GDP Estimates by three approaches by taoyni


									Module-I: LN4

                             Lecture Notes

                GDP Estimates by Three Approaches

                Training Course Material for e-Library on
                      System of National Accounts
                              March 2009
                     GDP Estimates by Three Approaches

        Estimate of Gross Domestic Product (GDP) of an economy can be compiled by
three approaches, namely production, income and expenditure as already explained in the
introduction. For the production and income approach one has to see in each of the
economic activity undertaken in the economy by the resident units what production and
value addition has been made and what income has been generated to the owners of
resources. It may be reiterated that gross value added (GVA) by a unit is its output less
intermediate consumption which is understood as production approach. GVA by a unit is
equal to the income generated in the unit which is the sum of the incomes received by the
owners of resources, in short the compensation of employees (received by human
resource) and gross operating surplus (received by other resources). In fact production
and income approach give same GVA, one viewed from production and the other viewed
from income approach. The sum total of GVA of all resident units in the economy and
taxes less subsidies on products becomes the GDP of the economy. For expenditure
approach one has to consider all final uses of the goods and services produced by the
resident units. The aggregate of all final uses comprising final consumption expenditure,
gross capital formation and exports net of imports is the GDP by expenditure approach
and is theoretically same as that obtained through production or income approach.
However in practice the GDP obtained through different approaches may differ due to the
use of various data sources for compiling the aggregates involved. We already discussed
the importance of the reconciliation exercise undertaken in the Supply and use tables.
Thus here we would elaborate on estimation of GVA by economic activity for covering
production and income approach, and estimation of GDP by expenditure approach

Estimation of Gross Value Added by Economic Activity

        The resident institutional units are engaged in the production of goods and
services. The producing units may be an enterprise including own account or
establishment. To have complete coverage the system advice is to use the International
Standard Industrial Classification of all Economic Activities (ISIC). It would be
worthwhile to first explain the various relevant terms used before describing the
estimation method.

Enterprise, Establishment and Industry
Enterprise – a unit in an institutional sector engaged in production
Establishment - a production unit defined by location and homogenous product,
enterprise or a sub-unit of enterprise
Industry – a group of establishments engaged in same economic activity or producing
same products

Activities of Establishment
Primary activity - production activity with highest share in output or gross value added
Secondary activity - other production activities

Ancillary activity - activity whose output is for internal use of the establishment or

Types of Output- Output from a unit may be either a good or a service
Goods- are generally tangible, transferable (ownership change), and can be stored
Service- are generally intangible, non transferable, and delivered as produced

        Production of goods and services is undertaken by units (establishment/ enterprise)
by acquiring required intermediate inputs (which are goods/services produced by other
units) and making use of the resources, namely human, produced, financial and natural.
The owners of the resources get compensated (primary inputs) for the use of the
resources in the production process. Thus the owner of human resource for contributing
labour gets compensation of employees, the owner of produced fixed resource gets
consumption of fixed capital (CFC), while owners of other resources get net operating
surplus. Individually owner of natural resource gets rent; owner of financial resource gets
interest. Besides the government puts taxes (net of subsidies) on the products produced.
The value of output is thus the sum of intermediate inputs and primary inputs (gross
value added). This value of output of goods and services produced can also be seen from
its disposition in the form of sales, change in inventory and own final use.

How to Measure Gross Output (GO) -
Gross Output can be measured in three alternative ways as physical output or as
disposition or at input cost.
Physical output- The GO is product of volume (unit) and price (value per unit)
GO = Quantity * Unit Price
e.g., GO of fish = Kg fish * average price per kg
GO of a Hotel = number of tourist nights * average room rate per night

Disposition - The GO is sum of all outflow of output, namely sales, change in inventory
and own final use
GO = Sales + Change in inventory + Own final use
Change in inventory = closing–opening inventory
Or,                  entry + withdrawal + normal losses
Own final use = own production for final consumption + own capital formation

Input cost - The GO is sum of all costs in production
GO = Intermediate consumption (IC)
                 + Compensation
                 + CFC
                 + Net operating surplus/ mixed income
                 + Taxes net of subsidies on production/product

        It may be clarified that the term Quantity means the number, or volume of the
goods produced or number of units of services provided, and Price means the value of a
unit of good or service provided depending upon the tax paid by producer. The price may
be at factor price (includes no tax); basic price (includes tax on production only);

producer price (includes tax on products paid by producer, not invoiced to buyer less

       Sales includes sale of goods and services for cash, credit, or barter. Change in
inventory means addition/reduction to inventory of finished goods, goods in process, or
goods for resale (closing inventory - opening inventory). Own final use means goods and
services used for own final consumption and own capital formation

Cost of Production
Intermediate input/consumption: is the value at purchaser’s price of goods and services
consumed as material inputs for the production. For example: seeds, fertilizers, raw
materials, fuel, electricity, water charges, chemicals, packing material, transport charges,
accounting / business services, food material in restaurants, linens in hotels, wrapper in
retail trade, insurance services charge, etc.

Compensation: comprises the wages, salaries, commissions and other benefits to
employees or workers for their labour input, includes social security or provident fund
contribution of employer for the employees and may be paid in cash or kind. For example
salaries of employees, wages of construction workers, bonus, tips of waiters in
restaurants, clothing allowance given to employees, food allowance, housing benefit,
gasoline allowance, etc..

