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Department of the Parliamentary Library

Background Paper 10 1996-97

Easy Guide to the National Accounts

Michael Warby Statistics Group

Abbreviations

ABS Australian Bureau of Statistics GDP Gross domestic product GDP(A) Gross domestic product-the average GDP(E) Gross domestic product-expenditure approach GDP(I) Gross domestic product-income approach GDP(P) Gross domestic product-production approach GNP Gross national product GOS Gross operating surplus IPD Implicit price deflator

Contents Introduction

1 What are the National Accounts?

1.1 Background

1.2 Some Terms

1.3 Measuring Economic Activity

1.4 The National Accounts in Brief

1.5 Sectoral Accounts

1.6 Adjusting for Inflation

1.7 Terms of Trade

1.8 Original, Seasonally Adjusted and Trend

1.9 Historical Tables

1.10 ABS National Account Publications

2 The Conceptual Framework

2.1 A System of National Accounts

2.2 Production in the National Accounts

2.3 Exclusions

2.4 Imputations and Non-Market Valuations

2.5 Gross Domestic Product

2.6 Keynesian Aggregates

3 Domestic Production Account

3.1 Contents

3.2 Receipts Side of the Domestic Production Account

3.3 Payments Side of the Domestic Production Account

3.4 Examples-economic growth and its components

4 National Income and Outlay Account

4.1 Contents

4.2 Income Side of the National Income and Outlay Account

4.3 Disbursement Side of the National Income and Outlay Account

4.4 Examples-Saving

5 National Capital Account

5.1 Contents

5.2 Receipts Side of the National Capital Account

5.3 Payments Side of the National Capital Account

5.4 Examples-Investment and Saving

6 Overseas Transactions Account

6.1 Contents

6.2 Payments Side of the Overseas Transactions Account

6.3 Receipts Side of the Overseas Transactions Account

6.4 Examples-Openness of the Economy

Appendix-Selected ABS National Accounts Publications

Introduction The national accounts published by the Australian Bureau of Statistics (ABS) represent an attempt to present in a useful and timely way a statistical picture of income, expenditure and economic production in Australia.

This Guide seeks to explain the contents and range of the national accounts. It does not presume any prior economic knowledge.

The national accounts aggregate a vast array of transactions in order to present information on the Australian economy which is informative and useful for policy purposes. The national accounts have a wide range of data collections feeding into them, covering such diverse areas as retail sales, motor vehicle registrations, house construction, wages, profits, capital expenditure and so on. The national accounts constitute a framework for putting these partial indicators into a coherent form, without, for example, double-counting an item of production. Because the national accounts sit on top of these other collections, there are difficulties in getting information in a timely way and the national accounts are therefore subject to revisions.

It is undoubtedly true that people often comment on particular economic statistics, including national accounts statistics, without understanding the context in which they operate-the limitations of the data and the conceptual links with other factors. There are many problems with measurement in compiling the national accounts due to such things as coverage problems and reporting errors.

That some people misuse statistics, however, is not a reason to refuse to collect them and, as the examples in this background paper illustrate, there is much interesting and useful information in the national accounts.

1 What are the National Accounts?

1.1 Background The national accounts published by the Australian Bureau of Statistics (ABS) represent an attempt to measure in money terms the total amount of economic production in Australia and to provide measures of income and expenditure. They measure different components of national economic activity in much the same way as company accounts or household accounts record spending and income for businesses and families, but on a much larger scale.

The ABS attempts to collate the economic transactions of firms, households and governments in various national totals (known as national aggregates) to get an overall picture of economic production in Australia. A large range of statistical collections feed into the national accounts.

There are great difficulties in getting the appropriate information, particularly on a timely basis. This is why the national accounts are subject to considerable revisions over time. (The trade-off between timeliness and accuracy is a general problem for statisticians.)

There are also various problems of definition and measurability which affect aspects of the national accounts.

The total final value of all goods and services produced or imported in Australia is defined as the national turnover of goods and services. The main national accounting identities which describe the various components of national turnover are shown in the chart below. The chart shows the relationship between these identities (but not their relative size) and is useful for understanding several of the terms used in this Guide.

1.2 Some Terms The following terms appear frequently in the national accounts:

balancing item-an item put in to make the two sides of an account balance. Accounting logic dictates that accounts must balance. Any imbalance implies errors or omissions in the data used to compile the accounts or is due to a key concept not being directly observed.

capital-a term used in two different ways in mainstream economics: ● goods or other assets (other than land) which are used to produce goods and services but which are not totally used up in the course of production in a given time period. In standard economic language such capital is the produced means of production (as distinct from those goods used up in the course of production in a given time period, which are known as intermediate goods). This form of capital is referred to in the national accounts as fixed capital to distinguish it from-

●

●

money the owner makes available for investment (e.g. in the form of expenditure on capital) rather than using it for personal consumption. ●

Both meanings are used in this Guide.

flow-amount occurring over a particular time period (e.g. expenditure for the year ended 30 June).

gross-total without deductions (e.g. gross operating surplus (GOS), the national account equivalent of profit, is measured before any deduction for the consumption of fixed capital).

net-total after deductions (e.g. net operating surplus is GOS less the consumption of fixed capital).

residual-a measure found by subtracting one measure from another. For example, if income is measured at $1000, expenditure is measured at $900 and saving is estimated as the excess of income over outlays (i.e. $1000 - $900 = $100) then saving is a residual.

saving-the excess of income over outlays. (This constitutes net saving and is not to be confused with gross saving(1) which is the sum of net saving and the consumption of fixed capital.)

stock-amount existing at a particular time (e.g. value of assets at 30 June).

unrequited transfer-a transfer (e.g. of money, goods or services) from one agent to another which does not involve a specific quid pro quo such as reciprocal receipt of goods or services or the repayment of a debt. Gifts, taxes, foreign aid and funds migrants bring to Australia are all unrequited transfers.

value added-the addition to the value of a product (or service) at a given stage of production. It is measured as the difference between sales revenue and the cost of materials used to make the product. For example, if wheat is bought at $600 a tonne and turned into $1000 worth of bread, the value added (ignoring other ingredients) is $1000 - $600 = $400.

