System of National Accounts Basic Concepts

1. System of National Accounts Basic Concepts National Academy of Statistical Administration Ministry of Statistics and Programme Implementation Central Statistics Office

2. System of National Accounts (SNA), 2008 System of National Accounts (SNA)Historical Development 1953 SNA, 1968 SNA,1993 SNA,2008 SNA SNA aims to provide a comprehensive, coherent, and consistent picture of the economy that reflects • all transactions • taking place between the agents that together constitute an economy • and other economic flows in an accounting period • and the opening and closing stocks of assets and liabilities Integrated Framework for Socio-Economic Analysis 2

3. SNA -Integrated Framework for Socio-Economic Analysis Resources:Human; Natural; Produced; Financial Economic Life: Production; Distribution Production- Goods and Services; Income; Residuals Distribution- Final Consumption; Accumulation; Exports Presenting Stock and Flows - Format • Stock of resources (opening) • Production • Consumption • Capital formation, net exports • Other changes in volume / prices • Stock of resources (closing) 3

4. OPENING STOCK OF RESOURCES CLOSING STOCK OF RESOURCES Human Human Produced Produced Natural Natural Financial Financial PRODUCTION Income Goods & Services Residuals DISTRIBUTION & USE Final Consumption Intermediateconsumption Accumulation Exports Other changes (volume, price) CHANGE: human CHANGE: produced, natural, financial +

5. SNA - Introduction What constitutes National Accounts? • The residents mostly earn their income from production carried out in the economy • Thus, income of all the residents is mainly generated from production activity of goods and services in the economy • Income, thus generated, is spent for purchase of goods and services produced in the economy or imported • either for final consumption • or saving for accumulating wealth • National Accounts provide a quantitative description of all these processes and their inter-linkages 5

6. SNA - Introduction System of National Accounts (Contd.) • SNA provides a framework for systematic presentation of estimates of macro-economic aggregates relating to national income and wealth • Stocks of economic assets represent ‘wealth’   • The SNA also has provision of recording ‘other flows’ • caused by events like war, natural calamity, and scientific discovery and changes in general price level affecting the stock of ‘economic’ assets 6

7. SNA - Introduction Structure of SNA Answers to the following questions • Who? : actors in an economy • Institutional units and establishments • What? : flows and stocks • economic activities and assets and liabilities • How? : macro-economic framework and accounting rules • national accounting identities and sequence of accounts • Why? : purpose • classification by purpose of expenditure provides an overview of the conceptual framework of SNA

8. Structure-Who?- Actors: Institutional Units/Establishments Institutional Units-Constituents of an Economy? • All institutional unitsresiding in the economic territory of a country during accounting period constitute its economy • Institutional unit is an economic entity that is capable of owning assets, incurring liabilities, carrying out economic activities, taking decisions on all aspects of economic life, engaging in transactions with other entities • All economic transactions take place only through institutional units • Institutional Sectors: Corporations - Financial ,Corporations - Non-financial, Government, Non-Profit Institutions serving households (NPISHs), Households (includes unincorporated enterprises) 8

9. Who? - Constituents of an Domestic Economy Residence • Definition: The economic territory in which the institutional unit has its centre of predominant economic interest • The definition of Domestic Economy is based on the concept of Residence. Andnot Currency or Nationality • All resident units constitute the domestic economy For national accounts, Rest of the World (RoW) consists of all Institutional units • not belonging to the domestic economy • but have some transactions with resident units

10. What ? - SNA aims to describe economic flows and stocks Economic Flows and Stocks The SNA accounts consist of tables and balance sheets that register (in monetary terms) • the economic actions or events (flows) that take place within a given period of time • Flows (Transactions) are captured during a period of time and • the effect of these events on the stocks of (economic) assets and liabilities at the beginning and end of that period • Stock of resources are measured at a certain point in time Within SNA boundaries

