Assets

The accounting treatment of assets previously called “intangible produced assets” and now called, more descriptively, “intellectual property products” has been clarified and expanded.
Many of these assets, often seen as a hallmark of the “new economy,” are associated with the establishment of property rights over knowledge in one form or another.

The treatments of databases and of originals and copies have been modified and the principle of treating expenditure on research and development as capital formation has been introduced.

The definition of assets in general was reviewed to set the framework for the discussion of such assets.
The review led to several refinements in the treatment of non-produced non-financial assets, covering both tangible assets (for example natural resources) and intangible assets (now identified as contracts, leases and licenses, which can be treated as assets in certain circumstances).

Expenditures on weapons systems that meet the general definition of assets have been reclassified as fixed capital formation.

The analytical concept of capital services has been introduced.
Details can be presented in a supplementary table for market producers, bringing into the SNA the advances in research in recent decades in the fields of growth and productivity and helping to satisfy the analytical needs of many users.

The financial sector

Recommendations regarding the financial sector have been updated to reflect developments in one of the fastest-changing segments of many economies.
In particular, the 2008 SNA provides a more comprehensive overview of financial services.

The 1993 SNA was modified several years ago to cater for some developments in financial derivatives during the 1990s. At its meeting in March 1999, the United Nations Statistical Commission approved changes to the treatment of financial derivatives.
The two most significant changes were that the financial assets boundary was expanded to include financial derivative contracts regardless of whether “trading” occurred on or off exchange, and flows associated with interest rate swaps and forward rate agreements were recorded as financial transactions rather than interest flows.
In addition, some new functional classifications were introduced.

The measurement of non-life insurance services has been modified in order to provide more plausible estimates following extreme events (for example earthquakes) that result in large insurance payouts.

Guidance on the treatment of impaired (non-performing) loans has been elaborated.

The method for calculating financial intermediation services indirectly measured, widely known as FISIM, has been refined in the light of experience in implementing the 1993 SNA recommendations.

The most far-ranging change in the financial area relates to new guidelines for recording pension entitlements.
The SNA now recognizes the liabilities of employers’ pension schemes, regardless of whether funding to meet them exists or not.
For pensions provided by government, countries have some flexibility to deviate from this rule in the set of core tables.
However, the full range of information required for a comprehensive analysis of pensions is provided in a new standard table that shows the liabilities and associated flows of all private and public pension schemes, whether funded or unfunded and including social security.

Globalization and related issues

The treatments of stocks and flows that are characteristic of economic globalization have been clarified and elaborated.

The treatment of remittances from the movement of persons abroad has been expanded, with coverage of the flows being closer to the economic reality.

The application of the principle of change in ownership of goods has been made universal, resulting in changes to the recording of merchanting and of goods sent for processing, both abroad and within the domestic economy, and then returned to the owner.
These changes have shifted the focus away from the physical movements of goods to the impact on the economies of the owner of the products and the processor.
As a result, they are consistent with international financial transactions that are increasingly important in a globalized economy.

In recognition of the changing structures of production and finance in many economies, guidance is now provided about when “special purpose entities”, which are sometimes called shell companies or brass plate companies and which can be created by corporations or the government, should be recognized as institutional units, how they should be classified, and how their operations should be treated.

The general government and public sectors

Several principles have been clarified and refined in response to developments in accounting standards for government.

The delineation of the government and the public sectors from the other sectors of the economy has been clarified.

The treatments of super dividends paid by public corporations and capital injections into public enterprises have been clarified.

The principles for the treatment of public-private partnerships have been outlined and the treatment of restructuring agencies elaborated.

Handling transactions between general government and related public corporations and with securitization vehicles has been clarified to improve the recording of items that could significantly affect government debt.

The treatment of several classes of loan guarantees has been clarified, and a new treatment has been introduced for standardized guarantees, such as export credit guarantees and student loan guarantees.

Some other new features are not easily grouped but are no less important.
Notable among these are the clarification of ancillary units and holding companies and the introduction of accounting for employee stock options, which came into wide usage in some countries during the 1990s.

These new features help maintain the relevance of the SNA in a time of rapid economic and institutional change, building on its solid existing framework.
Accordingly, the provision of the guidance on the accounting rules, the accounts and tables, and their integration in the 2008 SNA can be seen as consistent with continuing efforts to implement the 1993 SNA in all countries.
In this regard, the four points made in the Preface to the 1993 SNA concerning the comprehensiveness of the SNA and the breadth of its applicability not only still hold; they have been reinforced in the 2008 SNA.

The informal sector

The 2008 SNA contains a chapter dedicated to the question of measuring activity carried out within households on an informal basis (the so-called informal sector) and activity that escapes formal statistical measurement (the so-called not-observed economy).

The SNA provides guidance for national accounts almost universally

The final stages of work on the 1993 SNA came at a time when the formerly centrally planned economies making the transition to market economies in the early to mid 1990s. The years since have proven the applicability and robustness of the SNA in those economies.
The European System of Accounts, 1995 was made broadly consistent with the 1993 SNA with respect to the definitions, accounting rules and classifications.
Its update, which is currently under way, will cover the recommendations and clarifications agreed at the international level for the 2008 SNA.
The new treatments of goods for processing and remittances from persons working abroad are especially relevant for developing economies that are moving into the global economy.
In addition, the new guidelines on handling public-private partnerships and the use of natural resources by non-residents are likely to be especially significant for many countries.

The SNA recognizes the need for flexibility

The 1993 SNA incorporated the concept of satellite accounts, a major step in the direction of flexibility.
Moving forward, satellite accounts are expected to continue to provide a useful way of working towards solutions that give the appropriate level of confidence in challenging measures, such as those for environmental accounting issues.
Using satellite accounts as a means of expanding the relevance of the national accounts, but without affecting the comparability of the central framework used for economic policymaking, has become an accepted means of developing and testing new data sources and methods.
Further, the 2008 SNA has introduced the item of “supplementary” items and tables.
The term “supplementary” is used when the SNA recognizes that items may be of limited relevance in some countries or that while of analytical interest, a table cannot be prepared to the same standard of accuracy as the main set of accounts.

The SNA reinforces the central role of national accounts in statistics

The concepts and classifications of the 2008 SNA are harmonized with other international statistical standards and manuals even more than was the case with the 1993 SNA.
Of special note is the close coordination of the processes during the update of the SNA and the simultaneous revision of the Balance of Payments Manual.
The chapter on price and volume measures has benefited from work since the 1993 SNA was released on the International Comparison Program and on the international manuals for consumer and producer price indices.
There is closer consistency with advice given in the resolutions of the International Conference of Labour Statisticians.
There is a chapter dedicated to the consideration of the role of non-profit institutions in the economy drawing on work in this area since the time of the 1993 SNA.
For environmental accounts, the ground has been laid for consistency with the revised Handbook of National Accounting: Integrated Environmental-Economic Accounting, which is expected to become an international standard.
Similarly, the 2008 SNA is consistent with the major classification systems, notably the International Standard Industrial Classification of All Economic Activities, Rev. 4 and the Central Product Classification, Version 2.

Future developments: the research agenda

The first comprehensive set of national accounting standards was released in 1953, with major updates in 1968, 1993 and, now, 2008. Clearly, though, developments in national accounting do not emerge in steps every 15 to 20 years, so identifying updates needed in the SNA is a continuing process even if a full-scale rewrite occurs infrequently.
Developments depend on a combination of the evolution of economic processes (such as new financial instruments), advances in statistical estimation and measurement techniques, and improvements in data collection.

Some contentious issues were considered during the SNA update process.
The decisions made were based on the best information and techniques available at the time.
In some cases, though, research was still under way while the SNA was being updated and the results of ongoing research may lead to the need to revisit some of these decisions prior to the next update of the SNA.

The ISWGNA has identified a number of areas of ongoing research.
The ISWGNA has recommended these topics should be included in a national accounts research agenda.
A list of items for consideration, as identified at the conclusion of the update process, appears in Annex 4.

The ISWGNA will be responsible for advancing the research on these issues (and any other important ones that transpire), but will be relying on assistance from the agencies responsible for national accounts around the world.
Depending on the outcomes, it may prove useful to incorporate the outcomes from this research into the 2008 SNA before the next major update.

The ISWGNA and project staff

The process involved the five international organizations that comprise the ISWGNA; other international, regional and nongovernmental organizations; project staff; agencies responsible for compiling official statistics in many countries; working groups, other expert groups and electronic discussion groups; and individual experts in national accounting and related fields from all regions of the world.
As could be expected of a product of such a complex and sustained process, the 2008 SNA reflects many diverse contributions.

· The ISWGNA managed and coordinated the process at the request of the Statistical Commission, similarly to what happened for the 1993 SNA.
The ISWGNA member organizations’ contributions were in cash and in kind.
At the senior level, the representatives were:

· Pieter Everaers and Laurs Norlund (Eurostat)

· Carol S. Carson and Robert Edwards (IMF)

· Enrico Giovannini (OECD)

· Willem de Vries and Paul Cheung (United Nations Statistics Division)

· Shaida Badiee (World Bank).

National accountants and other professionals of the ISWGNA organizations who regularly participated in tasks of coordination and substantive leadership were as follows:

· Eurostat: Gallo Gueye, Christian Ravets, Dieter Glatzel and Brian Newson

· IMF: Adriaan Bloem and Kim Zieschang

· OECD: François Lequiller and Charles Aspden

· United Nations Statistics Division: Ivo Havinga, Viet Vu, Magdolna Csizmadia, Gulab Singh, Herman Smith and Annette Becker

· United Nations Economic Commission for Europe: Lidia Bratanova and Tihomira Dimova

· World Bank: Barbro Hexeberg.

Other staff members of the ISWGNA organizations who contributed substantively were:

· Eurostat: Paolo Passerini, Francis Malherbe, Ligia Frankford and John Verrinder

· IMF: Edgar Ayales, Sagé de Clerck, Robert Dippelsman, Keith Dublin, René Fiévet, Cornelis Gorter, Robert Heath, John Joisce, Lucie Laliberté, Alfredo Leone, Ralph Kozlow, Russell Krueger, Jaroslav Kucera, Randall Merris, Jose-Carlos Moreno, Neil Patterson, Lisbeth Rivas, Armida San Jose, Manik Shrestha and Mick Silver

· OECD: Nadim Ahmad, William Cave, Jean-Pierre Dupuis, Anders Nordin, and Paul Schreyer

· United Nations Statistics Division: Alessandra Alfieri, Youlia Antonova, Ralf Becker and Vetle Hvidsten.

The staff of the Economic Statistics Branch of the United Nations Statistics Division, under Ivo Havinga, served as the secretariat to the ISWGNA.
The United Nations Statistics Division developed and maintained the Project website, which provides more information on the contributions summarized in this preface (see http://unstats.un.org/unsd/nationalaccount/snarev1.asp).
A team from the Development Data Group of the World Bank, under Misha Belkindas, provided administrative support, including for the multidonor trust fund established for the SNA Update Project.

The Project staff comprised Carol S. Carson, Project Manager from 2004 to February 2008, Paul McCarthy, Project Manager from February 2008, and Anne Harrison, Editor.
Anne was an expert voice in all phases of the Project and undertook the enormous task of revising the text of the 2008 SNA.

The Advisory Expert Group

The Advisory Expert Group (AEG) on National Accounts was established in 2003. It was positioned to have a key role in the update process by considering proposals for change and expressing its views.
The following served as members of the AEG: Heidi Arboleda, Philippines; Ole Berner, Denmark; Mariam Cover Jimenez, Costa Rica; Meshesha Getahun, Ethiopia; Omar Mohammad Ali Hakouz, Jordan; Peter Harper, Australia; Jan Heller, Czech Republic; Andrey Kosarev, Russian Federation; Akhilesh C. Kulshreshtha, India; Robin Lynch, United Kingdom of Great Britain and Northern Ireland; Jacques Magniez, France; Reimund Mink, European Central Bank; Brent R. Moulton, United States of America; Chellam Palanyandy, Malaysia; Peter Pariag, Trinidad and Tobago; Johan Prinsloo, South Africa; Roberto Luís Olinto Ramos, Brazil; Irena Tvarijonaviciute, Lithuania; Peter van de Ven, Netherlands; Karen Wilson, Canada.

The AEG met six times: in February 2004, in Washington, hosted by the IMF; in December 2004, in New York City, hosted by the United Nations Statistics Division; in July 2005, in Bangkok, hosted by the United Nations Economic and Social Commission for Asia and the Pacific; in January-February 2006, in Frankfurt, hosted by the European Central Bank; in March 2007, in New York City, hosted by the United Nations Statistics Division, and in November 2008 in Washington, hosted by the World Bank.
In all of these meetings and in electronic consultations, the national accountants of the ISWGNA also participated and expressed their views.
Paul McCarthy served as rapporteur for the meetings in July 2005, February 2006 and March 2007.

The papers prepared for consideration of the AEG represent a substantial body of research.
They will continue to be available on the Project website noted above.
The authors included the following individuals: Nadim Ahmad, Alessandra Alfieri, Charles Aspden, Adriaan Bloem, Stuart Brown, Carol S. Carson, William Cave, W. Erwin Diewert, Robert Dippelsman, Brian Donaghue, René Fiévet, Russel Freeman, Jean Galand, Antonio Galicia- Escotto, Jeff Golland, Cornelis Gorter, Anne Harrison, Ivo Havinga, Tony Johnson, John Joisce, Brett Kaufmann, Andrew Kitili, Ralph Kozlow, François Lequiller, Robin Lynch, Christoph Maier, Reimund Mink, Brent R. Moulton, Anders Nordin, Patrick O’Hagan, Neil Patterson, John Pitzer, Jens Reinke, Lisbeth Rivas, Philippe de Rougemont, John Ruser, Carlos Sánchez Muñoz, Paul Schreyer, Richard Shepherd, Manik Shrestha, Gulab Singh, Herman Smith, Pierre Sola, Philippe Stauffer, Hidetoshi Takeda, Viet Vu, John Walton and Chris Wright.

Other expert groups

Topical expert groups, some standing groups and some created especially for the purpose of advancing the update, carried out most of the research on issues and preparation of proposals for change put forward to the AEG.
These groups included the Canberra II Group on the Measurement of Non-financial Assets (Peter Harper, chair, and Charles Aspden, secretary), the IMF-BEA Task Force on Employers’ Retirement Schemes (Adriaan Bloem and John Ruser, co-chairs, and Brian Donaghue, secretary), the IMF-OECD Task Force on the Harmonization of Public Sector Accounts (Lucie Laliberté, chair, and Jean-Pierre Dupuis, secretary), the OECD Task Force on Financial Services (Ruth Meier, chair, and Philippe Stauffer and Anders Nordin, secretaries), the OECD Task Force on the Measurement of Non-life Insurance (Fenella Maitland-Smith and then François Lequiller, moderator) and the OECD Task Force on the Valuation and Measurement of Equity (Patrick O’Hagan, moderator).
The annex to this preface lists the authors of issues papers prepared for and considered by most of these groups.
The IMF Committee on Balance of Payments Statistics (Robert Edwards, chair, and John Joisce, Manik Shrestha and Andrew Kitili, secretaries) and its subgroups considered a number of issues that were of common concern to national accountants and balance of payments compilers.
The authors of the issues papers most related to the SNA are also listed in the annex.

A number of other groups considered SNA-related topics as part of their larger agenda.
These include the European Central Bank/ Eurostat Task Force on the Statistical Measurement of the Assets and Liabilities of Pension Schemes in General Government (Eduardo Barredo and Reimund Mink, co-chairs, and John Verrinder, secretary), the OECD Group of National Experts on Science and Technology (Fred Gault, chair, and Alessandra Colecchia, secretary), the Paris Group on Labour and Compensation (Denis Ward, moderator), the Delhi Group on Informal Sector Statistics (Pronab Sen, chair), the United Nations Expert Group on Industrial Statistics (Ivo Havinga, chair, and Viet Vu and Gulab Singh, secretaries), the United Nations Expert Group on International Classifications (Ivo Havinga, chair, and Ralf Becker, secretary) and the United Nations Technical Subgroup on the Movement of Persons—Mode 4 (Ivo Havinga, chair, and Alessandra Alfieri, secretary).

Other consultations also informed the process.
These included meetings of OECD and Eurostat national accounts working groups, national accounts meetings and workshops of several United Nations regional commissions, and the International Association for Research in Income and Wealth.

Country contributions

Agencies responsible for compiling official statistics contributed in several distinct ways.
In the first of these, heads of statistical offices were involved through participation in the Statistical Commission in agreeing the governance of the process and then shaping the list of issues to be considered in the update.

Secondly, to an unprecedented extent, countries provided comments on the provisional recommendations for change.
After each meeting, the AEG’s recommendations were sent to national statistical offices and interested central banks with an invitation to comment.
From 40 to 60 countries commented after each round of recommendations.
In all, comments were received from almost 100 countries.
All these comments, which are posted on the Project website, provide a rich source of information on why countries supported the recommendations or, in some cases, why they did not; their views on implementation of the recommendations, and ideas about the kind of guidance they would hope to find in the updated SNA.

Thirdly, countries provided comments on draft chapters.
Around 70 countries commented on the final draft of volume 1 during April and May 2008 and on volume 2 in January and February of 2009. Fourthly, a number of statistical offices provided in-kind contributions, such as the time of AEG members for meetings (and for developing country AEG members, travel expenses as well).

Finally, a group of national statistical offices and central banks supported the project by financial contributions.
These contributions were from Statistics Sweden, the Australian Bureau of Statistics, Statistics Canada, the Central Bank of Cyprus, the Central Bank of Kazakhstan, Statistics Netherlands, the Office of National Statistics of the United Kingdom and the Bureau of Economic Analysis of the United States of America.

Notes

1. See the report of the 39^th session of the Statistical Commission (document E/2008/24 and E/CN.3/2008/34) at http://unstats.un.org/unsd/statcom/doc08/Report-English.pdf

2. Referred to, at the time of the United Nations Statistical Commission session, as 1993 SNA, Rev. 1.

3. See the report of the 40^th session of the Statistical Commission (document E/2009/24 and E/CN.3/2009/29) at http://unstats.un.org/unsd/statcom/doc09/Report-English.pdf

References

Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank, System of National Accounts 1993.
Brussels/Luxembourg, Washington, D.C., Paris, New York, 1993. United Nations Publication, Sales No. E.94.XVII.4.

Commission of the European Communities, European System of Accounts 1995. Luxembourg, 1999.

International Monetary Fund, The Balance of Payments and International Investment Position Manual, sixth edition. Washington, D.C., 2009.

Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank. Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003. Luxembourg, Washington, D.C., Paris, New York, 2003.

United Nations. International Standard Industrial Classification of All Economic Activities, Revision 4. New York, 2008. UNited Nations Publication, Sales No. E.08.XVII.25,

United Nations. Central Product Classification, Version 2. New York, 2008. United Nations Publication, Sales No. E.08.XVII.7.

Canberra II Group on the Measurement of Nonfinancial Assets

Nadim Ahmad, Charles Aspden, John R. Baldwin, Desmond Beckstead, Dirk van den Bergen, Lauren Binns, Ariel Coremberg, Carol Corrado, Mariam Cover Jimenez, Martin Daniels, W. Erwin Diewert, Emma Edworthy, Barbara Fraumeni, Guy Gellatly, Dominique Guellec, Mark de Haan, Michael Harper, Peter Harper, Anne Harrison, Ivo Havinga, Richard Hemming, Peter Hill, Charles Hulten, Ning Huang, Vetle Hvidsten, Tony Johnson, Andreas Kuipers, François Lequiller, Robin Lynch, Christophe Maier, Pablo Mandler, Ian McPhee, Franciso Moris, Brent Moulton, Carol Moylan, Carl Obst, Sumiye Okubo, Dean Parham, Soli Peleg, John Pitzer, Marshall Reinsdorf, Carol Robbins, Antoine Rose, Paul Romanis, Salem, Oda Schmalwasser, Paul Schreyer, Daniel Sichel, Yusuf Siddiqi, Zuzana Stara, Leo Sveikauskas, Luke Thompson, Jeff Tyndall, André Vanoli, Peter van de Ven, John Verrinder and Viet Vu.

IMF Committee on Balance of Payments Statistics

Stuart Brown, Robert Dippelsman, Robert Edwards, Antonio Galicia-Escotto, René Fiévet, Jean Galand, Robert Heath, John Joisce, Andrew Kitili, Carlos Sanchez Munoz, Neil Patterson, Jens Reinke, Richard Shepherd, Manik Shrestha, Pierre Sola, Hidetoshi Takeda and Chris Wright.

IMF-BEA Task Force on Employers’ Retirement Schemes

Bo Bergman, Ole Berner, Dieter Glatzel, Peter Harper, Anne Harrison, Tony Johnson, Ramesh Kolli, François Lequiller, Jacques Magniez, Tonya Manning, Reimund Mink, Tulsi Ram, Marshall Reinsdorf, Ingber Roymans, Peter Van de Ven and J. S. Venkateswarlu.

IMF-OECD Task Force on the Harmonization of Public Sector Accounts

Bruce Baker, Matthew Bohun, Søren Brodersen, Paula Burges, Ian Carruthers, Giseal Csonka, Sagé De Clerck, Tim Dobbs, Jean-Pierre Dupuis, Keith Dublin, Jeff Golland, Betty Gruber, Ivo Havinga, Christopher Heady, Richard Hemming, Graham Jenkinson, Brett Kaufmann, Robert Keys, François Lequiller, Jacques Magniez, Reimund Mink, Robert Kilpatrick, Lucie Laliberté, François Lequiller, Ian Mackintosh, Iana Paviola, John Pitzer, Tulsi Ram, Brooks Robinson, Philippe de Rougemont, Veronique Row, André Schwaller, Richard Shepherd and Paul Sutcliffe, Ken Warren, Kurt Wass and Graham Watkins.

OECD Task Force on Financial Services

Dennis Fixler, Anne Harrison, Anders Nordin, Paul Schreyer, Philippe Stauffer, John Turnbull and John Walton.

OECD Task Force on the Measurement of Non-life Insurance

Robert Dippelsman, Fenella Maitland-Smith, François Lequiller, Anne Harrison, Ingber Roymans, Gabe H. de Vries and John Walton.

1. Activities and transactions

1.7 The SNA is designed to provide information about the behaviour of institutional units and the activities in which they engage, namely production, consumption and the accumulation of assets, in an analytically useful form.
This is achieved by recording the exchange of goods, services and assets between institutional units in the form of transactions.
At the same time, other transactions are recorded that represent the form of payment for the exchange which may be a good, service or asset of similar value but is often some form of financial claim including notes and coins.

1.8 Data on transactions provide the basic source material from which the values of the various elements in the accounts are built up or derived.
The use of transactions data has important advantages.
The first of these is that the prices at which goods and services are exchanged in transactions between buyers and sellers on markets provide the information needed for valuing, directly or indirectly, all the items in the accounts.
Secondly, a transaction that takes place between two different institutional units has to be recorded for both parties to the transaction and therefore generally appears twice in a system of macroeconomic accounts.
This enables important linkages to be established in the SNA.
For example, output is obtained by summing the amounts sold, bartered or transferred to other units plus the amounts entered into, less the amounts withdrawn from, inventories.
In effect, the value of output is obtained by recording the various uses of that output by means of data on transactions.
In this way, flows of goods and services can be traced through the economic system from their producers to their eventual users.
Some transactions are only internal bookkeeping transactions that are needed when a single unit engages in two activities, such as the production and consumption of the same good or service, but the great majority of transactions takes place between different units on markets.

2. The institutional sectors of the economy

1.9 Two main kinds of institutional units, or transactors, are distinguished in the SNA; households and legal entities.
Legal entities are either entities created for purposes of production, mainly corporations and non-profit institutions (NPIs), or entities created by political processes, specifically government units.
The defining characteristic of an institutional unit is that it is capable of owning goods and assets, incurring liabilities and engaging in economic activities and transactions with other units in its own right.

1.10 For the purposes of the SNA, institutional units that are resident in the economy are grouped together into five mutually exclusive sectors composed of the following types of units:

a. Non-financial corporations;

b. Financial corporations;

c. Government units, including social security funds;

d. NPIs serving households (NPISHs);

e. Households.

The five sectors together make up the total economy.
Each sector may be further divided into subsectors; for example, the non-financial and financial corporations sectors are divided to distinguish corporations subject to control by governments or foreign units from other corporations.
The SNA makes provision for a complete set of flow accounts and balance sheets to be compiled for each sector, and subsector if desired, as well as for the total economy.
The total number of accounts that may be compiled is therefore potentially quite large, depending upon the level of disaggregation that is required and feasible.
Only by disaggregation into sectors and subsectors is it possible to observe the interactions between the different parts of the economy that need to be measured and analysed for purposes of policymaking.

1.11 Institutional units that are resident abroad form the rest of the world.
The SNA does not require accounts to be compiled in respect of economic activities taking place in the rest of the world, but all transactions between resident and non-resident units have to be recorded in order to obtain a complete accounting for the economic behaviour of resident units.
Transactions between residents and nonresidents are grouped together in a single account, the rest of the world account

3. Accounts and their corresponding economic activities

1.12 This section gives a very brief summary of the accounts of the SNA.
It is impossible to do justice to the wealth of information contained in the SNA in a short section of this kind, and reference should be made to chapter 2 for a comprehensive overview.

