Chapter 3 - The basic national accounting concepts

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The UN System of National accounts
The institutional unit
Enterprise, establishment and industry
Households as producers
The principal, secondary and ancillary productive activities
The concept of production
The production boundary
Measurement of output
Basic, producers' and purchasers' prices
The output of agriculture, forestry and fishing
The value of output
Intermediate consumption
Consumption of fixed capital
Gross and net value added at current and constant prices
Compensation of employees
Taxes on production and on imports
Subsidies
Operadag surplus and mixed income
Gross fixed capital formation
Land
Changes in inventories
Property income

The UN System of National accounts

3.1 The purpose of the UN SNA, as given in the 1953 report "A System of National Accounts and Supporting tables", is to set out a standard national accounting system to provide a framework for reporting national income and product statistics of general applicability in such a way as to ensure consistency with the definitions and classifications used or recommended by international bodies. The system, after being introduced in 1953, has been revised four times to incorporate the expanding need of the users. The latest revision, undertaken jointly by EUROSTAT, the International Monetary Fund (IMF), OECD, UN and the World Bank, was approved by the UN Statistical Commission in 1993. The 1993 SNA embodies many new features including a complete, integrated set of accounts for all institutional sectors and for the consolidation of information on population and labour force, prices and volume measures and purchasing power parities. It recommends that the system be implemented flexibly and not rigidly; it suggests the use of alternative classifications in the framework of a social accounting matrix to augment the tools for analyzing poverty and other social concerns. It recognizes the usefulness of having integrated economic and environmental accounts.

3.2 SEAFA, as mentioned in Chapter 2, uses the same basic concepts, definitions and accounting structure as the 1993 SNA. Some of the relevant concepts and definitions used in SEAFA have been reproduced in this chapter for the benefit of users and producers of SEAFA who may not have ready access to the 1993 SNA. The extracts reproduced in this Chapter have been tailored to the requirements of SEAFA but readers are advised to consult the 1993 SNA for further details and clarifications, if necessary.

The institutional unit

(see Chapter IV of the 1993 SNA)

3.3 The 1993 SNA recommends that complete sets of accounts should be compiled for sectors or sub-sectors consisting of groups of institutional units. Institutional units are economic entities that are capable of owning assets, incurring liabilities and engaging in economic activities and transactions with other entities. There are two main types of entities in the real world that may qualify as institutional units -- persons or groups of persons in the form of households and legal or social entities (such as a corporation, non-profit institution or government unit)" whose existence is recognized by law or society independently of the persons or other entities that may own or control them (see paragraphs 4.1 to 4.21 of the 1993 SNA for further details). These institutional units have been grouped into five mutually exclusive sectors on the basis of their principal functions, behaviour and objectives. The five sectors are: the non-financial corporations; the financial corporations; the general government; the non-profit institutions serving households; and the households. The 1993 SNA also recommends that production accounts should be compiled for industries defined as groups of establishments, as in ISIC.

Enterprise, establishment and industry

(see Chapter V of the 1993 SNA)

3.4 An enterprise is an institutional unit in its capacity as producer. It may be a corporation, a non-profit institution or an unincorporated enterprise. A single enterprise, especially a large corporation, may engage simultaneously in many different kinds of productive activities, there being virtually no upper limit to the size of an enterprise. For the analysis of production, in which the technology of production plays an important role, it is necessary to work with groups of producers who are engaged in essentially the same kind of production. This requirement means that some enterprises must be partitioned into smaller production units that are as homogeneous as possible and that the system describes as "establishments". Furthermore, industries are defined as groups of establishments. The classification of production activities used to define establishments and industries in the system is the International Standard Industrial Classification of All Economic Activities (ISIC).

Households as producers

(see paragraphs 4. 139 to 4. 150 of the 1993 SNA)

3.5 A Household may be defined as "a small 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." Households may engage in any kind of economic activity and not merely consumption. In this respect:

their economic behaviour may be more varied than that of legal entities whose activities may be restricted to the purpose for which they are created;
they may participate in production either by operating their own unincorporated enterprises or by supplying labour to other unincorporated or corporate enterprises by working as employees;
production within the household sector takes place within enterprises that are directly owned and controlled by members of households, either individually or in partnership with others. When members of households work as employees for corporations, quasi-corporations or government, the production to which they contribute takes place outside the household sector;
the term "unincorporated enterprise" emphasizes the fact that the producer unit is not incorporated as a separate legal entity from the household itself. The fixed and other assets used in unincorporated enterprises do not belong to the enterprises but to their owners.