1.3 Measuring Economic Activity In theory, there are three ways to measure in money terms all economic production in Australia during a given time period. The first is to add up the total money value of the production of all goods and services, i.e. the value added at each stage of production-this produces GDP(P). The production measure of GDP is used for industry accounts and is important in the production of constant price measures (see 1.6).

The second is to add up all income received from the production of goods and services (wages and salaries, taxes on goods and services minus production subsidies, and profits)-this produces GDP(I).

The third is to add up all expenditure on goods and services (consumption, capital expenditure, increase in stocks, plus export income minus expenditure on imports)-this produces GDP(E). In each case, care has to be taken to ensure that output is not double-counted.

In theory, these three approaches will produce the same result. (The ABS booklet A Guide to the Australian National Accounts, Cat. No. 5235.0 provides more detail on the three approaches.) In practice, the three measures produce slightly different results. The ABS therefore publishes an average of the above three approaches known as GDP(A). GDP(A), measured at constant prices (see 1.6), is the ABS preferred indicator of economic growth.

The difference between the measure of all income from the production of goods and services and the measure of all expenditure on goods and services is known as the statistical discrepancy. It represents the net effect of deficiencies in the data sources, not the gross effect, as it does not include those errors in the two measures which operate in the same direction. During the past ten years the statistical discrepancy has ranged between -0.8 and 1.4 per cent of measured

GDP(I).

The key data feeding into the national accounts come from business data collections. A firm's accounts arrange information around income and expenditure and the returns to the firm's owners. The national accounts takes data and aggregates and re-arranges these to emphasize production and the way in which the income from production accrues to the economy's stakeholders (labour, capital owners, government) and is expended by them.

The unit of measurement used in the national accounts is the dollar. The use of this unit of measure affects what is and is not included in the accounts (see 2.4). Another difficulty with use of the dollar as the unit of measurement is that the value of the dollar is not constant from year to year (see 1.6).

1.4 The National Accounts in Brief There are four main summary accounts in the national accounts: ● domestic production account; ● national income and outlay account; ●

national capital account; and ● overseas transactions account. ●

These accounts are double entry accounts (i.e. each entry has a counterpart entry) and are part of the carefully designed closed system which is the national accounts. The conceptual background to the accounts is outlined in Section 2. A more detailed examination of the accounts is given in Sections 3 to 6.

Brief summaries of the four accounts are given below:

The domestic production account is a summary of all the economic transactions which take place in Australia. On the receipts side it shows domestic sales of goods and services produced in or imported to Australia. On the payments side it shows the costs of production, viz. wages, salaries and supplements, gross operating surplus and indirect taxes less subsidies. This account records the level of GDP. The statistical discrepancy is the balancing item in this account.

The national income and outlay account shows on the income side the various types of income received (wages, salaries etc.) and on the disbursement side the uses to which that income is put (consumption or saving). This account records the level of national income. Saving (specifically net saving) is the balancing item in this account.

The national capital account shows on the receipts side, the consumption of fixed capital (which forms part of the gross operating surplus in the domestic production account) and saving (from the national income and outlay account). On the payments side it shows purchases of capital goods, the increase in stocks of goods and net lending overseas. This account records the level of gross capital accumulation in Australia-the additions to national wealth that result from investment in durable fixed assets and from investment resulting in an increase in stocks and materials.

The overseas transactions account records transactions by Australian residents with overseas economic agents (firms, households, governments). Receipts from overseas for exports etc. are recorded on one side, payments to overseas agents for imports etc. are recorded on the other. Net lending to overseas-an item which records the net provision of capital to (or from) overseas during the relevant time period-is the balancing item in this account. (In Australia's case, such lending is usually negative and therefore constitutes borrowing from overseas.)

1.5 Sectoral Accounts In addition to the accounts covering the whole of Australia, the ABS also produces State and sectoral accounts. The sectoral accounts cover particular types of economic units-households (including unincorporated enterprises), general government, corporate trading enterprises (including public trading enterprises) and financial enterprises. (The rest of the world also constitutes a notional sector of the economy.) These sectoral accounts are particularly important for the national capital account, as its receipts side is dominated by items from the sectoral income and outlay accounts.

1.6 Adjusting for Inflation The national accounts record the level of economic production in Australia in money terms. This is not a constant unit of measure because the amount of goods and services a given amount of money can purchase is reduced over time by inflation. The ABS therefore presents national accounts data in two forms. The first is in current prices or the dollars in which the transaction actually occurred. These are also known as nominal dollars. Nominal just means the dollar values

have not been adjusted for inflation, i.e. the number of dollars takes precedence over their actual purchasing power.

The other way the ABS presents national accounts data is in constant or average price terms. The ABS adjusts the nominal dollar amounts to some constant unit of measure, i.e. the average prices prevailing in a selected base year (currently 1989-90). Money values adjusted for inflation are often also called the value in real terms because, at least notionally, their purchasing power in terms of goods and services remains the same.

The ratio of a national accounting aggregate (such as GDP) at current prices to its constant price equivalent is known as an implicit price deflator (IPD). Within the national accounts there are many IPDs and they each refer to a different sector of the economy. IPDs provide an estimate of the price change between the base year and any other period.

