Understanding N Understanding NATIONAL ACCOunTS Second Edition Revised and Expanded Updated to SNA 2008 and ESA 2010 This 2014 edition of Understanding National Accounts contains new data and new chapters ATIO Understanding and is adapted to the new systems of national accounts, SNA 2008 and ESA 2010, which come into effect in September 2014. It approaches N national accounts from a truly global perspective, AL AL with special chapters dedicated to international NATIONAL comparisons, globalisation and well-being as well A as to the national systems used in major OECD CCO economies, such as the United States. ACCOunTS Each chapter of this manual uses practical un examples to explain key concepts in national accounts in a clear and accessible way. Each TS TS François Lequiller Derek Blades concludes with a synthesis of key points covered in the chapter, followed by resources for further exploring the topic and by a set of exercises S to test your knowledge. It is an ideal guide econd Edition SECOND EDITION to national accounts for students and other interested readers. REVISED AND EXPANDED National accounts data as well as answers to the exercises and supplementary material are available at www.oecd-ilibrary.org. ISBN 978-92-64-21462-0 30 2014 05 1 P 9HSTCQE*cbegca+ Understanding National Accounts SECOND EDITION François Lequiller, Derek Blades This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: Lequiller, F. and D. Blades (2014), Understanding National Accounts: Second Edition, OECD Publishing. http://dx.doi.org/10.1787/9789264214637-en ISBN 978-92-64-21462-0 (print) ISBN 978-92-64-21463-7 (PDF) Series/Periodical: ISSN 0000-0000 (print) ISSN 0000-0000 (online) The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Photo credits: Cover ©. Corrigenda to OECD publications may be found on line at: www.oecd.org/about/publishing/corrigenda.htm. © OECD 2014 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of the source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d'exploitation du droit de copie (CFC) at [email protected]. FOREWORD Foreword Today more than ever, national accounts remain at the core of a modern system of economic statistics. The global economic and financial crisis has further underlined the importance of a timely, reliable and comprehensive monitoring of economic activity and also pointed to directions for new developments and extensions in the accounts. National accounts provide the conceptual and actual tool to bring coherence to hundreds of statistical sources available in OECD countries. They deliver essential macro-economic indicators to guide policymaking. The questions, however, are whether users are sufficiently aware of the richness of information contained in the national accounts and fully exploit their analytical and statistical potential. At the same time, how can we ensure that users fully grasp the complex concepts underpinning the national accounts, as well as their limitations? And what about issues around their international comparability? This second edition of “Understanding National Accounts” intends to provide answers to these questions, and to many more, in an easy and accessible, yet rigorous, way. It is an update of the previous edition published by the OECD in 2006, which was very well received by both people familiar with the world of economic statistics, and national accounts in particular, and non-specialist users. Indeed, at the time many readers wrote to the authors that ”for the first time, they had come across a book on national accounts that was easy to understand and not boring!” Since 2006, four key developments have occurred that have made an update of the previous edition a must. First, the financial crisis that hit OECD countries has highlighted the need to better explain how strong movements in economic activity are actually reflected in national accounts. Second, in 2008, the System of National Accounts (SNA) underwent a major round of modernisation. One example of the revisions to the accounting system has been to treat expenditure in R&D as investment in knowledge. Previously, it was simply considered as a current cost item. Third, the new emphasis put on “better lives”, beyond the traditional objective of economic growth and GDP, has offered an opportunity to outline how the national accounts can also be a rich underlying source for tracking households’ material well-being. Finally, new data on “trade in value added” are now being compiled in parallel to core national accounts, allowing to better understand the increased interconnectedness of our economies UNDERSTANDING NATIONAL ACCOUNTS © OECD 2014 3 FOREWORD This new, augmented, version of “Understanding National Accounts” reflects the four developments above. In particular, its publication has been scheduled to coincide with the time when most OECD countries will have moved to the new 2008 System of National Accounts. I am confident that, like the previous one, this edition of the report will receive a similar warm welcome from all those, and they are numerous, whether young statisticians, students, journalists, economists, or citizens, who want to know more about the statistics that are at the heart of the measure of economic development in OECD economies. Martine Durand OECD Chief Statistician and Director, Statistics Directorate 4 UNDERSTANDING NATIONAL ACCOUNTS © OECD 2014 TABLE OF CONTENTS Table of contents Acknowledgements .............................................. 11 Chapter 1. The essential macroeconomic aggregates.................. 13 1. Defining GDP ............................................. 15 2. The first fundamental equation: Deriving GDP in volume ....... 21 3. Defining demand: the role of investment and consumption ..... 24 4. Second fundamental equation: Reconciling global output and demand .............................................. 26 5. Third fundamental equation: Reconciling global output and income .............................................. 30 Key points .................................................. 36 Going further................................................ 37 Exercises ................................................... 44 Chapter 2. Distinguishing between volume and price increases ....... 47 1. A word of caution: Compare volumes ........................ 48 2. The volume/price breakdown applied to changes over time ..... 50 3. The difficulties of aggregation ............................... 51 4. Volume indices and price indices ............................ 55 5. Constant prices ........................................... 57 6. “Chained” accounts and the loss of additivity ................. 58 7. Unpleasant practical consequences of chain linking ........... 61 8. The special cases .......................................... 63 9. And what about the price indices? ........................... 66 Key points .................................................. 69 Going further................................................ 70 Exercises ................................................... 72 Chapter 3. International comparisons ............................... 79 1. Comparison of growth rates................................. 80 2. Comparison of ratios: The example of the saving ratio, the profit rate and the public debt ratio....................... 83 3. Comparison of levels of variables: GDP per head in volume...... 87 4. The spatial volume/price breakdown: Purchasing power parities . 89 5. Comparison of variables in absolute terms: Household consumption 96 UNDERSTANDING NATIONAL ACCOUNTS © OECD 2014 5 TABLE OF CONTENTS Key points .................................................. 100 Exercises ................................................... 101 Chapter 4. Production: What it includes and excludes................. 103 1. The production frontier .................................... 106 2. The illegal economy and the underground economy............ 109 3. Measurement of output and of value added: The general case . 110 4. The measurement of output and of value added: Special cases . 113 5. Nomenclatures and classifications........................... 117 Key points .................................................. 120 Going further................................................ 121 Exercises ................................................... 126 Chapter 5. Defining final uses of GDP ............................... 129