The principal, secondary and ancillary productive activities

(see paragraphs 5.7 to 5.16 of the 1993 SNA)

3.6 In the system of economic accounts production consists of processes or activities carried out under the control and responsibility of institutional units, in which inputs are transformed into outputs of goods and services. The classification of activities by grouping the producer units according to similarities in their outputs, inputs and technology of production, provides the basis for identifying industries and establishing linkages between them. To apply the system uniformly it is necessary to know the fundamental distinctions between principal, secondary and ancillary activities. These are given below.

3.7 The principal activity of a producer unit is the activity whose value added exceeds that of any other activity carried out within the same unit. The classification of the principal activity is determined with reference to the most detailed level of classification of economic activities as defined in ISIC. When completed, the output of the principal activity, i.e. its principal product and any by-product (that is, a product necessarily produced together with the principal product) must be capable of being supplied to other units.

3.8 A secondary activity is an activity carried out within a single producer unit in addition to the principal activity and whose output, as with that of the principal activity, must be suitable for delivery outside the producer unit.

3.9 The output of an ancillary activity, in contrast, is not intended for use outside the enterprise. An ancillary activity is a supporting activity undertaken within an enterprise in order to create the conditions within which the principal or secondary activity can be carried out. Ancillary activities have certain common additional characteristics related to their output:

(i) They typically produce outputs that can be found as inputs into almost any kind of productivity activity.
(ii) They produce services (and, as an exception, goods that may not become a physical part of the output of the principal or secondary activity) as output.
(iii) The value of an individual ancillary activity's output is likely to be small compared to that of the principal or secondary activities of an enterprise.

3.10 By definition, an ancillary activity is not undertaken for its own sake but purely in order to provide supporting services for the principal or secondary activity with which it is associated. As a result:

(i) The output of an ancillary activity is not explicitly recognized and recorded separately in the system, nor is the use to which that output is put.
(ii) All the inputs consumed by an ancillary activity are treated as inputs into the principal or secondary activity that it supports.
(iii) It is not possible to identify the value added of an ancillary activity.

3.11 In principle, an enterprise may have a choice between engaging in an ancillary activity or purchasing the required services on the market, but this is not always possible in practice. Furthermore, if the ancillary activity grows to the point which it has the capacity to provide services outside the enterprise, it should be treated as a secondary rather than an ancillary activity.

3.12 The production accounts of the system do not provide any separate information about the incidence or range of the ancillary activities carried out within producer units. The existence of ancillary activities can only be inferred by studying the structure of the inputs consumed by the producers.

The concept of production

(see paragraphs 6.6, 6.15 and 6.16 of the 1993 SNA)

3.13 'Economic Production' can be defined as activity, carried out under the control and responsibility of an institutional unit, that uses inputs of labour, capital and goods and services to produce outputs of goods or services. There must be an institutional unit that assumes responsibility for the process and owns any goods produced as outputs or is entitled to be paid, or otherwise compensated, for the services provided. A purely natural process without any human involvement or direction is not production in the economic sense. For example, the unmanaged growth of fish stock in international waters is not production, whereas the activity of fish farming is production. Thus, production can be described in general terms as an activity in which an enterprise uses inputs to produce outputs that can be delivered or provided to other institutional units. There are two kinds of output -- goods and services. Goods are physical objects for which a demand exists and over which ownership rights can be established and transferred from one institutional unit to another by engaging in transactions on the market. The production of services must be confined to activities that are capable of being carried out by one unit for the benefit of another. Services are not separate entities over which ownership rights can be established.

The production boundary

(see paragraphs 6.7, 6.8, 6.24, 6.25, 6.30, 6.34 of the 1993 SNA)

3.14 Production is understood to be a physical process, carried out under the responsibility and management of an institutional unit, in which labour and assets are used to transform inputs of goods and services into output of goods and services. The goods must be such that their ownership can be exchanged in transactions between institutional units while the services must be such that they can be provided by one unit to another (i.e. they are capable of being purchased or acquired on markets). Accordingly activities that fall within the production boundary are:

(a) the production of all individual or collective goods or services that are supplied or intended to be supplied, to units, including the production of goods and services used up in the process of producing such goods or services;

(b) the own account production of all goods that are retained by their producers for their own final consumption or own gross capital formation.