IPDs can be used to adjust various aggregates for inflation. A simple example is given below:

In 1995-96, Commonwealth budget outlays in Australia totalled $126.7 billion-$4.7 billion or 3.8 per cent more than in 1994-95, when they equalled $122.0 billion. A component of this increase, however, may be attributed to inflation. To determine whether there had been an increase in real terms (i.e. after adjusting for inflation) it is necessary to express outlays in some constant unit of measure for both years.

The relevant deflator to use in this situation is the implicit price deflator for GDP. This deflator equalled 112.6 in 1995-96 and 109.6 in 1994-95. By definition the IPD for 1989-90=100. Using this information, it is possible to express outlays in both years at average 1989-90 prices as follows:

Outlays in 1994-95 at average 1989-90 prices = $122.0 x 100 / 109.6 = $111.3 billion

Outlays in 1995-96 at average 1989-90 prices = $126.7 x 100 / 112.6 = $112.5 billion

Therefore the increase in real outlays between 1994-95 and 1995-96 was 1.1 per cent.

Another method of adjusting for inflation is to express all dollar amounts in terms of the average prices of the latest year. Hence, outlays in 1995-96 remains at $126.7 billion while outlays in 1994-95 is expressed in terms of average 1995-95 prices. Therefore:

Outlays in 1994-95 at average 1995-96 prices = $122.0 x 112.6 / 109.6 = $125.3 billion

Outlays in 1995-96 = $126.7 billion

Therefore the increase in real outlays between 1994-95 and 1995-96 was 1.1 per cent.

Hence, whereas the increase in nominal outlays between 1994-95 and 1995-96 was 3.8 per cent, the increase after adjustment for inflation was just 1.1 per cent. Another way of expressing this is to say that the increase in the volume of outlays (as opposed to value) was 1.1 per cent.

1.7 Terms of Trade An important use of implicit price deflators is to calculate the terms of trade. The ABS calculates an IPD for Australia's exports of goods and services and an IPD for its imports of goods and services. The terms of trade measures changes in the real purchasing power of Australian production on world markets. Australia's terms of trade is the ratio between the IPD for exports and the IPD for imports. A fall in the terms of trade means the prices received for Australian exports have fallen relative to the prices paid for imports to Australia (i.e. Australia must export more to purchase the same amount of imports). A rise in the terms of trade means the prices received for Australian exports have risen relative to the prices paid for imports to Australia (i.e. Australia can purchase more imports with the same amount of exports).

1.8 Original, Seasonally Adjusted and Trend Quarterly national accounts figures are published in original, seasonally adjusted and trend terms.

Original figures are the original numbers as collected before any adjustments are made to calculate seasonally adjusted or trend figures.

Seasonally adjusted means that the original data have had predictable influences (such as holidays, harvest cycles, taxation cycles etc.) removed. The adjustment is made to provide a clearer indication of whether a movement from quarter to quarter in the original figures represents a known pattern (i.e. seasonal factor), a random effect or some significant shift. By adjusting for seasonal patterns, we get some indication of the significance of quarterly movements.

Trend means that one-off irregular movements or random effects which are still present in the seasonally adjusted figures are removed. This is done by smoothing the seasonally adjusted figures by applying a weighted moving average. Trend figures allow us to see more clearly turning points in economic cycles. Unfortunately, due to the properties of moving averages, the most recent observations are calculated using a hybrid averaging process and so are more likely to be revised as more figures become available.

1.9 Historical Tables At the back of its annual national accounts publication (Cat. No. 5204.0), the ABS provides a table of estimates for gross domestic product, gross national expenditure and gross fixed capital formation back to 1901. Other data are published back to 1948-49.

1.10 ABS National Account Publications The ABS publishes a range of publications on the national accounts or parts thereof. These are listed in the relevant section of the ABS Catalogue of Publications and Products (Cat. No. 1101.0). A selected list of such publications is provided as an appendix to this paper.

2 The Conceptual Framework

2.1 A System of National Accounts The Australian national accounts is based on the System of National Accounts (SNA) developed by the United Nations. The SNA was first published in 1953 and fully revised in 1968 and again in 1993.(2) The Australian national accounts represents an attempt to aggregate national economic activity in ways which economic theory suggests is appropriate and which is useful for policy makers.

2.2 Production in the National Accounts Production is the process whereby labour, natural resources, accumulated capital assets and knowledge are applied to the provision of goods and services. It includes the application of services to add money value to goods (e.g. transport, merchandising services) or services which are bought and sold in their own right (e.g. the services of teachers, doctors or plumbers).

2.3 Exclusions While the national accounts are notionally an attempt to measure all production, certain activities are excluded from the core accounts. These include unpaid domestic labour (e.g. housework) and illegal economic activity (e.g. sale of illegal narcotics). The former are excluded on conceptual grounds, the latter for practical reasons.

It is also important to realise that the national accounts only provide information on the productiveness of the Australian economy. They do not, except partially and indirectly, provide information on the well-being of Australians. For example, the birth of a child decreases per capita GDP, yet it is likely to be a source of great happiness to family and friends. Similarly, a choice of leisure over work may decrease income but increase personal welfare. It should be noted that the national accounts make no distinction between social goods (such as recreational activities and housing improvement) and social bads (such as natural disasters and illness). If they generate economic transactions then they are recorded as activity in the national accounts.

Finally, there are some exclusions which make national accounting concepts somewhat different from normal usage. For example, for the purpose of calculating GDP, interest received is not included as part of income while interest paid is not included as part of the expenses in earning income (since interest is neither expenditure on, nor income from, goods or services exchanged within the time period of the accounts).

