Classification of Expenditures for ICP 2004

1. Classification of Expenditures for ICP 2004 Chapter 3 of the Manual

2. Contents • National accounts statistics • national accounts and the ICP • main expenditure aggregates • valuation • Expenditure classification • general framework • basic headings • Data sources

3. National Accounts and the ICP

4. Role of national accounts experts • ICP 2004 is a joint project involving both price statisticians and national accountants. • To calculate the PPPs, the national accounts experts provide the expenditure weights while the price statisticians provide the prices. • A main objective of ICP 2004 is to compare the real GDP of participating countries. This requires good estimates of the level of GDP in national currencies.

5. 1993 System of National Accounts • ICP 2004 will be based on the 1993 SNA, but some approximations are inevitable. For example: • Non-profit institutions not distinguished • No estimates for valuables, patented entities... • No work in progress for agriculture • FISIM not allocated to users • No estimates for illegal activities

6. Key requirements • GDP must cover informal activities: • crops and livestock for own consumption • market traders, taxi drivers, street vendors, personal services… • All levels of government • Software and mineral exploration in capital formation • Significant NPISHs • Foreign trade, including shuttle trade and smuggling

7. Main expenditure aggregates

8. Main expenditure aggregates

9. Actual final consumption • ICP 2004 will compare actual final consumption between countries - not final consumption expenditure • Actual final consumption consists of: • actual individual consumption of households • actual collective consumption of government

10. Who consumes versus who spends

11. But expenditure weights will refer to final consumption expenditure • Participating countries will need to supply weights for final consumption expenditure. • Conversion to actual final consumption will be done by the ICP organisers. • Participating countries will need to distinguish between individual and collective consumption expenditures of government.

12. Individual consumption expenditure by households • Actual expenditures • food, clothing, transport, rent, services…. • Imputed expenditures: • rents of owner-occupiers • food and other goods for own consumption • goods and services provided as income in kind • FISIM (if allocated to consumers)

13. Individual consumption expenditure by NPISHs • Non-Profit Institutions Serving Households (NPISH) are mainly funded by households - either residents or foreign households. • Examples: • religious organisations (mosques, temples, churches, schools, clinics, hospitals) • trade unions • political parties in multi-party states • UNICEF, OXFAM, Red Crescent

14. Individual consumption expenditure by government • Most expenditures on housing, health, recreation and culture, education and social protection are individual. • Two kinds: • production of services by government for the benefit of individual households • purchase of goods and services by government from other producers which are then passed on to households, either free or at low cost (health and education only)

15. Collective consumption expenditure by government • Mainly fall under the COFOG headings of general public services, defence, public order and safety, economic affairs and environment protection • Only one kind - the production of services by government. Collective consumption does not involve the purchase of goods and services for delivery to households.

16. Gross fixed capital formation (GFCF) • Goods that are expected to be used in production for several years • GFCF is always measured net of sales: • sales for scrap, sales to abattoirs, exports • 1993 SNA includes expenditures on software and on mineral exploration in GFCF

17. Change in inventories • Work in progress - construction, ships… • Stocks of raw materials, finished goods, goods for resale, goods stored by government as strategic reserves, such as food and fuel. • Estimates may not be comprehensive but should cover important items such as food and fuel stocks, stocks of mining companies, large retailers...

18. Valuation

19. Valuation - general rule • General rule is to use the prices at which sales of goods and services are transacted - “purchasers” (or “market”) prices. • These prices may be reduced by discounts or rebates: • bargaining, sales,bulk purchases… • Note that price data for ICP must also reflect discounts or rebates.

20. Valuation - imputed rents • Imputed rents of owner occupiers • use rents actually paid for similar kinds of dwellings, in similar locations and with similar facilities • if not possible, rents are valued at cost - consumption of fixed capital, return on capital, regular maintenance, and insurance

21. Valuation - two other imputations • Goods produced for own consumption. • Prices in local markets for livestock, vegetables, fruit… • Estimated basic prices for furniture, textiles, hand-tools (retail prices less sales taxes and retail margins) • Goods and services provided as income in kind • at purchasers’ prices if the employer has purchased the goods or services and at producers’ prices if they have been produced by the enterprise itself.