3.15 Despite the obvious practical difficulties in obtaining data on illegal production, concealed production and the underground economy, the following activities are also covered in the System:

(i) the production of goods and services for which there is a market demand even though their sale, distribution or possession may be forbidden by law;
(ii) production activities that may be legal when carried out by authorized producers but that become illegal when carried out by unauthorized producers; e.g. the production of narcotics by cultivators who do not have a licence to produce them;
(iii) production of goods and services that are quite legal (provided certain standards or regulations are complied with) but that are deliberately concealed from public authorities to avoid taxes, social security contributions, staff regulation, etc.

3.16 The system includes the production of all goods whether they have been produced for delivery to other units or for own final use. At the time production takes place it may not be decided whether, or in what proportion, the goods produced are destined for the market or for own use. The following types of production that may be partly or wholly intended for own consumption within households are therefore included:

(1) the production of agricultural products and their subsequent storage; the gathering of berries or other uncultivated crops; cutting peat; forestry; wood cutting and the collection of fuelwood; hunting and fishing;
(2) the processing of agricultural products; the production of grain by threshing; the production of flour by milling; the curing of skins and the production of leather; the production and preservation of meat and fish products; the preservation of fruit by drying, bottling, etc.; the production of dairy products such as butter or cheese; the production of beer, wine or spirits; the production of baskets, mats, etc. by the households; (The cooking of foods and the preparation of meals for immediate consumption by members of the household is not included, however,).
(3) other kinds of processing and production of durables for own use.

3.17 It is not feasible to draw up a complete, exhaustive list of all possible production activities but the above list covers the most common types. It can be seen that this list includes activities that belong to different groups or divisions of ISIC. To the extent possible the grouping together of such different activities should be minimized. If a particular household activity becomes significant and details of its output as well as inputs are available, it should be treated as a separate household establishment and may be classified accordingly.

Measurement of output

(see paragraphs 6.37 to 6.50 of the 1993 SNA)

3.18 Goods and services are produced by processes of production. Output consists of those goods and services that are produced by an establishment within a given accounting period. The total output of an establishment is the sum total of (i) completed output, i.e. goods and services that become available for use outside that establishment (including for own final use) and (ii) work in progress, i.e. output that is not complete and, therefore, is not yet in the state in which it is normally marketed. The latter must be included if all the output produced is to be recorded. In practice, some of the goods sold or otherwise used within any given accounting period may have been withdrawn from inventories of goods produced in previous periods. This leads to the well-known accounting identity:

the value of output = the value of total sales or other uses of goods or services produced as outputs + the value of changes in the inventories of goods produced as outputs (including changes in work-in-progress)

3.19 A fundamental distinction is drawn between market output (output that is sold at prices that are economically significant, that is otherwise disposed of on the market or that is intended for sale or disposal on the market), output produced for own final use and other non-market output. Goods and services produced for own final use are valued at the average basic prices of similar products sold on the market provided they are sold in sufficient quantities to enable reliable estimates to be made of those average prices. If no suitable average prices are available, goods and services for own final use must be valued by their costs of production. The non-market output produced by government units and non-profit institutions and supplied free, or at prices that are not economically significant, to other institutional units or to the community as a whole is valued by total production costs, including consumption of fixed capital and any taxes (less subsidies) on production except those on products.

3.20 The measurement of total output can be done either at the site where the production is taking place or at the end users. Whichever method is used to measure agricultural output, it is possible to obtain a clear indication of its coverage by listing the different ways in which it is used. Producers of goods and services must dispose of their output in one or more of the following ways during the period in which they are produced:

(1) they may be sold (only goods or services sold at economically significant prices are included here);
(2) they may be bartered in exchange for other goods, services or assets, provided to employees as compensation in kind or used for other payments in kind;
(3) they may enter the producers' inventories prior to their eventual sale, barter or other use (incomplete outputs enter the producers' inventories in the form of additions to work-in-progress);
(4) they may be supplied to another establishment belonging to the same enterprise for use as intermediate inputs into its production; they may also be used as intermediate inputs into a different kind of productive activity within a single agricultural establishment (for example, output of grain used as feedstuffs in the farming of cattle);
(5) they may be retained by their owners for own final consumption or own gross fixed capital formation;
(6) they may be supplied free or sold at prices that are not economically significant to other institutional units, either individually or collectively. In practice, agricultural outputs are unlikely to be disposed of in this way.

