National accounts systems
National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting. By construction such accounting makes the totals on both sides of an account equal even though they each measure different characteristics, for example production and the income from it. As a method, the subject is termed national accounting or, more generally, social accounting. Stated otherwise, national accounts as systems may be distinguished from the economic data associated with those systems. While sharing many common principles with business accounting, national accounts are based on economic concepts.
National accounting has developed in tandem with macroeconomics from the 1930s with its relation of aggregate demand to total output through interaction of such broad expenditure categories as consumption and investment.[4] Economic data from national accounts are also used for empirical analysis of economic growth and development.
National accounts broadly present output, expenditure, and income activities of the economic actors (households, corporations, government) in an economy, including their relations with other countries' economies, and their wealth (net worth). They present both flows (measured over a period) and stocks (measured at the end of a period), ensuring that the flows are reconciled with the stocks. As to flows, the national income and product accounts (in U.S. terminology) provide estimates for the money value of income and output per year or quarter, including GDP. As to stocks, the 'capital accounts' are a balance-sheet approach that has assets on one side (including values of land, the capital stock, and financial assets) and liabilities and net worth on the other, measured as of the end of the accounting period. National accounts also include measures of the changes in assets, liabilities, and net worth per accounting period. These may refer to flow of funds accounts or, again, capital accounts.
There are a number of aggregate measures in the national accounts, notably including gross domestic product or GDP, perhaps the most widely cited measure of aggregate economic activity. Ways of breaking down GDP include as types of income (wages, profits, etc.) or expenditure (consumption, investment/saving, etc.). Measures of these are examples of macro-economic data. Such aggregate measures and their change over time are generally of strongest interest to economic policymakers, although the detailed national accounts contain a source of information for economic analysis, for example in the input-output tables which show how industries interact with each other in the production process.
National accounts can be presented in nominal or real amounts, with real amounts adjusted to remove the effects of price changes over time. A corresponding price index can also be derived from national output. Rates of change of the price level and output may also be of interest. An inflation rate (growth rate of the price level) may be calculated for national output or its expenditure components. Economic growth rates (most commonly the growth rate of GDP) are generally measured in real (constant-price) terms. One use of economic-growth data from the national accounts is in growth accounting across longer periods of time for a country or across to estimate different sources of growth, whether from growth of factor inputs or technological change.
The accounts are derived from a wide variety of statistical source data including surveys, administrative and census data, and regulatory data, which are integrated and harmonized in the conceptual framework. They are usually compiled by national statistical offices and/or central banks in each country, though this is not always the case, and may be released on both an annual and (less detailed) quarterly frequency. Practical issues include inaccuracies from differences between economic and accounting methodologies, lack of controlled experiments on quality of data from diverse sources, and measurement of intangibles and services of the banking and financial sectors.
Macroeconomic data not derived from the national accounts are also of wide interest, for example some cost-of-living indexes, the unemployment rate, and the labor force participation rate. In some cases, a national-accounts counterpart of these may be estimated, such as a price index computed from the personal consumption expenditures and the GDP gap (the difference between observed GDP and potential GDP).
The presentation of national accounts data may vary by country (commonly, aggregate measures are given greatest prominence), however the main national accounts include the following accounts for the economy as a whole and its main economic actors.
Current accounts:
production accounts which record the value of domestic output and the goods and services used up in producing that output. The balancing item of the accounts is value added, which is equal to GDP when expressed for the whole economy at market prices and in gross terms;
income accounts, which show primary and secondary income flows - both the income generated in production (e.g. wages and salaries) and distributive income flows (predominantly the redistributive effects of government taxes and social benefit payments). The balancing item of the accounts is disposable income ("National Income" when measured for the whole economy);
expenditure accounts, which show how disposable income is either consumed or saved. The balancing item of these accounts is saving.
Capital accounts, which record the net accumulation, as the result of transactions, of non-financial assets; and the financing, by way of saving and capital transfers, of the accumulation. Net lending/borrowing is the balancing item for these accounts
Financial accounts, which show the net acquisition of financial assets and the net incurrence of liabilities. The balance on these accounts is the net change in financial position.
Balance sheets, which record the stock of assets, both financial and non-financial, and liabilities at a particular point in time. Net worth is the balance from the balance sheets (United Nations, 1993).
The accounts may be measured as gross or net of consumption of fixed capital (a concept in national accounts similar to depreciation in business accounts).
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living; GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capital. GDP is related to national accounts, a subject in macroeconomics. GDP is not to be confused with gross national product (GNP) which allocates production based on ownership. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach.
The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.[6]
Example: the expenditure method:
GDP = private consumption + gross investment + government spending + (exports − imports), or
Note: "Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP measures production that takes place within the country's borders. In the expenditure-method equation given above, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports).
Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
If separated from endogenous private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework.
Production approach
The production approach is also called as Net Product or Value added method. This method consists of three stages:
Estimating the Gross Value of domestic Output in various economic activities;
Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.
Symbolically,
Net Value Added = Gross Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.
The sum of Net Value Added in various economic activities is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.
For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two methods:
By multiplying the output of each sector by their respective market price and adding them together and
By collecting data on gross sales and inventories from the records of companies and adding them together
Subtracting each sector's intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost. Adding indirect tax minus subsidies in GDP at factor cost, we get GDP at Producer Prices.