National accounts & measurement of constant price output of the service sector

1. National accounts & measurement of constant price output of the service sector Matt Berger 23rd Voorburg Group, Aguascalientes, Mexico 2008

2. Why are we here? • Establishing internationally comparable methodologies for service sector GDP • “Constant dollar output of the service industries” • Emphasis on SPPI’s, classifications and turnover surveys • And bringing them together for service sector GDP Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

3. 2007 Seoul • National accounts papers • Presentation of range of issues • Considerable overlap • Common and recurring themes • Discussion drew out further issues Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

4. Issues covered • Brief overview of GDP(P) • Issues raised by discussants • Issues raised in summary session • Summary Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

5. Gross Domestic Product (P) Gross output at basic pricesless intermediate inputs at purchasers' pricesequalsgross value added at basic pricesplustaxes on subsidieslesssubsidies on productsequalsGross Domestic Product (P) Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

6. Basic Price The basic price is the amount received by the producer for the product/service including any per unit subsidies on the product/service Includes taxes on production Excludes taxes on products and subsidies on production Excludes retail & wholesale margins and separate insurance & transport Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

7. Producer's price Producer's price = the amount received by producer from the purchaser Excludes deductible taxes on products (eg, VAT) invoiced to purchaser Excludes retail & wholesale margins and separate insurance & transport Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

8. Producer's vs. Basic Price • Both measure payment received by producers for output • Differ in treatment of taxes and subsidiesProducer’s Price equals Basic Price plus (producer’s) non-deductible taxes on products less (producer’s) subsidies on products Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

9. Purchasers' price The amount paid by the purchaser for the good or service Includes any taxes payable Less any subsidies receivable Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

10. Output • All domestic output • Not just business-to-business • Not just sales to domestic customers Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

11. Constant price • Express the quantities from the current period (t) in prices of an earlier period (0) • Quantity revaluation • Measure quantities directly, and multiply by earlier prices • Price deflation • Divide value data (revenue) by change in price between 0 and t • Also used sometimes in the inverse for “reflation”, to get constant price measures to current prices in order to form aggregates Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

12. 1 Double deflation • Production approach uses double deflation • Outputs measured to constant price • Inputs measured to constant price • Constant price value added equalsConstant price outputs lessConstant price inputs Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

13. 2 Prefer SPPI’s • Deflation of output by SPPI is the preferred approach of NSO’s • SPPI’s measure prices at constant quality • Changes in resulting constant price output measures are changes in volumes Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

14. Deflation and measures of volume change V = Value Q = Quantity (volume) Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

15. 3 SPPI’s used for other purposes • SPPI’s also have uses beyond output of the service sector • Adopted in some circumstances in compilation of the expenditure approach Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

16. 4 Other approaches for non-market • SPPI’s not generally used for non-market outputs • Products not sold at economically significant prices • Price change not measurable by price index • Preference to determine measures of volume based on inputs Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

17. 5 Product based SPPI’s • National accountants require a product focus for SPPI’s • Industry SPPI’s are not satisfactory (in general) Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

18. 6 When SPPI’s are not available … • In the absence of suitable SPPI’s, national accountants • Use nearest CPI (where applicable) • Construct output measures based on inputs • Use “nearest” PPI’s (for distributive trade) • Reluctant solution (for the production approach) • Not priced to constant quality or on correct pricing basis • Using inputs for outputs is a concern when using the value added approach to GDP Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

19. 7 Integration • National accountants stress importance of • Integration • Coherence • Consistencybetween national accounts (volumes), turnover and prices • “Don’t develop solutions in isolation” Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

20. 8 Revenue & output • Income and revenue do not always equate with industry output • Examples: • Retail and wholesale • “Brokerage” – ticketing, travel agents, freight forwarders • Some advertising • Employment placement • Need to understand activities of different industries • And their treatment in the national accounts (including understanding why) Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

21. 9 Goods vs. Services disparity • Disparity between • Availability of detailed SPPI’s for services compared with equivalent detailed PPI’s for goods (more goods indices than services) • Importance of service sector to many economies, either in terms of size or relative growth (services makes up a larger share of GDP than goods) Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

22. 10 Gaps • National accountants emphasised, in particular, the lack of SPPI’s for: • Financial services • Wholesale trade services • Retail trade services • Intangibles, such as research & development, and software • International trade in services Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

23. International Trade in Services • Exports form part of domestic output • Different destinations should be measured as different services • What, when, where …? Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

24. International Trade Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

25. International trade in services Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

26. International Trade in Services Statistics Branches Foreign Affiliates FATS FATS x2 Agencies GATS Natural Persons Captive Units Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

27. Complex area Needs dedicated treatment Covered in other forums And covered much better too Needs coordinated approach, involving experts beyond SPPI , turnover & classification alone General Agreement on Trade Statistics (GATS) Foreign Affiliate Trade Statistics (FATS) Foreign Affiliate Trade in Services (FATS) Statistics Manual on Statistics on International Trade in Services Export and Import Price Index Manual (XMPI) International Trade in Services Statistics Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

