Lesson-IV-2: Printable Lesson: IV Part -2 Economic Flows and Stocks An Introduction to System of National Accounts - Basic Concepts Fourth e-learning Course on the 2008 System of National Accounts October December 2013
Content Definition of Output Types of Output and their Valuation Measuring Output Intermediate Consumption SIAP 2
Definition of Output SIAP 3
Definition of Output Forms of Output Output Goods: Tangible Transferable (ownership) Can be stored Services: Intangible Non transferable Produced as delivered SIAP 4
Definition of Output Output - Definition Output is defined as the goods & services produced by an establishment (production unit), excluding the value of any goods and services a. used in an activity for which the establishment does not assume the risk of using the products in production, b. consumed by the same establishment, except for goods and services used for capital formation (fixed capital or changes in inventories) or own final consumption. SIAP 5
Definition of Output Processing Service This is an example of exclusion of the kind (a) mentioned in the previous slide. Goods for processing are the goods owned by one enterprise (say A) that are sent for processing to another enterprise (say B). Cloth Service charges Enterprise A Garments Enterprise B SIAP 6
Definition of Output Output - Processing Service The receiving enterprise B (for example an independent tailor working for a garment-seller) does not take on the responsibility or the risk of disposal of the finished product. The enterprise A (garment-seller in the example) owns both the raw materials (cloth) sent for processing as well as the finished product (garments). Gross value of output: GVO of A: value of garments GVO of B: processing services it receives from A. SIAP 7
Definition of Output Disposal of Output Output of an enterprise is disposed of in the following three ways: Sales - Sale of goods and services for cash, credit, or barter Change in inventory (CII) - addition/reduction to inventory of finished goods, goods in process, or goods for resale (CII = closing inventory - opening inventory) Own final use - goods and services used for own final consumption and own capital formation SIAP 8
A Question Which of the following (more than one) are included in output a. Value of products sold in the market b. Value of the flour that a small miller turns out from the wheat provided by a customer. c. Value of machinery purchased by a firm for use as capital goods. d. Costs incurred for erecting a workshop constructed by a factory for its own use. e. Value of cars made in an automobile factory that remained unsold during the accounting period. f. Cost of fertilizers unused during the accounting period incurred by a farmer. SIAP 9
Types of Output and their Valuation Three-way distinction Market output Non-market output Output for Own Final Use Valuation of output SIAP 10
Type of Output Three-way Distinction of Output The 2008 SNA makes a three way distinction of output Market output: Those sold in the market at economically significant prices. Non-market output: Those provided free or at prices that are not economically significant to other institutional units These are mainly services produced by the Government and NPISHs. Output for own final use: Those used for own final consumption and own capital formation. SIAP 11
Type of Output Market Output Those intended for sale at economically significant prices. The gross value of (market) output includes the value of produced goods & services: sold at economically significant prices; bartered in exchange for other goods, services or assets; used for payments in kind, including compensation in kind; SIAP 12
Type of Output Market Output (contd.) The gross value of (market) output includes the value of produced goods & services: used for intra-enterprise deliveries from one establishment to another that are used as intermediate inputs; entering in inventories of finished goods and work-inprogress intended for one or other of the above uses; and the margins charged on the supply of goods and services: trade & transport margins, margins on the acquisition and disposal of financial assets, etc. SIAP 13
Type of Output Non-Market Output Non-market output consists of goods and individual or collective services produced by non-profit institutions serving households (NPISHs) or government that are supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole. SIAP 14
Type of Output Output for Own Final Use Output for own final use consists of products retained by the producer for his own use as final consumption or capital formation. This consists of: goods produced by an unincorporated enterprise and consumed by the same household; services provided to households by paid domestic staff; imputed services of owner-occupied dwellings; fixed assets produced by an establishment that are retained; (own-account gross fixed capital formation); changes in inventories of finished goods and work-in-progress intended for one or other of the above uses. SIAP 15
Value of Output Non-Market Output Non-market output is recommended to be measured at production costs, when it is provided without charge to households or at a nominal cost Output at production costs is the sum of the following items: a) Intermediate consumption; b) Compensation of employees; c) Consumption of fixed capital; d) Other taxes (less subsidies) on production. SIAP 16
Value of Output Output for own use Output for own final use should be valued at the basic prices at which the goods and services could be sold if offered for sale on the market. When reliable market prices cannot be obtained, the value is deemed to be equal to the sum of their costs of production: (2008 SNA) a) Intermediate consumption; b) Compensation of employees; c) A net return to fixed capital; d) Consumption of fixed capital; e) Other taxes on production. SIAP 17
Measuring Output A sum up Output Market Output Non-Market Output For Own Final Use Measured as Measured as the sum of Measured as the sum of volume X market price or outflow of output or by input cost SIAP IC, CE, CFC and other (t-s) on production IC, CE, CFC and other (t-s) on production + Net return to fixed capital 18
Measuring Output SIAP 19
Measuring Output Table 1. Gross Domestic Product of Bangladesh A General Practice One of the first few tables of a country s NAS publication typically looks like this It consists of GVA estimates of for each industrial sector which sum up to the GDP of the country. SIAP 20
Measuring Output A General Practice The GDP by production-approach is compiled as the sum of GVAs estimated industry by industry. The industry-wise GVAs often referred to as distribution of GDP by industry / economic activity are presented at either basic prices or at market prices. Finally, the GDP for the economy is always produced at market prices. SIAP 21