1. Monitoring the behaviour of the economy

1.28 Certain key aggregates of the SNA, such as GDP and GDP per head of population, have acquired an identity of their own and are widely used by analysts, politicians, the press, the business community and the public at large as summary, global indicators of economic activity and welfare.
Movements of such aggregates, and their associated price and volume measures, are used to evaluate the overall performance of the economy and hence to judge the relative success or failure of economic policies pursued by governments.

1.29 National accounts data provide information covering both different types of economic activities and the different sectors of the economy.
It is possible to monitor the movements of major economic flows such as production, household consumption, government consumption, capital formation, exports, imports, etc., in both value and volume terms.
Moreover, information is provided about certain key balancing items and ratios which can only be defined and measured within an accounting framework, for example, the budget surplus or deficit, the share of income that is saved or invested by individual sectors of the economy or the economy as a whole, the trade balance, etc.
The SNA also provides the background against which movements of short-term indicators, such as monthly indices of industrial production, consumer or producer prices can be interpreted and evaluated.
The monitoring of the behaviour of the economy may be significantly improved if at least some of the main aggregates of the SNA are compiled quarterly as well as annually, although many of the accounts, tables or balance sheets of the SNA are not usually compiled more frequently than once a year.

2. Macroeconomic analysis

1.30 National accounts are also used to investigate the causal mechanisms at work within an economy.
Such analysis usually takes the form of the estimation of the parameters of functional relationships between different economic variables by applying econometric methods to time series of data in both value and volume terms compiled within a national accounting framework.
The types of macroeconomic models used for such investigations may vary according to the school of economic thought of the investigator as well as the objectives of the analysis, but the SNA is sufficiently flexible to accommodate the requirements of different economic theories or models, provided only that they accept the basic concepts of production, consumption, income, etc. on which the SNA is based.

1.31 Economic policy in the short term is formulated on the basis of an assessment of the recent behaviour and current state of the economy and a view, or precise forecast, about likely future developments.
Short-term forecasts are typically made using econometric models of the type just described.
Over the medium- or long-term, economic policy has to be formulated in the context of a broad economic strategy.

1.32 Economic policymaking and decision-taking take place at all levels of government and also within public and private corporations.
Large corporations such as multinationals have the ability to build their own macroeconomic models tailored to their own requirements, for which they need national accounts data.
The investment programmes of major corporations must be based on long-term expectations about future economic developments that require national accounts data.
There are also specialist agencies that provide forecasts for individual clients in return for fees.
Such agencies typically require very detailed national accounts data.

3. International comparisons

1.33 The SNA is used for international reporting of national accounts data that conform to standard, internationally accepted concepts, definitions and classifications.
The resulting data are widely used for international comparisons of the volumes of major aggregates, such as GDP or GDP per head, and also for comparisons of structural statistics, such as ratios of investment, taxes or government expenditures to GDP.
Such comparisons are used by economists, journalists or other analysts to evaluate the performance of one economy against that of other similar economies.
They can influence popular and political judgements about the relative success of economic programmes in the same way as developments over time within a single country.
Databases consisting of sets of national accounts for groups of countries can also be used for econometric analyses in which time-series and cross-section data are pooled to provide a broader range of observations for the estimation of functional relationships.

1.34 Levels of GDP or, alternatively, gross national income (GNI) per head in different countries are also used by international organizations to determine eligibility for loans, aid or other funds or to determine the terms or conditions on which such loans, aid or funds are made available.
When the objective is to compare the volumes of goods or services produced or consumed per head, data in national currencies must be converted into a common currency by means of purchasing power parities and not exchange rates.
It is well known that, in general, neither market nor fixed exchange rates reflect the relative internal purchasing powers of different currencies.
When exchange rates are used to convert GDP, or other statistics, into a common currency the prices at which goods and services in high-income countries are valued tend to be higher than in low-income countries, thus exaggerating the differences in real incomes between them.
Exchange rate converted data must not, therefore, be interpreted as measures of the relative volumes of goods and services concerned.
Levels of GDP, or GDP per head, in different countries are also used to determine, in whole or in part, the size of the contributions which the member countries of an international organization make to finance the operations of the organization.

1.35 Although international organizations use the SNA in order to be able to collect internationally comparable national accounts data, the SNA has not been created for this purpose.
It has become the standard, or universal, system used with little or no modification by most countries in the world for their own national purposes.
National statistical offices and government agencies have a strong vested interest in ensuring that the SNA meets their own analytic and policy requirements and have taken an active part in the development of the SNA for this reason.

1. Non-monetary transactions

1.36 When goods and services produced within the economy are sold in monetary transactions, their values are automatically included in the accounts of the SNA.
Many goods or services are not actually sold but are nevertheless supplied to other units: for example, they may be bartered for other goods or services or provided free as transfers in kind.
Such goods and services must be included in the accounts even though their values have to be estimated.
The goods or services involved are produced by activities that are no different from those used to produce goods or services for sale.
Moreover, the transactions in which the goods and services are supplied to other units are also proper transactions even though the producers do not receive money in exchange.
It is misleading to describe such output as “imputed”. For example, the services of financial intermediaries which are measured indirectly in the SNA do actually take place; but their values have to be measured indirectly.
It is the value, not the transaction that is “imputed”.

1.37 When goods or services are retained for own use, no transactions with other units take place.
In such cases, in order to be able to record the goods or services in the accounts, internal transactions have to be recorded whereby producers allocate the goods or services for their own consumption or capital formation and values also have to be estimated for them.

1.38 Thus, estimates and imputations are needed in order to be able to record in the accounts productive activities whose outputs are not disposed of in monetary transactions with other units.
Such estimates and imputations should not be interpreted as introducing hypothetical activities or flows of goods and services into the SNA.
Their purpose is the opposite, namely, to capture in the accounts major flows of goods and services actually taking place in the economy that would otherwise be omitted.
In order to obtain comprehensive measures, values have to be estimated for all outputs of goods and services that are not sold but disposed of in other ways.

1.39 In practice the SNA does not record all outputs, however, because domestic and personal services produced and consumed by members of the same household are omitted.
Subject to this one major exception, GDP is intended to be a comprehensive measure of the total gross value added produced by all resident institutional units.
GDP is confined to outputs produced by economic activities that are capable of being provided by one unit to another.
Not all activities that require the expenditure of time and effort by persons are productive in an economic sense, for example, activities such as eating, drinking or sleeping cannot be produced by one person for the benefit of another.

2. The production boundary

1.40 The activity of production is fundamental.
In the SNA, production is understood to be a physical process, carried out under the responsibility, control and management of an institutional unit, in which labour and assets are used to transform inputs of goods and services into outputs of other goods and services.
All goods and services produced as outputs must be such that they can be sold on markets or at least be capable of being provided by one unit to another, with or without charge.
The SNA includes within the production boundary all production actually destined for the market, whether for sale or barter.
It also includes all goods or services provided free to individual households or collectively to the community by government units or NPISHs.

3. The consumption boundary

1.45 The coverage of production in the SNA has ramifications that extend considerably beyond the production account itself.
The boundary of production determines the amount of value added recorded and hence the total amount of income generated by production.
The range of goods and services that are included in household final consumption expenditures, and actual consumption, is similarly governed by the production boundary.
For example, these expenditures include the estimated values of the agricultural products consumed by households that they have produced themselves and also the values of the housing services consumed by owner occupiers, but not the values of “do-it-yourself” repairs and maintenance to vehicles or household durables, the cleaning of dwellings, the care and training of children, or similar domestic or personal services produced for own final consumption.
Only the expenditures on goods utilized for these purposes, such as cleaning materials, are included in household final consumption expenditures.

4. The asset boundary

1.46 Balance sheets are compiled for institutional units, or sectors, and record the values of the assets they own or the liabilities they have incurred.
Assets as defined in the SNA are entities that must be owned by some unit, or units, and from which economic benefits are derived by their owner(s) by holding or using them over a period of time.
Financial assets and fixed assets, such as machinery, equipment and structures which have themselves been produced as outputs in the past, are clearly covered by this definition.
However, the ownership criterion is important for determining which natural resources are treated as assets in the SNA.
Natural resources such as land, mineral deposits, fuel reserves, uncultivated forests or other vegetation and wild animals are included in the balance sheets provided that institutional units are exercising effective ownership rights over them, that is, are actually in a position to be able to benefit from them.
Assets need not be privately owned and could be owned by government units exercising ownership rights on behalf of entire communities.
Thus, many environmental assets are included within the SNA.
Resources such as the atmosphere or high seas, over which no ownership rights can be exercised, or mineral or fuel deposits that have not been discovered or that are unworkable, are not included as they are not capable of bringing any benefits to their owners, given the technology and relative prices existing at the time.

1.47 Changes in the values of natural resources owned by institutional units between one balance sheet and the next are recorded in the accumulation accounts of the SNA.
For example, the depletion of a natural resource as a result of its use in production is recorded in the other changes in volume of assets account, together with losses of fixed assets due to their destruction by natural disasters (floods, earthquakes, etc.).
Conversely, when deposits or reserves of minerals or fuels are discovered or previously unworkable deposits become workable, their appearance is recorded in this account and they enter the balance sheets in this way.

5. National boundaries

1.48 The accounts of the SNA are compiled for resident institutional units grouped into institutional sectors and subsectors.
The concept of residence is the same as that used in the Balance of Payments and International Investment Position Manual, Sixth Edition (International Monetary Fund (IMF), 2008), known as BPM6.
An institutional unit is said to be resident within the economic territory of a country when it maintains a centre of predominant economic interest in that territory, that is, when it engages, or intends to engage, in economic activities or transactions on a significant scale either indefinitely or over a long period of time, usually interpreted as one year.

1.49 The GDP of a country, viewed as an aggregate measure of production, is equal to the sum of the gross value added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).
This is not exactly the same as the sum of the gross value added of all productive activities taking place within the geographical boundaries of the national economy.
Some of the production of a resident institutional unit may take place abroad, for example, the installation of some exported machinery or equipment or a consultancy project undertaken by a team of expert advisers working temporarily abroad.
Conversely, some of the production taking place within a country may be attributable to nonresident institutional units.

1.50 When GDP is derived from the expenditure side, allowance has also to be made for goods and services produced by non-residents but consumed by residents as well as for goods and services produced by residents but consumed abroad.
For the SNA to be comprehensive in coverage, all transactions with the rest of the world have to be identified so their impact on measures relating to the resident economy is properly accounted for.
The complete set of transactions with the rest of the world in the SNA matches exactly the set of transactions captured in the balance of payments.

6. Final consumption, intermediate consumption and gross fixed capital formation

1.51 The contents of the accounts are determined not only by the conceptual framework, definitions and classifications of the SNA but also by the ways in which they are interpreted and implemented in practice.
No matter how simple and precise concepts and classifications may appear in principle, there are inevitably difficult borderline cases which cannot easily be fitted into predetermined categories.
These points may be illustrated by considering a fundamental distinction in economics and in the SNA, namely, the distinction between consumption and gross fixed capital formation (or gross fixed investment, as it is often described in other contexts).

1.52 Before considering the difference between consumption and investment, though, it is necessary to look more closely at the nature of consumption.
Consumption is an activity in which institutional units use up goods or services, but there are two quite different kinds of consumption.
Intermediate consumption consists of goods and services used up in the course of production within the accounting period.
Final consumption consists of goods and services used by individual households or the community to satisfy their individual or collective needs or wants.
The activity of gross fixed capital formation, like intermediate consumption, is restricted to institutional units in their capacity as producers, being defined as the value of their acquisitions less disposals of fixed assets.
Fixed assets are produced assets (such as machinery, equipment, buildings or other structures) that are used repeatedly or continuously in production over several accounting periods (more than one year).
The distinction between intermediate consumption and gross capital formation depends on whether the goods and services involved are completely used up in the accounting period or not.
If they are, the use of them is a current transaction recorded as intermediate consumption; if not it is an accumulation transaction recorded in the capital account.

1.53 The general nature and purpose of the distinction between gross fixed capital formation and consumption, whether intermediate or final, is clear.
The distinction is fundamental for economic analysis and policymaking.
Nevertheless, the borderline between consumption and gross fixed capital formation is not always easy to determine in practice.
Certain activities contain some elements that appear to be consumption and at the same time others that appear to be capital formation.
In order to try to ensure that the SNA is implemented in a uniform way, decisions have to be taken about the ways in which certain difficult, even controversial, items are to be classified.
Two examples are given below.

1. Harmonization between different statistical systems

1.57 The SNA has a very important statistical function by serving as a coordinating framework for economic statistics in two different senses.
In the first place, the SNA is seen as the conceptual framework for ensuring the consistency of the definitions and classifications used in different, but related, fields of statistics.
Secondly, the SNA acts as an accounting framework to ensure the numerical consistency of data drawn from different sources, such as industrial inquiries, household surveys, merchandise trade statistics, VAT returns and other administrative sources.

1.58 Consistency between different statistical systems enhances the analytical usefulness of all the statistics involved.
The SNA has always occupied a central position in economic statistics because the data from more specialized systems, such as balance of payments or labour force statistics, typically have to be used in conjunction with national accounts data.
The need for harmonization of the SNA and related statistical systems, such as financial statistics or balance of payments statistics, leads to the practice of revising other statistical systems in parallel with, and in close collaboration with, that of the SNA.
This coordination eliminates conceptual differences between them other than a few exceptions that can be specifically justified in terms of the special characteristics of different kinds of data, or the special requirements of different kinds of users.
Harmonization between the SNA and other major systems has proved to be largely successful and has been achieved by making changes to the SNA as well as to the other systems.

2. The use of microdata for macroeconomic accounting

1.59 The sequence of accounts and balance sheets of the SNA could, in principle, be compiled at any level of aggregation, even that of an individual institutional unit.
It might therefore appear desirable if the macroeconomic accounts for sectors or the total economy could be obtained directly by aggregating corresponding data for individual units.
There would be considerable analytical advantages in having microdatabases that are fully compatible with the corresponding macroeconomic accounts for sectors or the total economy.
Data in the form of aggregates, or averages, often conceal a great deal of useful information about changes occurring within the populations to which they relate.
For example, economic theory indicates that changes in the pattern of the distribution of income may be expected to have an impact on aggregate consumption over and above that due to changes in the aggregate level of income.
Information relating to individual units may be needed not only to obtain a better understanding of the working of the economy but also to monitor the impact of government policies, or other events, on selected types of units about which there may be special concern, such as households with very low incomes.
Microdata sets also make it possible to follow the behaviour of individual units over time.
Given the continuing improvements in computers and communications, the management and analysis of very large microdatabases is becoming progressively easier.
Data can be derived from a variety of different sources, such as administrative and business records, as well as specially conducted censuses and surveys.

1.60 In practice, however, macroeconomic accounts can seldom be built up by simply aggregating the relevant microdata.
Even when individual institutional units keep accounts or records, the concepts that are needed or appropriate at a micro level may not be suitable at a macro level.
Individual units may be obliged to use concepts designed for other purposes, such as taxation.
The accounting conventions and valuation methods used at a micro level typically differ from those required by the SNA.
For example, the widespread use of historic cost accounting means that the accounts of individual enterprises may differ significantly from those used in the SNA.
Depreciation as calculated for tax purposes may be quite arbitrary and unacceptable from an economic viewpoint as a measure of consumption of fixed capital.
In such situations, it is impractical to try to adjust the individual accounts of thousands of enterprises before aggregating them.
Instead the data are adjusted after they have been aggregated to some extent.
Of course, the data do not have to be aggregated to the level of the total economy, or even complete sectors or industries, before being adjusted and it is likely to be more efficient to make the adjustments for smaller and more homogenous groups of units.
This may involve compiling so-called intermediate systems of accounts.
At whatever level of aggregation the adjustments are made, the inevitable consequence is to make the resulting macrodata no longer equivalent to simple aggregations of the microdata from which they are derived.
When the microdata are not derived from business accounts or administrative records but from censuses or surveys designed for statistical purposes, the concepts used should be closer to those required, but the results may still require adjustment at a macro level because of incomplete coverage (the surveys being confined to enterprises above a certain size, for example) and bias from response errors.

1.61 Most households are unlikely to keep accounts of the kind needed by the SNA.
Microdata for households are typically derived from sample surveys that may be subject to significant response and reporting errors.
It may be particularly difficult to obtain reliable and meaningful data about the activities of small unincorporated enterprises owned by households.
Aggregates based on household surveys have to be adjusted for certain typical biases, such as the underreporting of certain types of expenditure (on tobacco, alcoholic drink, gambling, etc.) and also to make them consistent with macrodata from other sources, such as imports.
The systematic exploitation of microdata may also be restricted by the increasing concerns about confidentiality and possible misuse of such databases.

1.62 It may be concluded therefore that, for various reasons, it may be difficult, if not impossible, to achieve microdatabases and macroeconomic accounts that are fully compatible with each other in practice.
Nevertheless, as a general objective, the concepts, definitions and classifications used in economic accounting should, so far as possible, be the same at both a micro and macro level to facilitate the interface between the two kinds of data.

1. International accounting standards

1.70 A feature of the 2008 update of the SNA is recognition of the increasing use of international accounting standards by corporations and in the public sector.
Subsequent chapters make reference to International Accounting Standards Board (IASB) and the International Public Sector Accounting Standards Board (IPSASB) norms.
In several cases, notably on pension liabilities and intangible assets, the feasibility of including certain items in the SNA is dependent on the application of the international accounting standards.

1. Qualifications to treating expenditure as a welfare measure

1.76 In a market economy, the prices used to value different goods and services should reflect not only their relative costs of production but also the relative benefits or utilities to be derived from using them for production or consumption.
This establishes the link between changes in aggregate production and consumption and changes in welfare.
However, changes in the volume of consumption, for example, are not the same as changes in welfare.
It is widely accepted that, other things being equal, increased expenditure on goods and services leads to increased welfare.
The increase in welfare may not, however, be proportionate to the increase in expenditure.
Nor is the unit incurring the expenditure necessarily the one that benefits from an increase in welfare.
The SNA makes a distinction between actual consumption, showing the amount of goods and services actually consumed, and consumption expenditure.
Household actual consumption is greater than consumption expenditure because it includes expenditures incurred by general government and NPISHs on behalf of individual households.

1.77 An increase in consumption of food by someone living in extreme poverty is likely to lead to a greater increase in welfare than a similar increase in consumption by someone already well-fed.
The SNA however, cannot distinguish this because although the rules allow distinguishing which unit incurs the expenditure as opposed to which unit consumes the food, the valuation basis in the SNA is the price paid for the food with no adjustment for the qualitative benefits derived from its consumption.
The most that can be claimed for treating expenditure as a measure of welfare is that it may be a reasonable lower bound on the level of welfare engendered by the expenditure.

2. Unpaid services and welfare

1.78 The production boundary of the SNA is such that the services produced and consumed by households are not included except for the imputed rental of owner-occupied dwellings and the payments made to domestic staff.
Similarly, no estimate is included in the SNA for the labour services of individuals provided without cost to non-profit institutions.
In both these cases, the contribution of time increases the welfare of other individuals in the community.
The exclusion of these services from the production boundary is not a denial of the welfare properties of the services but a recognition that their inclusion would detract from rather than add to the usefulness of the SNA for the primary purposes for which it is designed, that is economic analysis, decision-taking and policymaking.

3. The impact of external events on welfare

1.79 The level of an individual's and a nation's welfare may be affected by a wide range of factors that are not economic in origin.
Consider the effects of an exceptionally severe winter combined with an influenza epidemic.
Other things being equal, the production and consumption of a number of goods and services may be expected to rise in response to extra demands created by the cold and the epidemic; the production and consumption of fuels, clothing and medical services will tend to increase.
As compared with the previous year, people may consider themselves to be worse off overall because of the exceptionally bad weather and the epidemic, notwithstanding the fact that production and consumption may have increased in response to the additional demand for heating and health services.
Total welfare could fall even though GDP could increase in volume terms.

1.80 This kind of situation does not mean that welfare cannot be expected to increase as GDP increases, other things being equal.
Given the occurrence of the cold and the epidemic, the community presumably finds itself much better off with the extra production and consumption of heating and health services than without them.
There may even be a general tendency for production to rise to remedy the harmful effects of events that reduce people's welfare in a broad sense.
For example, production may be expected to increase in order to repair the damage caused by such natural disasters as earthquakes, hurricanes and floods.
Given that the disaster has occurred, the extra production presumably increases welfare.
However the question remains how changes in welfare should be measured over time; a community that has suffered a natural disaster will have a higher level of welfare if damage is repaired than if it is not, but how does this new level of welfare compare to the situation in the absence of the disaster?

4. The impact of externalities on welfare

1.81 Some production activities cause a loss in welfare that is not captured in the SNA.
A factory, for example, may generate noise and emit pollutants into the air or nearby water systems to the extent of causing a loss of amenity and thus a loss of welfare to individuals living nearby.
As long as there is no financial penalty to the factory, the consequences go unmeasured in the SNA.
If, in response to government legislation or otherwise, the factory incurs expenditures that reduce the noise or quantity of pollutants emitted, costs will rise and so will welfare but again the match is not necessarily one to one and the level of welfare after the ameliorations may still be lower than it might be if the factory simply closed down.

1.82 Environmental externalities are a major cause of concern both as regards measuring welfare and indeed economic growth itself.
In response to these concerns, a satellite account of the SNA has been developed and is being refined to try to answer such questions.

5. Non-economic impacts on welfare

1.83 An individual’s state of well-being, or welfare, is not determined by economic factors alone.
Personal and family circumstances, quality of health, the satisfaction of lack of it derived from employment are just some other factors that affect welfare.
It is difficult to imagine an objective way in which factors such as these could be quantified and more difficult to imagine the usefulness of including them in a system designed primarily to facilitate economic analysis

6. Welfare indicators and macroeconomic aggregates

1.84 Welfare is a wide-ranging concept with many different facets.
Some of these may be captured reasonably well by one or more of the key aggregates of the SNA.
Others may be captured by using the basic structure of the SNA and expanding it in certain directions, perhaps by including unpaid services and the effects of environmental damage, for example.
Yet other aspects are likely to remain forever outside the reach of a system not designed with the measurement of welfare as a prime consideration.
It would be foolish to deny this just as it is unrealistic to expect a system of economic accounts to necessarily and automatically yield a wholly satisfactory measure of welfare.

1. Analysing flows and stocks

2.5 Basically, the purpose of a system of national accounts is to record economic flows and stocks.
Economic flows can be thought of in various ways.
Consider the question “Who does what?” “Who” refers to the economic agent engaged in doing something, the operator. “What” is connected with the kind of action this agent is undertaking.
In a few cases, the answer to this simple question provides a good preliminary characterization of an economic flow.
However, in general the question is too simple to provide even a rough economic description of a specific flow.
Take the example of somebody buying a loaf of bread.
In order to characterize the flow, it is necessary to consider from whom this loaf of bread is bought (a baker or a supermarket) and what is given in exchange (a coin or a note).
So the starting question is transformed into “Who does what with whom in exchange for what?” This rather simple flow involves two operators (a buyer, a seller), two main actions (a purchase, a sale), two secondary actions (a payment, a receipt) and two objects (bread, a coin or a note).
Again, a complete description would require more information, at least the weight, kind and price of the bread.

2.6 The picture in the real world is still more complicated.
Before this flow occurred, the seller had a certain quantity of bread in his shop; afterwards he has less bread but more money.
The buyer had a certain amount of money, now he has less money but some bread (before eating it).
So the flow between them has changed their initial situations.
This means that flows cannot be looked at in isolation; the situations before and after a flow occurs need to be considered.
At those two points in time, one must ask the question “Who has what?” The baker not only has bread and currency, he also has a house with the shop, baking equipment, some flour, a deposit in a bank, a car, etc.
In other words, he has (he owns) a certain stock of objects.
The same is true for the buyer.
In addition to what they are in themselves, flows modify stocks.
Flows and changes in stocks are intrinsically connected.
The previous question is again transformed into “Who does what with whom in exchange for what with what changes in stocks?”

2.7 However, the various ways of looking at this example have not yet been exhausted.
Before the baker can sell bread, he has to bake it. He uses flour, water, electricity, baking equipment, etc.
So, an additional question is “Who does what by what means?”
What he does can also be characterized in two ways: his activity (to bake) and the result of it (a product: bread).
With respect to the buyer one can ask “Why does he buy bread?”
The obvious purpose is to eat, as food; however, it could be to give to a beggar, as charity.
This raises the question “Who does what for what purpose?”

2.8 Adding all the questions together results in a rather complex combination of simple links: “Who does what, with whom, in exchange for what, by what means, for what purpose, with what changes in stocks?” Answering these questions for all economic flows and stocks and operators in a given economy would provide an enormous amount of information describing the complete network of economic interrelations.
However, it would require an enormous amount of basic information, which is not always available nor complete in that it may cover only certain aspects of the complex chain of questions.
Further, it is necessary to organize the recording of economic flows and stocks in a comprehensible way, as discussed in the next section.

2. Recording flows and stocks

2.9 Users' needs set certain requirements for the accounting framework.
The first requirement is that it should provide a picture of the economy, but the picture must be simplified in order to be both comprehensible and manageable.
The second requirement is that it should faithfully represent economic behaviour by covering all important aspects in a balanced way without neglecting or giving too little emphasis to some aspects or giving others too much prominence.
Finally, it should portray all significant economic interrelations and the results of economic activity.
Although meeting these requirements is necessary, they are somewhat contradictory.
Achieving the right balance between them is not easy.
Too great a simplification can lose sight of or neglect important aspects of economic behaviour; too detailed a portrayal of reality can overburden the picture and reduce insight; too much sophistication can lower comprehension and mislead some users; and so on.