Consumption of fixed capital: is the value of the replacement cost of fixed assets used for
production. It is the value of services of fixed asset in production; the asset is revalued
every accounting period .Consumption of fixed capital (CFC) is estimated on the
revalued assets. It is in fact an accounting entry because fixed assets are owned by

Taxes are transfer to government (something for nothing), while Subsidies are transfer
from government to producers (something for nothing) considered as negative taxes.
Types of taxes are as under
Taxes on production - Imposed on producers because of production
Taxes on income and wealth - Imposed on institutional units or persons on income
received or assets owned
Taxes on capital - Imposed on capital transactions which are not on regular basis

Taxes on products: are taxes imposed on finished product or service delivered. For
example: excise tax, sales tax, value added tax, service tax, import duties, export tax, etc.
Other taxes on production: are taxes imposed on inputs or other factors of production
used in production. For example: land tax, building tax, road tax, license to operate, etc.
Subsidies: are negative taxes granted by the government to reduce /stabilize the price,
maintain production and maintain returns to factors of production

Operating surplus: is the balance or residual when all the costs are deducted from the
value of goods and services produced. Includes incomes for the use of assets (produced,

non produced, financial) owned by producer and incomes due to assets of other
institutions put at the disposal of producers by other institutions

Mixed income: is the balance or residual in household own account enterprise; thus a
combination of compensation and operating surplus. It thus includes compensation and
operating surplus of household own account enterprise; and imputed compensation of
unpaid family workers engaged in the household enterprise production.

The goods and services may be market or non-market. Market goods and services bear
economically significant prices whereas non-market goods and services are provided by
the government or non-profit institutions serving households and are supplied either free
or at economically insignificant price.

GO of market goods and services: can be obtained as physical output multiplied by price;
or as disposition; or as cost with operating surplus.
        GO = quantity * unit price
             = sale + change in inventory + own final use
             = Intermediate input + compensation + taxes net of subsidies + CFC
                   + operating surplus
GO of non-market goods and services: is obtained only as input cost without operating
surplus. It is generally applied for general government units and non profit institutions
serving households
        GO = intermediate input + compensation + taxes net of subsidies + CFC

Valuation/Measurement of Output
Output has different valuations based on taxes net of subsidies included in the price of the

Factor price is the price without any tax. However the term factor price is not encouraged
by the 1993 SNA as well as 2008 SNA.
GO (factor price) = IC + compensation + CFC + Net Operating Surplus

Basic price is the price which includes the value of taxes less subsidies (T-S) on
GO (at basic price) = IC + compensation + CFC + + net operating surplus
                       + (T-S) on production

Producer’s price is the price which includes taxes net of subsidies on production and on
products which are paid by producers themselves
GO (at producer’s price) = IC + compensation + CFC + + net operating surplus
                              + (T-S) on production and products

Measurement of output of special industries
Cultivated assets: GO of cultivated assets can be obtained by disposition as
GO = Sales + change in inventory + own final use

For example consider a case of a cultivated forest where trees were planted and expected
to be cut for sale after 4 years. The following are the estimated value of opening, closing
stock, intermediate consumption and sales:
         Cultivated forest       Year                  1990 1991 1992 1993
                                Opening stock               0 100     250    400
                                Closing stock            100 250      400       0
                                Int. consumption          30    70     90    100
                                Sales                     0      0       0   700
The GO of cultivated forest is obtained as sum of sales, change in inventory and own
final use. GVA is then obtained as difference of GO and intermediate consumption.

Year                          1990    1991    1992   1993
Closing stock                 100       250    400      0
Less opening stock             -0     -100    -250   -400
= Change in inventory         100       150    150   -400
+ Sales                         0         0      0    700
+ Own final use                 0         0      0      0
= GO                          100      150     150    300
- II/IC                        30        70     90    100
= GVA                          70        80     60    200

Trade: is a service provided for making the goods available to the purchasers
GO = Sale - cost of goods sold
Cost of goods sold = Purchases of goods for resale + opening stock of goods for resale
                       - closing stock of goods for resale
Thus, GO = Sale + closing stock - opening stock - purchases of goods for resale

For example consider a retail store that recorded the following transactions in 2006:
Sale                           = 50,000
Purchases of goods for sale = 30,000
Opening stock = 4,000, Closing stock= 5,000
Utilities                      = 200
Supplies                       = 500
Other services paid            = 50
GO = 50,000 + (5000-4000) -30,000 = 21,000
GVA = 21,000 - (200+500+50) = 21,000 – 750 = 20,250

Banks: basically provide a service channeling saving of savers to the borrowers.
GO = service charges and other receipt from services + FISIM
Where, FISIM (financial intermediation services indirectly measured)
                 =Value of services integrated in the computation of interest on deposit
                      and loans
Imputed service charge = Interest received on loans - interest paid on deposits
FISIM: On Loans      = (actual - pure) interest rate
       On Deposits = (pure –actual) interest rate

For example consider that households deposited 500 mil and bank lent out 300 mil. The
bank charges 10% interest on loans while gives 6% on deposits. If the reference rate is
10 %, then what is the FISIM of bank?
FISIM rate on deposit = 10% - 6% = 4 percent
FISIM on Deposits      = 500 (0.04) = 20 mil
FISIM rate on loan     = 15% -10% = 5 percent
FISIM on Loans         = 300 (0.05) = 15 mil

There are other deviations in the estimate of FISIM depending upon the availability or
choice of reference rate and the data. The GVA of banking activity is obtained by
subtracting the intermediate consumption (inputs) from the GO.