11. What?- Economic flows and Stocks (Contd.) Economic Flows- reflectcreation, transformation, exchange, transfer or extinction of economic value ; reflect creation, transformation, exchange, transfer or extinction of economic value undertaken by institutions Stocks of (Economic) Assets- are a position in, or holdings of non-financial (produced or non-produced) assets , financial assets and liabilities at a point in time Economic asset is subject to ownership rights and used in some kind of economic activity or as a store of valueExcluded:Consumer durables and natural resources that are not owned (Environmental assets)

12. What?- Two Types of Economic flows Types of Transactions: Transaction in goods and services: Two kinds: (i) Produced goods and services or (ii) Non-Produced assetsDistributive transactions: Two kinds: (i)Distribution of income generated (ii)TransfersTransactions in Financial assets and liabilities • Transactions– interaction by mutual agreement between institutional units : (a) With counterpart – exchange something for something (b) Without counterpart – transferssomething for nothing • Other flows – change in value of assets and liabilities without transaction caused by (a) volume change, (b)level and structure of price

13. What?- Transactions in products (Goods and Services) Supply and Use of Products • Supply (Gross Value of Output) of goods and services produced in the domestic economy (GVO) and imports (M) are used as • Intermediate Consumption (IC) • Final Consumption of the residents • Households Final Consumption Expenditure (HFCE) • Government Final Consumption Expenditure (GFCE) • Final Consumption Expenditure of the NPISHs • Gross Domestic Capital Formation (GDCF) • Gross Fixed Capital Formation (GFCF) • Change in Inventories (CII) • Acquisition less disposal of valuables • Consumption of Fixed Capital (CFC) • and exports (X)

14. How? - SUT SNA Framework- Supply and Use Tables In the SNA framework, Supply and Use Tables (SUTs) are the first set of global tables These are based on the commodity balance identity: GVOmp + M =supply ≡ use = IC + PFCE + GFCE + GFCF + CIS + acquisition less disposal of valuables+ X … …. [1] • As many commodity balance identities as the number of product categories used in national accounts compilation • SUTs are a combined presentation of all these identities that help in • verification and reconciliation of the estimates and • estimating the missing values

15. What? - Distributive Transactions Distribution of Income from ‘Production’ • Compensation of employees • Wages and salaries; Employers’ social contributions • Taxes on production and imports • Taxes on products; Other taxes on production • Subsidies • Subsidies on products; Other subsidies on production • Property income • Investment income • Interest, Dividends, Reinvested earnings on FDI, etc. • Rent

16. What? - Distributive Transactions Transfers • Current transfers (other than social transfers in kind) • Current taxes on income, wealth, etc. • Net social contributions • Social benefits other than social transfers in kind • Other current transfers • Social transfers in kind • Adjustment for the change in pension entitlements • Capital transfers Boundaries in the SNA • Production Boundary • Consumption Boundary • Asset Boundary

17. What? - Boundaries SNA Production Boundary includes • production of all goods and individual or collective services that • are supplied to other units or • intended to be so supplied including the production of goods and services used up in the process of producing such goods and services; • own-account production of all goods that are retained by their producers for their own • final consumption or • gross capital formation • own-account production of housing services and domestic services produced by employing paid domestic staff

18. What? - Boundaries Consumption Boundary • Consumption of goods and services is the act of completely using them up • in a process of production (intermediate consumption) or • for direct satisfaction of human needs / wants (final consumption) • The second activity represents final consumption and includes use of goods and services for both • individual needs - acquired by a household and used to satisfy the needs or wants of members of that household; and • collective human needs - service provided simultaneously to all members of the community or a section of the community These are provided only by the government

19. What? - Boundaries Assets Boundary All that has a life of more than a year and qualifies as • economic assets i.e. store of value • on which ownership right can be established and • the economic owner derives benefits by holding or using • including • all non-financial assets whose economic owners are residents of the economy • all financial claims, shares or other equity in corporations of the residents plus gold bullion held by monetary authorities as a reserve asset fall in the assets boundary of the SNA