Basic, producers' and purchasers' prices

(see paragraphs 6.204 to 6.217 of the 1993 SNA)

3.21 The system utilizes two kinds of output prices; 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 on that unit 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.

3.22 The purchaser's price is the amount paid by the purchaser, excluding any deductible VAT (i.e VAT on purchases that a producer is permitted to deduct from his liability of VAT to the government) or similar deductible tax, 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.

3.23 Output valued 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, although producers' prices may be used when valuation at basic prices is not feasible. Expenditure by enterprises on goods and services intended to be used for intermediate consumption or gross fixed capital formation should be valued at purchasers' prices.

The output of agriculture, forestry and fishing

(see paragraphs 6.94 to 6.100 of the 1993 SNA)

3.24 The 1993 SNA recommends that, in order to have a concept of production that is consistent with economic activities other than agriculture, forestry and fishing along with the managed growth of crops, standing timber or other trees and fish and livestock reared for the purposes of food, under the control of institutional units should be treated as a continuous process of production whose output consists of work-in-progress -- that is, output that is not yet sufficiently processed to have reached the form in which it is usually marketed or used to produce other goods and services. When the crops are harvested, the trees felled or the animals killed, the process of production is completed and the work-in-progress is transformed into inventories of finished products ready for sale or other use (see paragraphs 6.94 and 6.95 of the 1993 SNA).

3.25 The 1993 SNA further states that when the process of production takes place over several periods (months, quarters or years for which accounts are compiled) to complete, the value of the output to be recorded as work-in-progress in each period is calculated by distributing the value of the finished product (the harvested crop, felled trees, slaughtered animals, etc.) in proportion to the costs incurred in each period. For this purpose, farms that are corporate enterprises need to be distinguished from those that are unincorporated. The output of corporate farms can be distributed in proportion to the actual costs incurred during each period, including compensation to employees. However, in the case of unincorporated farms owned by agricultural households, unpaid labour inputs provided by the owner(s) may account for much of the real costs incurred. The allocation of the work-in-progress for these farms may be accomplished as follows, first, actual costs (expenditure on seed, fuels, etc.) are allocated to the periods in which they were incurred, then the remaining part of the value of the finished product is distributed in proportion to unpaid hours worked by the owner(s). For this purpose, rough indicators of the relative amount of work done in different periods may be sufficient.

3.26 When the value of the output is distributed as additions to work-in-progress, it is essential to record also the reduction in work-in-progress, which takes place at the moment when production is completed, to avoid double counting.

3.27 The system described above suggests that, if the entire production process is completed within a single accounting period, it may be superfluous to estimate the work-in-progress. In agriculture, as in other industries, it may sometimes be necessary to estimate the work-in-progress in advance of the production process being completed and before the value of the finished products (which is to be allocated as work-in-progress) is known. In such cases, the allocation may be done either on the basis of the expected value of the crop, taking account of its condition, or by marking up the actual costs incurred to account for operating surplus or mixed income based on previous experience. If a growing crop is badly damaged or destroyed prior to the harvest in the same accounting period, the earlier provisional estimates of work-in-progress obviously have to be revised downwards, to zero if necessary, even before the production process is completed.

