About Functional Classifications

Functional classifications are used in the System of National accounts for classifying certain transactions of producers and of three institutional sectors - namely households, general government and non-profit institutions serving households. Also, Governmnet Finance Statistics makes use of functional calssification of govermnent expenditures.

The classifications are described as “functional” classifications because they identify the “functions” - in the sense of “purposes” or “objectives” - for which these groups of transactors engage in certain transactions. The classifications concerned are:

1. Classification of individual consumption by purpose, COICOP
2. Classification of the functions of government, COFOG
3. Classification of the purposes of non-profit institutions serving households, COPNI
4. Classification of outlays of producers by purpose, COPP

The functional classifications serve three purposes:

1. COFOG is used to distinguish between collective services and individual consumption goods and services provided by government. Individual goods and services are treated as social transfers in kind and they are deducted from total consumption expenditure of government to obtain actual collective consumption of government. They are also added to individual consumption expenditure of households to obtain actual individual consumption of households.
2. It provides analysts with statistics of interest for a wide variety of analytic uses. For example, COICOP shows household expenditure on food, health and education all of which are important indicators of national welfare; COFOG shows government expenditure on “desirables” such as health and education as well as on “less desirables” such as defence and prison services; COPP may provide information on the “outsourcing” of business services, i.e., on the increasing tendency for producers to buy-in catering, cleaning, transport, auditing and other services which were previously carried out as ancillary activities within the enterprise.
3. It provides users with the means to recast key aggregates of the System of National Accounts for particular kinds of analyses. For example: (a) In studies of labour productivity, researchers often need a measure of “human capital” which is normally derived from information on past expenditures on education. The functional classifications therefore identify expenditures on education incurred by households, general government, non-profit institutions serving households and producers; (b) In studying the process of economic growth, researchers sometimes prefer to treat some or all research and development (R&D) expenditures as capital formation rather than as consumption expenditure. COFOG, COPNI and COPP report R&D separately; (c) In studies of household expenditure and saving, some researchers have found it more useful to consider expenditures on consumer durables as capital rather than current expenses. For this reason, COICOP provides for the separate identification of expenditures on durable goods. (It also identifies expenditures on semi-durable goods, non-durable goods and services); (d) In studies of the impact of economic growth on the environment, researchers often need information on expenditures undertaken to repair or prevent damage to the environment. COFOG, COPNI and COPP identify outlays on environment protection.