2.10 To meet these requirements, the SNA uses a limited number of basic categories to analyse and aggregate certain aspects (Who? What? What purpose? What stocks?) of the very numerous elementary flows.
However, the SNA simplifies the picture it gives of the economic interrelations by not recording the “from-whom-to-whom?” question in a fully systematic way; that is, it does not always depict the network of flows between the various types of operators.
Consider three units, A, B and C, each of which makes payments of the same type to the other two; they might be three shopkeepers, for example, who sell different types of goods.
Suppose A buys 2 from B and 3 from C; B buys 6 from A and 1 from C; C buys 4 from each of A and B. A full articulation of the flows could be captured in a threeby-three table as follows:

2.11 Although only the purchases were specified, it follows that the receipts of each unit are also available in the table.
The totals in the right-most column show the total purchases of each of the three units and the bottommost row shows the total receipts by each of the three units.
The sum of each must, obviously, be the same since each is the sum of all entries within the table.
Within the central framework, the full detail of the flows from each of A, B and C to each of the others is not generally shown; it is sufficient to show only the totals in the right-most column and the bottommost row and know that these must balance.

2.12 In some presentations, particularly those using a matrix format of presentation, some of these extra details may be shown.
Discussion of this appears in chapters 14, 28 and 29.
Even in the central framework, the full detail may be available.
For example if in some case A, B and C do not interact with one another but only with another unit G, as is the case in the payment of taxes, then there are only four entries to be shown; the payments by each of A, B and C and the receipts by G.

2.13 Another case where the SNA introduces a simplification is in terms of the “what in exchange for what?” question; that is, it does not indicate, for example, the specific nature of the financial counterpart (currency or deposit or short-term loan, etc.) for the purchases of goods and services or the payment of taxes.

2.14 The fact that the SNA is integrated, although articulated in only two and not three dimensions, does not reduce its consistency requirements.
In effect, the purpose of the SNA is to derive national accounts that are as consistent as they would be if they were fully articulated; each economic flow or stock should be measured identically for both parties involved.
The consistency in the SNA is achieved by applying the same concepts and definitions throughout and also by using a single strict set of accounting rules.

1. Institutional units and sectors

2.16 The fundamental units identified in the SNA are the economic units that can engage in the full range of transactions and are capable of owning assets and incurring liabilities on their own behalf.
These units are called institutional units.
Further, because they have legal responsibility for their actions, institutional units are centres of decision-making for all aspects of economic behaviour.
In practice, some institutional units are controlled by others and thus in such cases autonomy of decision is not total and may vary over time.
Legally independent holding of assets and liabilities and autonomous behaviour do not always coincide.
In the SNA, preference is generally given to the first aspect because it provides a better way to organize the collection and presentation of statistics even if its usefulness is limited in some cases.

2. Transactions and other flows

2.21 Institutional units fulfil various economic functions; that is, they produce, consume, save, invest, etc.
They may engage in various types of production (agriculture, manufacturing, etc.) as entrepreneurs, providers of labour or suppliers of capital.
In all aspects of their economic functions and activities, they undertake a great number of elementary economic actions.
These actions result in economic flows, which, however they are characterized (wages, taxes, fixed capital formation, etc.), create, transform, exchange, transfer or extinguish economic value; they involve changes in the volume, composition or value of an institutional unit's assets or liabilities.
The economic value may take the form of ownership rights on physical objects (a loaf of bread, a dwelling) or intangible assets (a film original) or of financial claims (liabilities being understood as negative economic value).
In all cases, economic value is potentially usable to acquire goods or services, pay wages or taxes, etc.

2.22 Most economic actions are undertaken by mutual agreement between institutional units.
They are either an exchange of economic value or a voluntary transfer by one unit to another of a certain amount of economic value without a counterpart.
These actions undertaken by mutual agreement between two institutional units are called transactions in the SNA.
The SNA also treats certain economic actions involving only a single institutional unit as transactions.
They are described as internal, or intra-unit, transactions.
For example, own-account fixed capital formation is treated as a transaction between a unit in its capacity as a producer with itself in its capacity as an acquirer of fixed capital.
Such transactions are similar in nature to actions undertaken by mutual agreement by two different institutional units.

2.23 However, not all economic flows are transactions.
For example, certain actions undertaken unilaterally by one institutional unit have consequences on other institutional units without the latter's consent.
The SNA records such actions only to a limited extent, essentially when governments or other institutional units take possession of the assets of other institutional units, including non-resident units, without full compensation.
In fact, unilateral economic actions bearing consequences, either positive or negative, on other economic units (externalities) are much broader but such externalities are not recorded in the SNA.
Human action may result in the transfer of natural assets to economic activities and the subsequent transformation of these assets.
These phenomena are recorded in the SNA as economic flows, bringing in economic value.
Noneconomic phenomena, such as wars and natural disasters, may destroy economic assets, and this extinction of economic value must be accounted for.
The value of economic assets and liabilities may change during the time they are held as stocks, as a consequence of changes in prices.
These and similar flows that are not transactions, which are called other economic flows in the SNA, are described in chapter 12.

2.24 Economic flows can be actual, observable flows or they can be built up or estimated for analytical purposes.
Certain flows may be directly observed in value terms.
This is the case for monetary transactions between two institutional units, such as a purchase or sale of a good or the payment of a tax.
Other two-unit flows are observable but cannot be immediately valued.
These flows include barter of goods and services or education services consumed by students and provided free of charge by government; a value in money terms has to be attributed to them.
Barter is an example of a two-unit flow involving a “quid pro quo” that is, a flow in one direction is linked to a counterpart flow in the opposite direction; a social assistance benefit in cash is a two-unit flow that does not involve a quid pro quo.
Another kind of flow involves only one institutional unit.
Such flows may be physically observable, as in the case of output for own-account consumption or capital formation, or destruction by natural catastrophes.
A value has to be attributed to them (this may be fairly easy in certain cases, such as when output is mostly sold).
Other intra-unit, or internal, flows may not be observable as such; accounting entries are then constructed in order to measure economic performance correctly.
This is the case for the consumption of fixed capital or the revaluation of assets and liabilities.
Certain inter-units flows, such as reinvested earnings on foreign direct investment, are also accounting entries created for analytical purposes.
Finally, some observable monetary transactions are not recorded as they are observed in practice because they are of a composite nature (nominal interest, total insurance premiums) or their legal nature does not correspond to their economic one (financial leasing).
Consequently, for the SNA, they are split up into various components and their classification and routing are modified.

2.25 Although monetary transactions have a basic role in the valuation of flows in the SNA, non-monetary transactions are also significant.
They include flows of goods and services that take place between institutional units for which values have to be estimated and also some flows that are assumed to take place within units.
The relative importance of non-monetary transactions varies according to the type of economy and the objectives pursued by the accounting system.
Although the volume of non-monetary flows is generally greater for less developed economies than for developed ones, even for the latter it is not negligible.

3. Assets and liabilities

2.33 Assets and liabilities are the components of the balance sheets of the total economy and institutional sectors.
In contrast to the accounts that show economic flows, a balance sheet shows the stocks of assets and liabilities held at one point in time by each unit or sector or the economy as a whole.
Balance sheets are normally constructed at the start and end of an accounting period but they can in principle be constructed at any point in time.
However, stocks result from the accumulation of prior transactions and other flows, and they are modified by future transactions and other flows.
Thus stocks and flows are closely related.

2.34 The coverage of assets is limited to those assets which are subject to ownership rights and from which economic benefits may be derived by their owners by holding them or using them in an economic activity as defined in the SNA.
Consumer durables, human capital and those natural resources that are not capable of bringing economic benefits to their owners are outside the scope of assets in the SNA.

2.35 The classification of assets distinguishes, at the first level, financial and non-financial (produced and non-produced) assets (see chapter 10).
Most non-financial assets generally serve two purposes.
They are primarily objects usable in economic activity and, at the same time, serve as stores of value.
Financial assets are necessarily and primarily stores of value, although they may also fulfil other functions.

4. Products and producing units

5. Purposes

2.42 The concept of purpose, or function, relates to the type of need a transaction or group of transactions aims to satisfy or the kind of objective it pursues.
Transactions are first analysed in the SNA according to their nature.
Then, for certain sectors or kind of transactions, they are analysed from the expenditure side, by purpose, answering the earlier question “for what purpose?” Classification by purpose is described in the context of the supply and use tables in chapter 14.

1. Introduction

2. Time of recording

2.54 One implication of the quadruple entry accounting principle is that transactions, or other flows, have to be recorded at the same point of time in the various accounts in question for both units involved.
The same applies to stocks of financial assets and liabilities.

2.55 The general principle in national accounting is that transactions between institutional units have to be recorded when claims and obligations arise, are transformed or are cancelled.
This time of recording is called an accrual basis.
Transactions internal to one institutional unit are equivalently recorded when economic value is created, transformed or extinguished.
Generally speaking, all transactions, however they are described, can always be viewed as dealing with economic value.

2.56 One has thus to distinguish carefully between the point in time at which a transaction and the corresponding cash movement take place.
Even when a transaction (a purchase or sale of a good, for example) and the payment or receipt are simultaneous, the two aspects exist.
The purchaser incurs a liability, the seller acquires a claim as a counterpart of the delivery of the good.
Then the liability and the claim are cancelled by the payment.
In most cases there is a delay between the actual transaction and the corresponding payment or receipt.
In principle, national accounts record actual transactions on an accrual basis, not on a cash basis.
Conceptually national accounts follow the same principle as business accounting.

2.57 Although the principle is clear, its implementation is far from simple.
Institutional units do not always apply the same rules.
Even when they do, differences in actual recording may occur for practical reasons such as delays in communication.
Consequently, transactions may be recorded at different times by the transactors involved, sometimes even in a different accounting period.
Discrepancies exist which national accounts must eliminate by after-the-fact adjustments.
In addition, because the time at which a claim or liability arises is not always unambiguous, further implementation problems arise.
The rules and conventions adopted in the SNA for particular transactions are specified in subsequent chapters, in particular in chapter 3.

3. Valuation

4. Consolidation and netting

1. Introduction

2.73 With the tools introduced in sections B and C above, all flows and stocks can be recorded.
This is done in the accounts of the SNA.
Each account relates to a particular aspect of economic behaviour.
It contains flows or stocks and shows the entries for an institutional unit, a group of units such as a sector or the rest of the world.
Typically the entries in the account do not conceptually balance so a balancing item must be introduced.
Balancing items are meaningful measures of economic performance in themselves.
When calculated for the whole economy, they constitute significant aggregates.

2.74 The accounts can be divided into two main classes:

a. The integrated economic accounts; and

b. The other parts of the accounting structure.

2.75 The integrated economic accounts use the first three of the conceptual elements of the SNA described in section B, (institutional units and sectors, transactions and assets and liabilities) together with the concept of the rest of the world to form a wide range of accounts.
These include the full sequence of accounts for institutional sectors, separately or collectively, the rest of the world and the total economy.
The full sequence of accounts is described briefly below.
A full description of each of the accounts concerned is the subject matter of chapters 6 to 13.
The rest of the world account is described in chapter 26.

2.76 The other parts of the accounting system bring in the three other conceptual elements from section B, that is, establishments, products and purposes as well as population and employment.
The accounts covered here include the supply and use framework, which is the subject of chapter 14, population and employment tables which are described in chapter 19, the three dimensional analysis of financial transactions and stocks of financial assets and liabilities, showing the relations between sectors (fromwhom-to-whom) described in chapter 27 and functional analyses, whereby certain transactions of institutional sectors are presented according to the purpose they serve.
These appear in a number of chapters including chapter 14.

2.77 The sections following are devoted to:

a. The full sequence of accounts;

b. An integrated presentation of the accounts including the goods and services account, the accounts for the rest of the world and an examination of the aggregates of the SNA; and

c. The other parts of the accounting structure.

2. The full sequence of accounts

2.78 Before presenting the full sequence of accounts for institutional units and sectors, some preliminary remarks are useful.
The purpose of this subsection is to explain the accounting structure of the SNA in general, not to show the precise content of the accounts for each specific unit or sector.
The accounting structure is uniform throughout the SNA.
It applies to all institutional units, subsectors, sectors and the total economy.
However, some accounts may not be relevant for certain sectors.
Similarly, not all transactions are relevant for each sector and, when they are, they may constitute resources for some sectors and uses for others.

Table 2.1: The production account

2.79 Another remark relates to the way the classification of transactions is used when presenting the general structure of the accounts.
Section B above shows only the main categories of transactions, not the detailed ones which are displayed in the relevant chapters of the publication.
However, in order to make the accounts clear, it is necessary to include a number of specific transactions.
This is done by using the actual classification of transactions in the SNA at a level of detail sufficient for a good understanding of the accounts.
Definitions of these transactions are not given at this stage unless absolutely necessary but appear in subsequent chapters.

2.80 It is also worth noting that balancing items can be expressed gross or net, the difference being the consumption of fixed capital.
Conceptually, net balancing items are much more meaningful.
However, gross concepts, specifically gross aggregates, are widely used and gross accounts are often estimated more easily, accurately and promptly than the net ones.
In order to accommodate both solutions and to ease the integrated presentation of the accounts and aggregates, a double presentation of balancing items is allowed.

2.81 Finally, it has to be said that the sequence of accounts shows the accounting structure of the SNA; it is not necessarily a format for publishing the results.

3. An integrated presentation of the accounts

2.125 It is now possible to put together the various elements which have been introduced in the previous subsections and to present in detail the integrated economic accounts. Table 2.13 gives a simplified version of the integrated current accounts.
It is formed by taking each of tables 2.1, 2.2, 2.3, 2.4 and 2.6 and placing them immediately one under the other.
In this presentation the transactions and other flows are shown in the middle of the table with columns to the left for the uses and columns to the right for resources.
In a full presentation of this type there would be one column for each sector or subsector of interest.
In the interest of introducing the table in a simple manner, only four columns are shown in table 2.13.
The first of these represents the sum of all the five sectors of the total economy (nonfinancial corporations, financial corporations, general government, NPISHs and households).
There follows a column for the rest of the world, then one headed goods and services and the last is a column representing the sum of the previous three.
This column has little economic meaning but is a critical way of ensuring that the tables are complete and consistent since the totals on the left-hand side and right-hand side of the accounts must be equal line by line.
(When balancing items are shown as the last item in one account and the first in the next account, this equality is misaligned but still obvious.)

2.126 Table 2.14 shows the continuation of the integrated accounts, including the accumulation accounts and balance sheets as previously presented in tables 2.8, 2.9, 2.10, 2.11 and 2.12.
Here the columns to the left represent assets or changes in assets and columns to the right liabilities or changes in liabilities and net worth.
Together tables 2.13 and 2.14 make up the integrated economic accounts.
The data in the two tables are drawn from the numerical example that runs through the entire publication.
The tables for each account in chapters 6 to 13 are expanded versions of the tables shown here with columns for all institutional sectors and a full set of transactions and other flows for each of these accounts.
A composite version of the tables, with all the details just mentioned, appears in Annex 2.

2.127 The integrated economic accounts give a complete picture of the accounts of the total economy including balance sheets, in a way that permits the principal economic relations and the main aggregates to be shown.
This table shows, simultaneously, the general accounting structure of the SNA and presents a set of data for the institutional sectors, the economy as a whole and the rest of the world.

2.128 The presentation of the integrated accounts in this form is one of several ways in which a bird's eye view of the accounts can be obtained.
Another way is by means of a diagram such as figure 2.1, which gives the same information in schematic form.

2.129 The integrated economic accounts provide an overview of the economy as a whole.
As already indicated, the integrated presentation contains much more detail than has actually been included in the tables and may be used to give a more detailed view if so desired.
Columns might be introduced for subsectors.
The rest of the world column can be subdivided according to various geographical zones.
The column for goods and services may show market goods and services separately.
The classification of transactions in the rows might be used at more detailed levels, and so on. However, including more detail directly in this scheme at the same time would result in a very complicated and unmanageable table.
For this reason, more detailed analysis of production and transactions in goods and services, transactions in financial instruments, detailed balance sheets, as well as analysis by purpose are done in other frameworks.
These are presented in the next section and their links with the integrated economic accounts are also explained.

4. The other parts of the accounting structure

1. Applying the central framework in a flexible way

2.159 The central framework of the SNA is consistent in terms of its concepts and its accounting structure.
Links between the various elements of the integrated SNA have been illustrated in order to depict its structure in a simple but complete way.
That presentation does not imply any order of priority or frequency (quarterly, annually, etc.) for implementing national accounts.
Priorities in compiling national accounts are a matter of statistical policy; no universal recommendation can be made.
(Some indications relevant to specific circumstances are provided in relevant handbooks.)
Similarly, the accounting structure does not imply that results always have to be presented exactly as they stand in this or other chapters.
A country may choose to publish mainly time series, to prepare only some accounts or aggregates, etc.

2.160 In general, the SNA has to be looked at in a consistent but flexible way.
According to analytical requirements and data availability, the attention paid to various aspects of the central framework may vary.
In general, greater emphasis may be given to one part rather than another by choosing the level of disaggregation to adopt for classifications of institutional sectors, industries, products, transactions, sequence of accounts, etc., by using different methods of valuation; by using different priorities for various parts of the accounts and different frequencies; by rearranging the results; by introducing some additional elements, etc.

2.161 The household sector provides a good illustration of what may be done in order to provide an in-depth analysis of the household conditions and the functioning of the economy as a whole.
A detailed approach to the household sector may be undertaken, first of all, by deconsolidating the household sector beyond the subsectors included in the main classification of the SNA, distinguishing, for instance, the type of economic activity carried out (formal or informal), the location of the household (urban or rural) or the level of skill.
Secondly, it is possible to adapt the way household activities are portrayed in the sequence of accounts.
For instance, a concept of discretionary income may be used by excluding from disposable income those elements which are provided in kind and for which the household has no choice on how to spend this part of income, or the classification of household transactions may be complemented, to show the industry of origin of various types of income, and so on.

2.162 The flexibility of the SNA is further illustrated with the public sector, whose components are systematically shown at various levels of detail in the classification of institutional sectors.
The components of the public sector may be rearranged to group the accounts of the overall public sector.
These accounts may be shown before consolidation and after consolidation to describe the relations between the public sector and the private sector and between the public sector and the rest of the world (by separating out the external transactions of the public sector).

2.163 Chapters 21-29 provide more detailed analyses of the above examples.
They also present illustrations of the flexible uses of the central framework in the field of key sector accounting, external accounts problems and the informal economy.

2. Introducing social accounting matrices

2.164 A social accounting matrix (SAM) is a presentation of the SNA in matrix terms that permits the incorporation of extra details of special interest.
To date, builders of SAMs have exploited the flexibility to highlight special interests and concerns such as disaggregating the household sector to show the link between income generation and consumption.
The power of a SAM, as well as of the SNA, comes from choosing the appropriate type of disaggregation to study the topic of interest.
In addition to a flexible application, SAMs may incorporate more extensive adjustments, which are of a satellite accounting nature, in order to serve specific analytical purposes.
For further explanation of the matrix presentation and SAMs, see chapters 28 and 29.

3. Introducing satellite accounts

2.165 In some cases, working with the central framework, even in a flexible way, is not sufficient.
Even when conceptually consistent, the central framework may become overburdened with details.
Moreover, some requirements may conflict with the concepts and architecture of the central framework.

2.166 In some types of analysis, the basic intention is not to use alternative economic concepts, but simply to focus on a certain field or aspect of economic and social behaviour in the context of national accounts.
The intent is to make apparent and to describe in more depth aspects that are hidden in the accounts of the central framework or surface only to a limited extent.
Tourism is a good example.
Various aspects of producing and consuming activities connected with tourism may appear in detailed classifications of activities, products and purposes.
However, transactions and purposes specific to tourism appear separately in only a few cases.
In order to describe and measure tourism in a national accounts framework, it is necessary to make a choice between two approaches: either subdivide many elements in the accounts of the central framework to get the required figures for tourism and pay the price of overburdening and unbalancing the various components of the accounts, or elaborate a specific framework for tourism.
The latter approach also allows adaptation of the various classifications and measurement of additional aggregates, such as national expenditure on tourism, which may cover intermediate as well as final consumption.

2.167 In other types of analysis, more emphasis is given to alternative concepts.
For instance, the production boundary may be changed, generally by enlarging it, for example, the production of domestic services by members of the household for their own final consumption may be brought within the production boundary.
The concept of fixed assets and the related fixed capital formation may be broadened, by covering consumer durables or human capital.
It is also possible in environmental accounting to record the relationships between natural resources and economic activities differently by recording the depletion and the degradation of subsoil or other natural resources.
In these approaches, the economic process itself is depicted differently and complementary or alternative aggregates are calculated.
The analysis of a number of important fields such as social protection, health or the environment may benefit from building a framework to accommodate elements which are included in the central accounts, explicitly or implicitly, plus complementary elements (either monetary or in physical quantities) possibly as well as alternative concepts and presentations.
In all cases, however, the links with the central framework are made explicit; there are a number of common elements and any contradictory features are introduced, not by chance, but after explicitly considering various ways of looking at reality.

2.168 Those special constructs, which are consistent with but not fully integrated the central framework, are called satellite accounts and are described in more detail in chapter 29.

1. Stocks and flows

3.4 Stocks are a position in, or holdings of, assets and liabilities at a point in time.
The SNA records stocks in accounts, usually referred to as balance sheets, compiled in respect of the beginning and end of the accounting period.
However, stocks are connected with flows: they result from the accumulation of prior transactions and other flows, and they are changed by transactions and other flows in the period.
They result in fact from a continuum of entries and withdrawals, with some changes in volume or in value occurring during the time a given asset or liability is held.

3.5 An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time.
It is a means of carrying forward value from one accounting period to another.
Assets may be financial in nature or not.
For almost all financial assets, there is a corresponding [financial] liability.
A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor).
An elaboration of these definitions and the concepts embodied in them as well as a typology of the different assets and liabilities in the SNA is given in section B of this chapter.

3.6 Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value; they involve changes in the volume, composition, or value of an institutional unit's assets and liabilities.
Mirroring the diversity of the economy, economic flows have specific natures as wages, taxes, interest, capital flows, etc., that record the ways in which a unit's assets and liabilities are changed.

3.7 Economic flows consist of transactions and other flows.
A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is operating in two different capacities.
The value of an asset or a liability may be affected by economic flows that do not satisfy the requirements of a transaction.
Such flows are described as “other flows”.
Other flows are changes in the value of assets and liabilities that do not result from transactions.
Examples are losses due to natural disasters and the effect of price changes on the value of assets and liabilities.

3.8 There is a discussion of the different types of economic flows in section C of this chapter.

2. Balancing items

3.9 Economic flows are grouped together into accounts with outflows (which may be called debit entries, uses or changes in assets) on the left-hand side and inflows (credit entries, resources, or changes in liabilities or net worth) on the right-hand side.
A balancing item is an accounting construct obtained by subtracting the total value of the entries on one side of an account (resources or changes in liabilities) from the total value of the entries on the other side (uses or changes in assets).
It cannot be measured independently of the entries in the accounts; as a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account.
There is also a balancing item for the balance sheet where the difference between assets and liabilities is known as net worth.

3.10 Balancing items are constructed because they convey interesting economic information.
Many of the key aggregates of the SNA including GDP actually emerge as balancing items.
Balancing items are discussed in section D.

3. Grouping stocks and flows into accounts

3.11 The accounts and tables of the SNA contain information relating to the economic actions or events that take place within a given period of time and the effect of these events on the stocks of assets and liabilities at the beginning and end of that period.

3.12 The flows and stocks are grouped according to the classification hierarchy of the SNA, shown in annex 1.
The classification of transactions and other flows has five headings at the highest level, dealing with transactions in products, transactions showing how income is distributed and redistributed within the SNA, transactions in nonproduced assets, financial assets and liabilities, and other accumulation entries.
In the accumulation accounts, the hierarchy may show both the transaction and the type of asset it applies to.

3.13 The flows and stocks are entered in the accounts of the institutional units involved and thus in the accounts of the sectors into which the institutional units are grouped.
Institutional units and sectors are the subject of chapter 4.
In general, flows and stocks are entered in the accounts of the institutional units that own or owned the goods and assets involved, in the accounts of units that deliver or take delivery of services, or in the accounts of units that provide labour and capital or use them in production.
For some purposes, an institutional unit participating in production is viewed as one or more establishments and establishments may be grouped into industries.
Establishments and industries are defined and discussed in chapter 5.

4. Accounting rules

3.14 All entries in the accounts have to be measured in terms of money, and therefore the elements from which the entries are built up must be measured in terms of money.
In some cases, the amounts entered are the actual payments that form part of flows that involve money; in other cases the amounts entered are estimated by reference to actual monetary values.
Money is thus the unit of account in which all stocks and flows are recorded.

3.15 In principle, any lapse of time may be chosen as the accounting period.
Periods that are too short have the disadvantage that statistical data are influenced by incidental factors, while long periods do not adequately portray changes going on in the economy.
Merely seasonal effects can be avoided by having the accounting period cover a whole cycle of regularly recurrent economic phenomena.
Most business and government accounting refers to complete years.
In general, calendar or financial years or quarters are best suited for drawing up a full set of national accounts.