Insurance: In non-life insurance only the risk is covered. Thus when the event happens
for which insurance has been made, claim is made. However in life insurance there is an
element of saving besides risk coverage. Thus besides claims the insurance company
pays the insured amount after completion of period to the survived person from its
actuarial reserve.
Thus for Non life or term insurance
 GO = premium payable + supplemental premium - claims
And for Life insurance -
 GO = premium payable + supplemental premium - claims - change in actuarial reserve

The GVA of insurance activity is obtained by subtracting the intermediate consumption
(inputs) from the GO.

Estimation of Gross Value Added
Direct estimation is simple when all required data is available. GVA is obtained as the
difference of GO and Intermediate inputs for the period. Thus GVA for the period t
                             GVAt = GOt – IIt

Where GOt is the value of gross output at period t, and IIt       is the value of all the
intermediate inputs used in production

Indirect Estimation is resorted to when details of intermediate inputs and / or output are
not readily available but are available for an earlier period. Thus when intermediate
inputs for are not available for the current period t, GVA for the period t is obtained by
multiplying the value of gross output for period t by a gross value added ratio (gvar) of
GVA and GO for latest available period under the assumption that the ratio gvar remains
constant during the period.
                               GVAt = GOt * gvar

Where GOt is the value of gross output at period t, and
                              gvar = gross value added ratio =

In situations where information on both intermediate inputs and GO are not available for
the current period t but are available for the previous period (t-1), GVA for the period t is
obtained from indirectly estimated GO and intermediate inputs for period t from that of
the period (t-1) making use of appropriate GO extrapolator and intermediate input

               GVAt = GOt-1 * GOE – IIt-1 * II E

Where, GVAt denotes gross value added at period t, GOt-1 denotes gross value of output
at period t-1, GOE denotes gross output extrapolator (data from survey, proxy statistics,
other output value indicator like GOt / GOt-1 ), IIt-1 denotes intermediate input at period
t-1, and II E denotes intermediate input extrapolator ( data on major input, other data
on input like IIt / IIt-1 ).

Another alternative way of indirect estimation of GVA for the period t is to move the
previous year GVA with the help of gross output value extrapolator under assumption of
no change in production technology, or with the help of Intermediate input extrapolator
under assumption of major intermediate input growth is the same as that of the output

              GVAt = GVAt-1 * GOt / GOt-1
                   = GVAt-1 * gross output value extrapolator
           (Assumption: production technology does not change)

              GVAt = GVAt-1 * IIt / IIt-1
                     = GVAt-1 * Intermediate input extrapolator
          (Assumption: production technology does not change, and
              major intermediate input growth is the same as that of the output)

Valuation of GVA

GVA at factor cost (is not a concept used explicitly in the system), Nevertheless it is the
value of GVA without any taxes or subsidies

GVA at basic price is the value of GVA with other taxes/subsidies on production

GVA at producer’s price is the value of GVA with other taxes/subsidies on production
and taxes/subsidies on products paid by producers

GDP at market price by Production approach
Denoting,  GVA as the sum of the GVA’s of all the different industries in the economy

GDP =  GVA (at basic price) + all taxes less subsidies on products

GDP at market price from GVA at various prices

(a) GDP =  GVA at producers’ prices + taxes less subsidies on imports + non-
         deductible VAT
(b) GDP =  GVA at basic price + all taxes less subsidies on products paid by producers

(c) GDP =  GVA at factor cost price + all taxes less subsidies on products + all taxes
         less subsidies on production

In cases (b) and (c) the item taxes, less subsidies on products include taxes and subsidies
on imports as well as on outputs

Data Sources for Compilation of GDP by Production

        Depending upon the statistical system and practice of economic statistics data
collection in the country a variety of data sources are used for compilation of GDP by
production approach. Some illustrative examples of data sources are listed below:

Censuses and Surveys: Economic Census which provides frame for the conduct of
various sample surveys besides important information on employment and economic
activities undertaken, Establishment Surveys on various economic activities which
basically provides industry wise data on outputs and material inputs for mining and
manufacturing activities on census or sample basis depending upon the system followed
by the country, Enterprise surveys that cover most important services sectors and provide
information on output and intermediate inputs of services produced, Agriculture Survey
conducted for capturing the agricultural and allied activities, Other special Surveys that
countries conduct to obtain relevant information for compilation of national accounts,
Employment Surveys which provide useful information on work force employed. The
information on workforce and value added per worker obtained from enterprise surveys is
very useful to capture informal sector activities.

Administrative data: Government Finance Statistics, Budget documents of Ministries and
Annual Reports of departmental and non-departmental undertakings of the government,
Taxes collected on various industries, Financial statement of companies, other by product
of administrative function, School enrollment, Other statistics collected as by-product of
administrative functions, Building construction permits.
Special Studies: Cost of production studies, Studies on new industries, Other special
Other sources: Expert opinion, Special research, Newspaper clippings

Illustrative Example of how VAT is applied in SNA Compilation

Let us consider three producers in an economy and a uniform 10 per cent rate of value
added tax (VAT). Due to value added tax the tax will be deducted to the extent it is
already paid on the intermediate inputs as shown in the following table

Transaction          Producer 1 Producer 2 Producer 3 Final         TOTAL
Intermediate input            0       100        300                       400
Value added                100           200         400                   700
(basic price)
Gross output               100           300         700               1100
VAT                         10            30          70                   110
Deductible                   0            10          30                    40
Non Deductible              10            20          40                    70
Value of sale              110           330         770
GVA                        110           220         440                   770
(producers price)
 PCE                                                          770          770

It may be clarified that the goods used as intermediate input are always at purchaser’s
price. The total of value added tax from the various flows is equal to the sum of non
deductible taxes. In the above table
Sum of GVA at basic price            = 700
VAT                                  = 70
GVA at basic price + VAT             = 770
Value of final demand (PCE, etc.) = 770

