Uses • One of the main uses of national accounts data relates to the need to support economic policy decisions and the achievement of economic and national objectives with high-quality short-term statistics that allow the monitoring of macro-economic developments and the derivation of macro-economic policy advice.

11. Uses • For instance, one of the most basic and long-standing uses of national accounts is to quantify the rate of growth of an economy, in simple terms the growth of GDP. • Core national accounts figures are notably used to develop and monitor macro-economic policies, while detailed national accounts data can also be used to develop sectorial or industrial policies, particularly through an analysis of input-output tables.

12. Uses • Policies within the EU are increasingly setting medium or long-term targets, whether binding or not. • For some of these, the level of GDP is used as a benchmark denominator, for example, setting a target for expenditure on research and development at a level of 3 % of GDP. • National accounts data are also used to determine contributions to other international organisations, such as the United Nations (UN). • Contributions to the UN budget are based on gross national income.

13. Uses • Policies within the EU are increasingly setting medium or long-term targets, whether binding or not. • For some of these, the level of GDP is used as a benchmark denominator, for example, setting a target for expenditure on research and development at a level of 3 % of GDP. • National accounts data are also used to determine contributions to other international organisations, such as the United Nations (UN). • Contributions to the UN budget are based on gross national income.

14. Uses • National accounts are also widely used by analysts and researchers to examine the economic situation and developments. • Financial institutions’ interest in national accounts may range from a broad analysis of the economy to specific information concerning savings, investment or debt among households, non-financial corporations or other institutional sectors. • Social partners, such as representatives of businesses (for example, trade associations) or representatives of workers (for example, trade unions), also have an interest in national accounts for the purpose of analysing developments that affect industrial relations.

15. Uses • Among other uses, researchers and analysts use national accounts for business cycle analysis and analysing long-term economic cycles and relating these to economic, political or technological developments.

16. National accounts in Education • http://www.cbs.nl/nr/rdonlyres/1dbebb42-89e2-4a59-9554-dc20c553203e/0/2007096p30pub.pdf • See Page 30. • SNA 2008: http://unstats.un.org/unsd/nationalaccount/sna2008.asp.

17. Scope • They present both flows (measured over a period) and stocks (measured at the end of a period), ensuring that the flows are reconciled with the stocks. • As to flows, the system of national accounts provide estimates for the money value of income and output per year or quarter, including GDP.

18. Scope • As to stocks, the 'capital accounts' are a balance-sheet approach that has assets on one side (including values of land, the capital stock, and financial assets) and liabilities and net worth on the other, measured as of the end of the accounting period. • National accounts also include measures of the changes in assets, liabilities, and net worth per accounting period. • These may refer to flow of funds accounts or, again, capital accounts.

19. Scope • National accounts can be presented in nominal or real amounts, with real amounts adjusted to remove the effects of price changes over time. • A corresponding price index can also be derived from national output. An inflation rate (growth rate of the price level) may be calculated for national output or its expenditure components. • Economic growth rates (most commonly the growth rate of GDP) are generally measured in real (constant-price) terms.

20. Scope • The accounts are derived from a wide variety of statistical source data including surveys, administrative and census data, and regulatory data, which are integrated and harmonized in the conceptual framework. • They are usually compiled by national statistical offices and/or central banks in each country. • They may be released on both an annual and (less detailed) quarterly frequency.

21. Scope • Practical issues include inaccuracies from differences between economic and accounting methodologies, lack of controlled experiments on quality of data from diverse sources, and measurement of intangibles and services of the banking and financial sectors.

22. Scope • Two developments relevant to the national accounts since the 1980s include the following: • Generational accounting is a method for measuring redistribution of lifetime tax burdens across generations from social insurance, including social security and social health insurance. • Environmental or green national accounting is the method of valuing environmental assets, which are usually not counted in measuring national wealth, in part due to the difficulty of valuing them.

23. Main components • The presentation of national accounts data may vary by country (commonly, aggregate measures are given greatest prominence), however the main national accounts include the following accounts for the economy as a whole and its main economic actors.

24. Main components • Current accounts: • production accounts which record the value of domestic output and the goods and services used up in producing that output. • The balancing item of the accounts is value added, which is equal to GDP when expressed for the whole economy at market prices and in gross terms;

25. Main components • income accounts, which show primary and secondary income flows - both the income generated in production (e.g. wages and salaries) and distributive income flows (predominantly the redistributive effects of government taxes and social benefit payments). The balancing item of the accounts is disposable income ("National Income" when measured for the whole economy); • expenditure accounts, which show how disposable income is either consumed or saved. The balancing item of these accounts is saving.

26. Main components • Capital accounts, which record the net accumulation, as the result of transactions, of non-financial assets; and the financing, by way of saving and capital transfers, of the accumulation. Net lending/borrowing is the balancing item for these accounts • Financial accounts, which show the net acquisition of financial assets and the net incurrence of liabilities. The balance on these accounts is the net change in financial position.

27. Main components • Balance sheets, which record the stock of assets, both financial and non-financial, and liabilities at a particular point in time. Net worth is the balance from the balance sheets (United Nations, 1993). • The accounts may be measured as gross or net of consumption of fixed capital (a concept in national accounts similar to depreciation in business accounts).

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