22. Valuation - NPISH • Individual consumption expenditure of NPISH • Valued at cost of production - compensation of employees, intermediate consumption, consumption of fixed capital, taxes less subsidies on production minus any payments received from households for services provided.

23. Valuation - Government • Goods and services purchased by government from other producers which are then passed on to households: • purchasers prices • All other consumption expenditure of government • at the costs of production (see valuation of NPISH)

24. Valuation - GFCF • GFCF is valued at purchasers’ prices but note that these should include not only the cost of transport but also the cost of installation and any fees or taxes for transfer of ownership. • Own-account production of fixed capital assets is valued at basic prices or, if not available, at the costs of production.

25. Valuation - Change in Inventories • The change in inventories must reflect only the physical change - not holding gains or losses due to changes in prices during the year. • The physical quantities of inventories at the beginning and end of the year are usually valued using the average prices over the year or, failing that, mid-year prices.

26. Valuation - Exports and Imports • Exports of goods and services • Free-on-board (f.o.b.) prices • Imports of goods and services • Cost, insurance, freight (c.i.f.) prices

27. Expenditure Classification

28. The Expenditure Classification • The Expenditure Classification for the ICP 2004 is based on four international classifications: • COICOP for household expenditure • COPNI for NPISH • COFOG for government • CPA/CPC for gross fixed capital formation

29. Structure of the Classification

30. Basic Headings

31. Importance of Basic Headings • They are the starting point for participating countries to draw up regional lists of the specific goods and services for which they agree to collect prices. • The basic headings will be used as the framework for editing the reported prices • The ICP organisers will calculate PPPs for the basic headings before aggregating them to higher levels for publication

32. Examples of basic headings:Food

33. Examples of basic headings:Machinery

34. Examples of basic headings: Government

35. Data Sources

36. Data sources: getting started • Starting point is the existing expenditure breakdown of GDP • Some countries will not even have the breakdown by the main expenditure aggregates. For example: • NPISH expenditures included with households • no estimates of change in inventories • no information on net acquisitions of valuables

37. Typical problems with main aggregates • NPISH • In some countries NPISHs may be trivial and can be ignored. In other countries there will be a few large NPISH for which accounts should be compiled • Change in inventories • Estimates need not be comprehensive but should cover strategic food and fuel stocks and stocks held by large enterprises. • Net acquisition of valuables • Can be ignored in most countries.

38. Data sources for household expenditures • Household budget/expenditure surveys • Nutrition surveys • Retail trade statistics • Production statistics - agriculture and industry • Import and export statistics • VAT or sales tax statistics • Information on sales of tobacco and alcohol • Motor vehicle registrations • Sales by utility companies and state monopolies • FAO data base on food balances

39. Supply and Use Table • All countries will need to use information from a number of more or less reliable sources. • A supply and use table is a good framework for checking and adjusting data coming from different sources. • The essential feature of a supply and use table is that the total supply of goods and services (left side) must equal the total uses (right side)

40. Example of a Supply and Use table

41. Data sources for government • Government budget (forecast) or expenditure (actual) records. • To distinguish between individual and collective consumption, assume that most housing, health, recreation and culture, education and social protection are individual. • The production accounts will supply basic headings consisting of compensation of employees, intermediate consumption, gross operating surplus and net taxes on products.

42. Data sources for GFCF • Government accounts • Investment surveys of enterprise • “Commodity flow” methods. • Estimate the total supply of goods used for GFCF. Add margins for labour costs, profits and product taxes to obtain GFCF in purchasers’ prices. • Particularly useful for estimating the 20 basic headings needed for machinery and equipment in countries where most of these assets are imported.

43. Fall-back strategies • Weights are needed for all basic headings • If countries do not supply them, the organizers will have to guesstimate them • Countries should do it - not the organizers. Possibilities: • equal division of group or class weights among basic headings • other countries’ weights • expert opinion