The value of output

(see paragraphs 6.57-6.79 and 6.128 of the 1993 SNA)

3.28 The value of output sold or put to other uses is calculated separately from the value of the change in the stock of inventories. The principles for valuing the former have already been discussed in paragraphs 2.17, 2.18 and 2.22. The value of changes in inventories is equal to the value of the inventories acquired by an enterprise less the value of the inventories disposed of during the accounting period. Some of these acquisitions and disposals are attributable to actual purchases or sales, but others reflect transactions that are internal to the enterprise. When a good is entered into inventories it is acquired as an asset by the owner of the enterprise either by purchase (or barter) or by an internal transaction within the producer unit. Conversely, a good leaving inventories represents the disposal of an asset by the owner by sale or other use or by internal transfer to the production process, recurrent losses (wastage, accidental damage or pilfering). Inventories movements that are not attributable to actual purchases or sales of the goods concerned are valued as if the goods were being bought or sold at that time. In other words, goods transferred out of inventories are valued at their current basic prices and goods transferred into inventories are valued as if they were being sold at that time. Additions to work-in-progress are valued in proportion to the estimated current basic prices of the finished product. Materials and supplies lost as a result of physical deterioration or recurrent accidental damage or pilfering are recorded and valued in the same way as if they were actually withdrawn to be used in production.

3.29 When prices are stable, the measurement of changes in inventories is relatively simple. However, when there is inflation, significant price increase may occur while goods are held in inventory. Holding gains occurring on goods held in inventory after they have been produced must not be included in the value of output.

3.30 In the case of work-in-progress, an estimate of the value of additions to work-in-progress during a given period is obtained by multiplying the current basic price of the finished product by the share of the total production costs incurred during that period. When there is general inflation, work-in-progress in successive accounting periods may be calculated on the basis of progressively higher expected sales prices. Despite the practical difficulty, this procedure has to be followed in order to match the values of inputs and outputs during each period and to obtain an economically meaningful measure of value added.

Intermediate consumption

(see paragraphs 6.147 to 6.177 of the 1993 SNA)

3.31 Intermediate consumption consists of the value of the goods and services that are consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital. The goods and 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, seeds, electricity and most services. The various items consumed as inputs may have been produced by other resident producers or imported from the rest of the world. The most common items of intermediate consumption are seeds and plants, animal products, energy and lubricants, fertilizers and soil improvers, plant protection products and medicines, feedstuffs, material and small tools, maintenance and repairs and irrigation charges and services. In the 1993 SNA, the consumption by one establishment of goods or services produced by another establishment belonging to the same enterprise is counted as part of the first establishment's intermediate consumption. SEAFA permits this principle to be extended in the case of agricultural establishments with one or more secondary activities to include the consumption by one activity of goods or services produced by another (non-ancillary) activity within the same establishment. For example, grain produced by an agricultural establishment and used up as cattle feed within the same establishment is recorded as both output and intermediate consumption of that establishment. This treatment does not affect value added.

Some important points which need care and attention for estimating intermediate consumption follows:

1. The intermediate consumption of a good or service is recorded at the time when it enters production, as distinct from the time when it was acquired by the producer. In practice, the two times coincide for inputs of services, but not for goods which may be acquired some time in advance of their use in production.
2. A good or service consumed as an intermediate input is normally valued at the purchasers' price prevailing at the time it enters the production process; that is, at the price the producer would have to pay to replace it at the time it is used.
3. All the goods and services used up in ancillary activities form part of the intermediate consumption of the establishment or enterprise.
4. Certain goods and services used by enterprises do not enter directly into the process of production itself but are provided to employees working on that process. In such cases it is necessary to decide whether the goods and services are counted as intermediate consumption or as remuneration in kind to 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 own 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; for example, special clothing, gloves or footwear which must be worn to carry out the work are counted as intermediate consumption.
5. Expenditures on durable producer goods that are small, inexpensive and used to perform relatively simple operations may be treated as intermediate consumption when such expenditures are made regularly and are very small compared with expenditures on machinery and equipment. Examples of such goods are hand tools such as saws, spades, knives, hammers and screwdrivers.
6. Maintenance and repairs of fixed assets already in use in production constitute part of the intermediate consumption if it is required to keep the fixed assets in good working condition. Major expenditures on items that are used to extend the life, renovate or enlarge existing fixed assets should be taken as gross fixed capital formation.
7. Collective services provided by government units that are not specific to the requirements of agriculture are not included in intermediate consumption.
8. The types of services produced for own use by ancillary activities within the establishment can, alternatively be obtained from outside, i.e. from specialist market enterprises. If an establishment obtains the services from outside instead of from ancillary activities, its intermediate consumption is increased and its value added reduced, even though its principal activity remains completely unchanged.
9. The decision to rent rather than purchase buildings, machinery or equipment, can also have a major impact on the ratio of intermediate consumption to value added as the rentals paid for the hire of buildings or equipment are treated as purchases of services and recorded under intermediate consumption.
10. Capital consumption on the fixed assets owned by the enterprise 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 maintenance and repairs appear under intermediate consumption.
11. Expenditures by enterprises on valuables (works of art, etc.) held as stores of value are treated as capital formation and not intermediate consumption (see paragraph
10.116 of the 1993 SNA).