Illustrative Example on an Input-Output Framework
      To Agri      Ind       Serv IC        FC    CF        X-M      Total
Agr         10     20        7      37      45    20        28       130

Ind          15      40     10     65          30    45     60       200

Serv         5       10     25     40          34    10     36       120

II           30      70     42     142         109   75     124      450

Comp         34      50     33     117

T-S          6       25     5      36

GOS/MI 60            55     40     155

GO           130     200    120    450

Estimates of GDP from three approaches in the above IO framework

GDP by production by economic activity
GDP = GVA = (GO-II)agri + (GO-II)ind + (GO-II)serv
             = (130-30)   + (200-70) + (120-42)
             = 100     + 130      + 78    = 308

GDP by expenditure: Sum of final consumption expenditure, gross capital formation and
net exports.
GDP = FC + CF + X - M = 109 + 75 + 124 = 308

GDP by Income: Sum of primary inputs, compensation, gross operating surplus and taxes
less subsidies.
GDP = Comp. + T - S + GOS = 117 + 36 + 155 = 308
The above illustrates that in a static input output framework the three approaches of
estimating GDP give the identical result

Problems of compiling GDP
The following are the general problems countries face in compiling the estimates of GDP
Non availability of data for estimation particularly on subsistence agriculture and
informal sector
Lack of support from management
Inadequate knowledge on some industries
Lack of confidence in estimation
Not enough personnel
Pressure to get the perceived estimates of high ups

Estimation of Gross Domestic Product by Expenditure Approach

        Gross Domestic Product (GDP) by expenditure is important as it shows final
demand for goods and services that is stimulus to the economy. It is the use of supply of
goods and services and is link to welfare and production capacity as well as with the rest
of the world. GDP by expenditure estimates are based on the supply and use of goods and
services. The estimates are at purchaser’s prices GDP by expenditure estimate is equal to
GDP by economic activity at market or purchaser's price

       The final uses/ expenditures are of broadly three types, namely final consumption
expenditure, Gross domestic capital formation, and Net export. The final consumption
expenditures are of three types, namely Households final consumption expenditure,
General Government final consumption expenditure, and Non profit institutions serving
households final consumption expenditure. The Gross domestic capital formation has
three categories, namely Gross Fixed Capital Formation, Change in Inventory, and
Valuables. Net export consists of Exports of goods and services Less Imports of goods
and services.

         Contribution of the institutional sectors to GDP by final expenditures is in the
form of Final Consumption Expenditure which is the expenditure incurred by resident
institutional units on goods or services that are used for the direct satisfaction of
individual needs or wants or the collective needs of members of the community that may
take place on the domestic territory or abroad.

         The Final Consumption Expenditure is the expenditure on goods and services by
final consumer institutions, namely General Government, Households, and Non Profit
Institutions Serving Households (NPISH). The consumption expenditure on goods and
services is from supply of goods and services in the economy during the period.

        Time of recording and valuation of final consumption expenditure follows the
main principles in the system. Valuation is at purchasers’ prices in general except for
income in kind, retained goods or services for own consumption which is taken at Basic
prices. Time of recording is on accrual principle. Expenditure on a good is to be recorded
at the time its ownership changes while expenditure on a service is recorded when the
delivery of the service is completed.

Household Final Consumption Expenditure

       Household Final Consumption Expenditure is the consumption expenditure of
resident households in the economic territory from domestic production as well as from
imports of goods and services. It also includes consumption expenditure of resident
households in other economic territory which is considered as import of goods and

       Households final consumption expenditure is the expenditure on goods and
services acquired/used/ consumed for well being of the members of the households. The

goods and services acquired/used/ consumed may be in the form of food, clothing,
housing, transport, education, health, personal needs, durables, other miscellaneous
expenditures, or use of the own produced goods, acquired by barter or gifts. Households
final consumption expenditure includes: Purchase of goods and services, Own account
production of goods, Services of owner-occupied dwellings, Gifts received in kind,
Financial services directly charged, Insurance services, Pension funding services,
Payments by households for licenses, permits, etc. which are regarded as purchases of
services, purchase of output at not economically significant prices, e.g. entrance fees for
a museum.

        Households final consumption expenditure excludes Social transfers in kind,
Items treated as intermediate consumption or gross capital formation (which are the
expenditures by households owning unincorporated enterprises), Expenditure that an
owner-occupier incurs on the maintenance and repair of the dwelling, the purchase of
dwellings (which is treated as gross fixed capital formation), expenditure on valuables
(treated as gross capital formation), Purchase of land, Payments of taxes, such as licenses
to own vehicles, boats or aircraft and also licenses to hunt, shoot or fish, Subscriptions,
contributions and dues paid by households to NPISHs, Voluntary transfers in cash or in
kind by households to charities, relief and aid organizations.

        For compiling Households final consumption expenditure there are additional
conceptual issues requiring special treatment. For example the Hire purchases are
recorded as purchases made by the households for the full value of the good at the
moment it takes place. Lottery services are valued net of lottery winnings (since lottery
winnings are considered as transfer payment), Imported second-hand goods are treated in
the way the newly purchased goods are treated. In case of trading between households no
transaction is recorded. Subscriptions, contributions and dues paid by households to
NPISHs like trade unions, professional societies etc are treated as other current transfers.

        In the system Households are as a consumer as well as a producer (of
unincorporated enterprises of households, Owners of own occupied dwelling).
Expenditures on goods and services of households in their capacity as consumers are
alone the final consumption expenditure. Expenditures on goods and services of
households in their capacity as producers are in fact the intermediate consumption or
fixed capital formation.

