The Final Consumption Expenditure of Households in Korea

1. The Final Consumption Expenditure of Households in Korea SangkyoHAN National Accounts Coordination Team Economic Statistics Department

2. Contents • Introduction • GDP by Expenditure Approach • Estimation Method of the Final Consumption Expenditure of Household • Household Income & Expenditure Survey Evaluation

3. I. Introduction • Korean System of National Accounts • Introduction of 1993 SNA in 2004 at the time of the 9threbasing from 1995 to 2000 • Additional implementation to 1993 SNA at the time of the 10threbasing from 2000 to 2005 E.g. introduction of chain-linking method, recognition of valuables as a separate item of gross capital formation • 2008 SNA intended to be introduced in 2014 at the time of the 11threbasing from 2005 to 2010

4. I. Introduction • Three aspects from which Korean National Accounts statistics are measured • Production, Expenditure, Distribution • Broadly known as production approach, expenditure approach and income approach • The final GDP aggregates are determined as GDP by production activities.

5. I. Introduction • GDP by production • Data sources : survey data from the Statistics Korea, the BOK’s self survey data and administrative data from government agencies such as the National Tax Services (NTS) • GDP by expenditure • Data sources : survey data from the Statistics Korea, corporate financial statement, administrative data, customs clearance statistics and BOP statistics, etc • GDP by income(compiled annually for nominal value) • Data sources : GDP estimates by production and expenditure, data from government and social security agencies, administrative data from the NTS, business analysis data and employment statistics

6. Collection of Source Data (survey, etc.) Check on Errors of Source data Estimation of GDP By production Estimation of GDP By expenditure - Output - Intermediate input - Value added Coincidence with annual Input/output table - Consumption - Gross capital formation - Export/Import Check on appropriateness of estimates Conciliation of GDP By production and GDP by expenditure Estimation of GDP by income Press release Flow Chart on the Compilation of National Accounts Statistics

7. II. GDP by Expenditure Approach • Conventional Estimating Process by Commodity Flow Method (CFM) • Calculate domestic gross output in production side • Derive total final demand by adding imports and deducting intermediate consumption and exports • Calculate each expenditure item by multiplying the total final demand by the weight of each item stemmed from I/O table in base year

8. II. GDP by Expenditure Approach The conventional estimating process by CFM (weight on total domestic demand)

9. II. GDP by Expenditure Approach • Problems revealed in CFM approach • Lack of independence in the estimates for some expenditure components of GDP • Introduction of new statistical techniques employing both the supply-side and the demand-side statistics • Identifying economic trends more accurately by coping with changing statistical environments and by incorporating much more statistical data • Enhancing accuracy, reliability of statistics, and transparency • Ensuring objectivity of the estimation process recommended by IMF

10. III. Estimation Method of the Final Consumption Expenditure of Household • Calculate base year and annual(final) figures based on consumer expenditure data • Calculate annual(preliminary) figures by sum of quarterly (preliminary) figures • Calculate quarterly (preliminary) figures by extrapolating alternative indicators with the year-on-year rates of change from the same period of the previous year • Nominal figures by item and the total are estimated; then real figures are calculated using a deflation method (deflator=mainly CPI)

11. Major Source Data Related to Household Final Consumption Expenditure

12. III-i. Estimation Method in Reference year Final consumption expenditure of household = Total expenditure in domestic market – Direct purchases in domestic market by non-resident households + Direct purchases abroad by resident households

13. III-i. Estimation Method in Reference year • Total expenditure in domestic market • Total expenditure of goods • Estimated based on sales by industry using ratios of selling to household consumers in ‘the Census of Service Industry’ • Disaggregated for expenditures by item using ‘Household Income & Expenditure Survey’ and other sources • Total expenditures on services • Based on ‘the Census of Service Industry’, ‘Household Income & Expenditure Survey’, and et cetera

14. III-i. Estimation Method in Reference year • Direct purchases abroad by residents /Direct purchases in domestic market by non-residents • Compiled based on the estimates of the external transaction account • Estimate data by reclassifying “Balance of Payments statistics (e.g. travel services and credit card usage)”

15. III-ii. Estimation Method in Current year • Nominal value estimation method in current year • Principally calculated in the same method as in reference year • Estimated on different grounding sources E.g. ‘Whole and Retail Trade Survey’, ‘The Service Industry Survey’, ‘The ServiceIndustryActivityIndex’, et cetera (instead of ‘The Census of Services Industry’)

16. III-ii. Estimation Method in Current year • Real value estimation in current year • Estimated by dividing nominal value into related deflators • Nominal value exists under the COICOP classification system • Add up nominal and real values by COICOP code to obtain the final consumption expenditure of households by purpose and by type

17. III-ii. Estimation Method in Current year • Direct Purchases by residents and non-residents • Compiled based on external transaction account estimates • Deflators for Direct Purchases Abroad by Residents: Exchange-rate adjusted consumer price index of major travel countries • Deflators for Direct Purchases in Domestic Market by Non-residents : Domestic consumer price index

18. V. Household Income & Expenditure Survey • Differences between National Accounts Statistics and Household Income & Expenditure Survey : • Coverage (by subjects or by items) • Bias due to the limitation of sampling method • Classification system • Limited compatibility between National Account and Household Income & Expenditure Survey (HIES)

19. Ⅳ. Household Income & Expenditure Survey • National Accounts : Households + NPISHs • HIES : Households only! • In addition, HIES excludes certain households1) 1) Farm and Fishery HHs, Communal HHs and HHs running restaurant and hotels in their own houses • The Coverage Ratio is 90.5% Coverage by Subjects

20. Ⅳ. Household Income & Expenditure Survey • Non-response rate tends to be high in high-income HHS. • On average, non-response rate was 18.9% in 2008 • Under-reporting could happen, especially in : • Income : Self-employment income, property income • Consumption : Sin item (i.e. tobacco, alcoholic beverages) • Sampling bias has been reported frequently in many comparative studies carried out in many OECD countries. Bias inherent in Sampling Method (HIES)

21. Ⅳ. Household Income & Expenditure Survey • Classification Systems are different • Ex) Withdrawal from income of Quasi-corporations : Property Income (National Accounts) vs. Income for Self-Employment (HIES) Different Classification Systems

22. Ⅳ. Household Income & Expenditure Survey • USE of HIES in Compiling GDP statistics • Total amount of income/expenditure/savings : Pointless • Absolute value by item level : Limited • Desirable to use detailed goods/service-level information(mainly increase rate) of HIES to estimate National Accounts

23. Ⅳ. Household Income & Expenditure Survey • USE of HIES : Income Sector • HIES mainly as a reference • Only a few items* are directly applicable Household Survey Current transfers between households (in current transfer paid) ↓ National Accounts Current transfers between households (in other current transfers)

24. Ⅳ. Household Income & Expenditure Survey • USE of HIES : Personal Consumption Sector • HIES is More useful than Income Sector because : • Many items are comparable in concepts or in classification system between HIES and Personal Consumption • Subdivision of HIES items are most detailed • Use of item-level absolute value (Benchmark year) : • Private tutoring fee, residence related services, household services, and etc. (of course, after parameterization)

25. Ⅳ. Household Income & Expenditure Survey • USE of HIES : Personal Consumption Sector (cont’d) • Use of weights information among items : • ‘clothing and footwear related services’, ‘furniture, furnishings and household equipment and operation related services’, and etc. • First, Estimate total amount based on ‘the Census of Service Industry’ and apply the HIES weights • Use of increase rate : • In most items • Retail Control Method : determine total amount based on other statistics such as ‘Whole and Retail Trade Survey’

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