The system of accounts

Goods and services

National accounts aim to give a synthetic picture of the economic activity of a country during a given period. For that, they begin by measuring in monetary terms the wealth produced by men during this period. This wealth is composed of goods and services that are distributed to various economic agents. These economic agents decide whether to consume these goods and services, i.e. to destroy them during the period, or to accumulate them, i.e. to keep them for a use in the following periods. The first equation is:

Output = consumption + accumulation

Accumulation can be negative since it is possible to consume goods that were produced and accumulated in previous periods.

However, goods and services used in a country have not necessarily been produced in this country, they may come from other countries, i.e. they may have been imported. Conversely, goods and services produced in the country may have been used in other countries, i.e. exported. Therefore, for a given country, the first equation is:

Output + imports = consumption + exports + accumulation

Output, imports, consumption, accumulation and exports are what national accountants call transactions, i.e. the result of decisions freely taken by units. We will see that national accounts also consider phenomena that affect wealth but are not regarded as transactions because they are incurred and not decided by units. Since the operations we have just quoted are for goods and services, they are called transactions in goods and services.

Natural resources and financial assets

Goods and services created by men are not the only form of wealth. Natural resources such as land can also be a form of wealth when they are owned by an economic agent. The monetization of an economy establishes equivalence between different kinds of wealth. Thus, the natural resources that are likely to be sold can be valued in monetary terms and traded for goods and services.

Claims are also a form of wealth. A claim is the other side of a debt, a debt being considered here as the requirement for an economic agent to perform in the future an action in favor of another economic agent. When this requirement can be expressed in monetary terms, it can be integrated into the accounts system.

A claim may have a monetary value, but the positive value of the claim is necessarily offset by a negative value of the related debt. A debt is deducted from the wealth of those who contracted it.

Definition: In the system, the various forms of wealth take the name of economic assets. Conversely, debts represent liabilities, that is to say a negative wealth. There are three types of assets: produced assets corresponding to goods and services, non-produced non-financial assets such as natural resources and financial assets.

Ownership

Rule: National accounts ignore the riches that are not subject to ownership.

Indeed, there would be no national accounts without ownership. By basing their estimates on monetary values, national accounts refer directly to trade and there is no trade without ownership because you cannot sell what you do not own. National accounts are obliged to ignore what is not subject to any ownership, like the air we breathe, despite its vital importance.

However, for the purposes of economic analysis, national accounts use a specific concept of ownership, different of the legal concept of ownership. They have adopted the concept of economic ownership, used in particular for financial leasing, goods acquired during these operations being considered as owned by the lessee even if the legal owner is the leasing company.

Accounts of economic agents

The account of an economic agent records its transactions, i.e. flows affecting the level or the composition of its wealth. As wealth consists in assets, the account of an economic records flows affecting assets. For an economic agent, assets may have been acquired in three ways:

• assets may have been produced, it is the case only for goods and services;
• assets may have been be transferred from other agents, this case corresponds to distributive transactions, for example wages;
• assets may have been created in compensation of liabilities, this case corresponds to financial assets.

The assets acquired can be used in three ways:

• assets can be consumed, i.e. destroyed;
• assets can be transferred to other economic agents by transactive transactions;
• assets can be or accumulated, i.e. kept for later use

An account presents the origin of assets acquired by an economic agent in its right column and their uses in its left column:

The various items therein correspond to transactions, i.e. to freely taken decisions. There are three main categories of transactions:

• transactions in goods and services;
• distributive transactions;
• financial transactions that involve financial assets and liabilities.

Accumulation corresponds to transactions in goods and services if it relates to produced assets and to financial transactions if it relates to financial assets or liabilities. Accumulation can be positive or negative since new assets can be accumulated but existing assets can also be used.

Integrated economic accounts

To give a synthetic picture of the economy, national accountants classify units into broad categories such as corporations, government and households. The accounts of these broad categories of units are grouped in a synthetic table: the integrated economic accounts. This table must comply with two global constraints that, for simplicity, are presented here in the framework of a closed economy, i.e. an economy without transactions with the rest of the world:

• output is equal to the sum of consumption and accumulation;
• the value of wealth distributed is equal to that received.

Accumulation is equal to the difference between changes (increases less decreases) in assets and changes in liabilities. The system distinguishes three types of assets:

• produced assets (goods and services)
• non-produced non financial assets (natural resources)
• financial assets.

Since non-produced assets cannot be created, any acquisition of such an asset from an economic agent necessarily corresponds to a disposal of another agent, i.e. to a negative accumulation. Globally, the accumulation of non-produced non-financial assets is zero.

For financial assets, since the total value of assets net of liabilities is zero, the accumulation of an economic agent is necessarily offset by a decrease of assets or an increase of liabilities for another agent.

Thus, the total accumulation of non-produced assets, whether financial or non-financial, is nil. The relationship between output, consumption and accumulation only concerns goods and services.

In its most simplified form, the integrated economic accounts are as follows:

The right side of the table shows the origin of the wealth, the left side its use. For example, corporations have produced 700 and borrowed 80; they have distributed 430, consumed 200 and accumulated 150. Households have produced 100 and received 600 by distributive transactions. This wealth has been distributed for 150, consumed for 400 and accumulated for 150. The account of each unit is balanced and the table complies with the two global constraints.

Balance sheets

At the end of the period, balance sheets may be elaborated. They show the value of different types of assets and liabilities at this moment. The difference between the value of assets and the value of liabilities is the net worth. Produced assets are broken down into fixed assets, inventories and valuables. Fixed assets are goods and services, such as machinery and buildings, that are durably used in the production process. Valuables, for example paintings, are not consumed during the current period and are a possible form of accumulation.

Accounts can be established to show the link between opening and closing balance sheets. The net worth of an economic agent can be impacted by its decisions involving its assets or liabilities; it may also be impacted by events that the agent has to endure. These events can be grouped into two categories:

• other changes in volume that are sustained flows impacting the net worth;
• holding gains and losses which correspond to changes in the value of assets and liabilities due to changes in their prices.

For example, a disaster destroying a house is an other change in volume. A change in the market price of the house corresponds to a holding gain.

Consumption of fixed capital has also to be considered, it corresponds to the depreciation of fixed assets involved in the production process. Consumption of fixed capital may be classified between transactions and the two categories above because it does not correspond to the total depreciation of fixed assets, but only to the expected part of the depreciation, that is to say, in fact, to an accepted depreciation. Officially, in SNA and ESA, consumption of fixed capital is considered a transaction.

For obtaining the closing net worth, we must add to the opening net worth accumulation transactions, other changes in volume, holding gains and losses and deduct consumption of fixed capital. Accumulation transactions, other changes of volume and holding gains can be positive or negative.

Classifications

Principle: it is not possible to describe individually all units, all transactions and all assets, it is necessary to proceed to aggregations.

Therefore, National accounts are based on classifications:

• a classification of economic agents: institutional sectors;
• a classification of transactions and other flows;
• a classification of assets and liabilities;
• a classification of products and activities;
• a classification of individual consumption of households;
• a classification of the functions of the government.

These classifications have been established to meet the needs of users.

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