Understanding National Accounts: Sectors & Units in Economic Territory

1. Item 3:Units and Sectors ESTP course on National Accounts ESA 2010 Luxembourg, 15 - 19 June 2015Eurostat

2. Units and Sectors • Limits of the economy • Institutional units • Institutional sectors

3. Limits of the economy Activity of units that have centre ofpredominant economic interest on economic territory (resident units)

4. Limits of the economy Economic territory, includes • geographical • including free zones • national air-space • territorial waters • continental shelf • territorial enclaves • oil/gas reserves

5. Limits of the economy Economic territory, excludes • Extraterritorial enclaves • GG agencies of other countries • institutions of the EU • international organisations

6. Centre of predominant economic interest • Location where a unit engages in economic activity indefinitely or for more than one year • Owners land and buildings

7. Resident units • Production, finance, insurance or redistribution activity • Consumption • Owners land and buildings

8. Resident units - Households • Resident providing periods spent abroad less than one year, includes: • border workers • seasonal workers • tourists, businessmen, crew members • locally recruited staff of extraterritorial enclaves • Students – always resident irrespective of study time abroad

9. Institutional units Decision-making units • autonomy of decision of the entity own goods and assets take economic decisions accountable at law incur liabilities complete set of account (ability not publication) • households

10. Institutional units • Head offices and holding companies • Groups of corporations • Special purpose entities • Captive financial institutions • Artificial subsidiaries • Special purpose units of general government

11. Institutional sectors Corporations (incl Quasi Corporations) Non-financial (S.11) Financial (S.12) Government (S.13) Households (S.14) Non-profit institutions (NPISH) (S.15) Rest of the World (S.2)

12. Non-financial corporations • Principally engaged in production of market goods and non-financial services • private corporations • co-operatives and partnerships • public producers recognised as separate units • non-profit institutions serving corporations • head offices controlling a group of corporations • SPEs • private and public quasi-corporations

13. Focus on…Quasi-corporations • Bodies without legal status, but which meet the following criteria: • Keep a complete (separate) set of accounts • Economic and financial behaviour that is different from the owners and similar to corporations • Includes unincorporated bodies owned by households and government – difficult borderline issue to decide what behaviour is similar to corporations!

14. Financial corporations • Principally engaged in financial intermediation and financial auxiliaries • Financial intermediation means • acquire assets and incur liabilities on own account • transform/repackage maturity, scale, risk • Financial auxiliaries facilitate financial intermediation, but do not acquire assets or incur liabilities

15. Financial corporations – sub-sectors • Central bank (S.121) • Deposit-taking corporations, except the central bank (S.122) • Money market funds (MMF) (S.123) • Non-MMF investment funds (S.124) • Other financial intermediaries, except insurance corporations and pension funds (S.125) • Financial auxiliaries (S.126) • Captive financial institutions and money lenders (S.127) • Insurance corporations (S.128) • Pension funds (S.129)

16. S.121 Central Bank • Definition: • financial corporations and quasi-corporations whose principal function is to issue currency, to maintain the internal and external value of the currency and to hold all or part of the international reserves of the country • Examples: • the national central bank, including when it is part of a European system of central banks • central monetary agencies of essentially public origin (e.g. agencies managing foreign exchange or issuing currency) which keep a complete set of accounts and enjoy autonomy of decision in relation to central government

17. S.122 Other Monetary and Financial Institutions • Definition: • deposit-taking corporations except the central bank subsector (S.122) includes all financial corporations and quasi-corporations which are principally engaged in financial intermediation and whose business is to receive depositsfrom institutional unitsand to grant loans and/or to make investments in securities

18. S.122 Other Monetary and Financial Institutions • Examples: • commercial banks, 'universal' banks, 'all-purpose' banks • savings banks • post office giro institutions, post banks, giro banks • rural credit banks, agricultural credit banks • cooperative credit banks, credit unions • specialised banks (e.g. merchant banks, issuing houses, private banks) • electronic money institutions principally engaged in financial intermediation

19. S.123 Money market funds (MMF) • Definition: • financial corporations and quasi-corporations, except those classified in the central bank and in the credit institutions subsectors, which are principally engaged in financial intermediation. Their business is to issue investment fund shares or unitsas close substitutes for deposits and to make investments primarily in money market fund shares/units, short-term debt securities, and/or deposits • Examples: • investment funds including investment trusts, unit trusts and other collective investment schemes whose shares or units are close substitutes for deposits

20. S.124 Non-Money-Market Investment Funds • Definition: • collective investment schemes, except those classified in the MMF subsector, which are principally engaged in financial intermediation. Their business is to issue investment fund shares or units which are not close substitutes for deposits and to make investments primarily in financial assets other than short-term financial assets and in non-financial assets (usually real estate)

