Accounting Methods of China's Expenditure-Based GDP: Framework, Classification, and Suggestions

1. COMMENTS ON THE PAPER “Accounting Methods of China’s Annual Expenditure-Based GDP” Ramesh Kolli Additional Director General Ministry of Statistics & Programme Implementation

2. Introduction • Expenditure GDP compiled in China at national and regional levels. • Follows largely 1993 SNA concepts • Data series is apparently available from 1978 • It is important that GDP is compiled by all three approaches, namely, production, income and expenditure and preferably through supply-use framework • Expenditure GDP assumes more importance as it depicts the final uses of output in terms of consumption, capital formation and net exports • Therefore, compilation of expenditure GDP by NBS is in line with best practices of compiling national accounts

3. Contd.. • At regional level, it is difficult to compile expenditure GDP, due to lack of data on exports and imports, as also on the inter-region movement of goods and services within the country. • It will be interesting to know the procedures adopted by the NBS to overcome these data issues • In India, regional domestic product estimates (known as state domestic product or SDP), are compiled by following the income originating approach, which is similar to the production approach GDP at the national level • This method provides estimates of domestic product at regional level by economic activity

4. I. The frame and classification of expenditure-based GDP accounting • Standard framework and classification • However, NPISH is apparently not covered, but this is an important institution • COICOP is adopted but not clear about COFOG inclusion • GFCF estimation is elaborate and according to conceptual basis

5. Contd… Few suggestions: • Procedures for construction GFCF is complicated • repair and maintenance part of output of construction should be subtracted from the output to get to GFCF (not clear from the paper if NBS is following this) • under machinery and equipment GFCF, number of assets appeared to be too broad, could be broken into few more important assets, such as transport equipment • NBS may contemplate including R&D expenditures and military capital expenditures which can be used by civilians under GFCF • Valuables in GCF

6. Contd… • For change in inventories, NBS inflates current year’s opening stock to the level of current year’s closing stock and then takes the difference • In India, inventories are brought to base year price levels and then change in inventories at constant prices is estimated. This is again inflated to estimate change in stocks at current prices. • However, this procedure needs adjustment to the data on inventories provided by the businesses to the prevailing market values, as businesses normally provide data on inventories normally at costs or at realisable values, rather than at the prevailing market value.

7. Contd… • Imports and exports appear to be single entries in GDP • Consider presenting goods and services separately • Build up a capital stock data series from the available data on GFCF using the PIM. • With this, NBS could switch over from ‘depreciation’ to ‘consumption of fixed capital’ • Procedures available for estimating opening stock figures prior to the GFCF series • Alternatively, opening capital stock could be estimated from capital output ratios of the first year for which GFCF data is available or from the data available from economic censuses or business accounts. • However, this needs to be done carefully at very detailed level, by enterprise/economic activity.

8. II. Household Consumption Expenditure • estimated separately for rural and urban households directly from the survey results • scope and coverage are as per standard norms • If the sources of data for consumption expenditure and output are different, there is a possibility of having a large discrepancy between production and expenditure GDP. • The ideal procedure is adoption of supply-use framework • In India, commodity flow procedure is adopted

9. Contd.. Expenditure on FISIM • method of compilation appears to be correct • Please check the formula (interest of loans – interest rate of deposits)/2 • FISIM is normally allocated to industries and final users. • The method followed by NBS is different from this procedure and may give rise to discrepancy between FISIM of industries and final users and the FISIM shown under financial intermediation • In India, FISIM from different financial institutions is allocated on the basis of indicators of deposits and loans, separately in respect of each financial institution.

10. Contd… Expenditure on insurance services • formula for estimating this component appears to provide reliable estimate • However, in general, life insurance and non-life insurance components need to be treated separately, since expenditures on these two types of insurance have different purposes • Premiums on non-life insurance by households is in the form of consumption expenditure, but only the commissions part of life insurance premiums and premium supplements would constitute consumption expenditure.

11. Gross Output • The gross output is estimated by the production approach, but the value added is stated to be estimated by the income approach. • In practice, apparently the same set of data is used for both the production and income approaches • The production approach GVA is divided into different components of value added. • The formula given for estimating the gross output needs to be re-written although the intention is clear.

12. Contd… Calculation method at constant price • The deflators used are appropriate • In respect of financial and insurance services, the implicit price deflator of the output of financial intermediation services could be an alternative. • Another alternative could be the rates of interest index of deposits and loans.

13. III. Government consumption expenditure • Not clear whether NBS covers central government, provincial governments, local bodies and autonomous government institutions • Most local bodies and autonomous government institutions also generate own resources, besides current and capital transfers they receive from the higher level of government

14. Contd… Calculation at current price • The compilation procedure appears to be in order • pension costs are excluded from the consumption expenditure, which is correct, as they are transfers • However, expenditures on wages and welfare of the government do not include the imputed pension liabilities of present employees. This should be estimated and included in GFCE • In India, since this imputed pension liabilities are not estimated, the actual pension payments are taken to be equal to the imputed pension liabilities of present set of employees and added to consumption expenditure of general government • Depreciation estimates need to be in terms of consumption of fixed capital.