20. SNA Framework- Identities, Accounts and Valuation SNA framework • SNA is founded on the macro-economic framework that gives a set of identities forming basis of SNA sequence of accounts measuring economic flows and stocks • SNA framework is based on the premises that all goods and services produced in domestic economy are put to “use” • circular flow of income and expenditure of residents and non-residents participating in transactions in the economy • The framework establishes the equivalence of • supply and use of goods and services produced • the value of production of goods and services, income generated in production and expenditure on final products

21. Circular Flow of Income and Expenditure [Showing also Leakages: Saving, Taxes, Imports; and Injections: Investment, Government Expenditure, Exports] Exports Govt. Expenditure Investment Final Consumption Government Income Saving Households Imports Taxes Rest of the World Enterprises Expenditure on intermediate & capital g&s Financial Market Taxes

22. How? - Output, Production Output • “Enterprises” produce goods and services (g&s), using g&s produced by other enterprise in the domestic economy or RoW or by themselves as intermediate consumption (IC) • The receipts of the enterprises from sale (or value of goods and services otherwise disposed) of the produced goods and services represent the gross value of output (GVO) Production In the SNA, the measure of production (in ‘gross’ terms) is Gross Value Added (GVA). Defined as GVA = GVO – IC ……[2] where GVO stands for Gross Value of Output, IC for Intermediate Consumption

23. How? - Gross Domestic Product Gross Domestic Product (GDP) • GDPis a measure in monetary terms of production of all goods and services counted without duplication, as sum of GVA of all resident producer units within the economic borders of country during a given period of time and taxes less subsidies on products GDP = ΣGVA+ taxes less subsidies on all products (t-s) • GDP includesIllegal & concealed production, Production of goods for own consumption, Production of non-market services by government and NPISH, Services of own occupied dwelling units of households • GDP excludes social activities, cultural activities and unpaid volunteers, do-it-yourself decoration, maintenance and small repairs to durables and dwellings by households

24. How? – Gross vs Net Gross / Net Domestic Product (GDP / NDP) • The Capital Stock (Produced resource in the form of buildings, infrastructure, machinery and equipment) attracts Consumption of Fixed Capital (CFC) in the process of production • Net Domestic Product (NDP) is obtained from GDP by subtracting the CFC NDP = GDP – CFC GDP = NDP +CFC • Similarly, NVA= GVA - CFC

25. How? - Circular Flow Generation of Income • GVA resulting from the process of production is the income generated, which in turn is distributed to • households as • Compensation of Employees (CE) and • (gross) Operating Surplus (OS) (en route financial market) • Mixed Income (MI): mix of CE and OS, and • government as production taxes (net of subsidies), composed of • Taxes on products and import taxes (net of subsidies) and • Other production taxes (net of subsidies)

26. How? - Generation of Income Primary Income - from recipients’ perspective • Primary incomes:incomes accruing to units for their • involvement in or • for ownership of assets used in production processes • Households receive primary income from producers of goods and services as • Compensation of employees (CE) and • Property income (PI) from • lending of financial assets • renting of natural resources owned by them • or mixed income (MI)

27. How?- Primary Income Primary Income - from recipients’ perspective (Contd.) • Government receives • Taxes less subsidies on products and imports (duties) • Property income • Primary income is also received from (and paid to) RoW • For an institutional unit, Balance of Primary Income is • total value of the primary incomes receivable less total of the primary incomes payable • At total economy level, it is called Gross National Income GNI = primary income generated in the domestic economy (GDP) + (net) primary income receivable from RoW • NNI = GNI – CFC • Per capita income = NNI / Mid year population

28. How? - Distribution of Income Secondary Distribution of Income • Out of the balance of primary income (gross), the institutional units may pay and/or receive current transfers: • transactions in which an institutional unit provides part of primary income to another unit without receiving from the latter any thing in return as a direct counterpart • After making the current transfers, the institutional units are left with Gross National Disposable Income (GNDI) GNDI = GNI + Current Transfers receivable - Current Transfers payable

