GDP and National Accounts: key concepts National Accounts (Part A)

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1 SUMMER SCHOOL ON MEASUREMENT OF WELL-BEING AND SOCIETAL PROGRESS Pisa 9-13 September 2013 GDP and National Accounts: key concepts National Accounts (Part A) Alessandra Coli, University of Pisa 1

2 About GDP (Gross Domestic Product) What is GDP? What does it measure? What does GDP include and what it does not? How is GDP estimated? What about international comparability? Can we trust GDP estimates? 2

3 GDP in daily life GDP guides or affects economic and social policies GDP is the most used macroeconomic indicator to assess whether the economy is in health or not. GDP is the yardstick for analysing lots of macroeconomic measures: taxes, government debt, shadow economy etc National and international policies are frequently based on GDP-strictly related aggregates: European budget, Maastricht parameters, Structural funds, etc. 3

4 GDP and the European budget (1/2) The EU budget revenue is divided into four categories: 1. Traditional own resources: taxes raised on behalf of the EU as a whole, principally import duties on goods brought into the EU. 2. VAT based own resources: taxes on EU citizens derived as a proportion of VAT levied in each member country. 3. GNI (Gross National Income) based own resources : the largest contribution to EU funding. A simple multiplier is applied to the calculated GNI for the country concerned. 4. Other revenue: interests on deposits or late payments, payments from non-eu organisations, underspent funding from community programs and any other surplus from the previous budget. 4

5 GDP and the European budget (2/2) 2012 budget 2013 budget 5% 12% 1% 14% 11% 11% 72% 74% Traditional resources GNI resources VAT resource Other resources Traditional resources GNI resources VAT resource Other resources Source: European Commission web-site 5

6 GDP and National Accounts (NAs) GDP is the key aggregate of NAs NAs describe the economy of a given country (region or groups of regions) in a given period (year, quarter, month). NAs provide an overview of economic processes, recording how production is generated, how income originating in production flows to the economic agents, and how the economic agents allocate income to consumption, saving and investment. The System for national accounts (SNA) is the world-level harmonised reference methodology for compiling NAs 6

7 The origins of the System of National Accounts The origins of the SNA go to the 1947 United Nations Report on the Measurement of National Income and the Construction of Social Accounts. The British economist Richard Stone chaired the subcommittee in charge of the Report. In 1984 Richard Stone received the Nobel Memorial Prize for having made fundamental contributions to the development of systems of national accounts and hence, greatly improved the basis for empirical economic analysis R. Stone was responsible for a breakthrough of a new methodology in the research concerning the empirical measure of the Economy. His ideas form the backbone of the current systems of national accounts 7

8 R. Stone s methodological innovations 1 ) Social Accounting Approach: rather than building up a single total such as the national income, it is necessary to: Classify accounting entities into certain broad sectors distinguished by function (producers, consumers etc) Consider the accounting (revenues and outlays) of each sector: e.g. income is an entry for consumers Decide which groups of transactions need to be kept distinct in the sector s accounting. 8

9 A simple example: one single account for one single accounting entity (1/2) Consider the accounting of a single individual family What are the constitutional elements? Accounting entity: FAMILY Transactions: Balancing item = SAVING REVENUE (entries): wage and salaries, profits what else? PAYMENTS (outlays): acquisition of goods, rents, taxes. 9

10 A simple example: one single account for one single accounting entity (2/2) Remarks: Building accounts for single accounting entities. What is the purpose? Is it useful to analyse/evaluate the Economy of the nation as a whole? Recording separately each single transaction between the accounting entity and the rest of the economy. Is it useful/possible? In setting out a system of national accounts, the principal problem is to know how far to go in combining accounts and transactions 10

11 R. Stone s methodological innovation 2) Double-entry booking-keeping principal: each item of revenue or expenditure on one side of an account reappears as expenditure or revenue, respectively, in another account. E.g. the rent paid by a family is a revenue for the landlord family; wages and salaries earned by a member of the family correspond to an outlay of the firm where the member of the family works. What are the consequences at the macro level? 11

12 Summarizing: the Economy is represented by an integrated set of accounts Economy can be seen as uncountable transactions between purchasers and sellers (an endlessly detailed and complicated mass of transactions). Basing on the social accounting approach and the double-entry accounting principle transactions are organizad into a set of integrated and interdependent accounts. National accounts are built in the context of internationally agreed concepts, definitions, classifications and accounting rules which are disseminated through the Systems of National Accounts manuals The SNA broad objective is to provide a comprehensive framework for compiling and reporting macroeconomic statistics 12

