System of National Accounts

From Infogalactic: the planetary knowledge core
Jump to: navigation, search

Lua error in package.lua at line 80: module 'strict' not found.

System of National Accounts refers to the specific set of accounts that a nation uses for national economic reporting. The concept is analogous to the Chart of accounts used by an enterprise to classify each transaction, which enables aggregation for financial reporting. National economic reporting however has major differences.

Since enterprises sell intermediate products to other enterprises who use them in their products (for example steel makers sell finished steel to automobile makers, who in turn use that steel (and many other inputs), and sell finished automobiles), a nation can't simply sum up the sales of all enterprises located in that country to arrive at a meaningful measure of national output. Without adjustment, continuing the simplified example, the value of the steel would be counted twice, once as it was sold to the automaker, and a second time when the car containing the steel was sold to a consumer.

National Accounting (based on Output) starts with enterprise financial statement data, but also adds significant amounts of information not contained in any audited financial statement such as structural information provided by trade organizations, periodic surveys, estimates interpolated from other direct measurements such as electricity usage, etc. The System of National Accounts guides classification and use of those various and varied data streams to facilitate aggregation and economic reporting at the national level.

By comparison, enterprise financial statements are based more on direct aggregation of specific, timely, granular, transaction data. Most of the volume of transactions involve an independent second party who "concurs" with the amount reported, such as: a sale to a specific customer, cash in a specific account at a specific bank, purchase from a specific vendor, etc. Estimates are used in financial accounting, but to a much less extent than in National Economic Accounting. For example, enterprises with capital equipment estimate useful lives to estimate quarterly depreciation.

The System of National Accounts is selected and maintained by each nation according to its own needs and various systems have and continue to evolve.


Three Independent Ways to Calculate the Size of an Economy

One objective of any System of National Accounts is to help measure the size of an Economy, often at quarterly intervals. Change across time periods can then be calculated to answer questions about how much growth or contraction? The size of an Economy is measured by its Gross domestic product.

GDP can be calculated in three independent ways, all of which should, in principle, give the same result. They are the production (or output or value added) approach, the income approach, and the expenditure approach. A System of National Accounts typically envisions using all three approaches, each drawing on different data streams and estimation methods, and are used to cross-check each other, to help insure overall accuracy.

Background

A fundamental 'identity in economic accounting (as fundamental as "assets equals liabilities plus owner's equity" is in the financial accounting world) is, in its most basic form:

Income = Output

Stated another way: the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product.

Here, income accounting must be careful to include income from all sources: wages, salaries, benefits, and "rents" (returns) on invested capital. Likewise Output accounting here must be measured carefully to avoid double counting.

Simplified example - "Enterprise A" gets wood for free, cuts it down and sells it for $50 to "Enterprise "B". B makes that wood into furniture and sells it to a customer for $200. Assume all the wood is used and any scrap left over has zero value, and assume all tools needed by A and B are hand-made and don't need to be purchased from others. Both A and B work from home so there are no facilities costs, supplies costs, electricity, etc. Also assume A cuts down the wood and then is idle for the rest of the accounting period, and B is idle at the beginning of the period and completes his work just before the end of the accounting period.

Recall the fundamental identity: Income = Output

Income accounting A's wage was $50, and B's wage was $150, for a total income of $200

Output accounting Recall output is not a simple sum of all enterprises, because that would be double counting. Output is not simply A plus B or $250. Output is the value added by A ($50) plus the value added by B ($150 is the value that enterprise added to the product, apart from the value that A added), for a total, combined, unduplicated output of $200, which is exactly equal to the income reported above.

Income Accounting

Most countries directly tax income: wages, salaries, benefits, and "rents" on invested capital (interest on loans and bonds, dividends, etc.) In order to run the taxation system they require and typically strongly enforce disciplined accountings. These accountings are provided along with the periodic tax remittance. The data streams are relatively "pure" and easy to access. Further, there are relatively few separate accounts involved.

See: National Income and Product Accounts#Income accounting for an example of the account structure for national income accounting.

Output Accounting

Independent accounting for output on the other hand is much more complex, involves relatively a very large number of classifications and accounts, changes much more often, and is by far the larger, much more expensive challenge for a nation's statistical agency. Starting primarily with enterprise level financial statements (and there are many) the statistical agency has to grapple with decomposing sales into the proper industry classifications (no simple tasks as most firms have output that falls into more than one industry, and even the required segment reporting in the U.S. is quite "loose"), dealing with inventory adjustments (again typically highly aggregated sums lumped together in raw materials, work in process and finished goods), and then setting about the task de-duplicating (subtracting off inputs that are not "value add" at this company). Most estimation techniques are survey based and assume that industry "structure" is stable over intervals of time, often 5 year periods.