29. How? - Circular Flow - Use of Income Use of Income • The GNDI the available income is spent by the households, government and NPISHs on final consumption • The balance is Saving Saving = GNDI- Final Consumption Expenditure which then flow to the financial market • Enterprises borrow from the financial market for acquisition of assets (capital formation)

30. How? - Valuation Valuation of Goods and Services • Taxes and subsidies on products bring about difference in prices of products at different stages – production, distribution and sale resulting in different perception of prices for same transactions between users and producers • Valuations recommended in 2008 SNA: ‘basic prices’, ‘producers prices’ and ‘purchasers prices’ Purchasers’ price Lesstrade and transport margins Equalsproducer's prices Lesstaxes less subsidies on products payable/receivable by their producers Equalsbasic prices

31. How? - Valuation Market Prices Prices paid by consumers are different from what the producers perceive as their receipts, because: • the taxes on products that are passed on to government are not receipts of the producers • trade and transport margins, which forms part of the traders and transporters income Thus, in the National Accounts: • Use of productsare recorded atpurchasers’ prices • Supply (output) of products are recorded atbasic prices

32. How? - Valuation GVA at basic price An enterprise’s earnings from production is the GVA at basic prices = Receipts from sale of its products minus (taxes on products –subsidies on products) = Gross value of output at basic prices (GVObp) minus Intermediate Consumtion (input) at purchasers prices (ICpurp) = Gross Value Added at basic prices(GVAbp ) GVAbp = GVObp - ICpurp Which gets distributed as CE + OS + MI + other production (t-s) Where, CE is compensation of employees, OS is gross operating surplus and MI is mixed income - mix of CE and OS

33. How? - Valuation GDP - at Market Prices GDP the measure of production is always at market prices GDP at market prices is defined as: GDPmp= ΣGVAbp + taxes less subsidies on all products (t-s) GDPmp≡GVObp – IC + (t-s)on products + (t-s)on imports … [2] GDPmp represents the primary income generated from the production undertaken within the domestic economy. Taxes on products is a part of income. The above equation is in fact the Production Account

34. How? - Identities Commodity Balance Identity The equivalence of supply and use of goods and services lead to the commodity balance identity: Output at purchasers’ prices is GVOpurp≡IC + PFCE + GFCE + GFCF + CII + acquisition less disposal of valuables + X – M …. …. …[1] exports and imports are both valued at f.o.b., which excludes taxes and subsidies on imports Note that PFCE stands for Private Final Consumption Expenditure, which includes final consumption expenditure of Household and NPISHs

35. How? - Identities Expenditure-side Identity GDPmp ≡ PFCE + GFCE + GFCF + CII + acquisition less disposal of valuables + X – M This is the expenditure-side identity GDPmp≡ ΣGVAbp + taxes less subsidies (t-s) on products (including on imports) = ΣGVAprodp + taxes less subsidies (t-s) on imports Sum of GVA at producers price includes taxes less subsidies on domestic products only. Thus taxes less subsidies on imports is to be further added to get GDP at market price

36. How? - Identities Income-side Identity On the income-side, GDPmp≡(CE + OS + MI) generated in domestic economy + (t-s) on products + (t-s) on imports … [3] Income of the residents of the economy ≡ primary income generated within the economy (GDPmp) + (net) primary income earned from abroad (RoW) ≡CE generated in (paid by) the domestic economy + OS and MI generated in the domestic economy + (t-s) on products + (t-s) on imports + CE from RoW (net) + PI from RoW (net) ≡ Gross National Income (GNI) …… …….[4]

37. How? - Identities Gross National Disposable Income From the income, taxes on income and wealth are paid both to the governments of the country and abroad. The Government similarly earns such taxes both from the domestic economy as well as abroad Further, there are current transfers made both within country and across the border. Thus, Gross National Disposable Income (GNDI) ≡ GNI- net taxes on income and wealth payable to RoW + net current transfers receivable from RoW ….[5] [Note that the transfers within the economy get cancelled out]