       Households final consumption expenditure is a national concept and therefore
includes expenditures of residents abroad and excludes expenditures of nonresidents in
the country. Households final consumption expenditure is valued at purchasers price and
the consumption expenditure is net of sale by household of second hand goods (clothing,
household equipment, other goods previously purchased by households).

   The system recommends compilation of Households final consumption expenditure
adopting Classification of Individual Consumption by Purpose (COICOP) shown below
   1. Food, and non alcoholic beverage
   2. Alcoholic beverage, tobacco and narcotics

   3. Clothing and footwear
   4. Housing, water, electricity, gas and other fuels
   5. Furnishing, household equipment and routine maintenance of house
   6. Health
   7. Transport
   8. Communication
   9. Recreation and culture
   10. Education
   11. Restaurant and hotels
   12. Miscellaneous goods and services

    Household Final Consumption Expenditure is compiled by direct use of sources of
data, like Household expenditure survey, Food Balance Sheet, Basic and Foreign Trade
statistics, Retail trade statistics, or by Commodity Flow Approach which considers the
availability of individual good/service and then knocks out the intermediate consumption,
government final consumption, gross fixed capital formation and export of the
good/service, i.e., [Availability – IC – GC – GFCF – Exports]. However by this approach
one will get private final consumption expenditure rather than households final
consumption expenditure as it would include final consumption expenditure of NPISHs.
Some countries follow this approach if their household consumption expenditure survey
is not very sound or if they have poor/ no information on NPISH consumption.

Actual Final Consumption of Household
Actual Final Consumption of Household is the value of goods and services that the
household consumed or used and not necessarily paid. Thus it will include Household
consumption expenditure and the Social transfer receivable in kind from general
government and non profit institutions serving households.

Social Transfer-in-kind is
    the value of general government consumption expenditure which benefits
       individual households or its members
    the value of consumption expenditure of NPISH which benefits individual
       households or its members
    a transfer of services or goods for which the general government and NPISH have
       recorded as part of their consumption expenditure
    the value of social transfer in kind is recorded as income in resource side of
       Redistribution of Income Account of household and as expenditure in Use of
       Adjusted Disposable Income of household
    recorded in the use side of the redistribution of income account and subtracted
       from the consumption expenditure of in the use of adjusted disposable income of
       general government and NPISH

    The expenditure of government and NPISH that are classified under social transfer in
kind includes: Health services, Education, Culture, religion, social security and welfare
services, Housing and refuse collection, and purchases of goods or services of

government that is directly provided to households and not included in GO of any of
general government production activities

Example on How to Treat Social Transfer in Kind: Government spent 50 million on the
state university. The record showed there was revenue of 12 million from tuition, sale of
books, and other services provided to the public. The treatment would be
        Household consumption expenditure = 12 million
        Government consumption expenditure = 50 – 12 = 38 million
Government consumption expenditure for education is social transfer in kind
        Social transfer in kind = 38 million
        Household adjusted disposable income = HH Income + 38 million, and
        Household actual final consumption = 12 + 38 = 50 million

Household Consumption Expenditure
                     Uses                                                Resources
        Household consumption expenditure               Disposable income
                                                           Property income
                                                           Current transfer
        Household saving

Household Actual Final Consumption
                       Uses                                              Resources
        Actual Household consumption                    Adjusted disposable income
           Household consumption expenditure               Household disposable income
           Individual consumption expenditure of           Government and NPISH social transfers in kind
            government and NPISH
            ( Social transfer in kind)
        Household saving

Government Final Consumption Expenditure

        Government Final Consumption Expenditure (GFCE) is the gross value of output
less sale of goods and services of the following economic activities of general
government: Public administration, Education services, Health services, other related
services produced by general government. Government sector includes: General
administration, Government entities producing free or almost free services (public
education, health services and other services), and Non-profit institutions mainly
controlled and financed by government.

        Output of Government Sector can be in three forms, namely Non-market output,
Output for own final use, or Market output. Largely it is the non-market output. As
clarified earlier, output of non-market producers is measured at costs. Thus gross output
of government will be obtained as sum of intermediate consumption, compensation of
employees, and CFC, no operating surplus.

       Output = intermediate consumption + compensation of employees + other taxes
                     on production + consumption of fixed capital

       Coverage of Government Final Consumption Expenditure includes government
purchases intended primarily as current transfer in kind, not used as intermediate input of
production of services such as government purchase of food to be distributed to the
victims of flood, and government purchase of blankets to be distributed to the homeless.

Estimation of Government Final Consumption Expenditure (GFCE)
       GFCE = Total Output of Government Sector
                     - Own account gross capital formation
                     - Sales of goods and services (mostly non-tax fees)
                     + Benefits in kind (purchases of market goods and services to be
                        provided free to households)

Type of Government Consumption Expenditure
       Government consumption expenditure is classified into individual and collective
consumption expenditure:

Individual consumption expenditure - expenditure whose recipients are individual
persons or individual households (health services, education services, social security and
welfare, sports, recreation, culture, etc)

Collective consumption expenditure - expenditure for general population-public goods-
(public administration, defence, law & order-police, infra-structure & economic
development, R& D etc.)