For example, based on a survey of an enterprise in year 1:

  • 70% of sales are to industry x
  • 20% of sales are to industry y
  • 10% of sales are to industry z

Those weights (70%, 20%, 10%) are assumed fixed and stable in years 2, 3, 4, and 5, where they are applied to each of those year's actual sales figures.

Likewise purchasing figures are also often established via survey because they are difficult or impossible to extract from published financial reports. In the above example we had a firm that only reported a single sales figure but actually delivered product to three industries. In economic accounting we are interested in output by industry, not sales. We need to subtract from sales "value they received from other firms" or "purchases" that relate to those sales. If another percentage is established via survey for Purchases, based off sales, there are now two sources of "drift" between survey dates.

Continuing the above example, in year 1, established by a survey of an enterprise:

  • 70% of sales are to industry x; 80% of those sales represent purchases by this firm from others, therefore 20% is the "value added" by this firm.
  • 20% of sales are to industry y; 25% of those sales represent purchases by this firm from others, therefore 75% is the "value added" by this firm.
  • 10% of sales are to industry z; 0% of those sales represent purchases by this firm from others, therefore 100% is the "value added" by this firm.

Now if the composition of sales changes (from 70%, 20%, and 10%; sales to industry x, y and z), or the percent of sales representing purchases from others changes (from 80%, 25%, 0%; purchases tied to sales to industry x, y and z), at any time during the 5-year run, usage period of those initially established fixed weights, the potential for error in reporting, particularly at the industry level is quite significant.

The System of National Accounts' is only as accurate as its initial design, communication clarity, survey accuracy and frequency, and it's consistent application all the way down to the clerical level. In enterprise accounting the design of the Chart of accounts, including typically a carefully written significant elaboration called the "manual of accounts" or "manual of accounting" along with the training, quality of the coding staff, and internal and external audit functions that help insure that accounting integrity remains high. Financial statement users who lend money to or invest in an enterprise ultimately fund the direct accounting and audit costs for that company and are typically very demanding. Alternatively National Economic Accounting is virtually always funded by general tax revenues, given away freely, and is therefore subject to levels of integrity, accuracy and timeliness standards established by the funding levels and the governmental provider. Quality varies widely.

Output (or Product) Accounts Systems

Expenditure Accounting

Expenditure accounting works off principal that everything produced is likewise consumed (by consumers, the government, or foreigners), or its added to an Investment account (additions to inventory, added to the stock of capital goods, etc.)

At a high level the expenditure accounting approach states: GDP = C + I + G + E
Where:
C = Gross Private Consumption Expenditures
I = Gross Private Investment
G = Government Purchases
E = Net Exports (exports - imports)

Consumption Roughly two-thirds of total Output (GDP) is consumed by individuals. This top account is broken down at the next level into three sub accounts:

  • Nondurable goods - goods that are immediately consumed in one use, or ones that have a lifespan of less than 3 years
  • Services' - activities that cost money, which provide direct satisfaction of wants and needs, however do not involve the production of tangible goods. Examples include entertainment, education, medical services, etc.
  • Durable goods - goods that that have a typical lifespan of more than 3 years

Durable Goods accounting causes occasional conceptual misunderstanding at the individual household level. For instance a household purchases a washer and dryer once every 15 to 20 years. Under the Expenditure approach there is GDP tabulated only in a year where a purchase is made, in all the other years (fully using that washer and dryer) there would be zero GDP contribution from that transaction. A matching problem would appear to occur.

However, when examining a large number of households, Expenditures for Consumer Durable Goods over a year matches up very well with economic output for that year. Mismatching is actually minimal. Assume the average life of a washer and dryer is 20 years. Therefore, on average, 5% of households actually replace them in a given year. For 100,000 households that means 5,000 washer dryer units made and sold each year to meet that demand. In aggregate, the annual Expenditures for Durable Goods, 5,000 washer dryer units in this illustration, closely matches the exact Output from that appliance factory (GDP) for that year, which equates well with the economic consumption by all 100,000 households for the year.