Consumption of fixed capital

(see paragraphs 6.179 to 6.187 of the 1993 sna)

3.32 Consumption of fixed capital may be defined as 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 and accidental damage. It excludes the value of fixed assets destroyed by acts of war or other exceptional events unconnected with production, such as major natural disasters which occur very infrequently. The value of consumption of fixed capital may deviate considerably from depreciation as recorded in business accounts or as allowed for taxation purposes, especially when there is inflation.

3.33 The destruction of assets resulting from natural disasters, such as earthquakes, tidal waves and exceptionally severe hurricanes, or other occasional disasters is recorded in a new account in the 1993 SNA described as the "other changes in volume of assets account". The degradation of land because of flooding, erosion or pollution and the depletion of natural resources are similarly recorded in this new account. However, the entries in the "other changes in volume of assets" do not have counterpart entries elsewhere in the 1993 SNA. They, therefore, have no effect on the measurement of production and do not appear in the production account. See Chapter XII of the 1993 SNA, especially paragraphs 12.28 to 12.37, for a full explanation of this new account and its place in the SNA.

3.34 Fixed assets may have been purchased years before in the past and both the relative prices and the general price levels may now be quite different. However, the consumption of fixed capital recorded in the production account should be consistent with the other entries in the account, namely output and intermediate consumption which are also valued at current prices. 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.

3.35 Capital consumption is calculated for all fixed assets -- that is, tangible and intangible produced assets used continuously or repeatedly in production -- but not for non-produced assets such as land. However, consumption of fixed capital must be calculated in respect of land improvements such as drainage systems, dykes or breakwaters and dams.

3.36 The consumption of fixed capital is one of the most important elements in the system. In most cases, when a distinction is drawn between "gross" and "net" recording gross means without deducting consumption of fixed capital while net means after deducting consumption of fixed capital. The consumption of fixed capital, being imputed is one of the most difficult items to measure and estimate. Depending on the level of development and the availability of data, the estimate of consumption of fixed capital can be subject to large errors. This aspect needs to be carefully understood by the users of the data. In recognition of the fact that it may not always be feasible to make a satisfactory estimate of the consumption of fixed capital, the main aggregates and balancing items of the accounts may record gross as well as net.

Gross and net value added at current and constant prices

(see paragraphs 6.222 to 6.239 and 16.71 to 16.77 of the 1993 SNA)

3.37 Value added measures the value created by production. It is an unduplicated measure of output in which the values of the goods and services used as intermediate inputs are eliminated from the value of output. It is a balancing item in the production account for an institutional unit or sector, an establishment or an industry. It may be calculated either before or after deducting the consumption of fixed capital on the fixed assets used. Thus, it is defined as follows:

(a) Gross value added is the value of output less the value of intermediate consumption;
(b) Net value added is 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 following sections. The corresponding conclusions for net value added are obvious. The gross value added (OVA) can be expressed in the form of the algebraic expression:

GVA = (Q x P) - (q x p)

where Q and q are the quantities of goods and services produced (output) and intermediate consumption (input) and P and p are their respective prices. Generally, GVA measured at the prices of the accounting year in which the production takes place is known as gross value added at current prices. However, alternative measures of GVA may be obtained by combining different price vectors with a single quantity vector. For example, GVA may be measured using the prices of some other time period or some other country. When GVA is calculated using fixed prices of some base year it is described as being "at constant prices" of that base year.