The system recommends compilation of GFCF as per international standard
Classification of Function of Government (COFOG) listed below
   1. General public services
   2. Defence
   3. Public order and safety
   4. Economic affairs
   5. Environmental protection
   6. Housing and community amenities
   7. Health
   8. Recreation, culture and religion
   9. Education
   10. Social protection

        It is useful to also compile the GFCE by economic classification for analytical
purposes to have separate expenditures on: (i) Intermediate consumption, (ii)
Compensation of employees, (iii) Consumption of fixed capital, (iv) Sales (market
output), (v) Social benefits in kind, (vi) Own account capital formation, (vii) Gross
capital formation (purchased), (viii) Subsidies, (ix) Property income, (x) Social benefits
other than in kind (in kind), (xi) Other current transfers, and (xii) Capital transfers.

        For compiling estimates of GFCF generally the sources of data are Government
Finance Statistics, Statement of Revenue and Expenditure of national and local
government, National Budget Statement, Budget documents (Demand for Grants) of
Central Government (all Ministries), all State / Prefecture / Province/ State Governments
and all Local bodies

Non-Profit Institutions Serving Households (NPISH) Final Consumption Expenditure

        NPISH Final Consumption Expenditure is the value of services of NPISH less the
sale or receipt from goods and services. Expenditure is generally funded through
donations, current transfers, property income and operating surplus of market
establishment of NPISH. All expenditures of NPISH are taken as individual consumption
expenditure and is social transfer in kind to households. Final consumption expenditure
of NPISH equals output of NPISH less sale of goods and services

       FCE of NPISH = GO (NPISH) – Sales

   All Final consumption expenditure of NPISH is classified as individual consumption
expenditure. The system recommends compilation of NPISH Final Consumption
Expenditure as per international standard Classification of the Purpose of the NPISH
(COPNI) listed below
   1. Housing
   2. Health
   3. Recreation and culture
   4. Education
   5. Social protection
   6. Religion
   7. Political parties, labour and
   8. Environmental protection
   9. Services n.e.c.

Concept of Final Consumption in the System: SNA looks at the final consumption from
two perspectives:
     Final consumption expenditure depicting the expenditures that the units incur
     Actual consumption referring to consumption benefited irrespective of who made
Difference - lies in the treatment of certain goods and services financed by the
government or NPISHs but supplied to households as social transfers in kind

Actual Final Consumption
       Actual final consumption and final consumption expenditure of the household,
NPISH and general government differs due to social transfers in kind provided by the
general government and the NPISH to households. However the total actual final

consumption and final consumption expenditure of the three institutional sectors is the
Actual final consumption of households
               = Household final consumption expenditure
                 + Individual consumption expenditure of general government
                 + Individual consumption expenditure of NPISH

Actual final consumption of general government
                = Government final consumption expenditure
                  - Individual consumption expenditure of general government

Actual final consumption of NPISH
                = NPISH consumption expenditure
                  - Individual consumption expenditure of NPISH

Social transfers in kind: could be social benefit in kind or transfers of individual non-
market goods and services. Social benefits in kind are in form of social security benefits,
reimbursements on specified goods and services, other social security benefits in kind
except reimbursement, or Social assistance benefits in kind. Transfers of individual non-
market goods and services should be equal to outputs of government and NPISHs less
(sales and own-account gross capital formation)

 Relationship between concepts
                        Sector making expenditure
                                                          Actual final consumption
               Government         NPISHs      Households
                     X               X            X
 Individual                      (= Social
                 (= Social                               Households actual individual
consumption                     transfers in
                transfers in                                 final consumption
                   kind)           kind)

 Collective           X               0                0
                                                                   Government's actual
                                                               collective final consumption

             Government's                        Households
                          NPISHs final
 Total final final                               final       Actual final consumption =
consumption consumption                          consumption Total final cons. expenditure
             expenditure                         expenditure

Gross Domestic Capital Formation
       Gross Domestic Capital Formation (GDCF) Consists of Gross fixed capital
formation, Changes in inventories, and acquisitions less disposals of valuables. Gross in
GDCF means gross of CFC. Thus GDCF less CFC is Net Domestic Capital Formation
                     GDCF – CFC = NDCF
       The concept of Gross Domestic Capital Formation is the acquisition less disposals
of fixed assets by resident producers, more specifically the resident producers’

acquisitions, less disposals of non- financial produced fixed assets plus certain additions
to value of non-produced assets; major improvement of tangible non- produced assets;
and cost of transfer of ownership of non- produced assets.

        GDCF thus includes: new or existing fixed assets purchased, fixed assets
produced and retained for producers’ own use , new or existing fixed assets acquired
through barter, new or existing fixed assets received as capital transfers in kind, new or
existing fixed assets acquired by the user under a financial lease, major improvements to
fixed assets and existing historic monuments, natural growth of those natural assets that
yield repeat products, and negative values, i.e. disposals of fixed assets recorded as
negative acquisitions in the form of either existing fixed assets sold, or existing fixed
assets surrendered in barter, or existing fixed assets surrendered as capital transfers in

        Important issues that need to be to considered in compiling estimates of GDCF
are that capital assets are used repeatedly for production, including: animals, plants, etc.
The cultivated assets while growing are treated as addition to inventory, and treated as
fixed assets once production starts. Death and reduction of productivity is taken as CFC.
GDCF include produced assets acquired by purchases, barter, capital transfers and
produced for own use. Only transfer cost of non-produced assets are included in capital
formation. Household durables for household operated activities should be allocated to
GDCF while household durables for household’s own use should be allocated to
household final consumption expenditure (HFCE).

        Four broad types of GFCF are: (i) Acquisitions, less disposals, of tangible fixed
assets in the form of Dwellings, Other buildings and structures, Machinery and
equipment, and cultivated assets, e.g. trees and livestock; (ii) Acquisitions, less disposals,
of intangible fixed assets in the form of mineral exploration, computer software,
entertainment, literary or artistic originals, and other intangible fixed assets; (iii) Major
improvements to tangible non-produced assets, in particular those pertaining to land; and
(iv) Costs associated with the transfers of ownership of non-produced assets, like land
and patented assets.