2.4 Imputations and Non-Market Valuations Generally, economic activities are valued in the national accounts at their market price. Some economic activities, however, such as many government services and activities of non-profit organisations, are not offered in the market. In such cases, the activities are valued at their production cost, i.e. the wages and salaries paid plus the cost of purchased goods and services used plus an allowance for the consumption of fixed capital.

For some goods and services not sold in the market place, an imputed value is derived. This is done where the ABS believes there is a reasonably satisfactory basis for valuing the implied transaction. Imputations are made for rent of owner-occupied dwellings, income received in kind, home improvements and producer-consumed goods and services as well as services by financial institutions for which explicit charges were not made.

2.5 Gross Domestic Product The most widely recognised national accounting aggregate is gross domestic product. The word gross means that no deduction is made for the consumption of fixed capital used in production-also known as economic depreciation. Thus the gradual using up of the economy's productive assets is not taken into account in GDP (partly because of difficulties of measurement and partly because of international differences in how consumption of fixed capital is measured). The word domestic means that it covers only production within Australian territory. This differentiates GDP from Gross National Product (GNP)(3) which covers all income to residents of a country regardless of where the income is accrued. Hence:

GNP = GDP + residents' income from overseas property or productive activity - income paid to overseas residents

That is:

GNP = GDP - net income paid overseas.

As Australia has been a net importer of capital, GDP is bigger than GNP, since the importation of capital has been financed in part by the sale of Australian assets. In countries which have been net exporters of capital, GNP is larger than GDP.

GDP seeks to measure economic production free of duplication. Therefore, all goods and services which are used up in the course of production by producers are treated as intermediate purchases ( intermediate consumption) and deducted from the calculations.

In summary, GDP is the total market value of goods and services produced in Australia in a given time period, after deduction of the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital.

2.6 Keynesian Aggregates National accounts statistics have been developed from the macroeconomic analysis of John Maynard Keynes. It is based on key Keynesian aggregates such as private consumption ©, government consumption (G), investment (I), gross saving (S), exports (X) and imports (M). An example of basic economic analysis using these aggregates is the following analysis of the connection between capital flows (saving and investment), the external balance on goods and services (X - M) and net income paid or transferred overseas (N).

The basic equation for GDP is:

GDP = C + G + I + (X - M) (1)

That is, total domestic production is equal to private and government consumption of (i.e. expenditure on) goods and services plus expenditure on capital goods and stocks (investment) plus expenditure on exported goods and services but not including expenditure on imported goods and services.

Since all income is either consumed or saved (or transferred overseas) GDP can also be expressed as:

GDP = C + G + S + N (2)

Rearranging (2) we get:

C + G = GDP - N - S

Substituting into (1):

GDP = (GDP - N - S) + I + (X - M)

Moving everything but the overseas balance on goods and services (X - M) and net income paid or transferred overseas (N) onto the left hand side we get:

GDP - GDP + S - I = X - M - N

Obviously GDP - GDP equals 0, so we get:

S - I = X - M - N

This tells us that the difference between saving and investment (i.e. Australia's net demand for capital) will equal export income less import expenditure less net income paid or transferred overseas.

3 Domestic Production Account

3.1 Contents The domestic production account is a summary of all the economic transactions which take place in Australia (see Table 1). This account records the level of gross domestic product. Items in the account are arranged from the viewpoint of the producer. Thus the first half of the table is the receipts side of the account since it records producer receipts from expenditure by final consumers on goods and services produced in Australia, i.e. the expenditure measure of GDP. The second half of the table is the payments side of the account since it records payments made by producers which in turn constitute the income that accrues to factors of production, i.e. the income measure of GDP.

Table 1. Domestic Production Account ($ million)

Year 1992-93 1993-94 1994-95 1995-96

Final consumption expenditure -

Private 254,277 266,479 284,003 303,836

Government 74,693 77,444 80,220 83,772

Gross fixed capital expenditure -

Private -

Dwellings 20,063 23,052 24,495 21,481

Non-dwelling construction 10,238 10,694 11,598 14,418

Equipment 27,153 29,527 34,833 36,133

Real estate transfer expenses 4,908 5,785 5,563 5,487

Public enterprises 10,337 9,509 11,383 11,281

General government 9,234 8,625 9,010 9,323

Increase in stocks -

Private non-farm -167 826 3,366 2,738

Farm -139 -139 453 690

Public marketing authorities 489 -7 -1,540 -191

Other public authorities -248 -105 246 16

Gross national expenditure 410,838 431,690 463,630 488,984

Exports of goods and services 76,396 82,361 86,502 97,822

less Imports of goods and services 77,993 83,910 96,148 99,518

Gross domestic product (GDP(E) 409,241 430,141 453,984 487,288

Statistical discrepancy -3,477 283 1,540 -1,112

Gross domestic product GDP(I) 405,764 430,424 455,524 486,176

Wages, salaries and supplements 200,766 210,955 223,960 240,062

Gross operating surplus -

Private trading enterprises -

Corporate 59,038 64,406 68,728 73,163

Unincorporated 43,055 44,224 44,585 49,314

Dwellings owned by persons 34,814 35,882 37,597 39,990

Public trading enterprises 19,084 19,899 20,909 19,857

General government 7,423 7,587 7,762 7,938

Financial enterprises - 8,362 8,084 7,114 9,293

less imputed bank service charge 12,514 11,617 11,576 13,952

Gross domestic product at factor cost 360,028 379,420 399,079 425,665

Indirect taxes less subsidies 45,736 51,004 56,445 60,511

Gross domestic product GDP(I) 405,764 430,424 455,524 486,176

Source: Table 23 of ABS, National Income Expenditure and Product (Cat. No. 5206.0)

3.2 Receipts Side of the Domestic Production Account Final consumption expenditure Private

Expenditure on all goods and services purchased by households not used for further production (food, clothing, household appliances, entertainment, imputed rent of owner-occupied dwellings etc.).