28. 11 Distributive trade • Retail trade and wholesale trade • Change of ownership of good • No transformation of product • The output of the industry is the service they provide to buyers and sellers • Does not directly equate with revenue • “Margin” services Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

29. Example: Retail trade services to purchasers • weatherproof premises with ease of access, suitable lighting, air-conditioning, and general levels of security and personal safety; • access to the store at a range of convenient times; • availability of a range of products in convenient-to-access displays, accompanied by pricing and other information, with stores laid out in familiar and constant patterns; • for a given product, choice between different varieties (sizes, brands, flavours); • car parking; • options for methods of payment (cash, debit card, credit card); • a range of sales points and sales assistants to provide advice or to enable payment to be made; • home delivery; • trolleys to enable better cartage of goods both within the premises and between the premises and transportation. Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

30. Example: Retail trade services to producers • Standardisation or grading of goods • Storage and transportation, risk bearing, financing • Risk accrues in part due to change of ownership • The supermarket owns the tins of beans • Pricing and presentation of product, including • tagging, • packaging, • display, • space allocation, • advertising, and • promotion. Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

31. Distributive trade in the SNA The value of sales, including sales at reduced prices plus the value of other uses of goods purchased for resale minus the value of goods purchased for resale plus the value of additions to inventories of goods for resale minus the value of goods withdrawn from inventories of goods for resale minus the value of recurrent losses due to normal rates of wastage, theft or accidental damage Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

32. More simply • Output = Sales – Cost of goods sold. • This is the output of the industry • This is not value added as per GDP(P) • Value added for distributive trades is subsequently determined as the difference between this output (above) and intermediate inputs consumed in the provision of this service Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

33. 12 Other issues regarding revenue and output • Common theme • Some services “bring together buyer and seller” • Distributive trades are one example • Where a defining characteristic is change of ownership • Other similar types of industry Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

34. Brokerage – “bringing together” • Labour services • Employment placement finds suitable employees • Placed personnel employed by customer • Output is “bringing together skilled worker and vacancy” • Revenue is fee for this service • Employment supply covers all labour costs (and risks) • Supplied personnel still employed by employment agency • Output and revenue reflect “remuneration plus overhead” • Similar type of service, different outputs • In each case output and revenue align • But different activities mean different outputs Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

35. Freight forwarding • Extreme example (?) • Brings together “need for transport” with “range of different transport service providers” • Different agents may never directly interact • Alignment of output and revenue depend on whether • Freight forwarder purchases freight services (margin?) or • End customer is separately billed by transport providers • With a separate fee for the Freight Forwarding Service Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

36. Advertising placement • Good example of “mixed mode” industry • Varies across country specific markets • e.g. practice in US and UK may differ • Different stakeholders may provide same or similar services • In some instances “advertising space” is purchased and resold (margin) • Other instances agents “bring together buyer and seller” Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

37. 13 Subcontracting & Outsourcing • A “principal” contracts a “supplier” to perform one or more aspects of production • Should appear (in the national accounts) as • Part of output of the supplier • Part of intermediate input of the principal • Complicated (in terms of measurement) by outsourcing • Change to production function • And complicated even more by offshoring Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

38. Measurement issues! • Not such a conceptual problem for the national accountants • That is, not in addition to the FATS & GATS issues • Problematic for SPPI’s • Time based methods rely on consistent relationship between labour and delivered service • Subcontracting (etc.) violates this principle Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

39. Bringing it all together • Over a dozen issues raised • Timely reminders • Keeping us on current course • And suggesting direction for the future • Can we make a convenient summary of key themes? Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

40. Supply Use Framework • Key tool in the compilation of the national accounts • Mentioned extensively by in Seoul 2007 • Shows flows of goods & services • From different types of producers … • … through different types of intermediate use … • … to final demand • Can be used (diagrammatically) to point out some themes covered here Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

41. Supply & Use tables Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

42. A word on pricing basis • Supply tables are sometimes provided at basic prices and use tables at purchasers prices • Trade margins are one of the key differences between basic price and purchasers’ price Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

43. The different pricing basis of the supply tables and the use table reminds us of the need to develop SPPI’s for the distributive trade services Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

44. Output of the Service industries is concerned with Domestic Production, regardless of destination Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

45. Intermediate use of services • reminds us of subcontracting • and imported services remind us of offshoring Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

46. Exports form • part of total use • InternationalTrade in Services Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

47. Business to business transactions (alone) miss Final Demand Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

48. CPI’s only cover part of final demand – Plus they include imports Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008

49. Questions? • Thank you Voorburg 2008 ONS - National Accounts General Methodology, 22-26 September 2008