        There are borderline cases on types of GFCF where one doubts whether the item
is a capital asset or consumption. To quote some borderline cases we may mention the
following which the system recommends for inclusion in GFCF: Acquisitions of
houseboats, barges, mobile homes and caravans used as residences of households and any
associated structures such as garages; Structures and equipment used by the military
(similar to those utilized by civilian producers) such as airfields, docks, roads and
hospitals; Light weapons and armored vehicles used by non-military units; Changes in
livestock used in production year after year, such as breeding stock, dairy cattle, sheep
reared for wool and draught animals; Changes in trees that are cultivated year after year,
such as fruit trees, vines, rubber trees, palm trees, etc.; Improvements to existing fixed
assets that go well beyond the requirements of ordinary maintenance and repairs; and the
acquisition of fixed assets by financial leasing .

        GFCF excludes: Transactions included in intermediate consumption such as
purchase of small tools; ordinary maintenance and repairs; purchase of military weapons
and their supporting systems; the purchase of fixed assets to be used under an operational
leasing contract; Transactions recorded as changes in inventories such as animals raised
for slaughter, including poultry; trees grown for timber (work-in-progress); Machinery
and equipment acquired by households for purposes of final consumption (final
consumption expenditure); Holding gains and losses on fixed assets (other changes in
assets); and Catastrophic losses on fixed assets (other changes in assets), e.g. destruction
of cultivated assets and livestock by outbreaks of disease (and not normally covered by
insurance) or damage due to abnormal flooding, wind damage or forest fires since these
are considered as other changes in volume.

       GFCF includes intangible fixed assets such as mineral exploration comprising
costs of actual test drilling, aerial or other surveys, transportation costs, etc.; computer
software and large data bases to be used in production for more than one year; literary
and artistic originals of manuscripts, renderings, models, films, sound recordings, etc.;
and costs of ownership transfer incurred by their new owner and consist of charges
incurred in taking delivery of the asset (new or existing asset) at the required location and
time, such as transport charges, installation charges, erection charges, professional
charges or commissions incurred, such as fees paid to surveyors, engineers, lawyers,
valuers, etc., commissions paid to estate agents, auctioneers, and taxes payable by new
owner on transfer of ownership of the asset

       Illustrative examples of major improvements to land, which is an important type
of GFCF are: Reclamation of land from sea by the construction of dikes, sea walls or
dams for this purpose; Clearance of forests, rocks, etc. to enable land to be used in
production for the first time; Draining of marshes or the irrigation of deserts by the
construction of dikes, ditches and irrigation channels; and Prevention of flooding or
erosion by the sea or rivers by the construction of breakwaters, sea walls or flood barriers

Time of recording and valuation of GFCF
       The system recommends time of recording for GFCF as the one when the
ownership of the fixed assets is transferred. Valuation of GFCF is at purchasers’ prices
including installation charges and other costs of ownership transfer. For GFCF produced
on own-account the valuation is at basic prices or at costs plus a mark-up for net
operating surplus or mixed income. The valuation for intangible fixed assets is made at
discounted future benefits.

Estimation methodology of GFCF
       Two broad ways of estimating GFCF are conventional approach and commodity
flow approach. In conventional approach information is collected from businesses and the
public sector largely based on the commercial accounting practice. In commodity flow
approach estimates of supply (output plus net imports of products adjusted for change in
inventories) are allocated to the components of uses. Due care and appropriate accounting
is made for parts of capital goods and partly (also used by households) capital goods.

Changes in Inventories
        Changes in inventories are measured at the value of the entries into inventories
less the value of withdrawals from the inventories less the value of any recurrent losses of
goods held in inventories. Categories of inventories are material and supplies, work-in-
progress, finished goods, and goods for resale.

        Time of recording should be consistent with the time of recording of other
transactions in products - intermediate consumption, output and GFCF. Valuation of
additions to inventories is at prices prevailing at the time of their entry and valuation of
withdrawals from inventories is made at prices prevailing at the time of withdrawal.
Holding gains/losses should be excluded in valuation.

        Prices Used in Change in Inventory
                      addition       withdrawal
Finished product      basic           basic
Goods in progress     basic           basic
Goods for resale      purchasers      purchasers
Raw materials         purchasers      purchasers
Supplies              purchasers      purchasers

Inventory valuation and measurement
        The system recommends inventory valuation at historic costs, based on business
accounts, or at weighted average cost. The historic cost method has two alternatives
First-In-First-Out (FIFO): where withdrawals are valued at prices of the oldest items and
stocks are valued at prices of recently purchased items.
Last-In-First-Out (LIFO): where withdrawals are valued at prices of the newest items and
stocks are valued at prices of the earliest purchases.
The weighted average cost considers information for both the value and volume of
inventories. The average prices are calculated on its basis. This price is used to derive the
book value figures at the end of the quarter.

An example for inventory valuation:

Consider the following basic data

(A)   Book values of sotck:
                        end September        1000
                        end December         1600

(B)   Inventories price index (base year = 100)
                               September      126
                               October        130
                               November       131
                                December 135

(C) Level of inventories at constant prices
                         end September       794 (1000 x 100/126)
                         end December       1185 (1600 x 100/135)
(D) Change in inventories at constant prices 391 (1185 - 794)
(E) Change in inventories at current
    replacement cost                         516 (391 x ((130+131+135)/3)/100)
(F) Holding gain                              84 (1600-1000)-516

Estimation of Change in Inventory
       = value of addition – value of withdrawal – recurrent losses
       = (volume of closing inventory – volume of opening inventory) * average price
               during the period
       = value at closing inventory – value at opening inventory

Estimation of Capital Formation on Non- Produced Assets
       Estimation of Capital Formation on Non- Produced Assets is made for the
improvement of non-produced assets, and transfer cost in change of ownership that
includes commission, taxes and other costs.