Government Expenditure on all goods and services purchased by governments not used for further production by government (the government is taken to be the consumer of its own output for all services not offered for sale for profit and which therefore do not have a market price).

(Plus) Gross fixed capital expenditure

Expenditure on capital goods (goods and services used in further production-buildings, machinery, equipment etc.) without any deduction for consumption of fixed capital during the production process.

Private

Dwellings

Private capital expenditure on dwellings.

Non-dwelling construction Private capital expenditure on non-dwelling construction.

Equipment Private expenditure on equipment.

Real estate transfer expenses Private expenditure on ownership changes for land and buildings.

Public enterprises Expenditure on all capital goods purchased by government trading enterprises and government financial enterprises.

General government Expenditure on all capital goods purchased by government departments and non-trading instrumentalities. By convention, expenditure on military hardware (the produced means of destruction, perhaps) is not included as capital expenditure but as final consumption expenditure.

(Plus) Increase in stocks

The net change in the value of goods held in storage, including work in progress.

Private non-farm

Change in value of goods held by non-farming private enterprises.

Farm Change in value of goods stored by farmers.

Public marketing authorities Change in value of goods stored by public marketing bodies.

Other public authorities Change in value of goods stored by all other government bodies.

(Equals) Gross national expenditure

The total expenditure in Australia on goods and services. It is a measure of total domestic expressed demand. It is gross national expenditure, as consumption of fixed capital is not deducted.

(Plus) Exports of goods and services

Income received by Australian residents for all goods and services produced in Australia but sold to non-residents.

(Less) Imports of goods and services

Expenditure on all goods and services produced overseas which are sold to Australian residents.

(Equals) Gross domestic product (expenditure approach)

Total expenditure, both in Australia and overseas, on goods and services produced in Australia.

(Plus) Statistical discrepancy

The item inserted to make sure the measured expenditure side of the domestic production account balances with the measured income side of the account.

(Equals) Gross domestic product (income approach)

See below.

3.3 Payments Side of the Domestic Production Account Wages, salaries and supplements

The total value of income from labour for production.

(Plus) Gross operating surplus

The income received by capital for production. It can be distributed as profits, interest, dividends etc. The term operating surplus is used instead of profits because it is the excess of gross output over costs incurred in producing that output. It is gross operating surplus as deductions for consumption of fixed capital have not been made.

Private trading enterprises

The amount by which sales exceed purchases for private firms. This is broken down into the operating surpluses for:

Corporate

Incorporated private bodies

Unincorporated Unincorporated private bodies

Dwellings owned by persons Private housing (gross rent, including rent imputed to be earned by owner-occupiers, less operating expenses, not including interest payments).

Public trading enterprises The difference between revenues and expenses of government trading enterprises.

General government The consumption of fixed capital by general government. By convention, the value of the output of general government is deemed to be the cost of producing that output, including the consumption of fixed capital. Since gross operating surplus is the excess of output over the cost of producing that output not including the consumption of fixed capital, that leaves general government's consumption of fixed capital as its GOS. The net operating surplus (GOS minus consumption of fixed capital) of general government is therefore zero.

Financial enterprises The difference between revenues, including the imputed bank service charge, over production costs incurred by financial enterprises.

(Less) Imputed bank service charge

The imputed service charge is a statistical construct equal to the excess of interest received on loans made from deposits over the interest paid on those deposits. It covers the way financial enterprises actually derive income for their services

(the margin between interest paid and interest received) rather than via their service charges (which are lower than their operating expenses-charges minus expenses would thus generate a negative operating surplus but for the imputed service charge).

The imputed service charge is deemed to be paid by borrowers and, in the sectoral accounts, is taken to be an operating cost (intermediate consumption) of a notional industry. In the domestic production account it is subtracted from gross operating surplus.

(Equals) Gross domestic product at factor cost

The income that accrues to the owners of the factors of production (labour, land, capital and enterprise). Factor cost is equivalent to the sale price of production excluding any indirect taxes or subsidies.

(Plus) Indirect taxes less subsidies

The excess of indirect taxes over subsidies paid for production.

(Equals) Gross domestic product (income approach)

The total income accruing from the production of goods and services in Australia.

3.4 Examples-economic growth and its components Apart from showing if the Australian economy as measured by GDP is growing or shrinking, and at what rate, the domestic production account is also useful for showing the components of growth and providing the values of the specific aggregates covered. To return to the simple equation covered in Section 2:

GDP = C + G + I + X - M

Where: C is private final consumption expenditure

G is government final consumption expenditure

I is gross fixed capital expenditure plus increase in stocks

X is exports of goods and services

M is imports of goods and services.

The ABS publication National Income, Expenditure and Production (Cat. No. 5206.0) gives the following values for the above aggregates for 1995-96:

Private final consumption expenditure = $303.8 billion

Government final consumption expenditure = $83.8 billion

Gross fixed capital expenditure = $98.1 billion, i.e. the sum of-private = $77.5 billion plus

public enterprises = $11.3 billion plus

general government = $9.3 billion

Increase in stocks = $3.3 billion

Exports of goods and services = $97.8 billion

Imports of goods and services = $99.5 billion

In 1995-96, substituting for C, G, I, X and M:

GDP = $303.8 + $83.8 + ($98.1 + $3.3) + $97.8 - $99.5 = $487.3 billion = GDP(E)

The ABS measured GDP(I) in 1995-96 at $486.2 billion. The difference is the statistical discrepancy of -$1.1 billion ($487.3 billion - $1.1 billion = $486.2 billion).