21. S.124 Non-Money-Market Investment Funds • Examples: • open-ended investment funds whose investment fund shares or units are repurchased or redeemed directly or indirectly out of the undertaking's assets • closed-ended investment funds with a fixed share capital, where investors entering or leaving the fund must buy or sell existing shares • real estate investment funds • investment funds investing in other funds ('funds of funds') • hedge funds

22. S.125 Other financial intermediaries • Definition: • financial corporations and quasi-corporations which are principally engaged in financial intermediation by incurring liabilities in forms other than currency, deposits, or investment fund shares, or in relation to insurance, pension and standardised guarantee schemes • Examples: • security and derivative dealers • financial leasing • hire purchase and the provision of personal or commercial finance • factoring • venture and development capital companies • export/import financing companies

23. S.126 Financial auxiliaries • Definition: • financial corporations and quasi-corporations which are principally engaged in activities closely related to financial intermediation but which are not financial intermediaries themselves

24. S.126 Financial auxiliaries • Examples: • insurance brokers, salvage and average administrators, insurance and pension consultants • loan brokers, securities brokers, investment advisers • flotation corporations that manage the issue of securities • corporations whose principal function is to guarantee, by endorsement, bills and similar instruments • corporations which arrange derivative and hedging instruments, such as swaps, options and futures (without issuing them) • corporations providing infrastructure for financial markets • central supervisory authorities of financial intermediaries and financial markets • managers of pension funds, mutual funds • corporations providing stock exchange and insurance exchange • non-profit institutions recognised as independent legal entities serving financial corporations • payment institutions (facilitating payments between buyer and seller)

25. S.127 Captive financial institutions • Definition: • financial corporations and quasi-corporations which are neither engaged in financial intermediation nor in providing financial auxiliary services, and where most of either their assets or their liabilities are not transacted on open markets • Examples: • trusts, estates, agencies accounts or 'brass plate' companies • holding companies • SPEs that qualify as institutional units and raise funds in open markets • money lenders, corporations engaged in lending to students or for foreign trade, pawnshops • special purpose government funds, usually called sovereign wealth funds, if classified as financial corporations

26. Special purpose entities (SPEs) • What are they? • A special purpose entity (SPE) or special purpose vehicle (SPV) is usually a limited company or a limited partnership, created to fulfil narrow, specific or temporary objectives and to isolate a financial risk, a specific taxation or a regulatory risk

27. Special purpose entities (SPEs) • No common definition, but the following characteristics are typical: • no employees and no non-financial assets • little physical presence beyond a 'brass plate' or sign confirming their place of registration • always related to another corporation, often as a subsidiary • resident in a different territory from the territory of residence of the related corporations. In the absence of any physical presence an enterprise's residence is determined according to the economic territory under whose laws the enterprise is incorporated or registered • managed by employees of another corporation which may or may not be a related one. The SPE pays fees for services provided to it and in turn charges its parent or other related corporation a fee to cover those costs. This is the only production the SPE is involved in, although it will often incur liabilities on behalf of its owner and will usually receive investment income and holding gains on the assets it holds

28. S.128 Insurance corporations • Definition: • financial corporations and quasi-corporations which are principally engaged in financial intermediation as a consequence of the pooling of risks mainly in the form of direct insurance or reinsurance • Examples: • life • non-life insurance to individual units or groups of units • fire, liability (casualty), motor, marine, aviation, transport, accident, health, financial insurance (provision of guarantees or surety bonds) • reinsurance to other insurance corporations • insurance bought by an insurer to protect against an unexpectedly large number of claims or exceptionally heavy claims

29. S.129 Pension Funds • Definition: • financial corporations and quasi-corporations which are principally engaged in financial intermediation as the consequence of the pooling of social risks and needs of the insured persons (social insurance). Pension funds as social insurance schemes provide income in retirement, and often benefits for death and disability • Examples: • funds of single enterprise or a group of enterprises, employees of a branch or industry, and persons having the same profession • benefits include can be: • paid after the death of the insured to the widow(er) and children • paid after retirement • paid after the insured becomes disabled

30. General Government • Produces non-market services • for individual and collective consumption • Redistributes income or wealth • Sub-sectors • Central (S.1311) • State (S.1312) • Local (S.1313) • Social security funds (S.1314)

31. Households • Consumers • Person living in institutions • Entrepreneurs (market producers) • Producers exclusively for own final use • Sub-sectors • Employers (S.141) and own-account workers (S.142) • Employees (S.143) • Recipients of property income (S.1441) • Recipients of pensions (S.1442) • Recipients of other transfers (S.1443)

32. Non-profit institutions serving households (NPISH) • Separate legal entities • Serving households • Resources mainly voluntary contributions • examples trade unions, political parties, churches, charities; hospitals/universities!

33. Rest of the World Not strictly sector = non-residents transactions within our economy  Only counter-part (mirror) of national economy Session tomorrow on BOP and rest of the world!