38. How? - Identities Gross Saving (Gross) Saving of the domestic economy is defined as Gross saving = GNDI minus (PFCE + GFCE).... ...... [6] Using the expenditure- and income-side identities, this reduces to Gross Saving = Gross Domestic Capital Formation + acquisition less disposal of valuables + acquisition less disposal of non-produced non-financial assets - (net) Capital transfer receivable + net lending (to RoW) .... ...... [7]

39. Main SNA Indicators – A sum up GDP plus(net) primary income from RoW = GNI plus(net) current transfer from RoW plus(net) taxes on income and wealth from RoW = GNDI minusfinal consumption expenditure = Gross Saving plus(net) capital transfer from RoW minusgross capital formation minusacquisition less disposalof valuables from RoW minusCFC = Net lending / borrowing from /to RoW How? - Accounts 39

40. SNA framework reflects economic processes in sequence of accounts that core of accounting framework, provides overview of the economy structured by institutional sectors (incl. ROW) and three sub-sets of accounts Three subsets of Accounts are: I. Current accounts Production Accounts … … … ← identity [2] IncomeAccounts i. Generation of income account … …← identity [3] ii. Allocation of primary income account … … ← identity [4] iii. Secondary distribution of income account …← identity [5] iv. Use of income account … … ← identity [6] II. Accumulation accounts … …← identity [7] III. Balance sheet SNA Framework- Sequence of Accounts Sequence of Accounts 40

41. How? - Accounts Transaction accounts Transaction accounts - All the accounts, except Balance Sheets and the Other Changes in Assets Accounts, consist of values of transactions and are linked to the basic economic activities of production income generation and distribution consumption and capital formation

42. How? - Accounts General Features of Accounts Like business accounts, each of these accounts of SNA are organised as a sequence ofT-accountsand thus have two sides, called • ‘resources’ and ‘uses’ for current accounts • ‘changes in liability & net worth’ and ‘changes in assets’ for accumulation accounts • ‘liabilities & net worth’ and ‘assets’ for Balance sheet Entries made in these accounts are based on the principle of double accounting, thus permit checking consistency The accounting structure - applies to all institutional units / sub-sectors / sectors and total economy. However, all transactions are not relevant for all sectors

43. How? - Accounts Links between Accounts • Among the transaction accounts: The balancing item (in the uses side) of one account is carried forward as the first item (in the resources) of the next account • The changes in assets and liabilities brought about by transactions (and other changes) are reflected in the Balance Sheet • The sequence of accounts thus provides an integrated view of the entire economy

44. How? - Accounts Links between the Accounts Transaction Accounts Production Account GDP Income Accounts savings Opening Balance Sheet Capital Account (non-financial assets) Other Economic flows Closing Balance Sheet Net lending/borrowing Financial Account (financial assets/ liabilities)

45. 45

46. Other Volume Change

47. Revaluation Account

48. Changes in Balance Sheet

49. How? - Accounts Balancing Items in Accounts • Balancing item • the sum of resources (right side) minus the sum of uses (left side) in each of thecurrent accounts • shown on the left side (uses side) of the account • Each account has a balancing item that is significant as a macro-economic aggregate like • gross / net domestic product (GDP / NDP) • gross / net national income (GNI/ NNI) • gross / net disposable income (GNDI/NNDI) • saving • net lending/borrowing

50. The value of a product or group of products, valued for the current period using its own prices from an earlier period(which are kept constant) At the micro level: At the aggregate level: the total value of a group of products in period t where each item is revaluated at its own prices of period 0(period 0 is kept constant for a period of time) Where: is the price of item i in base period 0 is the quantity of item i in period t is the total value in period t measured at the prices of base period 0 What is Estimates at Constant Prices 50