3.16 The SNA covers all economic activity in such a way that it is possible to derive accounts for individual groups of units or for all units in the economy.
To permit this, the accounting rules ensure consistency with respect to valuation, timing, classification and grouping of flows and stocks.
These rules are summarized below to provide a context for the discussion of the nature of stocks, flows, and balancing items in sections B, C and D.

a. Flows and stocks must be recorded consistently with respect to their valuation.
Entries are at current value on the market (that is, the amount agreed upon by two parties) or at its closest equivalent.
The value on the market may need to be adjusted to the coverage of the flow or stock as defined in the SNA and expressed appropriately given the nature of the flow or stock with respect to taxes and subsidies on products, transport costs and trade margins.

b. Flows and stocks must be recorded consistently with respect to timing.
Flows are recorded at the moment of accrual within the accounting period (that is, the moment economic value is created, transformed, exchanged, transferred or extinguished).
Stocks are recorded at the moment to which the account relates, typically the beginning or end of the accounting period.

c. Individual flow and stock entries must be recorded consistently with respect to their classification, both in respect of the categories in the classifications of transactions, other flows and assets and the categories in the classification of transactors as (sub)sectors or industries.

d. Depending on the character of the entry, a distinction should be made between resources and uses or between assets and liabilities.
In the process of grouping, netting is implicit for several items, but consolidation is not advised.

3.17 The basic accounting framework of the SNA is one of quadruple accounting.
This implies that a transaction gives rise to two entries for each party to the transaction.
There is vertical consistency within each unit and horizontal consistency between the two units for each type of entry.
The principles of quadruple accounting are explained in more detail in section E in this chapter.

1. Benefits

3.19 The heart of the SNA describes how labour, capital and natural resources including land are used to produce goods and services.
These goods and services are used for the three economic activities recognized in the SNA, production, consumption and accumulation.
An economic benefit is defined as denoting a gain or positive utility arising from an action.
It implies a comparison between two states.
This can be elaborated within the SNA so that benefits are seen as rewards for providing services, such as those of labour and capital to production and also the means of acquiring goods and services for production, consumption or accumulation in the current period or in future periods.

3.20 Sometimes the immediate benefit is in terms of goods and services directly, for example own account production or wages and salaries in kind.
More often a benefit is in the form of the medium of exchange (money), for example as wages and salaries.
Consumption is an activity that takes place in the current period only but may be financed from past benefits.
Production and accumulation also involve benefits postponed to future periods.
Thus, means of allowing benefits to be moved from one accounting period to another have to be recognized.
These take the form of assets and liabilities where a benefit in one period is converted to a benefit in one or more future periods.
Similarly goods and services, or current benefits, may be acquired by committing future benefits in the form of financial liabilities.

2. Ownership

3.21 Two types of ownership can be distinguished, legal ownership and economic ownership.
The legal owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled in law and sustainable under the law to claim the benefits associated with the entities.

3.22 Sometimes government may claim legal ownership of an entity on behalf of the community at large.
No entity that does not have a legal owner, either on an individual or collective basis, is recognized in the SNA.

3.23 The acts of production, consumption and accumulation involve varying degrees of risk.
Two main forms of risk can be identified.
The first sort refers to production.
These arise because of such uncertainties as the demand for goods and services once produced, developments in the economy in general and technical innovation that affects the benefits to be earned from capital and natural resources.
The consequence is that benefits from capital, natural resources and labour in the form of operating surplus and income from employment are not wholly predictable in advance, but embody a degree of risk.

3.24 The second type of risk refers to the process of transferring benefits between time periods.
It arises because of uncertainty over interest rates in future periods, which in turn affects the comparative performance of different types of benefits.

3.25 When economic agents make decisions about consumption or accumulation, they have to make a judgement about the relative advantages of benefits being converted to goods and services in the current period as against conversion in a later period.
Thus all economic activity involves both benefits and risks.
Transferring benefits between time periods inevitably involves transferring risks also.
An agent may opt for a lower but more certain benefit in future rather than a benefit that might be higher but is less certain.
Of particular interest is the case when an agent swaps benefits and risks associated with production with those associated with financial assets and liabilities.

3.26 The economic owner of entities such as goods and services, natural resources, financial assets and liabilities is the institutional unit entitled to claim the benefits associated with the use of the entity in question in the course of an economic activity by virtue of accepting the associated risks.

3.27 Every entity has both a legal owner and an economic owner, though in many cases the economic owner and the legal owner of an entity are the same.
Where they are not, the legal owner has handed responsibility for the risk involved in using the entity in an economic activity to the economic owner along with associated benefits.
In return the legal owner accepts another package of risks and benefits from the economic owner.
In general within the SNA, when the expression “ownership” or “owner” is used and the legal and economic owners are different, the reference should be understood to be to the economic owner.
Part 5 of chapter 17, on contracts, leases and licences, discusses a number of cases where legal and economic ownership are different.

3.28 When government claims legal ownership of an entity on behalf of the community at large, the benefits also accrue to the government on behalf of the community at large.
Thus government is both the legal and economic owner of these entities.

3.29 The benefits inherent in financial assets and liabilities are seldom transferred from a legal owner to an economic owner in exactly the same state.
They are usually transformed to new forms of financial assets and liabilities by the intermediation of a financial institution that assumes some of the risk and benefits while passing the balance on to other units.

3. The definition of an asset

3.30 Leading on from the above it is possible to define an asset as follows.
An asset is a store of value representing a benefit or series of benefits accruing to the economic owner by holding or using the entity over a period of time.
It is a means of carrying forward value from one accounting period to another.

3.31 All assets in the SNA are economic assets.
Attributes such as reputation or skill, which are sometimes described in common parlance as an asset, are not recognized as such in the SNA because they are not economic in nature in the sense described under ownership.

4. Financial assets and liabilities

3.32 A particularly important mechanism in the economy is the device whereby one economic unit exchanges a particular set of benefits with another economic unit.
Benefits are exchanged by means of payments.
From this a financial claim, and hence a liability, can be defined.
There are no non-financial liabilities recognized in the SNA, thus the term liability necessarily refers to a liability that is financial in nature.

3.33 A liability is established when one unit (the debtor) is obliged, under specific circumstances, to provide a payment or series of payments to another unit (the creditor).
The most common circumstance in which a liability is established is a legally binding contract that specifies the terms and conditions of the payment(s) to be made and payment according to the contract is unconditional.

3.34 In addition, a liability may be established not by contract but by long and well-recognized custom that is not easily refuted.
In these cases, the creditor has a valid expectation of payment, despite the lack of a legally binding contract.
Such liabilities are called constructive liabilities.

3.35 Whenever either of these types of liability exists, there is a corresponding financial claim that the creditor has against the debtor.
A financial claim is the payment or series of payments due to the creditor by the debtor under the terms of a liability.
Like the liabilities, the claims are unconditional.
In addition, a financial claim may exist that entitles the creditor to demand payment from the debtor but whereas the payment by the debtor is unconditional if demanded, the demand itself is discretionary on the part of the creditor.

3.36 Financial assets consist of all financial claims, shares or other equity in corporations plus gold bullion held by monetary authorities as a reserve asset.
Gold bullion held by monetary authorities as a reserve asset is treated as a financial asset even though the holders have no claim over other designated units.
Shares are treated as financial assets even though the financial claim their holders have on the corporation is not a fixed or predetermined monetary amount.

5. The asset boundary and the first-level classification of assets

3.37 All entities that meet the definition of an asset given above are included in the asset boundary of the SNA.
Assets that are not financial assets are non-financial assets.
Non-financial assets are further subdivided into those that are produced and those that are non-produced.

3.38 Because assets represent a store of future benefits, all assets can be represented by a monetary value.
This value represents the market's view of the total of the benefits embodied by the asset.
Where a direct market view of this value is not available, it must be approximated by other means.
There is a discussion of this topic in chapter 11.

3.39 The only non-financial assets included in the asset boundary of an economy are those whose economic owners are resident in the economy.
However, in the case of most natural resources and immobile fixed capital, which physically cannot leave the economy, a notional resident unit is established if the economic owner is technically a non-resident unit.
In this way the assets in question do become those with resident economic owners and so are included within the asset boundary and are included on the balance sheet.
Portable non-financial assets that are physically located in an economy but are owned by nonresidents are excluded from the balance sheet; those that are physically located in the rest of the world but owned by residents are included in the asset boundary.
For example, planes belonging to a domestic airline are always assets of the domestic economy regardless of where in the world they happen to be.

6. Entry and exit of assets from the balance sheet

3.42 All assets appear on the balance sheet of the economy.
The first level of classification of assets is important since the process by which assets enter and leave the balance sheet differs for the three types of assets.

3.43 Produced non-financial assets come into being via the production process or as imports.
Two exceptions exist.
Historical monuments are included as produced assets even though they may have been constructed long before economic accounts existed.
Occasionally a monument may be newly recognized as having value and thus enter the asset boundary as a produced asset other than through a current production process.
Similar arguments apply to artefacts treated as valuables.
Produced non-financial assets leave the asset boundary by being exhausted or by being sold to resident units that will not continue to use the asset in production as a source of future benefits or by being sold to non-resident units.

3.44 Non-produced non-financial assets are of three types; natural resources; contracts, leases and licences; and purchased goodwill and marketing assets.
The borderline determining which natural resources are considered assets and which are not depends on a number of factors described in chapter 10.
Contracts, leases and licences may represent an asset to the holder when the agreement restricts the general use or supply of products covered by the agreement and thus enhances the benefits accruing to the party to the agreement beyond what would accrue in the case of unrestricted supply.
These assets come into existence when the agreement is made and the enhanced benefits become apparent.
They leave the balance sheet when the conditions restricting access are lifted or when there is no longer a benefit to be earned from having restricted access to the asset.
Goodwill and marketing assets are only recognized as assets in the SNA when they are evidenced by a sale.

3.45 Financial assets and liabilities come into being when a commitment is made by one unit to make a payment to another unit.
They cease to exist when there is no longer a commitment for one unit to make payments to the other.
This may be because the term of the agreement specified in the commitment has expired or for other reasons.

7. Exclusions from the asset boundary

3.46 The coverage of assets is limited to those assets used in economic activity and that are subject to ownership rights; thus for example, consumer durables and human capital, as well as natural resources that are not owned, are excluded.

3.47 Consumer durables are not regarded as assets in the SNA because the services they provide are not within the production boundary.
Because the information on the stock of durables is of analytical interest, though, it is suggested that this information appear as a memorandum item in the balance sheet but not be integrated into the totals of the table.

3.48 Human capital is not treated by the SNA as an asset.
It is difficult to envisage “ownership rights” in connection with people, and even if this were sidestepped, the question of valuation is not very tractable.

3.49 There are some environmental resources excluded from the SNA asset boundary.
These are usually of the same type as those within the boundary but are of no economic value.

1. Transactions

3.51 A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is analytically useful to treat like a transaction, often because the unit is operating in two different capacities.

3.52 Institutional units, referred to in the definition, are the fundamental economic units of the SNA.
They are described and defined in chapter 4.
The following are the main attributes of institutional units that are relevant to their engaging in transactions:

a. They are entitled to own goods or assets in their own right, and therefore are able to exchange them;

b. They are able to take economic decisions and engage in economic activities for which they are held to be directly responsible and accountable at law;

c. They are able to incur liabilities on their own behalf, to take on other obligations or future commitments and to enter into contracts.

3.53 The definition of a transaction stipulates that an interaction between institutional units be by mutual agreement.
When a transaction is undertaken by mutual agreement, the prior knowledge and consent of the institutional units is implied.
This does not mean, however, that both units necessarily enter a transaction voluntarily, because some transactions are imposed by force of law, such as payments of taxes or other compulsory transfers.
Although individual institutional units are not free to fix the amounts of taxes they pay, there is nevertheless collective recognition and acceptance by the community of the obligation to pay taxes.
Thus, payments of taxes are considered transactions despite being compulsory.

3.54 Transactions take so many different forms that, even with these explanations, any general definition is inevitably rather imprecise.
To give more precision, the various kinds of transactions have to be systematically described and classified.
A first distinction is between monetary and non-monetary transactions.
Other distinctions, such as between transactions with and without a quid pro quo, are drawn within each of these kinds of transactions.
Frequently the individual, identifiable transactions of everyday economic life are simply grouped together in the accounts; sometimes they are subdivided and rearranged in order to form the transaction categories of the SNA.

2. Other flows

3.99 Other flows are changes in the value of assets and liabilities that do not result from transactions.
The reason that these flows are not transactions is linked to their not meeting one or more of the characteristics of transactions.
For example, the institutional units involved may not be acting by mutual agreement, as with an uncompensated seizure of assets.
Or the change may be due to a natural event such as an earthquake rather than a purely economic phenomenon.
Alternatively the value of an asset expressed in foreign currency may change as a result of an exchange rate change.

3.100 The entries for other flows appear in one of the two accounts that comprise the other changes in assets accounts.
The other changes in the volume of assets account includes changes that lead to a change in value of an asset because of a change in the quantity or physical characteristics of the asset in question.
The revaluation account includes changes in the value of assets, liabilities, and net worth due to only changes in the level and structure of prices, which are reflected in holding gains and losses.

Balancing items in the flow accounts

3.108 Balancing items are not simply devices introduced to ensure that accounts balance.
They are often used as key macroeconomic indicators to assess economic performance.
They encapsulate a great deal of information and include some of the most important entries in the accounts, as can be seen by the examples of balancing items for the accounts containing flows reproduced below:

a. Value added or domestic product,

b. Operating surplus,

c. Disposable income,

d. Saving,

e. Net lending or net borrowing,

f. Current external balance.

Balancing items in the balance sheets

3.109 Net worth, which is defined as the value of all the non-financial and financial assets owned by an institutional unit or sector less the value of all its outstanding liabilities, is the balancing item in the balance sheets.
As is true for other balancing items in the SNA, net worth cannot be measured independently of the other entries, nor does it relate to any specific set of transactions.

3.110 As well as net worth appearing as a stock level, changes in net worth due to different sorts of transactions and other flows may also be derived.
Just as the changes in the levels of any asset can be traced through changes in transactions and other flows throughout the period, so changes in total net worth can be exhaustively described according to the transactions and other flows that led to changes in the total level of assets and liabilities.

1. Quadruple-entry accounting

3.112 The accounting system underlying the SNA derives from broad bookkeeping principles.
To understand the accounting system for the SNA, three bookkeeping principles can be distinguished:

1. Vertical double-entry bookkeeping, also known as simply double-entry bookkeeping used in business accounting,

2. Horizontal double-entry bookkeeping, and

3. Quadruple-entry bookkeeping.

3.113 The main characteristic of vertical double-entry bookkeeping is that each transaction leads to at least two entries, traditionally referred to as a credit entry and a debit entry, in the books of the transactor.
This principle ensures that the total of all credit entries and that of all debit entries for all transactions are equal, thus permitting a check on consistency of accounts for a single unit.
Each transaction requires two entries.

3.114 Other flows have their counterpart entries directly in changes in net worth.
As a result, vertical double-entry bookkeeping ensures the fundamental identity of a unit's balance sheet, that is, the total value of assets equals the total value of liabilities plus net worth.
The total value of the assets owned by an entity minus the total value of liabilities provides net worth.

3.115 The concept of horizontal double-entry bookkeeping is useful for compiling accounts that reflect the mutual economic relationships between different institutional units in a consistent way.
It implies that if unit A provides something to unit B, the accounts of both A and B show the transaction for the same amount: as a payment in A's account and as a receipt in B's account.
Horizontal double-entry bookkeeping ensures the consistency of recording for each transaction category by counterparties.
For example, dividends payable throughout the economy should be equal to dividends receivable throughout the economy once transactions with the rest of the world are taken into account.

3.116 The simultaneous application of both the vertical and horizontal double-entry bookkeeping results in a quadruple-entry bookkeeping, which is the accounting system underlying the recording in the SNA.
It deals in a coherent way with multiple transactors or groups of transactors, each of which satisfies vertical double-entry bookkeeping requirements.
A single transaction between two counterparties thus gives rise to four entries.
In contrast to business bookkeeping, national accounts deal with interactions among a multitude of units in parallel, and thus require special care from a consistency point of view.
As a liability of one unit is mirrored in a financial asset of another unit, for instance, they should be identically valued, allocated in time and classified to avoid inconsistencies in aggregating balance sheets of units by sectors or for the total economy.
The same is also true for all transactions and other flows that affect balance sheets of two counterparties.

3.117 The SNA uses the following conventions and terminologies for recording flows with the rest of the world.
Imports, for instance, are a resource of the rest of the world used in the domestic economy and payments for imports represent a drawdown of wealth for the domestic economy but a financial resource for the rest of the world.
By treating the rest of the world account as a pseudo-sector, the quadruple entry accounting principle can be applied and all stocks and flows within the economy and with the rest of the world are completely balanced.
The balance of payments accounts show the consolidated position of all domestic sectors relative to the rest of the world.
It is thus an exact mirror image of the accounts for the rest of the world within the SNA.
However, despite the reversal of the sides of the accounts on which items are shown, there is equality in coverage, measurement and classification between the two systems.
This is discussed further in chapter 24.

2. Valuation

3. Time of recording

4. Aggregation, netting, consolidation

1. Institutional units

4.2 An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.
The main attributes of institutional units may be described as follows:

a. An institutional unit is entitled to own goods or assets in its own right; it is therefore able to exchange the ownership of goods or assets in transactions with other institutional units;

b. It is able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable at law;

c. It is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts;

d. Either a complete set of accounts, including a balance sheet of assets and liabilities, exists for the unit, or it would be possible and meaningful, from an economic viewpoint, to compile a complete set of accounts if they were to be required.

4.3 There are two main types of units in the real world that may qualify as institutional units, namely persons or groups of persons in the form of households, and legal or social entities.

4.4 For purposes of the SNA, a household is a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food.
As well as individual households, there are units described as institutional households that comprise groups of persons staying in hospitals, retirement homes, convents, prisons, etc. for long periods of time.

4.5 The individual members of multiperson households are not treated as separate institutional units.
Many assets are owned, or liabilities incurred, jointly by two or more members of the same household while some or all of the income received by individual members of the same household may be pooled for the benefit of all members.
Moreover, many expenditure decisions, especially those relating to the consumption of food, or housing, may be made collectively for the household as a whole.
It may be impossible, therefore, to draw up meaningful balance sheets or other accounts for members of the household on an individual basis.
For these reasons, the household as a whole rather than the individual persons in it must be treated as the institutional unit.

4.6 The second type of institutional unit is a legal or social entity that engages in economic activities and transactions in its own right, such as a corporation, non-profit institution (NPI) or government unit.
A legal or social entity is one whose existence is recognized by law or society independently of the persons, or other entities, that may own or control it.
Such units are responsible and accountable for the economic decisions or actions they take, although their autonomy may be constrained to some extent by other institutional units; for example, corporations are ultimately controlled by their shareholders.
Some unincorporated enterprises belonging to households or government units may behave in much the same way as corporations, and such enterprises are treated as quasi-corporations when they have complete sets of accounts.

4.7 In the legal sense, corporations may be described by different names: corporations, incorporated enterprises, public limited companies, public corporations, private companies, joint-stock companies, limited liability companies, limited liability partnerships, and so on. Conversely, some legal entities that are non-profit institutions may sometimes be described as “corporations”. The status of an institutional unit cannot always be inferred from its name, and it is necessary to examine its objectives and functions.
In the SNA, the term corporation covers legally constituted corporations and also cooperatives, limited liability partnerships, notional resident units and quasi-corporations.
The description of these various institutional units is given in section B.

4.8 Non-profit institutions (NPIs) are legal or social entities created for the purpose of producing goods and services but whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them.
In practice, their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units.
The articles of association by which they are established are drawn up in such a way that the institutional units that control or manage them are not entitled to a share in any profits or other income they generate.
For this reason, they are frequently exempted from various kinds of taxes.
A description of the treatment of NPIs within the SNA is given in section C.

4.9 Government units are unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area.
Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in non-market production.

2. Residence

4.10 The residence of each institutional unit is the economic territory with which it has the strongest connection, in other words, its centre of predominant economic interest.
The concept of economic territory in the SNA coincides with that of the BPM6.
Some key features are as follows.
In its broadest sense, an economic territory can be any geographic area or jurisdiction for which statistics are required.
The connection of entities to a particular economic territory is determined from aspects such as physical presence and being subject to the jurisdiction of the government of the territory.
The most commonly used concept of economic territory is the area under the effective economic control of a single government.
However economic territory may be larger or smaller than this, as in a currency or economic union or a part of a country or the world.

4.11 The economic territory includes the land area, airspace, territorial waters, including jurisdiction over fishing rights and rights to fuels or minerals.
In a maritime territory, the economic territory includes islands that belong to the territory.
The economic territory also includes territorial enclaves in the rest of the world.
These are clearly demarcated land areas (such as embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies, central bank representative offices with diplomatic immunity, etc.) located in other territories and used by governments that own or rent them for diplomatic, military, scientific, or other purposes with the formal agreement of governments of the territories where the land areas are physically located.

4.12 Economic territory has the dimensions of physical location as well as legal jurisdiction.
The concepts of economic territory and residence are designed to ensure that each institutional unit is a resident of a single economic territory.
The use of an economic territory as the scope of economic statistics means that each member of a group of affiliated enterprises is resident in the economy in which it is located, rather than being attributed to the economy of location of the head office.

4.13 In general, an institutional unit is resident in one and only one economic territory determined by the unit's centre of predominant economic interest.
Exceptions may be made for multiterritory enterprises that operate a seamless operation over more than one economic territory.
Although the enterprise has substantial activity in more than one economic territory, it cannot be broken up into separate branches or a parent and branch(es) because it is run as an indivisible operation with no separate accounts or decisions.
Such enterprises are typically involved in cross-border activities and include shipping lines, airlines, hydroelectric schemes on border rivers, pipelines, bridges, tunnels and undersea cables.
If it is not possible to identify a parent or separate branches, it is necessary to prorate the total operations of the enterprise into the individual economic territories.
For more information on these special cases, reference should be made to BPM6.

4.14 An institutional unit has a centre of predominant economic interest in an economic territory when there exists, within the economic territory, some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale.
The location need not be fixed so long as it remains within the economic territory.
Actual or intended location for one year or more is used as an operational definition; while the choice of one year as a specific period is somewhat arbitrary, it is adopted to avoid uncertainty and facilitate international consistency.

4.15 The concept of residence in the SNA is exactly the same as in BPM6.
Some key consequences follow:

a. The residence of individual persons is determined by that of the household of which they form part and not by their place of work.
All members of the same household have the same residence as the household itself, even though they may cross borders to work or otherwise spend periods of time abroad.
If they work and reside abroad so long that they acquire a centre of economic interest abroad, they cease to be members of their original households;

b. Unincorporated enterprises that are not quasi-corporations are not separate institutional units from their owners and, therefore, have the same residence as their owners;

c. Corporations and NPIs may normally be expected to have a centre of economic interest in the country in which they are legally constituted and registered.
Corporations may be resident in countries different from their shareholders and subsidiary corporations may be resident in countries different from their parent corporations.
When a corporation, or unincorporated enterprise, maintains a branch, office or production site in another country in order to engage in production over a long period of time (usually taken to be one year or more) but without creating a subsidiary corporation for the purpose, the branch, office or site is considered to be a quasi-corporation (that is, a separate institutional unit) resident in the country in which it is located;

d. Owners of land, buildings and immovable structures in the economic territory of a country, or units holding long leases on either, are deemed always to have a centre of economic interest in that country, even if they do not engage in other economic activities or transactions in the country.
All land and buildings are therefore owned by residents;

e. Extraction of subsoil resources can only be undertaken by resident institutional units.
An enterprise that will undertake extraction is deemed to become resident when the requisite licences or leases are issued, if not before;

f. For entities such as many special purpose entities, that have few if any attributes of location, the location is determined by their place of incorporation.

Further elaboration of borderline cases is given in chapter 26 and in BPM6.

3. Sectoring and economic behaviour

4.16 The institutional sectors of the SNA group together similar kinds of institutional units.
Corporations, NPIs, government units and households are intrinsically different from each other in that their economic objectives, functions and behaviour are different.

4.17 Institutional units are allocated to sector according to the nature of the economic activity they undertake.
The three basic economic activities recorded in the SNA are production of goods and services, consumption to satisfy human wants or needs and accumulation of various forms of capital.
Corporations undertake either production or accumulation (or both) but do not undertake (final) consumption.
Government undertakes production (but mainly of a different type from corporations), accumulation and final consumption on behalf of the population.
All households undertake consumption on their own behalf and may also engage in production and accumulation. NPIs are diverse in nature.
Some behave like corporations, some are effectively part of government and some undertake activities similar to government but independently of it.

4.18 Fundamental to the distinction between corporations and government is the basis on which production is undertaken.
Corporations produce for the market and aim to sell their products at economically significant prices.
Prices are said to be economically significant if they have a significant effect on the amount that producers are willing to supply and the amounts purchasers wish to buy.
These prices normally result when the producer has an incentive to adjust supply either with the goal of making a profit in the long run (or at a minimum, covering capital and other costs) and consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.
There is more extensive discussion of the definition of economically significant prices and the meaning of market and non-market production in chapters 6 and 22.

4.19 Corporations are divided between those mainly providing financial services and those mainly providing goods and other services.
The two groups are known as financial corporations and non-financial corporations respectively.
The distinction is made because of the special role that financial corporations play in the economy.

4.20 The economic objectives, functions and behaviour of government units are quite distinct.
They organize and finance the provision of goods and services, to individual households and the community at large and therefore incur expenditures on final consumption.
They may produce most of these goods and services themselves but the products are usually either provided free or at prices determined by considerations other than purely market forces.
Government units are also concerned with distribution and redistribution of income and wealth through taxation and other transfers.
Government units include social security funds.

