International Comparison Program [05.02] Treatment of Exports and Imports, and Adjustment of Household Consumption for Net Purchases Abroad Adjustment of household consumption for net purchases abroad Paul McCarthy and Sergey Sergeev To be presented at the TAG Meeting Global Office 2 nd Technical Advisory Group Meeting February 17-19, 2010 Washington DC
Table of Contents 1 Objective... 2 2 The problem... 2 3 Issues... 2 4 Conclusion... 3 5 Annex A: Laspeyres/Paasche Spread: Asia/Pacific ICP 2005 / GDP (without the distribution of NEA)... 5 6 Annex B- Share of imports within household final consumption expenditure and gross fixed capital formation on equipment... 6 1
1 Objective Spell out the problems and make recommendations 2 The problem In the 2005 ICP, the net expenditure of residents abroad (NEA) balancing component of household final consumption expenditure (HFCE) was not reported consistently by participating countries. In many cases, zero expenditure was reported for this item, indicating either it had been allocated across relevant components of HFCE or it had not been estimated (perhaps because it was considered insignificant or because the data sources (e.g. household budget surveys) used to calculate HFCE did not require this adjustment to be made). The NEA can be either positive or negative, depending on whether the expenditures of visitors to the country outweigh those of the country s residents who go abroad or vice versa (the respective expenditure of non-residents and residents abroad go also into Exports / Imports but with an opposite sign). Generally the size of this component was relatively small in the ICP 2005 but it was quite significant in a few cases. Three issues arise: i. the consistency in the ways that countries report this item; ii. iii. the potential inconsistency arising between the PPPs for NEA being based on directly collected prices for imported goods compared with the reference PPP (exchange rates) applied to net exports of goods and services, particularly if NEA is allocated across components of household final consumption expenditure; the complication arising from dealing with a negative value in calculating the aggregated PPP for total HFCE and GDP. 3 Issues The ICP uses traditionally the domestic concept of expenditure at the basic heading level, to obtain a better consistency with price data collected also on the domestic market. The NEA is used as a balancing component, to obtain total HFCE based on the national concept. The 1993 SNA does not include NEA as a specific category within the national accounts. However, as shown in paragraphs 9.70 and 9.71, it does recognise that the compilation methods used may result in NEA being shown as an adjustment (balancing) item within household final consumption expenditure: 9.70 Resident households make expenditures while travelling abroad, while non-resident households may make expenditures inside the economic territory of a country. Household final consumption expenditure in the System refers to the expenditure incurred by resident households, whether that expenditure is incurred within the economic territory or abroad. 9.71 In order to calculate total household final consumption expenditure it may be convenient to calculate the total expenditure made by all households, whether resident or not, within the economic territory and to adjust this figure by adding expenditures by residents abroad and subtracting expenditures by non-residents within the economy territory. Expenditures by residents abroad constitute imports, while expenditures by non-residents are exports. However, while the total expenditures by all households within the economic territory may be used for calculation in this way, it is not an aggregate recognized within the System. 2
The outcome is that countries are unlikely to treat NEA consistently, with some identifying it as a separate item in their accounts, while others have allocated it across the components of household final consumption expenditure. Therefore, it will be problematical to treat it explicitly in the ICP and so allocating it across the relevant components of HFCE would be a pragmatic method of handling NEA in the 2011 ICP, despite the potential inconsistency arising between the PPPs for imported components within final demand and those for imports of goods and services. Adopting this method would also overcome the problem of having a negative component in aggregating the basic heading PPPs to that for total HFCE and GDP (although this problem would still arise in inventories and net exports). If the size of the negative NEA is relatively small then there are no substantial problems in the aggregation (neither by the EKS nor by the G-K method). However if the size of NEA is high and this feature is combined with large differences between PPPs and exchange rates then this combination can lead to a significant effect. One example from the Asia/Pacific region in the 2005 ICP is given in Annex A: Fiji had a very high negative NEA (and very high negative Net exports); in effect, most of the bilateral comparisons were unreliable even for the GDP (the Laspeyres/Paasche spread shows this clearly most of them are substantially lower than 1). The consistency problem described above for NEA is a relatively minor one but it points to a much more important issue of consistency between the PPPs for imports and those for final demand components of the accounts. Annex B shows the imports share of HFCE and of gross fixed capital formation on equipment, both based on imports data classified by broad economic category (BEC). Four countries are included (Australia, Netherlands, NZ and USA). The websites for several other countries were checked but data could not be found for imports classified by BEC, which identifies goods for the purposes of each of consumption, investment and intermediate consumption. These data show there is a potential consistency problem because of the significant shares of imports within the final demand aggregates. The effect of imports on government final consumption expenditure was not analysed because it was impossible to identify the imports going into this aggregate (some are intermediate consumption, which is also used by businesses). In addition, military equipment was not specifically identified in the imports data available, but it is probably included as part of the BEC investment and so would be contributing to the share of gross fixed capital formation on equipment. In addition, many developing countries receive imports of equipment for general government purposes (e.g. computers, etc.) as free of charge assistance. Their values should be recorded in the accounts as a positive amount in gross fixed capital formation and as an offsetting negative in imports. The pricing basis for such types of aid would be difficult to identify, particularly in the gross fixed capital formation component. Another point to note is that the imports of machinery and equipment include motor vehicles and a significant part of them should be allocated to HFCE rather than to gross fixed capital formation on machinery and equipment. However, this will not affect the overall point that the shares of imports to each of these (particularly the latter) are significant and so it is likely that the PPP for GDP is being distorted by using directly calculated PPPs for the final expenditures and exchange rates for imports of goods and services. The team concluded that the TAG should be focussing any efforts in this area on sorting out the consistency between imports and each of household and government final consumption expenditure and gross fixed capital formation on machinery and equipment rather than on NEA. However, data is a potential stumbling block with many countries seeming to not have imports classified by BEC, which would make any adjustments problematical. 4 Conclusion In order to provide a consistent and simple treatment of NEA, it is proposed that non-zero amounts reported for this item should be distributed across relevant product groups in household final consumption as a pragmatic solution. This also removes the need to adopt special aggregation procedures to handle the combination of positive and negative values for NEA in different countries. 3
The TAG should examine the possibility of introducing specific PPPs for imports of goods and services, with the aim of improving the consistency between the PPPs for imports and the corresponding imported components of final demand. While it is likely that the lack of detailed data will prevent any changes being made in the 2011 ICP, it would be useful to identify possibilities for future rounds. 4
5 Annex A: Laspeyres/Paasche Spread: Asia/Pacific ICP 2005 / GDP (without the distribution of NEA) 5
6 Annex B- Share of imports within household final consumption expenditure and gross fixed capital formation on equipment AUSTRALIA NETHERLANDS NEW ZEALAND USA 2007-08 2008-09 2007 2008 2007-08 2008-09 2007 2008 Imports of consumption goods 59,371 61,419 37,928 40,287 10,359 11,111 474,552 481,643 Household final consumption expenditure 655,287 690,695 263,498 272,457 102,539 106,017 9,826,400 10,129,900 Imports of consumption goods to HFCE (%) 9.1 8.9 14.4 14.8 10.1 10.5 4.8 4.8 Imports of capital goods 45,299 51,460 22,016 23,688 8,298 9,115 703,747 687,507 GFCF on machinery and equipment 89,573 96,741 39,104 40,376 14,971 14,453 1,104,800 1,084,100 Imports of capital goods to GFCF on M and E (%) 50.6 53.2 56.3 58.7 55.4 63.1 63.7 63.4 6