The statistical discrepancy affects the S - I = X - M - N identity we arrived at earlier (see Section 2), as measured GDP

includes the statistical discrepancy (sd). That is:

GDP = C + G + I + (X - M) + sd

so the equation we finished with in Section 2 is now:

S - I = X - M - N + sd

4 National Income and Outlay Account

4.1 Contents This account records the level of national income, i.e. the sum of all income of Australian residents arising from economic activity (see Table 2). The first half of the table is the income side of the account, while the second half is the disbursement side and shows how that income is used. The balancing item in the account is the nation's saving-referred to as net saving and not to be confused with gross saving which is the sum of net saving and the consumption of fixed capital.

4.2 Income Side of the National Income and Outlay Account Wages, salaries and supplements

The total value of income from labour for production.

(Plus) Net operating surplus

Gross operating surplus (see 3.3) less the consumption of fixed capital.

(Equals) Domestic factor incomes

The total income from the factors of production-labour, land, capital and enterprise.

(Less) Net income paid overseas

The sum of interest, dividends and labour income paid overseas minus interest, dividends and labour income received from overseas.

(Plus) Indirect taxes

The total value of taxes on the sale of goods and services.

(Less) Subsidies

The total value of grants made by general government to enterprises for the production of goods and services.

Table 2. National Income and Outlay Account ($ million)

Year 1992-93 1993-94 1994-95 1995-96

Wages, salaries and supplements 200,766 210,955 223,960 240,062

Net operating surplus 96,473 103,344 108,461 116,988

Domestic factor incomes 297,239 314,299 332,421 357,050

less Net income paid overseas 13,627 13,665 16,017 16,769

Indirect taxes 52,064 57,396 62,589 66,668

less Subsidies 6,328 6,392 6,144 6,157

National income 329,348 351,638 372,849 400,792

less net unrequited transfers to

overseas -662 -178 -524 -1,209

National disposable income 330,010 351,816 373,373 402,001

Final consumption expenditure -

Private 254,277 266,479 284,003 303,836

Government 74,693 77,444 80,220 83,772

Saving 1,040 7,893 9,150 14,393

Disposal of income 330,010 351,816 373,373 402,001

Source: Table 24 of ABS, National Income Expenditure and Product (Cat. No. 5206.0)

(Equals) National income

The total income received by Australian residents from economic activity. It therefore includes returns to labour and to capital.

(Less) Net unrequited transfers to overseas

The total of income paid overseas for which goods or services were not exchanged (taxes, pensions, donations etc.) minus the income received from overseas for which goods or services were not exchanged.

(Equals) National disposable income

The total income available to Australian residents.

4.3 Disbursement Side of the National Income and Outlay Account Final consumption expenditure Private

Expenditure on all goods and services purchased by households not used for further production (food, clothing, household appliances, entertainment, imputed rent of owner-occupied dwellings etc.).

Government Expenditure on all goods and services purchased by governments not used for further production by government (the government is taken to be the consumer of its own output for all services not offered for sale for profit and which therefore do not have a market price).

(Plus) Saving

Total net saving by households, governments and firms, i.e. the excess of income over outlays.

(Equals) Disposal of income

The sum of final consumption expenditure and saving since all income must either be consumed or saved.

4.4 Examples-Saving The national income and outlay account provides the estimated level of the saving, consumption and factor income aggregates. In conjunction with the domestic production account, it enables saving to be calculated as a percentage of GDP.

Since all income must be either consumed or saved (or transferred overseas) we know that GDP can be expressed in terms of the following equation:

GDP = (C + G) + S + N

Moving S over to the left hand side we get:

S = GDP - (C + G) - N

Where: C is private final consumption expenditure G is government final consumption expenditure S is gross national saving

N is net income paid or transferred overseas

In 1995-96 the relevant aggregates were:

Gross domestic product = $486.2 billion

Private final consumption expenditure = $303.8 billion

Government final consumption expenditure = $83.8 billion

Net income paid overseas = $16.8 billion

Net unrequited transfers = -$1.2 billion

Substituting into the above equation:

Gross national saving (S) = $486.2 - ($303.8 + $83.8) - $16.8 - (-$1.2) = $83.0 billion

= 17.1 per cent of GDP.

5 National Capital Account

5.1 Contents This account records the level of gross capital accumulation in Australia (see Table 3). The first half of the table is the receipts side of the account, covering the domestic sources of the financing of capital expenditure. The second half of the table is the payments side of the account and shows how saving was used.

5.2 Receipts Side of the National Capital Account Consumption of fixed capital

That part of gross product required to replace fixed capital used up in a given accounting period. It is also known as economic depreciation.

(Plus) Other saving

The sum of increase in income tax provision (the difference between income tax payable and income tax paid), undistributed income (the various forms by which the corporate trading enterprise sector and the financial enterprise sector save) and extraordinary insurance claims paid (insurance claims sufficiently in excess of normal claims to be considered separately).

(Plus) Household saving

The residual item in the household income and outlay account.

(Plus) General government surplus on current transactions

The residual item in the general government income and outlay account.

(Equals) Finance of gross accumulation

A measure of gross national saving.