4.21 The economic objectives, functions and behaviour of households are different again.
Although primarily consumer units, they can also engage in production.
Often this production activity is relatively small scale and includes informal and subsistence activities.
When the production units of households are not legal entities (and cannot be treated as such) they are described as unincorporated enterprises.
They remain part of the same institutional unit as the household to which they belong.

4.22 NPIs are institutional units created for the purpose of producing or distributing goods or services but not for the purpose of generating any income or profit for the units that control or finance them.
Nevertheless, some NPIs deliver goods and services to customers at economically significant prices and, when they do, these NPIs are treated in the same way as corporations in the SNA.
Other NPIs that are controlled by government are treated as government units.
The remaining NPIs, those that produce goods and services but do not sell them at economically significant prices and are not controlled by government, are treated as a special group of units called non-profit institutions serving households (NPISHs).
They are in effect non-governmental social institutions.

4. The total economy

4.23 The total economy is defined as the entire set of resident institutional units.
The resident institutional units that make up the total economy are grouped into five mutually exclusive institutional sectors.
Sectors are groups of institutional units and the whole of each institutional unit must be classified to one or other sector of the SNA.
The full sequence of accounts of the SNA may be constructed for a single institutional unit or a group of units.
The attributes of an institutional unit described in paragraph 4.2 explain why it is not possible to compile a full set of accounts for only part of a unit.
However, it is possible, useful and common practice to compile some accounts for sub-divisions of corporations, discriminating on the basis of the type of production the parts undertake.
This is the subject of chapter 5.
For the present chapter attention focuses on the allocation of complete units to one sector or another.

Figure 4.1: Illustrative allocation of units to institutional sectors

5. An overview of institutional sectors

4.24 All resident institutional units are allocated to one and only one of the following five institutional sectors:

The non-financial corporations sector;

The financial corporations sector;

The general government sector;

The non-profit institutions serving households sector;

The households sector.

4.25 The conceptual basis for the allocation of a unit to the appropriate sector can be seen in figure 4.1.
The boxes for the sectors of the total economy, plus the box for the rest of the world, appear with double borders.
Once non-resident units and households are set aside, only resident legal and social entities remain.
Three questions determine the sectoral allocation of all such units.
The first is whether the unit is a market or non-market producer.
This depends on whether the majority of the unit's production is offered at economically significant prices or not.

4.26 The second question determining sectoral allocation applies to non-market units, all of which, including non-market NPIs, are allocated either to general government or to the NPISH sector.
The determining factor is whether the unit is part of, or controlled by, government.
The criteria to establish control are discussed in section C below.

4.27 The third question determining sectoral allocation applies to market units, all of which, including market NPIs, are allocated to either the non-financial corporations sector or the financial corporations sector.
In the context of sectors as elsewhere in the SNA, the term “corporation” is used to encompass cooperatives, limited liability partnerships, notional resident units and quasi-corporations as well as legally constituted corporations.

4.28 All resident non-financial corporations are included in the non-financial corporations sector and make up most of the sector in practice.
In addition, the sector includes non-profit institutions (NPIs) engaged in the market production of goods and non-financial services: for example, hospitals, schools or colleges that charge fees that enable them to recover their current production costs, or trade associations financed by subscriptions from non-financial corporate or unincorporated enterprises whose role is to promote and serve the interests of those enterprises.
The non-financial corporations sector is described further in section D.

4.29 The financial corporations sector includes all resident corporations whose principal activity is providing financial services including financial intermediation, insurance and pension fund services, and units that provide activities that facilitate financial intermediation.
In addition, the sector includes NPIs engaged in market production of a financial nature such as those financed by subscriptions from financial enterprises whose role is to promote and serve the interests of those enterprises.
The financial corporations sector is described further in section E.

4.30 The general government sector consists mainly of central, state and local government units together with social security funds imposed and controlled by those units.
In addition, it includes NPIs engaged in non-market production that are controlled by government units or social security funds.

4.31 The non-profit institutions serving households sector consists of all resident NPIs, except those controlled by government, that provide non-market goods or services to households or to the community at large.

4.32 The households sector consists of all resident households.
These include institutional households made up of persons staying in hospitals, retirement homes, convents, prisons, etc. for long periods of time.
As already noted, an unincorporated enterprise owned by a household is treated as an integral part of the latter and not as a separate institutional unit unless the accounts are sufficiently detailed to treat the activity as that of a quasi-corporation.

6. Subsectors

4.33 Each of the five institutional sectors listed above may be divided into subsectors.
No single method of subsectoring may be optimal for all purposes or all countries, so that alternative methods of subsectoring are recommended for certain sectors.
Dividing the total economy into sectors enhances the usefulness of the accounts for purposes of economic analysis by grouping together institutional units with similar objectives and types of behaviour.
Sectors and subsectors are also needed in order to be able to target or monitor particular groups of institutional units for policy purposes.
For example, the household sector has to be divided into subsectors in order to be able to observe how different sections of the community are affected by, or benefit from, the process of economic development or government economic and social policy measures.
Similarly, it may be important to treat corporations subject to control by non-residents as subsectors of the financial and non-financial corporate sectors not only because they are liable to behave differently from domestically controlled corporations but because policymakers may wish to be able to identify and observe those parts of the economy that are subject to influence from abroad.
The division of sectors into subsectors depends upon the type of analysis to be undertaken, the needs of policymakers, the availability of data and the economic circumstances and institutional arrangements within a country.

7. The rest of the world

4.37 On occasion it is convenient to refer to non-resident households or corporations as units that are resident in the rest of the world.
Whenever accounts are drawn up for institutional sectors, as well as an account for the total economy, a further account is shown showing the relationship with the rest of the world.
In effect, therefore transactions with the rest of the world are recorded as if the rest of the world is a de facto sixth sector.

1. Types of corporations

4.38 In the SNA, the term corporation is used more broadly than in just the legal sense.
In general, all entities that are:

a. capable of generating a profit or other financial gain for their owners,

b. recognized at law as separate legal entities from their owners who enjoy limited liability,

c. set up for purposes of engaging in market production,

are treated as corporations in the SNA, however they may describe themselves or whatever they may be called.
As well as legally constituted corporations the term corporations is used to include cooperatives, limited liability partnerships, notional resident units and quasi-corporations.
Whenever the term corporation is used, the broader coverage rather than the narrow legal definition is intended unless otherwise stated.
Each of the main components of the broader coverage is discussed in turn below.

2. Special cases

3. Ownership and control of corporations

4.68 The ownership of a listed corporation is diffused among the institutional units that own its shares in proportion to the shareholdings.
It is possible for one single institutional unit, whether another corporation, a household or a government unit, to own all the equity or shares in a corporation but, in general, ownership of a listed corporation is diffused among several, possibly very many, institutional units.

4.69 A single institutional unit owning more than a half of the shares, or equity, of a corporation is able to control its policy and operations by outvoting all other shareholders, if necessary.
Similarly, a small, organized group of shareholders whose combined ownership of shares exceeds 50 per cent of the total is able to control the corporation by acting in concert.
There may be exceptional cases in which certain shareholders enjoy privileged voting rights, such as a “golden share” giving a right of veto, but in general an individual institutional unit or group of units owning more than half the voting shares of a corporation can exercise complete control by appointing directors of its own choice.
The degree of autonomy exercised by the directors and managers of a corporation is, therefore, likely to vary considerably, depending upon the extent to which the ownership of its shares is concentrated in the hands of a small number of other institutional units, whether these are other corporations, households or government units.
In general, institutional units do not have to be autonomous but they do have to be responsible, and accountable, for the decisions and actions they take.

4.70 Because many shareholders do not exercise their voting rights, a single shareholder, or small number of shareholders acting together, may be able to secure control over a corporation, even though they may hold considerably less than half of the total shares.
When ownership of shares is widely diffused among a large number of shareholders, control may be secured by owning considerably less than half of the total shares.

4.71 However, it is not possible to stipulate a minimum shareholding below 50 per cent that will guarantee control in all cases.
The minimum must vary depending upon the total number of shareholders, the distribution of shares among them, and the extent to which small shareholders take an active interest, etc.

1. The characteristics of NPIs

4.85 The main features of NPIs may be summarized as follows:

a. Most NPIs are legal entities created by process of law whose existence is recognized independently of the persons, corporations or government units that establish, finance, control or manage them.
The purpose of the NPI is usually stated in the articles of association or similar document drawn up at the time of its establishment.
In some countries, especially developing countries, an NPI may be an informal entity whose existence is recognized by society but does not have any formal legal status; such NPIs may be created for the purpose of producing non-market goods or services for the benefit of individual households or groups of households.

b. Many NPIs are controlled by associations whose members have equal rights, including equal votes on all major decisions affecting the affairs of the NPI.
Members enjoy limited liability with respect to the NPI's operations.

c. There are no shareholders with a claim on the profits or equity of the NPI.
The members are not entitled to a share in any profits, or surplus, generated by the productive activities of the NPI, such profits being retained within the NPI.

d. The direction of an NPI is usually vested in a group of officers, executive committee or similar body elected by a simple majority vote of all the members.
These officers are the counterpart of the board of directors of a corporation and are responsible for appointing any paid managers.

e. The term “non-profit institution” derives from the fact that the members of the association controlling the NPI are not permitted to gain financially from its operations and cannot appropriate any surplus that it may make.
It does not imply that an NPI cannot make an operating surplus on its production.

4.86 In some countries NPIs are subject to preferential tax treatment, possibly to exemption from income tax, but this is not necessarily so and is not a determining factor in the identification of an NPI.

4.87 As in the case of producer units owned by government units, it is important to distinguish between NPIs engaged in market and non-market production as this affects the sector of the economy to which an NPI is allocated.
NPIs do not necessarily engage in non-market production.

2. NPIs engaged in market production

4.88 Market producers are producers that sell most or all of their output at prices that are economically significant, that is, at prices that have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy.
Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market producers when they charge fees that are based on their production costs and that are sufficiently high to have a significant influence on the demand for their services.
Their production activities must generate an operating surplus or loss.
Any surpluses they make must be retained within the institutions as their status prevents them from distributing them to others.
On the other hand, because of their status as “non-profit institutions” they are also able to raise additional funds by appealing for donations from persons, corporations or government.
In this way, they may be able to acquire assets that generate significant property income in addition to their revenues from fees, thereby enabling them to charge fees below average costs.
However, they must continue to be treated as market producers so long as their fees are determined mainly by their costs of production and are high enough to have a significant impact on demand.
Such NPIs are not charities, their real objective often being to provide educational, health or other services of a very high quality using their incomes from endowments merely to keep down somewhat the high fees they have to charge.

3. NPIs engaged in non-market production

4.90 The majority of NPIs in most countries are non-market rather than market producers.
Non-market producers are producers that provide most of their output to others free or at prices that are not economically significant.
Thus, NPIs engaged mainly in non-market production may be distinguished not only by the fact that they are incapable of providing financial gain to the units that control or manage them, but also by the fact that they must rely principally on funds other than receipts from sales to cover their costs of production or other activities.
Their principal source of finance may be regular subscriptions paid by the members of the association that controls them or transfers or donations from third parties, including government or from property income.

4.91 NPIs engaged mainly in non-market production are divided into two groups: those NPIs controlled by government and those that are not.
The former are included in the general government sector.
The latter are described as “non-profit institutions serving households” (NPISHs) and constitute a separate sector in the SNA.

1. Central bank

4.104 The central bank is the national financial institution that exercises control over key aspects of the financial system.
In general, the following financial intermediaries are classified in this subsector:

a. The national central bank, including where it is part of a system of central banks.

b. Currency boards or independent currency authorities that issue national currency that is fully backed by foreign exchange reserves.

c. Central monetary agencies of essentially public origin (for example, agencies managing foreign exchange or issuing bank notes and coin) that keep a complete set of accounts but are not classified as part of central government.
Supervisory authorities that are separate institutional units are not included with the central bank but are included with financial auxiliaries.

As long as the central bank is a separate institutional unit, it is always allocated to the financial corporations sector even if it is primarily a non-market producer.

2. Deposit-taking corporations except the central bank

4.105 Deposit-taking corporations except the central bank have financial intermediation as their principal activity.
To this end, they have liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits.
The liabilities of deposit-taking corporations are typically included in measures of money broadly defined.

4.106 In general, the following financial intermediaries are classified in this subsector:

a. Commercial banks, “universal” banks, “all-purpose” banks;

b. Savings banks (including trustee savings banks and savings and loan associations);

c. Post office giro institutions, post banks, giro banks;

d. Rural credit banks, agricultural credit banks;

e. cooperative credit banks, credit unions; and

f. Specialized banks or other financial corporations if they take deposits or issue close substitutes for deposits.

3. Money market funds (MMFs)

4.107 Money market funds (MMFs) are collective investment schemes that raise funds by issuing shares or units to the public.
The proceeds are invested primarily in money market instruments, MMF shares or units, transferable debt instruments with a residual maturity of not more than one year, bank deposits and instruments that pursue a rate of return that approaches the interest rates of money market instruments.
MMF shares can be transferred by cheque or other means of direct third-party payment.
Because of the nature of the instruments the schemes invest in, their shares or units may be regarded as close substitutes for deposits.

4. Non-MMF investment funds

4.108 Non-MMF investment funds are collective investment schemes that raise funds by issuing shares or units to the public.
The proceeds are invested predominantly in financial assets, other than short-term assets, and in non-financial assets (usually real estate).
Investment fund shares or units are generally not close substitutes for deposits.
They are not transferable by means of cheque or direct third-party payments.

Table 4.2: Subsectors of the financial corporations sector

1. Central Bank

2. Deposit-taking corporations except the Central Bank

3. Money market funds (MMF)

4. Non-MMF investment funds

5. Other financial intermediaries except insurance corporations and pension funds (ICPF)

6. Financial auxiliaries

7. Captive financial institutions and money lenders

8. Insurance corporations (IC)

9. Pension funds (PF)

5. Other financial intermediaries, except insurance corporations and pension funds (ICPFs)

4.109 Other financial intermediaries except insurance corporations and pension funds consist of financial corporations that are engaged in providing financial services by incurring liabilities, in forms other than currency, deposits or close substitutes for deposits, on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market.
It is a feature of a financial intermediary that transactions on both sides of the balance sheet are carried out in open markets.

4.110 In general, the following financial intermediaries are classified in this subsector:

a. Financial corporations engaged in the securitization of assets;

b. Security and derivative dealers (operating on own account);

c. Financial corporations engaged in lending, including the finance associates of retailers, who may be responsible for financial leasing and both personal or commercial finance;

d. Central clearing counterparties.
These organizations provide clearing and settlement transactions in securities and derivatives.
Clearing relates to identifying the obligations of both parties to the transaction, while settlement is the exchange of the securities or derivatives and the corresponding payment.
The central clearing counterparties involve themselves in the transaction and mitigate counterparty risk;

e. Specialized financial corporations that provide:
· Short-term financing for corporate mergers and takeovers;
· Export/import finance;
· Factoring services;
· Venture capital and development capital firms.

6. Financial auxiliaries

4.111 Financial auxiliaries consist of financial corporations that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted.

4.112 In general, the following financial auxiliaries are classified in this subsector:

a. Insurance brokers, salvage and claims adjusters (whether employed by the insurance company, an independent adjuster or a public adjuster employed by the policyholder), insurance and pension consultants;

b. Loan brokers, securities brokers, investment advisers, etc.;

c. Flotation corporations that manage the issue of securities;

d. Corporations whose principal function is to guarantee, by endorsement, bills and similar instruments;

e. Corporations that arrange derivative and hedging instruments, such as swaps, options and futures (without issuing them);

f. Corporations providing infrastructure for financial markets;

g. Managers of pension funds, mutual funds, etc. (but not the funds they manage);

h. Corporations providing stock exchange and insurance exchange;

i. Foreign exchange bureaux;

j. Non-profit institutions recognized as independent legal entities serving financial corporations,;

k. Head offices of financial corporations that are principally engaged in controlling financial corporations or groups of financial corporations but that do not themselves conduct the business of financial corporations;

l. Central supervisory authorities of financial intermediaries and financial markets when they are separate institutional units.

7. Captive financial institutions and money lenders

4.113 Captive financial institutions and money lenders consist of institutional units providing financial services, where most of either their assets or liabilities are not transacted on open financial markets.
It includes entities transacting within only a limited group of units (such as with subsidiaries) or subsidiaries of the same holding corporation or entities that provide loans from own funds provided by only one sponsor.

4.114 In general, the following financial corporations are classified in this subsector:

a. Units which are legal entities such as trusts, estates, agencies accounts or brass plate companies.

b. Holding corporations that hold only the assets (owning controlling-levels of equity) of a group of subsidiary corporations and whose principal activity is owning the group without providing any other service to the life, accident, sickness, fire or other forms of insurance to enterprises in which the equity is held, that is, they do individual institutional units or groups of units or not administer or manage other units.

c. SPEs or conduits that qualify as institutional units and raise funds in open markets to be used by their parent corporation.

d. Units which provide financial services exclusively with own funds, or funds provided by a sponsor to a range of clients and incur the financial risk of the debtor defaulting, including
· Moneylenders.
· Corporations engaged in lending (for example providing student loans, import/export loans) from funds received from a sponsor such as a government unit or non-profit institution.
· Pawnshops that predominantly engage in lending.

8. Insurance corporations (ICs)

4.115 Insurance corporations consist of incorporated, mutual and other entities whose principal function is to provide life, accident, sickness, fire or other forms of insurance to individual institutional units or groups of units or reinsurance services to other insurance corporations.
Captive insurance is included, that is, an insurance company that serves only its owners.
Deposit insurers, issuers of deposit guarantees and other issuers of standardized guarantees that are separate entities and act like insurers by charging premiums and have reserves, are classified as insurance corporations.

9. Pension funds (PFs)

4.116 Pension liabilities arise when an employer or government obliges or encourages members of households to participate in a social insurance scheme that will provide income in retirement.
The social insurance schemes may be organized by employers or by government, they may be organized by insurance corporations on behalf of employees or separate institutional units may be established to hold and manage the assets to be used to meet the pensions and to distribute the pensions.
The pension fund subsector consists of only those social insurance pension funds that are institutional units separate from the units that create them.

1. Government units as institutional units

4.117 Government units are unique kinds of legal entities established by political processes that have legislative, judicial or executive authority over other institutional units within a given area.
Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes, to redistribute income and wealth by means of transfers, and to engage in non-market production.
In general terms:

a. A government unit usually has the authority to raise funds by collecting taxes or compulsory transfers from other institutional units.
In order to satisfy the basic requirements of an institutional unit in the SNA, a government unit, whether at the level of the total economy, a region or a locality, must have funds of its own either raised by taxing other units or received as transfers from other government units and the authority to disburse some, or all, of such funds in the pursuit of its policy objectives.
It must also be able to borrow funds on its own account;

b. Government units typically make three different kinds of final outlays:
· The first group consists of actual or imputed expenditures on the free provision to the community of collective services such as public administration, defence, law enforcement, public health, etc. that are organized collectively by government and financed out of general taxation or other income;
· The second group consists of expenditures on the provision of goods or services free, or at prices that are not economically significant, to individual households.
These expenditures are deliberately incurred and financed out of taxation or other income by government in the pursuit of its social or political objectives, even though individuals could be charged according to their usage;
· The third group consists of transfers paid to other institutional units, mostly households, in order to redistribute income or wealth.

4.118 Within a single territory there may be many separate government units when there are different levels of government, specifically central, state or local governments.
In addition, social security funds also constitute government units.
These different kinds of government units are described later when the subsectoring of the general government sector is explained.

2. The general government sector

4.127 The general government sector consists of the following groups of resident institutional units:

a. All units of central, state or local government (as described immediately below);

b. All non-market NPIs that are controlled by government units.

The sector also includes social security funds, either as separate institutional units or as part of any or all of central, state or local government.
The sector does not include public corporations, even when all the equity of such corporations is owned by government units.
Nor does it include quasi-corporations that are owned and controlled by government units.
However, unincorporated enterprises owned by government units that are not quasi-corporations remain integral parts of those units and, therefore, must be included in the general government sector.

3. Subsectors of the general government sector

4.128 A full subsectoring of the general government would allow for both NPIs and social security funds to be distinguished for each of central, state and local government.
In practice, though, it is usual to show all social security funds together as one subsector or to merge them all with their appropriate level of government and not show social security funds by level of government separately.
Further, NPIs may be shown as an “of which” item for general government as a whole or for central, state and local government individually.

4.129 The first method of subsectoring general government is as follows:

a. Central government;

b. State government;

c. Local government;

d. Social security funds;

where it is understood that each of the subsectors a, b and c include NPIs but exclude social security funds at that level of government.

4.130 The second method of subsectoring general government is as follows:

a. Central government;

b. State government;

c. Local government;

where it is understood that each of the subsectors a, b and c include both NPIs and social security funds at that level of government.

4.131 Under either method of subsectoring, NPIs should be shown as an “of which” heading under the appropriate level of government.

4.132 The choice between the two methods of subsectoring depends mainly on the size, or importance, of social security funds within a country and on the way in which they are managed.

4.133 In some countries there may not exist a proper intermediate level of government between central and local government, in which case the subsector “state government” is not distinguished.
In others there may be more than two levels of government below the central government.
In that case, the lower levels should be aggregated with state or local government as appropriate.

4. The alternative method of subsectoring

4.148 The alternative method of subsectoring the general government sector is to group the social security funds operating at each level of government with the corresponding government units and government controlled and financed NPIs at that level of government.
The two alternative methods of subsectoring are designed to accommodate different analytical needs.
The decision as to which method is more appropriate in a given country cannot be made a priori.
It depends on how important social security funds are and on the extent to which they are managed independently of the government units with which they are associated.
If the management of social security funds is so closely integrated with the short- or medium-term requirements of the government's general economic policy that contributions and benefits are deliberately adjusted in the interests of overall economic policy, it becomes difficult, at a conceptual level, to draw any clear distinction between the management of social security and the other economic functions of government.
Alternatively, in some countries, social security funds may exist in only a very rudimentary form.
In either of these circumstances it is difficult to justify treating social security funds as a separate subsector on a par with central, state and local government, and it is more appropriate to use the alternative method of subsectoring in which they are grouped with the corresponding government units at each level of government.
This is the approach generally favoured in the GFSM2001.

1. Households as institutional units

4.149 For the purposes of the SNA, a household is defined as a group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food.
In general, each member of a household should have some claim upon the collective resources of the household.
At least some decisions affecting consumption or other economic activities must be taken for the household as a whole.

4.150 Households often coincide with families, but members of the same household do not necessarily have to belong to the same family so long as there is some sharing of resources and consumption.
Households may be of any size and take a wide variety of different forms in different societies or cultures depending on tradition, religion, education, climate, geography, history and other socio-economic factors.
The definition of a household that is adopted by survey statisticians familiar with the socio-economic conditions within a given country is likely to approximate closely to the concept of a household as defined in the SNA, although survey statisticians may add more precise, or operational, criteria within a particular country.

4.151 Domestic staff who live on the same premises as their employer do not form part of their employer's household even though they may be provided with accommodation and meals as remuneration in kind.
Paid domestic employees have no claim upon the collective resources of their employers' households and the accommodation and food they consume are not included with their employer's consumption.
They should therefore be treated as belonging to separate households from their employers.

4.152 Persons living permanently in an institution, or who may be expected to reside in an institution for a very long, or indefinite, period of time are treated as belonging to a single institutional household when they have little or no autonomy of action or decision in economic matters.
Some examples of persons belonging to institutional households are the following:

a. Members of religious orders living in monasteries, convents or similar institutions;

b. Long-term patients in hospitals, including mental hospitals;

c. Prisoners serving long sentences;

d. Persons living permanently in retirement homes.

4.153 On the other hand, persons who enter hospitals, clinics, convalescent homes, religious retreats, or similar institutions for short periods, who attend residential schools, colleges or universities, or who serve short prison sentences should be treated as members of the individual households to which they normally belong.

4.154 The residence of individual persons is determined by that of the household of which they form part and not by their place of work.
All members of the same household have the same residence as the household itself, even though they may cross borders to work or otherwise spend periods of time abroad.
If they work and reside abroad so long that they acquire a centre of economic interest abroad, they cease to be members of their original households.

2. Unincorporated enterprises within households

4.155 As noted in the introduction, households are unlike corporations in that they undertake final consumption.
However, like corporations, they may also engage in production.
Household unincorporated market enterprises are created for the purpose of producing goods or services for sale or barter on the market.
They can be engaged in virtually any kind of productive activity: agriculture, mining, manufacturing, construction, retail distribution or the production of other kinds of services.
They can range from single persons working as street traders or shoe cleaners with virtually no capital or premises of their own through to large manufacturing, construction or service enterprises with many employees.

4.156 Household unincorporated market enterprises also include unincorporated partnerships that are engaged in producing goods or services for sale or barter on the market.
The partners may belong to different households.
When the liability of the partners for the debts of the enterprises is unlimited, the partnerships must be treated as unincorporated enterprises and remain within the household sector since all the assets of the household, including the dwelling itself, are at risk if the enterprise goes bankrupt.
However, unincorporated partnerships with many partners, such as some large legal, accounting or architectural firms, are likely to behave like corporations and should be treated as quasi-corporations assuming complete sets of accounts are available for the partnerships.
Partnerships whose partners enjoy limited liability are effectively separate legal entities and, as already noted, are treated as corporations.

4.157 An unincorporated enterprise can only be treated as a corporation if it is possible to separate all assets, including financial assets down to the level of cash, into those that belong to the household in its capacity as a consumer from those belonging to the household in its capacity as a producer.