15. Contd…. Calculation at constant price • The deflator for depreciation is taken to be the Producers’ Prices of Industrial Products • An alternative could be the implicit deflator of GFCF • CPI is used to deflate other component of GFCE • In India, different price indices (producer, consumer and implicit industry-wise GDP deflators) are applied on each component of the GFCE, namely, the compensation of employees and purchase of goods and services, as also in respect of different Ministries • The CPI is also the wage index in India and is, therefore, applied on the compensation of employees

16. IV. Gross Fixed Capital Formation Construction • Procedure is somewhat complicated • GFCF of construction is the output of construction, minus, repairs and maintenance • Output of construction is the value of material inputs+value of factor inputs (the gross value added is the value of factor inputs) • NBS is estimating the value of output in terms of sales of units, while in India, it is estimated on the basis of value of available of basic construction materials, other construction materials and the factor inputs • It is not clear from the paper whether NBS removes the repair and maintenance part of construction output to arrive at GFCF of construction.

17. Contd… Machinery and equipment • Conceptually and in terms of coverage, the procedure followed by the NBS is correct • Data is also available from the sources directly (from enterprises) • Procedures adopted for smaller businesses may not provide reliable estimates • In India, we follow commodity-flow approach for estimating the overall supply of machinery and equipment, which is taken as GFCF and from this government and corporations part is subtracted to get GFCF of households

18. V. Increase in inventories • Title could be change rather than increase in inventories • The definition provided in the paper is conceptually correct, except that when output is estimated as production*price, finished goods do not form part of inventories. They become part of inventories when output is estimated as sales+change in inventories. • NBS updates the inventories at the beginning of the year with relevant price indexes to bring them to the price levels of the reference year and when this estimate is subtracted from the inventories at the close of the year, the change in inventories data is obtained • This is done by industries (and by broad three groups of institutions, state-owned enterprises, large enterprises and others; it is presumed that inventories with government and government commercial undertakings are also taken into account) • In India, the change in inventories is first estimated at constant prices by revaluing the stocks and this is inflated to get to current price estimates. This procedure is followed at each industry/institution level.

19. VI. Net Export of Goods and Services • Method of compilation both at current and constant prices is in order • trade data is available only in terms of US dollars – NBS may obtain data in terms of CNY • NBS compiles import data on FOB basis, which is the standard procedure • Most countries could present import data on CIF basis only • Sources for goods and services are respectively the Customs and BOP statistics. There could be discrepancy in the two sources of data in respect of goods

20. 1. Which Deflator should be applied to GFCE at constant price? • GFCE consists of three components, compensation of employees, net (receipts netted) purchase of goods and services and consumption of fixed capital • The three components are needed to be separately deflated • For compensation of employees in respect of non-market production, the ideal deflator is the wage index. If this is not available, the CPI which is linked to the wages of government employees may be used • For goods and services component, deflators could be the price indices of different commodities and services to be applied to the expenditures of different Ministries of government • CFC is to be estimated ideally through the PIM. Otherwise, the price indices of fixed assets could be considered.

21. What is the data source to compute GFCF (whether to use the Balance Sheet of government and enterprises)? How to get and process these data? • Government accounts show normally the acquisition of fixed assets, • Accounts of enterprises show normally (i) opening stock, purchases, disposals and closing stock • GFCF is purchases minus disposals of fixed assets • However, value of disposals of fixed assets is generally in terms of book values. The correct procedure is to take the depreciated value or the realised value of disposed assets • Normally, the books of accounts of enterprises have these data • The problem is in respect of smaller enterprises • In order to estimate their GFCF, in India, overall GFCF for the country is estimated from the supply side through commodity flow approach. The household GFCF is the residual.

22. How to compute the change of inventories exactly and comprehensively? How to estimate the value of inventories at the beginning and the end of the period? • Normally, books of accounts show value of inventories at the beginning and closing of the year • The ideal way to measure the change of inventories is to bring both these values to the current market values, since the books of accounts normally show these at ‘costs’ or realisable value, and also since these inventories enter the production process at current market values • Once the opening and closing stock figures are brought to the current market values, the difference of these two would give the ‘change in inventories’

23. Contd… • Another alternative to this is to revalue inventories using appropriate price indexes to the base year levels. The difference between the inventories of two successive years gives ‘change in inventories’ at constant prices. This change in inventories is again inflated with the same price indexes, to get the estimates of change in inventories at current prices. • For smaller enterprises, which do not maintain accounts, compiling change in inventories data is a problem • Normally, using data from economic census or periodic enterprise surveys, the data on inventories is prepared for a benchmark year • For other years, indicators (such as output or short term credits or the ratios of large businesses) are used to extrapolate the inventories.

24. Thanks