13 Historic Versions of the System of National Accounts 1953 SNA it made the empirical application easier also for developing countries. Two slightly modified editions of the 1953 SNA were published in 1960 and SNA Introduced input-output accounts and balance sheets; gave more attention to estimates at constant prices SNA Represents a major advance in national accounting SNA The SNA2008 (an update of SNA93) is the world-level harmonised reference methodology for national accounts. 13

14 The European System of National Account 1995 (ESA95) The ESA95 is the harmonised European methodology for the compilation of national accounts. The ESA and the SNA are broadly consistent. Formally, the ESA is a legal act, it has more precise definitions and it is intended as reference guide. An update of ESA95, the ESA2010, is close to finalisation. 14

15 The circular flow of income in NAs PRODUCTION INVESTMENT SAVING FINAL CONSUMPTION EXPENDITURE GENERATION AND DISTRIBUTION OF INCOME 15

16 The circular flow of income and GDP Final production = Income = Final demand CLOSED ECONOMY PRODUCTION GDP = FINAL PRODUCTION INVESTMENT GDP = FINAL DEMAND SAVING FINAL CONSUMPTION EXPENDITURE GDP = INCOME GENERATION AND DISTRIBUTION OF INCOME 16

17 Estimating GDP. The Theoretical framework (1/4) GDP is derived in three ways (independent measures) 1 ) VALUE ADDED OR PRODUCTION METHOD GDP is the balancing item of the Production account GDP = Y - IC - NPT Y = Output NPT = taxes less subsidies on production IC = Intermediate consumption GDP is the Final production of the economic process, i.e. the value of all the good and services produced by the economic system (Output) once subtracted the value of goods and services consumed as inputs (Intermediate consumption). 17

18 Estimating GDP. The Theoretical framework(2/4) 2 ) INCOME METHOD GDP as the sum of income generated during economic activities (generation of income account) GDP = WS + GOS + GMI + NIT WS: compensation of employees GOS: gross operating surplus GMI: gross mixed income NIT: taxes on production and imports net of any subsidies on production 18

19 Estimating GDP. The Theoretical framework (3/3) 3) EXPENDITURE METHOD GDP as the the sum of expenditures on final goods and services by households, firms and government (goods and services account) GDP = C + I + E M C = final consumption expenditure I = Investment E = Exports M = Imports 19

20 Estimating GDP: empirical aspects The estimation of GDP is based on a variety of micro data sources on production, income, expenditure (including administrative sources, enterprises surveys, households surveys) The three different calculations of a country s GDP should lead to the same number. This obviously does not happen. A reconciliation is needed. National accountants reconcile estimates coming from the three methods considering strengths and weaknesses of the various data sources. 20

21 What does GDP actually measure? (1/4) Y = IC + GDP IC GDP Y GDP depends on Y but also on the position of the dotted line. Boundaries of Production and of Intermediate Consumption 21

22 What does GDP actually measure? (2/4) Boundaries of Production and Intermediate consumption: impact on GDP, some examples GDP is not affected by moral considerations: all production activities are included even illegal ones (prostitution, illegal production of drugs) or activities notregistered at tax, social security, statistical or other public authorities (shadow economy is included in GDP) GDP excludes the production of domestic and personal services that are produced and consumed within the same household 22

23 What does GDP actually measure? (3/4) Boundaries of Production and Intermediate consumption: impact on GDP, some examples. GDP excludes services (caretaking, cleaning) provided by volunteers GDP excludes capital gains GDP excludes travelling expenditures made by employees when reimbursed by employers. Commute costs are in GDP instead 23

24 What does GDP actually measure? (4/4) GROSS: means that GDP includes fixed capital consumption NDP (Net domestic product) = GDP - depreciation on country s capital DOMESTIC: GDP includes goods and services produced within the country s borders. NNI (Net national income)= NDP + net compensation of production factors from abroad 24

25 Measuring Material Well-being in NAs Per capita GDP Per capita NDP Per capita NNI Per capita Households disposable income 25

26 Net National Income (EU 27 countries) % GDP EU (27 countries)

27 Net National Income (% GDP) Luxembourg Italy EU (27 countries) Germany United Kingdom 27

28 Cumulated growth of GDP versus Gross Disposable Income of households (total / per capita) Euro area, in volume / real terms, seasonally adjusted data, 2005Q1= Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GDP Gross Disposable Income Gross Disposable Income per capita Source: Denis Leythienne and Liviana Mattonetti (Eurostat) E-frame conference, Paris, June

29 Concluding remarks GDP is not meant to measure wellbeing. NAs are not only GDP. NAs provide alternative indicators for measuring material wellbeing (focus on Households accounting) NAs can be extended to cover specific topics (environmental accounts, social accounts etc) 29

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