Transactions in products

Goods and services account

To analyse the creation, the destruction and the storage of wealth, the principal transactions are:

• Output which consists of the goods and services produced during the accounting period;
• intermediate consumption which consists of the value of the goods and services consumed as inputs by a process of production;
• final consumption which corresponds to the goods and services consumed to satisfy the needs of households;
• gross fixed capital formation which corresponds to the goods and services used for a long period in a process of production;
• changes in inventories which consist of the goods and services kept for later use;
• acquisitions less disposals of valuables which correspond to assets used as stores of value.

To take account of the exchanges with the rest of the world, it is necessary to add imports and exports which correspond to the trade of goods and services of the national economy with the rest of the world.

It is possible to present these transactions within the framework of an account, the goods and services account which, in a simplified form, is as follows:

This account is balanced because it describes the value of the products used in the economy during the period according to two points of view: the origin of the goods and services and their use.

Time of recording and valuation

Principle: The transactions in products have to be recorded when they occur.

Since national accounts aim to describe transactions during the accounting period, any other principle would not be acceptable. Moreover, it is the only principle which permits to simply link the transactions of national accounts with other elements like economic policy decisions.

Principle: goods and services are valued by the monetary expenditure that should be necessary to acquire them.

Indeed, the utility of a good or of a service, which is a necessary condition for a recording in national accounts, is really established if a user agrees to spend money to acquire it. However, the previous principle prevents to use the effective amount of money spent because the sale of a good can occur a long time after its production, i.e. at a price which is no longer significant of the utility of the good at the time of its production.

Therefore, to value transactions in products, national accounts generally use market prices, i.e. prices of similar products actually sold at the time of the transaction. When there is no market price, either because the product is free of charge, or because it is intended for the producer and that there is no similar product sold on the market, products are valued on the basis of their production costs.

Principle: The valuation of transactions is based on exchanges between economic agents accepted by mutual agreement.

The value of a product can be determined by the amount of money against which it can be exchanged only if the exchange is balanced. Generally, an exchange occurs only if, for each economic agent involved, what it receives is more useful than what it gives, so that it is difficult to determine whether an exchange is balanced or not. Therefore, national accounts adopt the voluntary character of the exchange as a criterion to decide whether an exchange is balanced or not. According to this criterion, an exchange is balanced if it is freely accepted by the two economic agents involved. Only balanced exchanges can be used to value products. Illegal activities such as drug trafficking and prostitution are incorporated into the system insofar as they are carried out on a voluntary, unconstrained basis.

Property: National accounts do not only describe monetary flows.

Indeed, output should be recorded in the accounts of a period even if it does not generate any cash flow during this period.

Production and output

Production is defined as an activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital and goods and services to produce goods and services.

Output consists of the products created during the accounting period. Output is to be recorded and valued when it is generated by the production process.

The output of a firm must not be confused with its sales. Indeed, output has to be recorded even if the product is not sold or even if the sale occurs later.

Intermediate consumption

Intermediate consumption consists of the value of the goods and services consumed as inputs by a process of production. For a firm, intermediate consumption does not generally come from its production but from its purchases. However, intermediate consumption must not be confused with purchases since goods can be consumed after their purchase. Products used for intermediate consumption should be recorded and valued at the time they enter the process of production.

Final consumption

Final consumption consists of the value of goods and services used for the direct satisfaction of individual needs or wants or the collective needs of members of the community.

For practical reasons covering the availability of basic data, households are supposed to consume immediately the products they buy. For example, a car is supposed to be consumed at the time of its purchase.

Gross fixed capital formation

Gross fixed capital formation consists of the part of goods and services, for example buildings and machines, produced as output from processes of production that will be themselves used repeatedly, or continuously, in processes of production for more than one year.

Gross fixed capital is a possible use of output. However, the gross fixed capital formation of a firm does not generally come from its own production, but from that of other firms. Thus, to be operational, gross fixed capital formation is defined as an acquisition. However, since a firm can sell to another one some used machines or buildings, gross fixed capital formation has also to take account of disposals. Indeed, if a firm buys a capital good and resells it to another firm, this good is counted twice in acquisitions, once in the accounts of the first firm, once in the accounts of the second firm. Therefore, to avoid a double counting, gross fixed capital formation is defined by acquisitions, less disposals, of goods and services used repeatedly, or continuously, in processes of production.

For example, firm 1 produces machines for a value of 100 and sells them to firm 2; firm 2 resells a part of the machines for a value of 20 to firm 3. The gross fixed capital formation of firm 2 is equal to 100-20=80, the gross fixed capital formation of firm 3 is equal to 20 and that of the total economy is equal to 100, which balances the output of firm 1.

Acquisitions and disposals should be recorded and valued at the time they occur.

Changes in inventories

Changes in inventories are not defined by the difference between the value of inventories at the end of the period and that at the beginning of the period but by the difference between the value of the entries into inventories and the value of withdrawals and of any current losses of goods held in inventories.

This definition is imposed by the balancing of the goods and services account. Let us suppose that at the beginning of the period there are no inventories and that a good is produced at a price of 100. If this good immediately enters into inventories, the balancing of the goods and services account necessitates that the changes in inventories are also valued at 100.

But, let us suppose that, at the end of the period, the price has risen to 110. In this case, the difference between the value of the inventories at the end of the period and that at the beginning of the period is equal to 110. With this value, the goods and services account is not balanced.

Similarly, at the following period, if the good is withdrawn to be consumed at a price of 120, the balancing of the goods and services account necessitates that the changes in inventories are estimated by the withdrawals.

By combining these two examples, it easy to deduce that the balancing of the goods and services account obliges to measure changes in inventories by the difference between the value of the entries and the value of withdrawals, entries and withdrawals being recorded and valued at the time they occur.

This text only reflects the opinion of its author: Francis Malherbe