Measuring Output Valuation according to disposal Note that for obtaining the GDP (at market prices) the industry-wise GVAs, if primarily estimated at basic price, have to be converted to market price. The prices to be applied for valuation of output at market prices depends on the mode of disposal Sales are valued at producer price (+ product taxes paid directly by the consumers if any) Change in inventory: for finished product - always at basic price for purchased raw materials always at purchaser s price Own final use - always at basic price SIAP 22
Measuring Output Valuation according to disposal For example, if a farmer produces rice and sells 100 kgs in the market at 110 per kg; of which, 10 per kg is product tax retains 50 kg for consumption of its household; and stores 15 kg for use as seeds the next year. The farmer had 10 kg of rice from the previous year that he used as seeds for current year production. What is the value of the farmers output at market prices? SIAP 23
Measuring Output Output of selected industries We will now see how the output of some of the special industries like trading financial intermediation insurance services and growth of cultivated assets are defined. SIAP 24
Measuring Output Output of Trading The output of trading activities is trade margin defined as: GVO = Sale - cost of goods sold Cost of goods sold = Purchases of goods for resale + opening stock of goods for resale - closing stock of goods for resale Thus, GVO = Sale + closing stock - opening stock - purchases of goods for resale. SIAP 25
Measuring Output Output of Trading an example For example consider a retail store that recorded the following transactions in 2006: Sale = 50,000 Purchases of goods for sale = 30,000 Opening stock = 4,000, Closing stock = 5,000 Utilities = 200 Expenditure on supplies = 500 Other services paid = 50 GVO = 50,000 + (5000-4000) - 30,000 = 21,000 GVA = 21,000 - (200+500+50) = 21,000 750 = 20,250 SIAP 26
Measuring Output Output - Financial Intermediation Banks provide services for both explicit fees and implicit charges. Explicit fees: fees for issuing a draft or doing money transfer etc., are always recorded as payable by the service-receiving unit to the service-provider, i.e. the banks. Implicit service charges: mainly for the services of channelling saving of savers to the borrowers. This is called financial intermediation services indirectly measured (FISIM). SIAP 27
Measuring Output Output of Commercial Banks Commercial banks are the main financial intermediaries. The gross value of output of commercial banks is GVO = service charges and other receipt from services + FISIM FISIM ( financial intermediation services indirectly measured) = Value of services integrated in the computation of interest on deposit and loans SIAP 28
Measuring Output Measuring FISIM 2008 SNA Total FISIM = FISIM on loans (f L ) + FISIM on deposits (f D ) Denoting reference rate: rr interest receivable: r L interest payable: r D FISIM on loans = stock of loans multiplied by (r L rr) FISIM on Deposits = stock of deposits multiplied (rr r D ). Thus Total FISIM = f L + fd = ( rl rr) YL + ( rr rd) Y D May 2012 29
Measuring Output Banks (Contd.) FISIM: On Loans = (actual - pure) interest rate On Deposits = (pure -actual) interest rate 6 % = pure interest rate - FISIM BANKS 15% = interest rate plus FISIM HOUSEHOLD CORPORATION 10% (pure interest rate) SIAP 30
Measuring Output FISIM Example: Households deposited 500 mill. and bank lent out 300 mill. to corporations (production units). If the reference rate (that is pure interest rate is 10 %, what is the FISIM of bank? FISIM rate on deposit = 10% - 6% = 4 per cent FISIM on deposit FISIM rate on loan FISIM on loan = 500*(0.04) = 20 mill. = 15% - 10 = 5 percent = 300*(0.05) = 15 mill. There are other ways of deriving the estimate of FISIM depending upon the availability or choice of reference rate and the data SIAP 31
Measuring Output Use of FISIM FISIM the output of the financial corporations are used either for production as intermediate consumption or final consumption by the depositors - households, NPISHs and also the government. In our example: Total FISIM = 35 mill. of which, 20 mill. is the final consumption of households and 15 mill. is the intermediate consumption of producers. SIAP 32
Measuring Output Output - Non-life Insurance In non-life insurance only the risk is covered. Thus, when the event occurs for which insurance has been made, the policy holder makes his/ her claim. Thus for Non life or term insurance GVO = Actual premiums earned plus premium supplements minus adjusted claims incurred No adjustment of premium supplements made. SIAP 33
Measuring Output Output of Insurance Service Figure 4: Insurance transactions involved Policy Holders Premium supplements Insurance Corporations Investment of reserves Investment Income Financial Market SIAP 34
Measuring Output Insurance Services - important terms Some important terms: Investment income: all income from the investment of reserves (usually financial assets). These are income attributed to policyholders. Premium supplement: The investment income attributed to policyholders as their primary income Repaid to the insurance corporation as premium supplements. SIAP 35
Measuring Output Output of growth of Cultivated Assets The gross value of output of cultivated assets is obtained as GVO = Sales + change in inventory + own final use Refer to the example on page 56 of the Reading Materials. The GVO of cultivated forest is obtained as sum of sales, change in inventory and own final use. SIAP 36
Intermediate Consumption SIAP 37
Intermediate Consumption Intermediate input/consumption Goods and services purchased by producers and used as part of production consumed during production paid for by producer Consists of the value of all goods (non-durable) and services consumed in the process of production. Includes rentals paid on use of fixed assets goods and services supplied by other establishments of same enterprise goods and services used as inputs for the ancillary activity expenditure that an owner-occupier incurs on the maintenance and repair of the dwelling SIAP 38
Intermediate Consumption Intermediate Consumption (Contd.) Excludes Value of consumption of fixed capital used Goods and services (intermediate products) produced and used within the establishment Bad debt provisions/write-offs, taxes, fines, donations, dividends, amortization of goodwill, exchange rate losses, land rent, loss on sale of assets, interest (other than allocated FISIM) Expenditures on valuables (work of arts, precious metals, etc.) as stores of value. PDOS 2011 SIAP 39
A Question Which of the following is included in intermediate consumption of a corporate unit? a) Compensation of employees b) Profit c) Cost of fuel d) Interest paid to bank e) Rent paid to landlord SIAP 40
Thanks SIAP 41