3. The household sector and its subsectors

4.158 The household sector consists of all resident households.
There are many useful ways in which the households sector may be subsectored and statistical agencies are advised to give due consideration to the various possibilities.
More than one method may be adopted if there is a demand for different breakdowns of the households sector from different users, analysts or policymakers.

4.159 The SNA has to be applied flexibly, not rigidly.
In order to implement any of the possible methods of subsectoring the households sector suggested below, individual countries are obliged to make their own decisions about what they consider to be the most relevant classification.
Thus, the fact that a specific, detailed classification according to a criterion of interest is proposed here should not be interpreted as implying that the characteristics proposed are necessarily or always the most important for purposes of economic analysis and policymaking.

1. International organizations

4.173 Certain international organizations have all the essential attributes of institutional units.
The special characteristics of an “international organization” as this term is used in the SNA may be summarized as follows:

a. The members of an international organization are either national states or other international organizations whose members are national states; they thus derive their authority either directly from the national states that are their members or indirectly from them through other international organizations;

b. They are entities established by formal political agreements between their members that have the status of international treaties; their existence is recognized by law in their member countries;

c. Because they are established by international agreement, they are accorded sovereign status; that is, international organizations are not subject to the laws or regulations of the country, or countries, in which they are located; they are not treated as resident institutional units of the countries in which they are located;

d. International organizations are created for various purposes including, among others, the following types of activities:
· The provision of non-market services of a collective nature for the benefit of their members;
· Financial intermediation at an international level, that is, channelling funds between lenders and borrowers in different countries.

4.174 Formal agreements concluded by all the member countries of an international organization may sometimes carry the force of law within those countries.

4.175 Most international organizations are financed wholly or partly by contributions (transfers) from their member countries, but some organizations may raise funds in other ways such as borrowing on financial markets or by subscriptions to the capital stock of international organizations and lending by member countries.
For purposes of the SNA, international organizations are treated as units that are resident in the rest of the world.

2. Central banks of currency unions

4.176 The central bank of a currency union is treated as a special kind of international organization.
The members of the international organization of which the central bank is part are the governments or the national central banks of the countries in the currency union.
The central bank is treated as being non-resident in any of the member countries of the currency union but is resident in the currency area as a whole.
More on the treatment of currency and economic unions can be found in appendix 3 of BPM6.

1. The classification of activities in the SNA

5.6 The classification of production activities used in the SNA is ISIC (Rev.4).
The criteria used in ISIC to delineate each of its four levels of the classification are complex.
The structure consists of 21 Sections, 88 Divisions, 238 Groups and 419 Classes.
At the Division and Group levels, substantial weight is placed on the nature of the good or service that is produced as the principal product of the activity in question by referring to the physical composition and stage of fabrication of the item and the needs served by the item.
This criterion furnishes the basis for grouping producer units according to similarities in, and links between, the raw materials consumed and the sources of demand for the items.
As well, two other major criteria are considered at these levels: the uses to which the goods and services are put, and the inputs, the process and the technology of production.

5.7 While it is not necessary for purposes of this chapter to explain the concept of an activity in any detail, it is necessary to clarify the fundamental distinction between principal and secondary activities on the one hand and ancillary activities on the other.

2. Principal and secondary activities

3. Ancillary activities

5.10 As its name implies, an ancillary activity is incidental to the main activity of an enterprise.
It facilitates the efficient running of the enterprise but does not normally result in goods and services that can be marketed.
For enterprises that are relatively small and have only a single location, ancillary activities are not separately identified.
For larger enterprises with multiple locations, it may be useful to treat ancillary activities in the same way as a secondary or even a principal product.
A detailed discussion of the recording of ancillary activities is given in section D after the discussion on the recording of primary and secondary production is complete.

1. Types of production units

2. Data and accounts for establishments

5.18 The only data that can meaningfully be compiled for an establishment relate to its production activities.
They include the following:

a. The items included in the production account and the generation of income account;

b. Statistics of numbers of employees, types of employees and hours worked;

c. Estimates of the stock of non-financial capital and natural resources used;

d. Estimates of changes in inventories and gross fixed capital formation undertaken.

5.19 The compilation of a production account and a generation of income account implies that it must be feasible to calculate output and intermediate consumption and thus value added and also compensation of employees, taxes on production and imports, subsidies and the operating surplus or mixed income.
In principle, it must be feasible to collect at least the above kinds of statistics for an establishment, even if they may not always be available, or needed, in practice.

3. Application of the principles in specific situations

5.20 The application of the principles given above for partitioning an enterprise into establishments is not always straightforward.
This section discusses several situations in which the organization of production is such that the application is particularly difficult.

Recording (or not) the output of ancillary activities

5.39 An ancillary activity is not undertaken for its own sake but purely in order to provide supporting services for the principal or secondary activities with which it is associated.
If all the ancillary activity is undertaken in the establishment where its output is used, the ancillary activity is regarded as an integral part of the principal or secondary activities with which it is associated.
As a result:

a. The output of an ancillary activity is not explicitly recognized and recorded separately in the SNA.
It follows that the use of this output is also not recorded.

b. All the inputs consumed by an ancillary activity, materials, labour, consumption of fixed capital, etc., are treated as inputs into the principal or secondary activity that it supports.

In this case it is not possible to identify the value added of an ancillary activity because that value added is combined with the value added of the principal or secondary activity.

5.40 When the production of an enterprise takes place in two or more different establishments, certain ancillary activities may be carried out centrally for the benefit of all the establishments collectively.
For example, the purchasing, sales, accounts, computing, maintenance or other departments of an enterprise may all be the responsibility of a head office located separately from the establishments in which the principal or secondary activities of the enterprise are carried out.

5.41 If an establishment undertaking purely ancillary activities is statistically observable, in that separate accounts for the production it undertakes are readily available, or if it is in a geographically different location from the establishments it serves, it may be desirable and useful to consider it as a separate unit and allocate it to the industrial classification corresponding to its principal activity.
However, it is recommended that statisticians do not make extraordinary efforts to create separate establishments for these activities artificially in the absence of suitable basic data being available.

5.42 When such a unit is recognized, the ancillary activity is recognized as a primary output.
The value of its output should be derived on a sum of costs basis, including the cost of the capital used in the unit.
The output will be deemed to be non-market output when the parent enterprise is a non-market enterprise and market otherwise.
If the output is treated as non-market, the cost of capital should be replaced by the consumption of fixed capital when summing costs to determine the value of output.
The output of the ancillary unit is treated as intermediate consumption of the establishments it serves and should be allocated across them using an appropriate indicator such as the output, value added or employment of these establishments.

5.43 It is appropriate to treat specialized agencies serving central government as a whole, for example, computer or communications agencies, which tend to be large, as separate establishments.

5.44 Even when an ancillary activity is undertaken in the establishment where it is used, it may grow to the point that it has the capacity to provide services outside the enterprise.
For example, a computer processing unit may develop in-house capabilities for which there is an outside demand.
When an activity starts to provide a proportion of its services to outsiders, the part of the output that is sold has to be treated as secondary rather than ancillary output.

The role of ancillary activities in the SNA

5.45 The production accounts of the SNA do not provide comprehensive information about the production of services treated in some cases as ancillary services.
It is therefore difficult to obtain information about their role in the economy.
For example, it is difficult to know how much output is produced, how many persons are engaged in such activities, how many resources are consumed, etc.
This may be regarded as a serious disadvantage for certain purposes, such as analysing the impact of “information technology” on productivity when the processing and communication of information are typical ancillary activities or when looking at the role of freight transport.
For some purposes, a satellite account may be compiled that makes estimates of all activities of a certain type regardless of whether they are ancillary or not.
The overall measure of value added does not alter because both output and intermediate consumption increase by the same amount but a more inclusive picture of the role of the activity in the economy can be obtained.
There is a discussion on the role of satellite accounts in chapter 29.

1. Market, own account and non-market producers

5.47 The term “industry” is not reserved for market producers.
An industry, as defined in the ISIC and in the SNA, consists of a number of establishments engaged in the same type of production, whether the institutional units to which they belong are market producers or not.
The distinction between market and other production is a different dimension of production and economic activity.
For example, the health industry in a particular country may consist of a number of establishments, some of which are market producers while others are non-market producers.
Because the distinction between market and other kinds of production is based on a different criterion from the nature of activity itself, it is possible to cross-classify establishments by type of activity and by whether they are market producers, non-market producers or producers for own final use.

2. Industries and products

5.48 As already mentioned, a one-to-one correspondence does not exist between activities and products and hence between industries and products.
Certain activities produce more than one product simultaneously, while the same product may sometimes be produced by using different techniques of production.

5.49 When two or more products are produced simultaneously by a single productive activity they are “joint products”. Examples of joint products are meat and hides produced by slaughtering animals or sugar and molasses produced by refining sugar canes.
The by-product from one activity may also be produced by other activities, but there are examples of by-products, such as molasses, that are produced exclusively as the by-products of one particular activity.

5.50 The relationship between an activity and a product classification is exemplified by that between the ISIC and the CPC.
The CPC is a classification based on the physical characteristics of goods or on the nature of the services rendered, while the ISIC also takes into account the inputs in the production process and the technology used in the production process.
In the development of the CPC, it is intended that each good or service distinguished in the CPC is defined in such a way that it is normally produced by only one activity as defined in ISIC.
However, due to different types of criteria employed, this is not always possible.
An example would be the product of mushrooms, which can be produced by controlled growing, that is, an activity classified in Agriculture in ISIC, or by simply gathering wild growing mushrooms, an activity classified in Forestry.
More detailed national classifications may distinguish different forms of energy production in ISIC, based on different technologies, resulting in separate activities for the operation of hydroelectric power plants, nuclear power plants etc.
The output of all these activities, however, would be the single product electricity.

5.51 Conversely, each activity of the ISIC, no matter how narrowly defined, will tend to produce a number of products as defined in the CPC, although they are often clustered within the CPC structure and could be perceived as one “type” of product.
As far as practically possible, an attempt is made to establish a correspondence between the two classifications, by allocating to each category of the CPC a reference to the ISIC class in which the good or service is mainly produced.
However, due to the reasons outlined above, this typically does not result in a one-to-one correspondence.
The majority of links between ISIC and CPC will tend to be one-to-many links, with a few cases requiring many-to-one links.
It is possible to force this correspondence into a stricter relationship by selecting one link out of the many-to-one correspondence.
This selection may facilitate data conversion, but is not a real description of the link between the two classifications.

1. Production as an economic activity

6.10 Production can be described in general terms as an activity in which an enterprise uses inputs to produce outputs.
The economic analysis of production is mainly concerned with activities that produce outputs of a kind that can be delivered or provided to other institutional units.
Unless outputs are produced that can be supplied to other units, either individually or collectively, there can be no division of labour, no specialization of production and no gains from trading.
There are two main kinds of output, namely goods and services, and it is necessary to examine their characteristics in order to be able to delineate activities that are productive in an economic sense from other activities.
Collectively, goods and services are described as products.

6.11 In the SNA, it is seldom if ever necessary to make a clear distinction between goods and services but in making the link to other data sets it is often necessary to understand which products have been treated as goods and which as services.

6.12 Industrial classifications, such as ISIC, identify a group of manufacturing industries.
However, many of these industries also produce services.
For example, some aircraft engine manufacturers may both fabricate aircraft engines and repair and service existing engines.
When goods dispatched to another unit for processing do not change ownership, the work done on them constitutes a service even though it may be undertaken by a manufacturing industry.
The fact that the processing is classified as a service does not prevent the processor from being classified within manufacturing.

6.13 Similarly, some service-producing industries may produce products that have many of the characteristics of goods.
For convenience, the products of these industries are described in the SNA as knowledge-capturing products.

6.14 Products are goods and services (including knowledge-capturing products) that result from a process of production.

2. The production boundary

6.23 Given the general characteristics of the goods and services produced as outputs, it becomes possible to define production.
A general definition of production is given first, followed by the rather more restricted definition that is used in the SNA.
Following this there is a discussion of the production boundary as it affects household activities and non-observed activities.

1. Basic and producers' prices

6.51 The SNA utilizes two kinds of prices to measure output, namely, basic prices and producers' prices:

a. The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, by the producer as a consequence of its production or sale.
It excludes any transport charges invoiced separately by the producer.

b. The producer's price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to the purchaser.
It excludes any transport charges invoiced separately by the producer.

Neither the producer's nor the basic price includes any amounts receivable in respect of VAT, or similar deductible tax, invoiced on the output sold.

6.52 Unlike the basic price, the producer's price includes taxes on products (taxes payable per unit of output) and excludes subsidies on products (subsidies receivable per unit of output).
The producer's price is the price, excluding VAT, that the producer invoices to the purchaser.
The basic price measures the amount retained by the producer and is, therefore, the price most relevant for the producer's decision-taking.
It is becoming increasingly common in many countries for producers to itemize taxes separately on their invoices so that purchasers are informed about how much they are paying to the producer and how much as taxes to the government.

6.53 Basic prices exclude any taxes on products the producer receives from the purchaser and passes on to government but include any subsidies the producer receives from government and uses to lower the prices charged to purchasers.

6.54 Both producers' and basic prices are actual transaction prices that can be directly observed and recorded.
Basic prices are often reported in statistical inquiries and some official “producer price” indices actually refer to basic prices rather than to producers' prices as defined here.

2. Purchasers' prices

6.64 The purchaser's price is the amount paid by the purchaser, excluding any VAT or similar tax deductible by the purchaser, in order to take delivery of a unit of a good or service at the time and place required by the purchaser.
The purchaser's price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place.

6.65 When a purchaser buys directly from the producer, the purchaser's price may exceed the producer's price by:

a. The value of any non-deductible VAT, payable by the purchaser; and

b. The value of any transport charges on a good paid separately by the purchaser and not included in the producer's price.

It follows that the purchaser's price may exceed the basic price by the amount of the two items just listed plus the value of any taxes less subsidies on the product (other than VAT).

6.66 If purchasers buy output not from the producer directly but from a wholesaler or retailer, it is necessary to include their margins in the difference between basic and purchasers' prices also.

6.67 For certain purposes, including input-output analysis, it may be convenient to consider that the purchase of a product consists of two separate transactions.
The first of these is the purchase of the product from the producer and the second is the margin paid to the wholesaler or retailer of the product.
The margin represents the difference between the price paid by the final purchaser of a product after it has passed through the wholesale and retail distribution chains and the producer's price received by its original producer.

6.68 The traditional concept of the “market” price becomes somewhat blurred under a system of VAT or similar deductible taxes because there may be two different prices for a single transaction: one from the seller's point of view and another from the purchaser's, depending upon whether or not the tax is deductible.
It is recommended in the SNA that the term “market prices” should be avoided when referring to value added and the price basis used, (basic, producers' or purchasers'), be specified to avoid ambiguity.

3. Basic, producers' and purchasers' prices - a summary

6.69 Figure 1 gives an overview of the essential differences between basic, producers' and purchasers' prices.

Figure 6.1: Basic, producers' and purchasers' prices
Basic prices
+
Taxes on products excluding invoiced VAT
-
Subsidies on products
=
Producers' prices
+
VAT not deductible by the purchaser
+
Separately invoiced transport charges
+
Wholesalers' and retailers' margins
=
Purchasers' prices

1. Gross and net value added

6.70 The balancing item of a current account is the excess of resources over uses.
The rationale for dividing transactions into sets of accounts is that the balancing item of each account is of economic interest.
The balancing item of the production account is value added, so called because it measures the value created by production.
Because a production account may be compiled for an institutional unit or sector, or establishment or industry, so value added may be derived for any of these.
Value added is of analytical interest because when the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).

6.71 Value added represents the contribution of labour and capital to the production process.
Once the amount of value added appropriated by government in the form of other taxes on production is deducted from value added and the value of subsidies is added, the compensation of labour and capital is revealed.
However, capital in the form of fixed capital has a finite life length.
Some part of value added should therefore be regarded as the reduction in value of fixed capital due to its use in production.
This allowance is called consumption of fixed capital.

6.72 Consumption of fixed capital is one of the most important elements in the SNA.
In most cases, when a distinction is drawn between “gross” and “net” recording, “gross” means without deducting consumption of fixed capital while recording “net” means after deducting consumption of fixed capital.
In particular, all the major balancing items in the accounts from value added through to saving may be recorded gross or net, that is, before or after deducting consumption of fixed capital.
It should also be noted that consumption of fixed capital is typically quite large compared with most of the net balancing items.
It may account for 10 per cent or more of GDP.

6.73 Consumption of fixed capital is one of the most difficult items in the accounts to define conceptually and to estimate in practice.
Further, consumption of fixed capital does not represent the aggregate value of a set of transactions.
It is an imputed value whose economic significance is different from entries in the accounts based mainly on market transactions.
For these reasons, the major balancing items in national accounts have always tended to be recorded both gross and net of consumption of fixed capital.
This tradition is continued in the SNA where provision is made for balancing items from value added through to saving to be recorded both ways.
In general, the gross figure is the easier to estimate and so may be more reliable, but the net figure is usually the one that is conceptually more appropriate and relevant for analytical purposes.

6.74 As stated above:

a. Gross value added is defined as the value of output less the value of intermediate consumption;

b. Net value added is defined as the value of output less the values of both intermediate consumption and consumption of fixed capital.

To avoid repetition, only gross value added will be cited in the following sections when the corresponding conclusions for net value added are obvious.

2. Alternative measures of value added

6.75 In the SNA, intermediate inputs are valued and recorded at the time they enter the production process, while outputs are recorded and valued as they emerge from the process.
Intermediate inputs are normally valued at purchasers' prices and outputs at basic prices, or alternatively at producers' prices if basic prices are not available.
The difference between the value of the intermediate inputs and the value of the outputs is gross value added against which must be charged consumption of fixed capital, taxes on production (less subsidies) and compensation of employees.
The positive or negative balance remaining is the net operating surplus or mixed income.

6.76 As indicated above, alternative measures of gross value added may be obtained by associating different sets of prices with a set of quantities of inputs and outputs.
The various measures that may be derived using the different sets of prices recognized in the SNA are considered below.

3. Gross domestic product (GDP)

6.82 The underlying rationale behind the concept of gross domestic product (GDP) for the economy as a whole is that it should measure the total gross value added from all institutional units resident in the economy.
However, while the concept of GDP is based on this principle, GDP as defined in the SNA is such that an identity exists between a measure built on value added, a measure built on income and one based on final expenditures.
To achieve this, it is important that the same contribution to GDP is made by taxes on production under all three measures.
The expenditure measure of GDP includes all taxes on production and taxes on imports since ultimately these are included in the purchasers' prices of the final users.

6.83 Given this definition of GDP, the following identities hold when the summations are taken over all resident producers:

a. GDP = the sum of the gross value added at producers' prices,

plus taxes on imports,

less subsidies on imports,

plus non-deductible VAT.

b. GDP = the sum of the gross value added at basic prices,

plus all taxes on products,

less all subsidies on products.

c. GDP = the sum of the gross value added at factor cost

plus all taxes on products,

less all subsidies on products,

plus all other taxes on production,

less all other subsidies on production.

In cases (b) and (c), the items taxes on products and subsidies on products includes taxes and subsidies on imports as well as on outputs.

4. Domestic production

6.84 GDP measures the production of all resident producers.
This does not necessarily coincide with all production taking place within the geographical boundary of the economic territory.
Some of the production of a resident producer may take place abroad, while some of the production taking place within the geographical boundary of the economy may be carried out by non-resident producer units.
For example, a resident producer may have teams of employees working abroad temporarily on the installation, repair or servicing of equipment.
This output is an export of a resident producer and the productive activity does not contribute to the GDP of the country in which it takes places.
Thus, the distinction between resident and non-resident institutional units is crucial to the definition and coverage of GDP.
In practice most of the productive activity of resident producers takes place within the country in which they are resident.
However, producers in service industries that typically have to deliver their outputs directly to their clients wherever they are located are increasingly tending to engage in production in more than one country, a practice that is encouraged by rapid transportation and instantaneous communication facilities.
Geographical boundaries between adjacent countries are becoming less significant for mobile service producers, especially in small countries bordered by several other countries.

1. Production versus output

6.85 Production is an activity carried out by an establishment.
It may not always be clear whether an establishment is producing a good or is providing a service.
For example, an oil refinery processing crude oil that it owns is producing a good (refined petroleum); if the same refinery processes crude oil belonging to another unit, then it is providing a refinery service to that unit.
This lack of clarity may often appear for goods passing between establishments of the same enterprise and it is important to know when to record the output of a good and when of a change-effecting service.
When the establishments belong to different enterprises (that is to different institutional units), the defining principle is that of economic ownership.
If an establishment has no discretion about the level of production, the price to be charged for the good or the destination of the good, there is evidence that the establishment has not taken economic ownership of the goods being processed and the value of the output should be treated as the processing element only.
This is the case for the refinery service cited above.

6.86 When the establishments involved belong to the same enterprise, there is no change of ownership since both establishments have the same owner.
However, the principle of transferring risk, which accompanies change of ownership, can still be applied.
Suppose, for example, that an establishment receives coal from another establishment in the same enterprise, uses it to generate electricity and then sells the electricity on the open market.
The electricity generator has discretion about the amount of coal it demands, the amount of electricity to be generated and the prices to be charged.
In such a case, the value of electricity generated should be measured including the cost of the coal consumed in the process even though there is no legal change in ownership given that both establishments belong to the same enterprise.

6.87 In general, all goods and services that are produced and used by the same establishment are excluded from the measure of output.
However, there are exceptions here also.
For example, output is recorded if the goods and services being produced are used for capital formation of the establishment.
Similarly output is recorded for products entering inventories even if eventually they are withdrawn from inventories for use as intermediate consumption in the same establishment in a later period.
If the establishment is a household unincorporated enterprise growing maize, the value of maize produced includes maize kept for household consumption.

6.88 An establishment may produce goods and services that are used as its own intermediate consumption.
An example is unglazed china that is only delivered to other units after glazing.
In general the unglazed china is not recorded as output but if there is some china remaining unglazed at the end of the production period, it should be recorded as being produced and entering inventories.
In the subsequent period, the unglazed china is withdrawn from inventories and the act of glazing constitutes output in the second period.

6.89 Although production is related to activities and thus the output of one production process is one set of products, output is measured for an establishment and may include the output of several production processes.
Thus output is defined as the goods and services produced by an establishment,

a. excluding the value of any goods and services used in an activity for which the establishment does not assume the risk of using the products in production, and

b. excluding the value of goods and services consumed by the same establishment except for goods and services used for capital formation (fixed capital or changes in inventories) or own final consumption.

2. Time of recording

6.90 The output of most goods or services is usually recorded when their production is completed.
However, when it takes a long time to produce a unit of output, it becomes necessary to recognize that output is being produced continuously and to record it as “work-in-progress”. For example, the production of certain agricultural goods or large durable goods such as ships or buildings may take months or years to complete.
In such cases, it would distort economic reality to treat the output as if it were all produced at the moment of time when the process of production happens to terminate.
Whenever a process of production extends over two or more accounting periods, it is necessary to calculate the work-in-progress completed within each of the periods in order to be able to measure how much output is produced in each period.

6.91 On the other hand, goods and services may be completed in an accounting period but not delivered (sold) to a user in that period.
Output is recorded when the work is completed and not when sold.
There is thus a significant difference between the value of output in a period and the value of sales, the difference being accounted for by changes in inventories of finished goods and work-in-progress.

3. Valuation of output

6.92 Goods and services produced for sale on the market at economically significant prices may be valued either at basic prices or at producers' prices.
The preferred method of valuation is at basic prices, especially when a system of VAT, or similar deductible tax, is in operation.
Producers' prices should be used only when valuation at basic prices is not feasible.

6.93 Output produced by market producers for own final use should be valued at the average basic prices of the same goods or services sold on the market, provided they are sold in sufficient quantities to enable reliable estimates to be made of those average prices.
If not, the output should be valued by the total production costs incurred, including consumption of fixed capital, plus any taxes (less subsidies) on production other than taxes or subsidies on products, plus a net return on the fixed capital and natural resources used in production.
The concept of the net return to capital is introduced in section H and discussed more fully in chapter 20.

6.94 The non-market output produced by government units and NPISHs that is supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole is valued by total production costs, including consumption of fixed capital, plus taxes (less subsidies) on production other than taxes or subsidies on products.
By convention, no net return to capital is included for non-market production.
Similarly, no net return to capital is included in the estimates of production for own final use by non-market producers when these are estimated as the sum of costs.

4. Market output, output for own final use and non-market output

6.95 A fundamental distinction is drawn in the SNA between market output and non-market output because of the way the output of each is valued.
Market output is the normal situation in a market economy where producers make decisions about what to produce and how much to produce in response to expected levels of demand and expected costs of supply.
The determining factor behind production decisions is that economically significant prices prevail.
Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy.
These prices normally result when:

a. The producer has an incentive to adjust supply either with the goal of making a profit in the long run or, at a minimum, covering capital and other costs; and

b. Consumers have the freedom to purchase or not purchase and make the choice on the basis of the prices charged.