See Classification of Individual Consumption by Purpose for a detailed account listing for Consumption Expenditures.

Investment

Total Investment = Fixed Investment + Inventory Investment + Residential Investment

Business have two types of investments, fixed investment (factories, machines, equipment, business vehicles, robotics, etc.) and inventory. Expenditures for fixed investment by business works like the consumer durable expenditures illustrated above, in large numbers the annual expenditure amount equates closely to what industry produced for the year.

If a firm produces 100 units and sells only 90, they have 10 left as inventory investment that year. The Output is therefore consumer expenditures for the 90 units, plus (planned or unplanned) "investment" in inventory for 10 units more. Economic accounting for Output is markedly different than financial accounting for profit. Under output accounting full "credit" is given in GDP for producing all 100 units, even though only 90 actually changed ownership. Under financial accounting the 10 units left in inventory are valued a lower of cost or market. Profit flows to the bottom line only for the 90 that actually changed hands. In the next accounting period, if the 10 are sold, profit will be then credited. In the economic accounting model, in that next accounting period, if the 10 are sold nothing will be credited to GDP in that period, they were all "produced" in period 1 (when the related labor was paid).

Inventory accumulation (in excess of what may be needed for sustainable growth rates) typically foreshadows economic slowdown (less production) in future periods. Demand for production (over time) drives the necessity for fixed investment. Since the consumer consumes two-thirds of all economic output, changes in consumer attitudes, while not strictly captured in a typical System of National Accounts is a carefully watched leading indicator. Production, fixed investment, and inventory investment typically only "respond" to changing and perhaps oftentimes fickle consumer demand.

Residential Investment is the purchase of new residential homes by the household sector. As new home purchases often drive many other related purchases (appliances, furniture, maintenance equipment, household services, etc.) they are an important contribution to output. Housing statistics are easy to obtain for each time period, and are generally very reliable. Permits issued for new home construction are not typically part of a System of National Accounts but are important inputs for forecasting residential investment in the near future.

Government Purchases

These represent expenditures on new goods and services by the local, state, and federal government. In most industrialized nations the detailed data streams for these expenditures are timely, and of high quality. In emerging market economies government data may be much less reliable, particularly at the regional and local level.

Although taxes that fund welfare are mandatory and involuntary, the expenditure side of the collection is not considered a government purchase. The expenditure side of welfare is accounted for as a series of simple consumer purchases, made by the consumer and not the government. Welfare benefits are awarded to individuals who have not in turn, work for it. Other people however have worked for it, so the expenditures are matched by income. Income was associated with creation of the wealth. The transfer of the wealth to another person is not part of GNP accounting. When the recipient expends that wealth those transactions are accounted for as consumer purchases. The mere transfer of wealth, which does not contribute to GNP, is labeled a transfer payment.

Net Exports

The value of a country's total exports, minus its total imports, is added to GDP. One might argue that the netting of imports and exports is archaic, particularly as nations have become more economically interdependent.

Expenditure records for citizens of one nation purchasing goods and services from another (imports) are typically accounted for by the nation's customs agency which is also responsible for border integrity. Likewise sales from one country to another (exports) are also accounted for by the nations's customs agency. Custom's records vary in quality. Under reporting value and misclassifying goods to minimize duty taxes impacts integrity. Nations officially report both their exports and their imports, so to some extent those records may be cross checked against the records reported by each trading partner.

A nations System of National Accounts is typically integrated with import and export record keeping enforced by the custom's agency. The major systems of accounting include:

Asia

China uses its own but is reportedly evolving to the 2008 version of United Nations System of National Accounts.[1] Other Asian countries generally report based on various versions of United Nations System of National Accounts

Europe, Middle East, Africa

The E.U., including the U.K. generally follow the 2008 version of United Nations System of National Accounts

North America

Most countries in North America follow the U.S. system National Income and Product Accounts which is often abbreviated NIPA

World

Various groups have attempted to publish worldwide economic data. The first task is to harmonize each countries current (and historical) reporting standards to some type of common economic accounting denominator (typically the United Nations System of National Accounts). Notably the EU has aggregated all of its member countries and 12 other major industrialized nations to report, on a harmonized basis, over 90% of the worlds gross output. See World Input Output Database

See also

References

  1. ↑ Lua error in package.lua at line 80: module 'strict' not found.
Retrieved from "https://infogalactic.com/w/index.php?title=System_of_National_Accounts&oldid=3562409"