Compensation of employees

(see paragraphs 7.21 to 7.47 of the 1993 SNA)

3.38 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. Compensation of employees is recorded on an accrual basis, i.e. it is measured by the value of the remuneration in cash or in kind which an employee becomes entitled to receive from an employer in respect of work done during the relevant period, whether paid in advance, simultaneously or in arrears of the work itself. No compensation of employees is payable in respect of unpaid work undertaken voluntarily, including work done by members of a household within an unincorporated enterprise owned by the same household. Unpaid family workers, including those working in unincorporated enterprises engaged wholly or partly in market production, are treated as self-employed. Compensation of employees does not include any taxes payable by the employer on the wages and salary bills.

3.39 Compensation of employees has two main components; wages and salaries payable in cash or kind; and the actual or imputed social contributions payable by employers to social security schemes, which are either funded or unfunded. The compensation of employees is directly related to the amount of work done or time spent at work. Furthermore, wages in kind include meals and drinks that are provided to employees at work and also other goods or services provided by the employer and used by the employee to satisfy his or her own needs or wants.

Taxes on production and on imports

(see paragraphs 7.48 to 7.50 and 7.62 to 7.70 of the 1993 SNA)

3.40 Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. They consists of:

(i) Taxes on products payable on goods and services when they are produced, delivered, sold, transferred, used or otherwise disposed of by their producers;
(ii) Other taxes on production such as taxes on the ownership or use of land, buildings or other assets used in production or taxes on the labour employed or the compensation of employees paid; and
(iii) Taxes and duties on imports that become payable when goods enter the economic territory by crossing the actual frontier or the customs frontier or when services are delivered to resident units by non-resident units.

3.41 At the level of an individual enterprise, taxes on production are recorded as being payable out of the enterprise's value added. In the past, such taxes were described as "indirect taxes" on the grounds that they can be passed on, in whole or in part, to other institutional units by increasing the prices of the goods or services sold. It is difficult to measure and generalize about the true incidence of this sort of taxes.

3.42 Taxes payable on production and imports are recorded under "uses" in the Generation of Income Account, while the receipt of taxes is recorded under "resources" in the Allocation of Primary Income Account of general government. In the generation of income account, taxes on imports are recorded only at the level of the total economy as they are not payable out of the value added of domestic producers. Moreover, at the level of an individual institutional unit or sector, only those taxes on products that have not already been deducted from the value of output of that unit or sector need to be recorded under uses in its Generation of Income Account. Such taxes, owever, vary depending on the way in which output is valued. When output is valued at basic prices, all taxes and subsidies on products payable or receivable on the goods or services produced as outputs are excluded from the value of that output and hence from the value added derived from it. They do not therefore appear under "uses" in the Generation of Income Accounts of the units or sectors concerned, but are recorded only at the level of the total economy, in the same way as taxes on imports. On the other hand, when output is valued at producers' prices, all taxes or subsidies on products payable or receivable on outputs have to be recorded under "uses" in the Generation of Income Accounts of the units or sectors concerned, except invoiced VAT or similar deductible taxes as these are always excluded from the value of output. Non-deductible VAT and similar taxes are recorded under uses only at the level of the total economy, in the same way as taxes on imports.

3.43 Other taxes or subsidies on production -- i.e. taxes payable on the land, assets, labour, etc. employed in production -- are not payable per unit of output and are therefore never deducted from the value of output. They are always recorded as being payable out of the value added of the individual producers or sectors concerned.

Subsidies

(see paragraphs 7.71 to 7.79 of the 1993 SNA)

3.44 Subsidies are current unrequited payments that government units, including nonresident government units, make to enterprises on the basis of the levels of their production activities or of the quantities or values of the goods and services which they produce, sell or import. Subsidies are receivable by resident producers or importers. In the case of resident producers subsidies may be designed to influence the producers' levels of production, the prices at which their outputs are sold or the remuneration of the institutional units engaged in production. Subsidies are equivalent to negative taxes on production so far as their impact on the operating surplus is in the opposite direction to that of taxes on production. The subsidy may be a specific amount of money per unit of a good or service or it may be calculated ad valorem as a specified percentage of the prices per unit. A subsidy may also be calculated as the difference between a specified target price and the market price actually paid by a buyer.

3.45 The 1993 SNA does not recognize consumer subsidies, all subsidies being treated as payable to producers. Any current transfers that governments make directly to households as consumers are treated as social benefits. Subsidies do not include grants that governments may make to enterprises in order to finance capital formation or to compensate them for damage to capital assets. Such grants are treated as capital transfers.


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