Acquisition less disposals of valuables

        Valuables are non-financial goods that are not used primarily for production or
consumption and do not deteriorate over time. These are acquired and held primarily as
stores of value. Types of valuables are: Precious stones and metals such as diamonds,
Non-monetary gold, platinum, and silver; Antiques and other art objects such as paintings
and sculptures; and other valuables such as jewellery fashioned out of precious stones
and metals, and collectors items

The following types of goods are to be recorded as acquisition or disposal of valuables
   Non-monetary gold, silver, etc. by (central) banks and other financial intermediaries
   The acquisition or disposal of valuables by enterprises whose principal or secondary
       activity does not involve the production or trade in such types of goods (i.e. this
       acquisition or disposal is not included in the intermediate consumption or fixed
       capital formation of these enterprises)
   The acquisition or disposal of valuables by households (i.e. such acquisitions are not
       included in final consumption expenditure by households)

Valuation of valuables
       Production of valuables is valued at basic prices; Acquisitions of valuables is
valued at the purchasers’ prices including any agents’ fees or commissions, and including
trade margins when bought from dealers. Disposal of valuables is valued at the prices
received by sellers excluding any fees or commissions paid to agents or other
intermediaries. Acquisitions less disposals between resident sectors cancel out, leaving
only agents or dealers margins

Exports and Imports of Goods and Services

    Broadly four kind of transactions are made with Rest of the World, namely Goods
and services (included in estimation of GDP by expenditure), Incomes (flows of factor
services: payment for resources of resident institutions used by rest of the world such as
labour income, investment income and rent of natural resources), Capital, and Financial

Transactions of Goods and Services with Rest of the World: There are two kinds of
transactions of goods and services with Rest of the World, namely Exports which are
flow of goods and services from resident units to non resident units, and Imports which
are flow of goods and services from non resident units to resident units. Transactions of
goods classified using Harmonized system (developed by International Customs
Association for tax purposes) or System of International Trade classification (SITC). The
transactions are recorded when transfer of ownership takes place. In practice when
recorded in Customs it crosses geographic boundary. It includes purchases of non
resident in economic territory.

Exports: Exports include both imports of goods and non factor services. Exported goods
are valued at f.o.b. (free on board, exclude value of insurance and freight) during change
of ownership or as the goods cross the customs boundary. Trade in non factor services
include provision of services to non residents on merchandising of goods, and transport,
insurance, hotels and restaurants, etc. Data on transaction of goods are taken from
customs manifest and institutions purchasing from local economy (embassies and non
resident institutions). Data on exports of services includes exports of non factor services
and purchases of non resident from resident institutions. Data on export of services are
taken from surveys or transactions from the banks, purchases of non residents in domestic
territory are recorded as travel in BOP. Exports could be understated by undervaluation,
smuggling, mis-declaration, under coverage and cross boarder trade and other unrecorded
flows such as e-commerce in services

Imports: Imports include both imports of goods and non factor services. Imported goods
are valued at c.i.f. (cost, insurance and freight) at customs boundary but national accounts
compilation removes insurance and freight and transfer to services to make it at f.o.b.
Imports of goods purchased by residents during travel to rest of the world are recorded as
services under travel. Data on imports of goods and services are understated by
smuggling, undervaluation, e- commerce, and under-recording of transactions, and
payment outside the banking system. Transactions of other services are difficult to
measure, e.g., communication, computer services (such as development of software) and
e- commerce.

        The system recommends some exclusion in transactions of goods and services
with rest of the world, namely Transactions of non resident units in the economy with rest
of the world, Flows of sample product, goods for exhibition, goods for repair and for rent,
Flows of goods of returning residents, Factor services (labour, financial resources, etc),
and Goods under operational leasing or for rent.

        The exports and imports are compiled as per Standard International Trade
Classification (SITC)
0 - Food and live animals
1 - Beverages and tobacco
2 - Crude materials, inedible, except fuels
3 - Mineral fuels, lubricants and related materials
4 - Animal and vegetable oils, fats and waxes
5 - Chemicals and related products, n.e.c.
6 - Manufactured goods classified chiefly by material
7 - Machinery and transport equipment
8 - Miscellaneous manufactured articles
9 - Commodities and transactions not classified elsewhere in the SITC
 I - Gold, monetary
II - Gold coin and current currency coin

Time of recording and valuation of exports and imports of goods

       Time of recording for exports and imports of goods in principle is when the
ownership of the goods is transferred. However in practice a change of ownership is
considered to occur at the time the parties to the transaction record it in their books or
accounts. This may not coincide with the various stages of the contractual process

        As regards valuation, imports and exports of goods are to be valued free on board
at the border of the exporting country (f.o.b.) which means basic prices plus the related
transport and distributive services up to that point of the border, including the cost of
loading on to a carrier for onward transportation plus any taxes less subsidies on the
goods exported.

Exports and imports of services: Exports of services are all services rendered by residents
to non-residents and Imports of services are all services rendered by non-residents to
residents. Type of services includes Transport, Tourism, and Other services such as
construction, business services, financial services, insurance, etc.



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