6.96 There is further discussion on economically significant prices in chapter 22.

6.97 Non-market output is output undertaken by general government and NPISHs that takes place in the absence of economically significant prices.
A price is said to be not economically significant when it has little or no influence on how much the producer is prepared to supply and is expected to have only a marginal influence on the quantities demanded.
It is a price that is not quantitatively significant from the point of view of either supply or demand.
Such prices are likely to be charged in order to raise some revenue or achieve some reduction in the excess demand that may occur when services are provided completely free, but they are not intended to eliminate such excess demand.
Once a decision has been taken on administrative, social or political grounds about the total amount of a particular non-market good or service to be supplied, its price is deliberately fixed below the equilibrium price that would clear the market.
The difference between a price that is not economically significant and a zero price is, therefore, a matter of degree.
The price merely deters those units whose demands are the least pressing without greatly reducing the total level of demand.

6.98 Non-market output may be produced for two reasons:

a. It may be technically impossible to make individuals pay for collective services because their consumption cannot be monitored or controlled.
The pricing mechanism cannot be used when transactions costs are too high and there is market failure.
The production of such services has to be organized collectively by government units and financed out of funds other than receipts from sales, namely taxation or other government incomes;

b. Government units and NPISHs may also produce and supply goods or services to individual households for which they could charge but choose not to do so as a matter of social or economic policy.
The most common examples are the provision of education or health services, free or at prices that are not economically significant, although other kinds of goods and services may also be supplied.

1. Introduction

6.135 The rules governing the recording and valuation of output are not sufficient to determine the way in which the output of certain kinds of industries, mostly service industries, such as wholesale and retail trade and financial institutions, is measured.
The following sections provide further information about the measurement of the output of a number of specific industries.
For convenience, the industries concerned are given in the same order as they appear in the ISIC.

2. Agriculture, forestry and fishing

6.136 The growth and regeneration of crops, trees, livestock or fish which are controlled by, managed by and under the responsibility of institutional units constitute a process of production in an economic sense.
Growth is not to be construed as a purely natural process that lies outside the production boundary.
Many processes of production exploit natural forces for economic purposes, for example, hydroelectric plants exploit rivers and gravity to produce electricity.

6.137 The measurement of the output of agriculture, forestry and fishing is complicated by the fact that the process of production may extend over many months, or even years.
Many agricultural crops are annual with most costs incurred at the beginning of the season when the crop is sown and again at the end when it is harvested.
However, immature crops have a value depending on their closeness to harvest.
The value of the crop has to be spread over the year and treated as work-in-progress.
Often the final value of the crop will differ from the estimate made of it and imputed to the growing crop before harvest.
In such cases revisions to the early estimates will have to be made to reflect the actual outcome.
When the crop is harvested, the cumulated value of work-in-progress is converted to inventories of finished goods that is then run down as it is used by the producer, sold or is lost to vermin.

6.138 Some plants and many animals take some years to reach maturity.
In this case, the increase in their value is shown as output and treated as increases in fixed capital or inventories depending on whether the plant or animal yields repeat products or not.
(There is more discussion of this distinction in chapter 10.)
The value of the increase in the plants or animals should take account of the delay before the yield from them is realized as explained in chapter 20.
Once the plant or animal has reached maturity, it will decline in value and this decline should be recorded as consumption of fixed capital.

3. Machinery, equipment and construction

6.139 The production of high value capital goods such as ships, heavy machinery, buildings and other structures may take several months or years to complete.
The output from such production must usually be measured by work-in-progress and cannot be recorded simply at the moment in time when the process of production is completed.
The way in which work-in-progress is to be recorded and valued is explained in chapter 20.

6.140 When a contract of sale is agreed in advance for the construction of buildings and structures, but not for other production spreading over several periods, the output produced each period is treated as being sold to the purchaser at the end of each period, that is, as a sale rather than work-in-progress.
In effect, the output produced by the construction contractor is treated as being sold to the purchaser in stages as the latter takes legal possession of the output.
It is recorded as gross fixed capital formation by the purchaser and not as work-in-progress by the producer.
When the contract calls for stage payments, the value of the output may often be approximated by the value of stage payments made each period.
In the absence of a contract of sale, however, the incomplete output produced each period must be recorded as work-in-progress of the producer.
Dwellings built speculatively (that is, without a prior contract of sale) remain in the inventories of the construction company until sold, changing status within inventories from work-in-progress to finished products if they remain unsold on completion.

4. Transportation and storage

5. Wholesale and retail distribution

6.146 Although wholesalers and retailers actually buy and sell goods, the goods purchased are not treated as part of their intermediate consumption when they are resold with only minimal processing such as grading, cleaning, packaging, etc.
Wholesalers and retailers are treated as supplying services to their customers by storing and displaying a selection of goods in convenient locations and making them easily available for customers to buy.
Their output is measured by the total value of the trade margins realized on the goods they purchase for resale.
A trade margin is defined as the difference between the actual or imputed price realized on a good purchased for resale and the price that would have to be paid by the distributor to replace the good at the time it is sold or otherwise disposed of.
The margins realized on some goods may be negative if their prices have to be marked down.
They must also be negative on goods that are never sold because they go to waste or are stolen.

6.147 The standard formula for measuring output has to be modified for wholesalers or retailers by deducting from the value of the goods sold or otherwise used the value of the goods that would need to be purchased to replace them.
The latter includes the additional goods needed to make good recurrent losses due to normal wastage, theft or accidental damage.
In practice, the output of a wholesaler or retailer is given by the following identity:

the value of output = the value of sales,

plus the value of goods purchased for resale and used for intermediate consumption, compensation of employees, etc.,

minus the value of goods purchased for resale, plus the value of additions to inventories of goods for resale,

minus the value of goods withdrawn from inventories of goods for resale,

minus the value of recurrent losses due to normal rates of wastage, theft or accidental damage.

6.148 The following points should be noted:

a. Goods sold are valued at the prices at which they are actually sold, even if the trader has to mark their prices down to get rid of surpluses or avoid wastage.
Allowance should also be made for the effect of reductions in price due to loyalty programmes or other schemes to offer reduced prices to certain customers in certain circumstances.

b. Goods provided to employees as remuneration in kind should be valued at the current purchasers' prices payable by the traders to replace them; that is, the realized margins are zero.
Similarly, goods withdrawn by the owners of unincorporated enterprises for their own final consumption should be valued at the current purchasers' prices payable by the traders to replace them.

c. Goods purchased for resale should be valued excluding any transport charges invoiced separately by the suppliers or paid to third parties by wholesalers or retailers: these transport services form part of the intermediate consumption of the wholesalers or retailers.

d. Additions to inventories of goods for resale should be valued at the prices prevailing at the time of entry into inventories.

e. The value of goods withdrawn from inventories of goods for resale depends on whether the goods were acquired with the intention of making a real holding gain over a given period in storage.
In the general case, when the goods being resold were not expected to realize a real holding gain while in storage, the value of the goods on withdrawal from inventories should be the cost to the wholesaler or retailer at the time of the withdrawal of acquiring exactly similar replacement goods for later sale.
This valuation is necessary to exclude holding gains and losses from the measurement of output, as is the general rule in the SNA.
However, when the goods have been stored for reasons of seasonal variation in prices or as part of the maturing process, the expected real holding gain over the anticipated period is deducted from the replacement value of goods withdrawn from inventories.
This deduction is fixed in value at the time the goods enter storage and is not altered in the light of actual holding gains, real or nominal.

f. The value of recurrent losses due to wastage, theft or accidental damage; goods lost are valued in the same way as goods withdrawn from inventories.
For this reason, the two terms are often combined.

6.149 The costs of storage incurred by wholesalers and retailers are not added to the value of the goods when they are withdrawn from inventories but are treated as part of intermediate consumption.

6.150 The margins realized on goods purchased for resale thus vary according to their eventual use.
The margins realized on goods sold at the full prices intended by the traders could be described as the normal margins.
In fixing these margins, traders take account not only of their ordinary costs such as intermediate consumption and compensation of employees but also of the fact that some goods may ultimately have to be sold off at reduced prices while others may go to waste or be stolen.
The margins realized on goods whose prices have to be marked down are obviously less than the normal margins and could be negative.
The margins on goods used to pay employees as compensation in kind or withdrawn for final consumption by owners are zero because of the way these goods are valued.
Finally, the margins on goods wasted or stolen are negative and equal to the current purchasers' prices of replacements for them.
The average margin realized on goods purchased for resale may be expected to be less than the normal margin, possibly significantly less for certain types of goods such as fashion goods or perishable goods.

6. Output of the central bank

6.151 Before discussing financial services more generally, it is helpful to discuss the output of the central bank.
There are three broad groups of central bank services.
These are monetary policy services, financial intermediation and borderline cases.
Monetary policy services are collective in nature, serving the community as a whole, and thus represent non-market output.
Financial intermediation services are individual in nature and in the absence of policy intervention in the interest rates charged by the central banks, would be treated as market production.
The borderline cases, such as supervisory services may be classified as market or non-market services depending on whether explicit fees are charged that are sufficient to cover the costs of providing the services.

6.152 In principle, a distinction should be made between market and non-market output but in practice the possible resource intensiveness of the exercise and the relative importance of making the distinction should be considered before implementing the conceptual recommendations.
In cases where market output is not separated from non-market output, the whole of the output of the central bank should be treated as non-market and valued at the sum of costs.

7. Financial services other than those associated with insurance and pension funds

6.157 A comprehensive discussion of the contribution of financial assets and liabilities to the generation and distribution of income and changes in wealth in an accounting period is given in part 4 of chapter 17.
What follows is a summary of the main aspects affecting the measurement of the output of financial services.
There are three types of financial activities; financial intermediation, the services of financial auxiliaries and other financial services.
Financial services include monitoring services, convenience services, liquidity provision, risk assumption, underwriting and trading services.

6.158 Financial intermediation involves financial risk management and liquidity transformation, activities in which an institutional unit incurs financial liabilities for the purpose of acquiring mainly financial assets.
Corporations engaged in these activities obtain funds, not only by taking deposits but also by issuing bills, bonds or other securities.
They use these funds as well as own funds to acquire mainly financial assets not only by making advances or loans to others but also by purchasing bills, bonds or other securities.
Auxiliary financial activities facilitate risk management and liquidity transformation activities.
Financial auxiliaries, which are the units primarily engaged in auxiliary financial activities, typically act on behalf of other units and do not put themselves at risk by incurring financial liabilities or by acquiring financial assets as part of an intermediation service.

6.159 Financial services are produced almost exclusively by financial institutions because of the usually stringent supervision of the provision of those services.
Similarly, financial institutions rarely produce other services.
If a retailer wishes to offer credit facilities to its customers, for example, the credit facilities are usually offered by a subsidiary of the retailer, the subsidiary being treated as a financial institution in its own right regardless of the classification of the parent.
Financial institutions may also create subsidiaries dealing with only particular forms of financial services.
For example, a credit card operation may be associated with a given bank but may be institutionally separate.

6.160 Financial services may be paid for explicitly or implicitly.
Some transactions in financial assets may involve both explicit and implicit charges.
Four main ways in which financial services are provided and charged for may be considered:

a. Financial services provided in return for explicit charges;

b. Financial services provided in association with interest charges on loans and deposits;

c. Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets;

d. Financial services associated with insurance and pension schemes.

The following sections look at each of these in turn.
In chapter 17 there is an overview of the transactions and other flows associated with each type of financial instrument.
The recording of investment income is described in chapter 7 and the acquisition and disposal of financial assets and liabilities in chapter 11.
Changes in the value of financial assets and liabilities not arising from transactions are described in chapter 12.

8. Financial services associated with insurance and pension schemes.

6.175 Five types of activities are covered under this heading:

Non-life insurance;

Life insurance and annuities;

Reinsurance;

Social insurance schemes;

Standardized guarantee schemes.

6.176 All these schemes lead to redistribution of funds, which are recorded in either the secondary distribution of income account or the financial account.
For non-life insurance and standardized guarantee schemes, most of the redistribution takes place between different units in the same period.
Many client units pay relatively small policy premiums or fees and a small number of them receive relatively large claims or payments.
For life insurance, annuities and pension schemes, the redistribution is primarily, though not entirely, between different periods for a single client.
In fulfilling their responsibilities as managers of these funds, insurance companies and pension funds are involved in both risk management and liquidity transformation, the prime functions of financial institutions.

6.177 Non-life insurance provides cover to the policyholder against loss or damage suffered as a result of an accident.
A premium is paid to the insurance corporation and a claim is paid to the policyholder only if the event insured against occurs.
If the event occurs then the maximum amount to be paid is specified in the policy so that the uncertainty concerns whether a payment will take place, not the amount of it.

6.178 Under a life insurance policy, many small payments are made over a period of time and either a single lump sum or a stream of payments is made at some pre-agreed time in the future.
There is little conditionality involved in life insurance, usually the fact that a payment will be made is certain but the amount may be uncertain.

6.179 Annuities are offered by insurance corporations and are a means for an individual person to convert a lump sum into a stream of payments in the future.

6.180 Just as an individual may limit their exposure to risk by taking out an insurance policy, so may insurance corporations themselves.
Insurance between one insurance corporation and another is called reinsurance.
(Insurance other than reinsurance is called direct insurance.)
Many reinsurance transactions are with specialized institutions in a few international financial centres.
Reinsurers may also take out a further reinsurance policy.
This practice is known as “retrocession”.

6.181 A social insurance scheme is one where a third party, usually an employer or the government, encourages or obliges individuals to participate in a scheme to provide benefits for a number of identified circumstances, including pensions in retirement.
Social insurance schemes have much in common with direct insurance and may be run by insurance corporations.
This is not necessarily the case, however, and there are special variations in how the payment of contributions (corresponding to premiums in the case of direct insurance) and benefits are recorded.

6.182 In some circumstances a unit, possibly but not necessarily within general government, may offer very many guarantees of very similar nature.
One example is export guarantees and another is student loans.
Because the guarantees are very similar and numerous, it is possible to make robust statistical estimates of the number of defaults the guarantor will have to cover and so these also are treated in a manner similar to direct non-life insurance.

6.183 The detailed recording for each of these activities, including the measurement of output, the recording of flows between the insurance corporations or pension funds on the one hand and policyholders or beneficiaries on the other, and the implications for changes in the balance sheets of both sets of institutions are described in part 3 of chapter 17.
What follows is a summary of the key features of measuring output for the various activities listed above.

9. Research and development

6.207 Research and development is creative work undertaken on a systematic basis to increase the stock of knowledge, and use this stock of knowledge for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production.
Research and development is not an ancillary activity, and a separate establishment should be distinguished for it when possible.
The research and development undertaken by market producers on their own behalf should, in principle, be valued on the basis of the estimated basic prices that would be paid if the research were subcontracted commercially, but in practice is likely to have to be valued on the basis of the total production costs including the costs of fixed assets used in production.
Research and development undertaken by specialized commercial research laboratories or institutes is valued by receipts from sales, contracts, commissions, fees, etc. in the usual way.
Research and development undertaken by government units, universities, non-profit research institutes, etc. is non-market production and is valued on the basis of the total costs incurred.
The activity of research and development is different from teaching and is classified separately in ISIC.
In principle, the two activities ought to be distinguished from each other when undertaken within a university or other institute of higher education, although there may be considerable practical difficulties when the same staff divide their time between both activities.
There may also be interaction between teaching and research which makes it difficult to separate them, even conceptually, in some cases.
The treatment of R&D as capital formation is discussed in chapter 10.

10. The production of originals and copies

6.208 The production of books, recordings, films, software, tapes, disks, etc. is a two-stage process of which the first stage is the production of the original and the second stage the production and use of copies of the original.
The output of the first stage is the original itself over which legal or de facto ownership can be established by copyright, patent or secrecy.
The value of the original depends on the actual or expected receipts from the sale or use of copies at the second stage, which have to cover the costs of the original as well as costs incurred at the second stage.

6.209 The output of the first stage is a fixed asset that belongs to the producer of the original (author, film company, program writer, etc.).
It may be produced for sale or for own-account gross fixed capital formation by the original producer.
As the asset may be sold to another institutional unit the owner of the asset at any given time need not be the original producer, although they are often one and the same unit.
If the original is sold when it has been produced, the value of the output of the original producer is given by the price paid.
If it is not sold, its value may be estimated on the basis of its production costs with a mark-up. However, the size of any mark-up must depend on the discounted value of the future receipts expected from using it in production, so that it is effectively this discounted value, however uncertain, that determines its value.

6.210 The owner of the asset may use it directly to produce copies in subsequent periods.
The value of the copies made is also recorded as production separately from the production involved in the making of the original.
Consumption of fixed capital is recorded in respect of the use of the asset in the making of the copies the same way as for any other fixed asset used in production.

6.211 The owner may also license other producers to make use of the original in production.
The latter may produce and sell copies, or use copies in other ways, for example, for film or music performances.
The copier undertakes production in making the copies.
Part of the cost of making the copies is the fee paid by the licensee to the owner or licensor.
This fee represents both intermediate consumption of the licensee and output of the owner that is recorded as a service sold to the licensee.
The payments made for the licences may be described in various ways, such as fees, commissions or royalties, but however they are described they are treated as payments for services rendered by the owner.

6.212 In certain circumstances the licence to make copies may also be treated as an asset, distinct from the original.
The conditions under which this applies and the consequences are discussed in greater detail in chapter 17.

1. Coverage of intermediate consumption

6.213 Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital.
The goods or services may be either transformed or used up by the production process.
Some inputs re-emerge after having been transformed and incorporated into the outputs, for example, grain may be transformed into flour which in turn may be transformed into bread.
Other inputs are completely consumed or used up, for example, electricity and most services.

6.214 Intermediate consumption does not include expenditures by enterprises on valuables consisting of works of art, precious metals and stones and articles of jewellery fashioned out of them.
Valuables are assets acquired as stores of value: they are not used up in production and do not deteriorate physically over time.
Expenditures on valuables are recorded in the capital account.
Intermediate consumption also does not include costs incurred by the gradual using up of fixed assets owned by the enterprise: the decline in their value during the accounting period is recorded as consumption of fixed capital.
However, intermediate consumption does include the rentals paid on the use of fixed assets, whether equipment or buildings, that are leased from other institutional units under an operating lease, and also fees, commissions, royalties, etc., payable under licensing arrangements, as explained above.

6.215 Where ancillary services are not shown as the output of a separate establishment, intermediate consumption includes the value of all the goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc.
In this case, the goods and services consumed by these ancillary activities are not distinguished from those consumed by the principal (or secondary) activities of a producing establishment.
When a unit provides only ancillary services, it continues to be shown as a separate unit as long as the necessary information is available.
There is more discussion of the treatment of ancillary activities in chapter 5.

2. The timing and valuation of intermediate consumption

6.216 The intermediate consumption of a good or service is recorded at the time when the good or service enters the process of production, as distinct from the time it was acquired by the producer.
In practice, establishments do not usually record the actual use of goods in production directly.
Instead, they keep records of purchases of materials and supplies intended to be used as inputs and also of any changes in the amounts of such goods held in inventories.
An estimate of intermediate consumption during a given accounting period can then be derived by subtracting the value of changes in inventories of materials and supplies from the value of purchases made.
Changes in inventories of materials and supplies are equal to entries less withdrawals and recurrent losses on goods held in inventories.
Thus, by reducing the value of changes in inventories, recurrent losses increase intermediate consumption.
Even if they are consistently large, as long as they occur regularly, losses are treated as increasing intermediate consumption.
Goods entering and leaving inventories are valued at the purchasers' prices prevailing at the times the entries, withdrawals or recurrent losses take place.
This is exactly the same method as that used to value changes in inventories of goods produced as outputs from the production process.
Thus, the earlier discussion of the properties and behaviour of the PIM applies to inventories of inputs.

6.217 A good or service consumed as an intermediate input is normally valued at the purchaser's price prevailing at the time it enters the process of production; that is, at the price the producer would have to pay to replace it at the time it is used.
As explained in more detail in section C, the purchaser's price can be regarded as being composed of three elements:

a. The basic price received by the producer of the good or service;

b. Any transportation costs paid separately by the purchaser in taking delivery of a good at the required time and location plus the cumulative trade margin on a good that passes through the chain of wholesale or retail distribution;

c. Any non-deductible tax on the product payable on the good or service when it was produced or while in transit to the purchaser less any subsidy on the product.

For purposes of the input-output tables, it may be necessary to distinguish all three elements but this is not necessary in the accounts for institutional sectors or the central supply and use table.

6.218 Intermediate inputs treated as being acquired from other establishments belonging to the same enterprise should be valued at the same prices as were used to value them as outputs of those establishments plus any additional transport charges not included in the output values.

6.219 When goods or services produced within the same establishment are fed back as inputs into the production within the same establishment, they are only recorded as part of the intermediate consumption if they have been recorded as part of the output of that establishment.
There is discussion on when this might be appropriate in section E. Deliveries of goods and services between different establishments belonging to the same enterprise are recorded as outputs by the producing establishments and intermediate inputs by the receiving establishments only when the receiving establishment effectively assumes all risks for completing the production process.

3. The boundary between intermediate consumption and compensation of employees

6.220 Certain goods and services used by enterprises do not enter directly into the process of production itself but are consumed by employees working on that process.
In such cases it is necessary to decide whether the goods and services are intermediate consumption or, alternatively, remuneration in kind of employees.
In general, when the goods or services are used by employees in their own time and at their own discretion for the direct satisfaction of their needs or wants, they constitute remuneration in kind.
However, when employees are obliged to use the goods or services in order to enable them to carry out their work, they constitute intermediate consumption.

6.221 It is immaterial to the employer whether they are treated as intermediate consumption or compensation of employees because they are both costs from the employer's viewpoint and the net operating surplus is the same.
However, reclassifying such goods and services from remuneration in kind to intermediate consumption, or vice versa, changes value added and balance of primary incomes, and hence GDP as a whole.

6.222 The following types of goods and services provided to employees must be treated as part of intermediate consumption:

a. Tools or equipment used exclusively, or mainly, at work;

b. Clothing or footwear of a kind that ordinary consumers do not choose to purchase or wear and which are worn exclusively, or mainly, at work; for example, protective clothing, overalls or uniforms;

c. Accommodation services at the place of work of a kind that cannot be used by the households to which the employees belong: barracks, cabins, dormitories, huts, etc.;

d. Special meals or drinks necessitated by exceptional working conditions, or meals or drinks provided to servicemen or others while on active duty;

e. Transportation and hotel services including allowances for meals provided while the employee is travelling on business;

f. Changing facilities, washrooms, showers, baths, etc. necessitated by the nature of the work;

g. First aid facilities, medical examinations or other health checks required because of the nature of the work.

Employees may sometimes be responsible for purchasing the kinds of goods or services listed above and be subsequently reimbursed in cash by the employer.
Such cash reimbursements must be treated as intermediate expenditures by the employer and not as part of the employee's wages and salaries.

6.223 The provision of other kinds of goods and services, such as ordinary housing services, the services of vehicles or other durable consumer goods used extensively away from work, transportation to and from work, etc. should be treated as remuneration in kind, as explained more fully in chapter 7.

4. The boundary between intermediate consumption and gross fixed capital formation

6.224 Intermediate consumption measures the value of goods and services that are transformed or entirely used up in the course of production during the accounting period.
It does not cover the costs of using fixed assets owned by the enterprise nor expenditures on the acquisition of fixed assets.
The boundary between these kinds of expenditures and intermediate consumption is explained in more detail below.

5. Services provided by government to producers

6.233 Government may provide services to producers.
To the extent that a charge is made for these services, the charges form part of the intermediate consumption of the producer.
However, when the charge does not represent an economically significant price, the value of the service to the producer is greater than the cost.
However, no estimation of this benefit is made and the costs of the services not covered by the charges made are included in collective consumption of government.

6. Social transfers in kind

6.234 Expenditures by government or NPISHs on goods or services produced by market producers that are provided directly to households, individually or collectively, without any further processing constitute final consumption expenditures by government or NPISHs and not intermediate consumption.
The goods and services in question are treated as social transfers in kind and enter into the actual consumption of households.

6.235 By convention, non-financial and financial corporations do not make social transfers in kind, nor engage in final consumption.

7. Services of business associations

6.236 Non-profit institutions in the form of business associations that exist to protect the interests of their members and are financed by them are market producers.
The subscriptions paid by the businesses constitute payments for services rendered.
These services are consumed as intermediate inputs by the members of the association and are valued by the amounts paid in subscriptions, contributions or dues.

8. Outsourcing

6.237 It is increasingly common for producers to change the way in which a production activity is completed.
Different stages in the process or different support activities such as office cleaning or assembly of electronic components may be contracted out to another producer, in the same country or abroad.
This changes the pattern of intermediate inputs even though the underlying technology may be the same.
The impact of this on input-output tables is discussed in chapters 14 and 28.

9. Leasing fixed assets

6.238 The decision to rent buildings, machinery or equipment under an operating lease, rather than purchase them, can have a major impact on the ratio of intermediate consumption to value added and the distribution of value added between producers.
Rentals paid on buildings or on machinery or equipment under an operating lease constitute purchases of services that are recorded as intermediate consumption.
However, if an enterprise owns its buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption.
The consumption of fixed capital on the assets forms part of gross value added while interest costs, both actual and implicit, have to be met out of the net operating surplus.
Only the costs of the materials needed for maintenance and repairs appear under intermediate consumption.
Decisions to rent rather than purchase may be influenced by factors quite unrelated to the technology of production, such as taxation, the availability of finance, or the consequences for the balance sheet.

6.239 There is a significant difference between rentals of fixed assets under an operating lease and the acquisition of an asset under a financial lease.
Under an operating lease, the lessor has a productive activity that involves the equipment in question and is responsible for the production risks associated with the operational status of the asset.
Payments by the lessee are treated as payments for a service.
Under a financial lease, the lessee accepts all risks and rewards associated with the use of the asset in production.
A financial lease is thus treated as a loan by the lessor to the lessee and purchase of the equipment by the lessee.
Subsequent payments are treated as payments of interest and repayments of principal by the lessee to the lessor.
Further details on the treatment of operating and financial leases are given in chapter 17.