Table 3. National Capital Account ($ million)

Year

1992-93 1993-94 1994-95 1995-96

Consumption of fixed capital 62,789 65,121 66,658 68,615

Other saving 5,844 11,622 11,984 10,744

Household saving 11,016 10,669 6,719 7,699

General government surplus on current transactions -15,820 -14,398 -9,553 -4,050

Finance of gross accumulation 63,829 73,014 75,808 83,008

Gross fixed capital expenditure -

Private -

Dwellings 20,063 23,052 24,495 21,481

Non-dwelling construction 10,238 10,694 11,598 14,418

Equipment 27,153 29,527 34,833 36,133

Real estate transfer expenses 4,908 5,785 5,563 5,487

Total private 62,362 69,058 76,489 77,519

Public enterprises 10,337 9,509 11,383 11,281

General government 9,234 8,625 9,010 9,323

Total gross fixed capital expenditure 81,933 87,192 96,882 98,123

Increase in stocks -

Private non-farm -167 826 3,366 2,738

Farm -139 -139 453 690

Public marketing authorities 489 -7 -1,540 -191

Other public authorities -248 -105 246 16

Total increase in stocks -65 575 2,525 3,253

Statistical discrepancy -3,477 283 1,540 -1,112

Net lending to overseas -14,562 -15,036 -25,139 -17,256

Gross accumulation 63,829 73,014 75,808 83,008

Source: Table 25 of ABS, National Income Expenditure and Product (Cat. No. 5206.0)

5.3 Payments Side of the National Capital Account Gross fixed capital expenditure

Expenditure on capital goods (goods and services used in further production-buildings, machinery, equipment etc.) without any deduction for consumption of fixed capital during the production process. This item from the receipts side of the domestic production account is further disaggregated in the national capital account as follows:

Private

Dwellings

Private capital expenditure on dwellings.

Non-dwelling construction Private capital expenditure on non-dwelling construction.

Equipment Private expenditure on equipment.

Real estate transfer expenses Private expenditure on ownership changes for land and buildings.

Public enterprises

Expenditure on all capital goods purchased by government trading enterprises and government financial enterprises.

General government Expenditure on all capital goods purchased by government departments and non-trading instrumentalities.

(Plus) Increase in stocks

The net change in the value of goods held in storage, including work in progress.

Private non-farm

Change in value of goods stored by non-farming private enterprises.

Farm Change in value of goods stored by farmers.

Public marketing authorities Change in value of goods stored by public marketing bodies.

Other public authorities Change in value of goods stored by all other government bodies.

(Plus) Statistical discrepancy

Included here since, by convention, the statistical discrepancy is defined as the excess of measured income over measured expenditure.

(Plus) Net lending to overseas

The net claim on foreign money by Australian residents (in economic theory, the excess of domestic investment over domestic saving). It is essentially the same as the current account deficit in the balance of payments, though there is one difference between the national accounts and balance of payments concepts (see Section 6).

(Equals) Gross accumulation

The increase in national wealth without any deductions being made for the consumption of fixed capital during the production process.

5.4 Examples-Investment and Saving The national capital account is a useful source of information on saving and investment in Australia.

One measure of aggregate business investment is private gross fixed capital expenditure on equipment and non-dwelling construction. In 1995-96 this came to $50.6 billion-$36.1 billion (equipment) plus $14.4 billion (non-dwelling construction). It is not a complete indicator of business investment since it excludes dwellings bought by firms, a component of private gross fixed capital expenditure on dwellings in the national accounts. An alternative measure of private investment is provided in the ABS publication New Private Capital Expenditure (Cat. No. 5625.0).

Gross saving may be calculated by summing together net national saving (i.e. saving in the national income and outlay account) and consumption of fixed capital. Gross saving appears in the national capital account as finance of gross accumulation. In 1995-96 the relevant aggregates were:

net national saving = $14.4 billion

consumption of fixed capital = $68.6 billion

Therefore:

gross national saving = $14.4 + $68.6 = $83.0 billion

The inclusion of net lending to overseas in the national capital account indicates the connection between domestic saving, domestic investment (i.e. capital expenditure) and flows of capital to and from Australia.

6 Overseas Transactions Account

6.1 Contents This account records transactions by Australians with overseas economic agents-firms, households, governments (see Table 4). It is derived from the detailed balance of payments current account produced by the ABS (see ABS, Balance of Payments, Cat. No. 5302.0).

Items in the overseas transactions account are named from the Australian viewpoint. The first half of the account is the payments side, which shows the use of current receipts from overseas, while the second half of the account shows the source of those receipts.

6.2 Payments Side of the Overseas Transactions Account Imports of goods and services

Expenditure by Australian residents on all goods and services produced overseas.

(Plus) Property income to overseas

Payment of interest and other debt charges to overseas lenders plus payment of earnings to overseas holders of equity in Australian assets. Also includes payment of royalties to overseas.

(Plus) Labour income to overseas

Payment of labour earnings to non-resident labour providers.

(Plus) Unrequited transfers to overseas

Transfer of funds to overseas agents for which no good or service was received in return (pensions, donations, gifts etc.).

Personal

Includes transfers of migrants' funds and personal donations, gifts, remittances etc. to overseas residents.

General Government Payments of aid, pensions, contributions to international organisations etc. by the Australian government.

Table 4. Overseas Transactions Account ($ million)

Year 1992-93 1993-94 1994-95 1995-96

Imports of goods and services 77,993 83,910 96,148 99,518

Property income to overseas 17,192 17,221 19,267 21,548

Labour income to overseas 311 283 389 441

Unrequited transfers to overseas -

Personal 1,002 1,041 1,131 1,195

General government 1,432 1,583 1,591 1,572

Net lending to overseas -14,562 -15,036 -25,139 -17,256

Use of current receipts 83,368 89,002 93,387 107,018

Exports of goods and services 76,396 82,361 86,502 97,822

Property income from overseas 3,379 3,328 3,088 4,610

Labour income from overseas 497 511 551 610

Extraordinary insurance claims - - - -

Unrequited transfers from overseas-

Personal 2,269 2,009 2,420 3,055

Income taxes 827 793 826 921

Current receipts from overseas 83,368 89,002 93,387 107,018

Source: Table 26 of ABS, National Income Expenditure and Product (Cat. No. 5206.0)

(Plus) Net Lending to Overseas

Net provision of capital to overseas agents. As Australia is historically a net importer of capital, this item is almost always negative. It is the same as the balance on current account as shown in the balance of payments but in national accounts form. (Net lending differs in concept from the current account deficit by the net amount of reinvested earnings.)

