Introduction to the SNA, advanced Lesson 3

1. Introduction to the SNA, advancedLesson 3 Summarizing the accounts and key balancing items

2. Background • Key features of the SNA are that it defines accounts that are comprehensive, consistent and integrated • the accounts consist of so-called “flow accounts” (which measure the flows of production, income etc in an accounting period) and balance sheets, which measure the levels of assets and liabilities at the beginning and end of an accounting period • Each flow account relates to a particular kind of activity such as production, or the generation, distribution, redistribution or use of income • Each flow account is balanced by an item that is estimated residually as the difference between the total resources and the identified uses in an account

3. T accounts Uses Resources (and balancing item) Intermediate consumption Gross output Value added

4. T accounts Uses Resources (and balancing item) Intermediate consumption Gross output Value added Value added = gross output less intermediate consumption

5. Production account

6. Generation of income account

7. Allocation of primary income account

8. Secondary distribution of income account

9. Use of disposable income account

10. Capital account

11. Summary of accounts and balancing items

12. Other accounts • The six accounts described above are the most important accounts for analysing production and income flows • in most countries, they are the accounts that are produced first when establishing a system of national accounts • generally it is easier to obtain the data for these accounts than is the case with the remaining ones • The remaining accounts are: • Financial account • Other changes in the volume of assets account • Revaluation account • Balance sheet

13. Financial account • The Financial account explains how financial assets owned by one unit are put at the disposal of another • Like the accounts already described, the Financial account records transactions between institutional units (both resident and non-resident) • it shows the transactions involving financial assets and liabilities that underlie the net lending or net borrowing derived as a balancing item in the Capital account

14. Financial account (continued) • Unlike the accounts described above, there is no balancing item in the Financial account, which means that the two sides of the account should balance • the net lending (or net borrowing) derived as a balancing item in the Capital account is part of the “Changes in liabilities and net worth”

15. Other changes in the volume of assets account • The Other changes in the volume of assets account provides a link between the transactions recorded in the Capital account and Balance sheet • it records the changes in assets, liabilities, and net worth between opening and closing balance sheets that are not a result of transactions between institutional units or that are not due to revaluations

16. Other changes in the volume of assets account (continued) Other changes in volume arise from changes in quantity (or quality) due to by economic or non-economic factors, such as • economic appearance/disappearance • catastrophic losses • uncompensated seizures • changes in classification

17. Revaluation account • The Revaluation account measures holding gains and losses • In effect, a “holding loss” is a negative holding gain so the term “holding gain” refers to a loss as well as an actual gain • Holding gains can be divided into • (i) nominal, (ii) neutral and (iii) real

18. Revaluation account (continued) • As an example, consider an asset purchased for 200, which increases in value to 240 during the year in which inflation was running at 5% • the nominal holding gain is 40 (i.e. 240 – 200) • the neutral holding gain is 10 (i.e. (200 x 1.05) – 200) • the real holding gain is 30 (i.e. 40 – 10) • A holding gain is realised only when an asset is disposed of or a liability is repaid

19. Balance sheet • The SNA defines a Balance sheet as a statement, drawn up in respect of a particular point in time, of the values of assets owned and of the liabilities owed by an institutional unit or group of units • Balance sheets can be drawn up for a single unit, an institutional sector or the whole economy

20. Balance sheet (continued) • Balance sheets are useful in identifying imbalances in an economy or in sectors within it • for example, analyzing consumer debt and incomes to determine the sustainability of the debt, or to examine the links between household borrowing and house values • Net worth is the summary aggregate in a balance sheet and it is the value of all the assets owned by an institutional unit or sector less the value of all its outstanding liabilities

21. Balance sheet (continued) • Other uses of balance sheets are: • providing a formal framework for applying values to physical estimates of a country's natural resources • determining household spending behaviour and liquidity • examining ratios that can point to future economic problems for a country (or institutional sector) • e.g. assets to liabilities, net worth to total liabilities, non-financial to financial assets, and debt to income • Even though data on government debt is available in Government Finance statistics, the SNA balance sheet enables the level of debt to be analysed in conjunction with that of other sectors

22. References • System of National Accounts, 2008