1. The coverage of consumption of fixed capital

6.240 Consumption of fixed capital is the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage.
The term depreciation is often used in place of consumption of fixed capital but it is avoided in the SNA because in commercial accounting the term depreciation is often used in the context of writing off historic costs whereas in the SNA consumption of fixed capital is dependent on the current value of the asset.

6.241 Consumption of fixed capital is calculated for all fixed assets owned by producers, but not for valuables (precious metals, precious stones, etc.) that are acquired precisely because their value, in real terms, is not expected to decline over time.
Fixed assets must have been produced as outputs from processes of production as defined in the SNA.
Consumption of fixed capital does not, therefore, cover the depletion or degradation of natural assets such as land, mineral or other deposits, coal, oil, or natural gas, or contracts, leases and licences.

6.242 The value of assets may decline not merely because they deteriorate physically but because of a decrease in the demand for their services as a result of technical progress and the appearance of new substitutes for them.
In practice, many structures, including roads and railway tracks, are scrapped or demolished because they have become obsolete.
Even though the estimated service lives may be very long for some structures, such as roads, bridges, dams, etc., they cannot be assumed to be infinite.
Thus, capital consumption needs to be calculated for all types of structures, including those owned and maintained by government units, as well as machinery and equipment.

6.243 Losses of fixed assets due to normal or expected levels of accidental damage are also included under consumption of fixed capital; that is, damage caused to assets used in production resulting from their exposure to the risk of fires, storms, accidents due to human error, etc.
When these kinds of accidents occur with predictable regularity they are taken into account in calculating the average service lives of the goods in question.
For an individual unit, or group of units, any difference between the average and the actual normal accidental damage within a given period is recorded in the other changes in the volume of assets account.
However, at the level of the economy as a whole, the actual normal accidental damage within a given accounting period may be expected to be equal, or close, to the average.

6.244 On the other hand, losses due to war or to major natural disasters that occur very infrequently, such as major earthquakes, volcanic eruptions, tidal waves or exceptionally severe hurricanes, are not included under consumption of fixed capital.
There is no reason for such losses to be charged in the production account as costs of production.
The values of the assets lost in these ways are recorded in the other changes in the volume of assets account.
Similarly, although consumption of fixed capital includes reductions in the value of fixed assets resulting from normal, expected rates of obsolescence, it should not include losses due to unexpected technological developments that may significantly shorten the service lives of a group of existing fixed assets.
Such losses are treated in the same way as losses due to above average rates of normal accidental damage.

2. Consumption of fixed capital and rentals on fixed assets

6.245 It is possible to draw a comparison between consumption of fixed capital and rental of assets under an operating lease.
The rental is the amount payable by the user of a fixed asset to its owner, under an operating lease or similar contract, for the right to use that asset in production for a specified period of time.
The rental needs to be large enough to cover (i) any direct costs incurred by the owner including the costs of maintaining the asset, (ii) the reduction in the value of the asset over that period (the consumption of fixed capital) and (iii) the interest costs on the value of the asset at the start of the period.
The interest costs may consist either of actual interest paid on borrowed funds or the loss of interest incurred as a result of investing own funds in the purchase of the fixed asset instead of a financial asset.
Whether owned or rented, the full cost of using the fixed asset in production is measured by the actual or imputed rental on the asset and not by consumption of fixed capital alone.
When the asset is actually rented under an operating lease or similar contract, the rental is recorded under intermediate consumption as the purchase of a service produced by the lessor.
When the user and the owner are one and the same unit, the direct costs are recorded as intermediate consumption.
The consumption of fixed capital represents the second element of the cost of using the asset.
The third part of the cost, referred to above as the interest cost, is also known as the return to fixed capital.
Like consumption of fixed capital, the return to capital is part of value added.
The sum of the consumption of fixed capital and the value of the return to capital is known as the capital services rendered by the asset.
Capital services are discussed in more detail in chapter 20.

6.246 The value of a fixed asset to its owner at any point of time is determined by the present value of the future capital services (that is, the sum of the values of the stream of future rentals less operating costs discounted to the present period) that can be expected over its remaining service life.
Consumption of fixed capital is measured by the decrease, between the beginning and the end of the current accounting period, in the present value of the remaining sequence of expected future benefits.
The extent of the decrease will be influenced not only by the amount by which the efficiency of the asset may have declined during the current period but also by the shortening of its service life and the rate at which its economic efficiency declines over its remaining service life.
The decrease is expressed in the average prices of the current period for an asset of exactly the same quality and should exclude holding gains and losses.
When the flow of future benefits that determines the present values used to derive consumption of fixed capital is expressed in terms of flows that include an element of inflation, then the discount factor should be nominal.
When the flows are expressed in terms of current period prices, then a real discount rate should be used.
Either procedure results in a present value expressed in current period prices.

6.247 Consumption of fixed capital is a forward-looking measure that is determined by future, and not past, events namely, the benefits that institutional units expect to derive in the future from using the asset in production over the remainder of its service life.
Unlike depreciation as usually calculated in business accounts, consumption of fixed capital is not, at least in principle, a method of allocating the costs of past expenditures on fixed assets over subsequent accounting periods.
The value of a fixed asset at a given moment in time depends only on the remaining benefits to be derived from its use and consumption of fixed capital must be based on values calculated in this way.

3. The calculation of consumption of fixed capital

6.248 Fixed assets may have been purchased in the past at times when both relative prices and the general price level were very different from prices in the current period.
In order to be consistent with the other entries in the same production account, consumption of fixed capital must be valued with reference to the same overall set of current prices as that used to value output and intermediate consumption.
Consumption of fixed capital should reflect underlying resource costs and relative demands at the time the production takes place.
It should therefore be calculated using the actual or estimated prices and rentals of fixed assets prevailing at that time and not at the times the goods were originally acquired.
The “historic costs” of fixed assets, that is, the prices originally paid for them, become quite irrelevant for the calculation of consumption of fixed capital as prices change over time.

6.249 For these reasons, depreciation as recorded in business accounts may not provide the right kind of information for the calculation of consumption of fixed capital.
If data on depreciation are used, they must, at the very least, be adjusted from historic costs to current prices.
However, depreciation allowances for tax purposes have often been grossly manipulated in quite arbitrary ways to try to influence rates of investment and are best ignored altogether in many cases.
It is recommended that independent estimates of consumption of fixed capital should be compiled in conjunction with estimates of the capital stock.
These can be built up from data on gross fixed capital formation in the past combined with estimates of the rates at which the efficiency of fixed assets decline over their service lives.

6.250 Whenever possible, the initial value of a new fixed asset should be that prevailing on the market when the asset is acquired.
If assets of all ages and specifications were regularly traded on markets, these prices should be used to value every asset as it ages.
However, there is scarce information on the prices of second-hand assets and faced with this lack, a more theoretical approach to determining the price of an asset as it ages must be adopted.

6.251 Conceptually, market forces should ensure that the purchaser's price of a new fixed asset is equivalent to the present value of the future benefits that can be derived from it. Given the initial market price, therefore, and knowledge of the characteristics of the asset in question, it is possible to project the stream of future benefits and continually update the remaining present value of these.
This method of building up estimates of the capital stock and changes in the capital stock over time is known as the perpetual inventory method, or PIM.
Estimates of consumption of fixed capital are obtained as a by-product of the PIM.

4. The perpetual inventory method

6.252 A brief explanation of how consumption of fixed capital may be calculated as a by-product of the perpetual inventory method of calculating the capital stock is given in this section.
An overview of the link between the calculation of consumption of fixed capital, the return to capital and the stock of assets is given in chapter 20.
Much more guidance on the way to calculate capital stock estimates appears in the manual Measuring Capital. (OECD, 2009).

1. Storage costs and holding gains and losses

A6.2 Holding products in inventories always involves costs whether they are being held by the original producer or a subsequent wholesaler or retailer.
These costs include those associated with providing the physical storage capacity, maintaining information on levels and types of inventories, costs of supplying withdrawals to customers and costs associated with renewing the level of inventories by acquiring replacement goods (other than the cost of the goods themselves).
These costs form part of the basic price charged by a manufacturer or are recovered in the margins charged by wholesalers and retailers.
The costs incurred are included in intermediate consumption, compensation of employees and the cost of capital.
It may also be the case that specialist storage producers provide a service to other producers and again their costs are included in intermediate consumption.

A6.3 For most products, called “type I” products, this is the only aspect of storage that is relevant.
All the costs associated with storage are included in production costs.
The value of the goods as they are withdrawn from inventories is valued at the costs of producing or acquiring replacement items at that time.
As a consequence, output is measured excluding any change in the value of products held in inventories; this change in value is treated as a holding gain or loss, as illustrated in the following example.

A6.4 Suppose a wholesaler buys and sells 100 packets of washing powder every period and in order to allow for marginal variations in demand keeps an inventory of 10 packets.
At the beginning of a period the price paid per packet is 2, so the value of his inventories is 20. During the period the acquisition cost per packet increases to 2.1. The value of the 10 packets in inventories rises to 21 but the increase in value of 1 reflects the fact only that if the 10 packets were withdrawn from inventories for sale and replaced by identical products, the new products would cost 21 to acquire.
Because output is measured with all units, whether newly produced or withdrawn from inventories, valued at the new price of 2.1, the 1 increase in the value of inventories does not enter the measures of production but appears only in the revaluation account explaining how the value of a stock of 10 packets at the beginning of the period, valued at 20, is replaced by a similar stock of 10 packets at the end of the period now valued at 21.

1. Goods with a long production period

A6.6 When a product is held in inventories for an extended period of time because of the length of the production process, in principle, discount factors should be used when calculating the value of work put in place each period before the delivery date.
For example, if a construction project ultimately worth 200 is put in place steadily over four years, it is unrealistic to count 50 as the contribution to production in the first year.
Any purchaser would take account of the fact that he would not be able to realize the value of this production for another three years and discount the value accordingly.
As time passes, there is income arising to the unit holding the products as the discount factor unwinds.
This case is described in chapter 20, with the full details of this numerical example.

A6.7 It is suggested that in practice it is necessary to make an allowance for the discount factor only for goods of a significantly high value and significantly long production process, where goods are recorded as work-in-progress or capital formation on own account for many periods before completion.

2. Goods whose physical characteristics change

A6.8 The second set of circumstances relates to goods whose physical characteristics change during storage because maturing is part of the production process.
The goods concerned are those that in the absence of any general or relative change in prices still increase in value because they improve in quality over the time held in storage.
Examples are fermentation affecting food products and the ageing of wine and spirits.
When the product is withdrawn from storage, it is physically different from a new item entering the maturing phase and so it is not appropriate to use the acquisition cost of the new entry into inventories as the value of the product being withdrawn.
The question is how to separate the increase in value due to maturing from the overall price increases of the goods concerned.

A6.9 Suppose a product takes three years to reach a sufficient maturity to be sold and there is final demand for the product until it reaches this state.
If the good is traded, even in its immature state, then prices will exist for the immature, newly manufactured product, for the one year old product, the two year old product and the mature product.
Supposing the product is well-established, at any point in time there will be a mix of newly manufactured items and those of maturities of one, two and three years.
If prices exist for these different maturities, separating the value of storage is not difficult.
In the first year the new product is transformed into a product of one year's maturity.
If the price when the product is brand new is P₀and when it is one year old is P₁, and t is the first year and t+1 the second, the change in value of a quantity Q of the product is Q(P_1,t+1– P_0,t).
The increase in value is due to two factors, the increase in the price of the new product made last year to the price of a similar new product made this year (Q(P_0,t+1 - P_0,t)) and the difference between the price of a similar new product made this year and the price of the one year mature product this year (Q(P_1,t+1 - P_0,t+1)).
By applying the price differences to the volumes involved, the first difference gives rise to a holding gain; the second to the value of output due to storage.

A6.10 The identity that:

the increase in value from period t to period t+1,

is equal to the change in value between products of the same maturity (or vintage) from period t to period t+1 (treated as a holding gain),

plus the change in value between products of successive maturities (or vintages) in period t+1 treated as the output due to storage,

is true for any two successive time periods.
Thus, in the second year the increase in price between the one year mature product at the beginning of the year and the price of a one year mature product at the end of the year gives rise to a holding gain and the difference in price between a one year mature product at the end of the year and the two year mature product at the same time gives the value of output due to storage, and so on.

A6.11 The identity in paragraph A6.10 holds in current values, when each term contains (or consists of) nominal holding gains (or losses) or when each term is deflated by the general level of inflation so that each term contains or consists of real holding gains (or losses).
In volume terms, as when there are no price increases, the increase in value is identified with the output due to storage.

A6.12 In practice it is very likely that robust time series of prices at different points in the maturing process do not exist.
It is possible that some close equivalent might be available but even this is not very likely.
How can storage be separated from holding gains in the absence of these prices?

A6.13 From long experience the producer may be able to make a reasonable prediction about the increase in value due to storage.
Suppose in a particular case he expects the value in volume terms after three years to be two and a half times the cost of producing the new product.
If the new product is worth 100, the three year old, mature, product is worth 250. This suggests that the volume of output due to storage is 50 in each of the next three years.
(Like the long construction product discussed above, in principle, a discount factor should be applied to the initial 100 and the first two tranches of 50 because the product is not ready for sale until the end of the third year.)
In the absence of information about the increase in the price of the product relative to the general increase in prices, it may be necessary to assume there are no real holding gains in the product and the actual increase in value must be taken as the value of the output due to storage in current values.
Once the price of the fully mature product is known, some adjustment could be made or, pragmatically, the difference between the original prediction and the outturn, adjusted for general inflation, may be taken as a real holding gain or loss.

A6.14 It is not ideal that the output due to storage is assumed to be invariant to fluctuations in relative prices, but in circumstances where most of the price increase will be due to storage and better basic data are not available, this approach gives a pragmatic estimate of output due to storage that is superior to the assumption that the whole of the increase in value is simply a holding gain.

3. Goods with seasonal patterns of supply and demand

A6.15 The third case where there is a change in value that is not attributable solely to holding gains and losses is when goods are placed in storage to take advantage of changes in the pattern of supply and demand over a year.
The most common case is storage of a staple crop, such as maize, where there is a relatively short harvest period but demand is fairly constant throughout the year.
As a result, the price rises as inventories decrease until the next harvest when an increase in supply causes the price to fall again.
It is possible to envisage the opposite case where demand is seasonal but it is cost effective for producers to produce the good for the whole, or most, of the year, even though for much of that time the production goes straight into inventories and stays there until demand peaks.

A6.16 The reason that this type of product is different from a type I product is that, as with the goods that change characteristics due to maturing, the price increases, relative to the general level of inflation, in a more or less predictable way because of the effect of transporting the goods through time, from a period of abundance to one of relative scarcity.
This is a quite different motivation from holding items in store for purely speculative reasons when there is no pattern established for the probable increase in prices and no predetermined time over which the goods might be held.

A6.17 The ideal situation is one where there is a well-established and robust seasonal pattern for the expected price increases in the crop.
In such a case, the seasonal pattern of the prices can be used to establish the output due to storage and the remaining increase in value represents holding gains and losses that can be separated into real and neutral elements as normal.

A6.18 However, given that the total level of a harvest can be quite different year on year and the actual time of harvest may vary slightly from year to year depending on climatic conditions, establishing a robust seasonal pattern of prices may not be easy.
In such a case, the pragmatic suggestion is similar to that for maturing goods when there is imperfect information.
The premise is that the increase in price will be attributable to two factors; the first is an increase matching the general increase in prices.
The element of increase in the value of inventories corresponding to this should be treated as nominal holding gains and losses.
The second factor leading to the increase in prices is a seasonal scarcity value and this element should be treated as giving rise to output due to storage.
Assuming that all the increase other than that matching average price increases is due to storage implies that there are no real holding gains.

4. Who benefits from the increase in value of goods in storage?

A6.19 The fact that type II products give rise to production of storage depends only on the type of product, not on the producer.
If a farmer produces a seasonal crop and then stores most of it to sell bit by bit throughout the year, he records the benefits of the increase in value due to storage in his output.
However, if he sells all of his crop at harvest time to another unit (for example, a wholesaler) and that unit puts it in inventories and sells it continuously throughout the year, then that unit derives the benefits from holding the crop in storage and records in his output these benefits that would otherwise have been recorded by the farmer as output.
However many times a type II good changes hands between its production and sale, the value of output due to storage will be the same.
It is likely that every time it changes hands, the associated intermediate consumption will increase so that value added will decrease but the level of output will not be affected.
Thus an increase in value accrues to the unit holding the goods, if they are type II goods and the holder is a wholesaler or retailer, he may have output just as the original producer may.

5. When is output due to storage recorded?

A6.20 Output due to storage is produced on a continuous basis.
In order to have an articulated set of information on production and inventories, output from storage must be calculated period by period.
If the goods that are changing value remain in inventories, the owner of the goods has output that is treated as an addition to inventories.
Even though the quantity of the inventories may not change, the quality-adjusted measures do change to reflect the increase in price that is treated as a quality change and not as a holding gain.

1. Some examples

A6.21 These simple examples show how the approximate approach to calculating storage works under different assumptions.

1. The generation of income account

7.3 The generation of income account (shown in table 7.1) represents a further extension or elaboration of the production account in which the primary incomes accruing to government units and to the units participating directly in production are recorded.
Like the production account, it may be compiled for establishments and industries as well as for institutional units and sectors.
The generation of income account shows the sectors, subsectors or industries in which the primary incomes originate, as distinct from the sectors or subsectors destined to receive such incomes.
For example, the only compensation of employees recorded in the generation of income account for the household sector consists of the compensation of employees payable by unincorporated enterprises owned by households.
This item is very different from the compensation of employees receivable by the household sector, which is recorded in the account below, the allocation of primary income account.

7.4 The resources, listed on the right-hand side of the generation of income account, consist of only a single item, value added, the balancing item carried forward from the production account.
As stated in chapter 6, value added may be measured before the deduction of consumption of fixed capital (gross) or after the deduction of consumption of fixed capital (net).
Provision must also be made throughout the remaining accounts of the SNA for the relevant balancing items to be measured gross or net of consumption of fixed capital.
The concept and measurement of consumption of fixed capital have already been explained in detail in chapter 6.
For simplicity, it will be assumed that value added is measured net, except when the context requires gross value added to be referred to explicitly.

7.5 The left-hand side of the generation of income account records the uses of value added.
There are only two main types of charges that producers have to meet out of value added: compensation of employees payable to workers employed in the production process and any taxes, less subsidies, on production payable or receivable as a result of engaging in production.
Compensation of employees is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.
Taxes less subsidies on production consist of taxes payable or subsidies receivable on goods or services produced as outputs and other taxes or subsidies on production, such as those payable on the labour, machinery, buildings or other assets used in production.
Taxes on production do not include any income taxes payable by the recipients of incomes accruing from production, whether employers or employees.

7.6 The content of the item taxes less subsidies on production payable out of value added varies according to the way in which output is valued.
Value added tax (VAT), or other similar deductible tax, invoiced on output is never treated as part of the price receivable by the producer from the purchaser.
Invoiced VAT is always omitted from value of output, whether output is valued at producers' or basic prices.
Hence, invoiced VAT is not a charge against value added and is not recorded as a payable in the producer's generation of income account.
However, when output is valued at producers' prices, any other tax on products payable on the output is treated as an integral part of the price receivable by the producer from the purchaser.
The tax is recorded as being payable by the producer out of value added at producers' prices in the generation of income account, that is, as a component of the item “taxes less subsidies on production”. Similarly, any subsidy on products receivable on the output is recorded as being receivable by the producer from government in the generation of income account as a supplement to value added at producers' prices.
By convention, it is not recorded under resources but as a component of “taxes less subsidies on production” as if it were a negative tax on output.

7.7 As explained in chapter 6, the basic price is obtained from the producer's price by deducting any tax on products payable on a unit of output (other than invoiced VAT already omitted from the producer's price) and adding any subsidy on products receivable on a unit of output.
In consequence, no taxes on products or subsidies on products are to be recorded as payables or receivables in the producer's generation of income account when value added is measured at basic prices, the preferred valuation basis in the SNA.
When basic prices are used to value output, the item “taxes less subsidies on production” refers only to other taxes or subsidies on production.

7.8 After deducting compensation of employees and taxes, less subsidies, on production from value added, the balancing item of the generation of income account is obtained.
The balancing item is shown on the left-hand side of the account under uses.
It measures the surplus or deficit accruing from production before taking account of any interest, rent or similar charges payable on financial assets or natural resources borrowed or rented by the enterprise, or any interest, rent or similar receipts receivable on financial assets or natural resources owned by the enterprise.

2. The allocation of primary income account

7.15 Whereas the generation of income account focuses on resident institutional units or sectors in their capacity as producers whose activities generate primary incomes, the allocation of primary income account (shown in table 7.2) focuses on resident institutional units or sectors in their capacity as recipients of primary incomes.
The allocation of primary income account shows where the items payable in the generation of income account are receivable and also includes the amounts of property incomes receivable and payable by institutional units or sectors.
As already noted, the generation of income account, being related to production activities, can be compiled for establishments and industries as well as for institutional units and sectors.
However, the allocation of primary income account has no such direct link with production and can only be compiled for institutional units and sectors.

7.16 Enterprises may invest surplus funds in financial assets or even land, especially in times of uncertainty and high interest rates.
Considerable property income may be received from such investments.
The property income paid out by a corporation will be influenced by the amount of property income received as well as by its operating surplus.
Thus, it is not appropriate to record all the property income paid out by an enterprise as if it were chargeable against operating surplus.
Some interest costs, especially implicit costs, may be attributable to assets other than those used in production.
For this reason, the explicit and implicit interest costs payable by an enterprise ought not to be recorded in the generation of income account in which the resources consist only of value added accruing from production.
They are recorded in the allocation of primary income account along with any property income receivable as well as the operating surplus.

7.17 There are two kinds of income listed under resources on the right-hand side of the allocation of primary income account.
The first shows where primary incomes already recorded in the generation of income account are receivable, as follows:

a. Compensation of employees receivable by households or non-resident households;

b. Taxes (less subsidies) on production or imports receivable (or payable) by government units or a foreign government;

c. Operating surplus, or mixed income, of enterprises carried forward from the generation of income account.

The second kind of income consists of property incomes receivable from the ownership of financial assets or natural resources:

d. Investment income receivable by the owners of financial assets from either resident or non-resident units;

e. Rent receivable by owners of natural resources leased to other units.

Table 7.1(cont): The generation of income account - concise form - resources

3. The entrepreneurial income account

7.22 The allocation of primary income account may be partitioned into two sub-accounts: the entrepreneurial income account and the allocation of other primary income account.
The purpose is to identify an additional balancing item, entrepreneurial income, that may be useful for market producers.
Like operating surplus and mixed income, it is a balancing item that is relevant only to producers, but one that can be calculated only for institutional units and sectors and not for establishments and industries.

7.23 Entrepreneurial income is calculated by deducting from operating surplus any interest, investment income disbursements and rent payable and adding property incomes receivable.
For the non-financial and financial corporations sectors, the only difference between entrepreneurial income and the balance of primary incomes is that entrepreneurial income is measured before the payment of dividends, the withdrawals of income from quasi-corporations and reinvested earnings.
Entrepreneurial income is not calculated for other sectors.
Although government and households may contain unincorporated enterprises undertaking market production, the fact that the assets attributed to this activity cannot be distinguished from the entirety of assets of the institution means that identification of property income relating to the activity is also difficult.
(If the assets and property income could be identified, it is probable that the unincorporated enterprise could be treated as a quasi-corporation and included in one of the corporate sectors.)

7.24 Entrepreneurial income is an income concept that is close to the concept of profit or loss as understood in business accounting (at least when there is no inflation).
On the other hand, it should be remembered that when profits are calculated at historic costs in business accounts, they also include nominal holding gains on the inventories and other assets owned by the enterprise; these holding gains and losses may be quite substantial during inflationary conditions.

4. The allocation of other primary income account

7.25 When the entrepreneurial income account is compiled for an institutional unit or sector, it is followed by the allocation of other primary income account in order to arrive at the balance of primary incomes.
In the allocation of other primary income account, the first item listed under resources is entrepreneurial income, the balancing item carried forward from the entrepreneurial income account instead of operating surplus or mixed income, which are the balancing items carried forward from the generation of income account.
The only item in the account, for non-financial and financial corporations, apart from the balancing items, is the entry for the distributed income of corporations.

7.26 For general government, households and NPISHs, the allocation of other primary income account matches the allocation of primary income account.

7.27 The entrepreneurial income account and the account for other primary income are shown in table 7.3.

Table 7.2(cont): The allocation of primary income account - concise form - resources

1. Identifying employees

7.28 It is not always self-evident whether a person is an employee or self-employed, for example, some workers paid by results may be employees while others may be self-employed.
The boundary also affects the subsectoring of the household sector.
The definitions in the SNA are consistent with resolutions of the International Conference of Labour Statisticians (ICLS) concerning the definitions of the economically active population.
For the SNA, though, the main objective is to clarify the nature of the employment relationship in order to fix the boundary between compensation of employees and other kinds of receipts.
Some persons who in labour statistics may be included with the self-employed, in particular some owners of quasi-corporations and owner-managers of corporations, are treated in the SNA as employees.
Further discussion on the measurement of the labour force and definitions of the related terms appear in chapter 19.