(Equals) Use of current receipts

The total of how Australia's current receipts from overseas have been used.

6.3 Receipts Side of the Overseas Transactions Account Exports of goods and services

Income received by Australian residents for all goods and services produced in Australia but sold overseas.

(Plus) Property income from overseas

Receipts of interest and other debt charges to Australian residents paid by overseas borrowers plus receipts of earnings to Australian holders of equity in overseas assets. Also includes receipts of royalties from overseas.

(Plus) Labour income from overseas

Overseas earnings of Australian labour providers.

(Plus) Extraordinary insurance claims from overseas

Insurance claims on overseas insurance companies sufficiently in excess of normal claims to be considered separately.

(Plus) Unrequited transfers from overseas

Transfers of funds from overseas agents for which no good or service was received in return (pensions, donations, gifts etc.).

Personal

Includes transfers of migrants' funds and personal donations, gifts, pensions, remittances etc. received by Australian residents.

Income Taxes Payments of income tax to the Commonwealth by overseas residents (usually as withholding tax).

(Equals) Current receipts from overseas

The total of Australia's current receipts from overseas.

6.4 Examples-Openness of the Economy The main source of information on Australia's overseas transactions are not the national accounts but the balance of payments publications which provide far more detail on transactions between Australian residents and overseas agents.(4) Balance of payments aggregates are generally the same as national accounts aggregates, though the labels are often different. The only conceptual difference is in the treatment of reinvested earnings, which explains the difference between net lending to overseas as recorded in the national accounts, and its equivalent, the balance on current account, as recorded in the balance of payments.

By comparing information from the overseas transactions account to results from the domestic production account or the national income and outlay account for the same period, it is possible to see how open the Australian economy is, i.e. its proportional involvement in the international economy. For example, the ABS estimated the Australian GDP(I) for 1995-96 as $486.2 billion. For the same year, the ABS estimated total value of Australian exports of goods and services as $97.8 billion or 20.1 per cent of GDP. Alternatively, the ABS estimated national disposable income for 1995-96 as $402.0 billion. During the same year, the ABS estimated expenditure by Australians on imported goods and services as being $99.5 billion or 24.8 per cent of national disposable income. These figures mean Australia is significantly affected by developments in international markets.

Returning again to the equation covered in Section 3:

S - I = X - M - N + sd

Where: S is gross national saving I is gross fixed capital expenditure plus increase in stocks X is exports of goods and services M is imports of goods and services N is net income paid or transferred overseas sd is the statistical discrepancy

Transferring the statistical discrepancy to the left hand side of the equation:

S - I - sd = X - M - N

In 1995-96 the values of S, I and sd were $83.0 billion, $101.4 billion and -$1.1 billion respectively. Using these figures we get:

S - I - sd = $83.0 - $101.4 - (-$1.1) = $17.3 billion

And $17.3 billion is equal to net lending to overseas.

The single most important point to remember in economics is the interconnectedness of economic phenomena. Taking the S - I = X - M - N + sd equation, a key point to remember is that all investment, without exception, must be funded from saving. If the demand for investment funds in Australia exceeds the supply of domestic saving, then funds must be obtained from abroad, i.e. Australia will draw upon foreign saving. If such capital inflow (or the increased foreign debt and/or foreign ownership that are its consequence) is viewed as a bad thing then either investment must be decreased (sacrificing future economic growth) or saving increased (sacrificing leisure and/or current consumption) or both.

Endnotes Also known as finance of gross accumulation-see 5.2. 1. This Guide describes the current situation as the ABS has not yet decided upon the extent to which the changes to the SNA contained in SNA-93 will be adopted. The ABS does not expect to complete revision of the ANA until

1998.

2.

Under the revised SNA, GNP becomes Gross National Income (GNI). As part of the revision of the SNA, this aggregate is now explicitly an income measure. 3.

Kryger, T. Easy Guide to the Balance of Payments , Parliamentary Library Background Paper No. 5, Oct 1996. 4.

Appendix-Selected ABS National Accounts Publications

Cat.No. ABS Publication Title

5204.0 Australian National Accounts: National Income, Expenditure and Product -Annual

5206.0 Australian National Accounts: National Income, Expenditure and Product -Quarterly

5209.0 Australian National Accounts: Input-Output Tables-Three yearly to 1992-93; annual thereafter.

5215.0 Australian National Accounts: Input-Output Tables (Commodity Details)-Three yearly

5216.0 Australian National Accounts: Concepts, Sources and Methods -Irregular

5220.0 Australian National Accounts: State Accounts-Annual

5221.0 Australian National Accounts: Capital Stock-Annual

5228.0 Australian National Accounts: Quarterly Data on Floppy Disk -Quarterly

5232.0 Australian National Accounts: Financial AccountsQuarterly

5234.0 Australian National Accounts: Multifactor Productivity-Annual

5235.0 A Guide to the Australian National Accounts -Irregular

5242.0 Australian National Accounts: State Accounts-Quarterly

5250.0 Australian Business ExpectationsQuarterly

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