The System of National Accounts (SNA) consists of a coherent, consistent and integrated set of macro-economic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules. It provides a comprehensive accounting framework within which economic data can be compiled and presented in a format that is designed for purposes of economic analysis, decision taking and policy making. The accounts provide a comprehensive and detailed record of the complex economic activities taking place within an economy and of the interactions between the different economic agents, and groups of agents, that takes place in markets or elsewhere. What are we measuring?
The economy is a collection of institutions and people, which combined together through market mechanisms create and use goods and services, as well as generate, distribute and re-distribute income flows.
The four major "players" in a national economy are the government, the corporations, the households and the rest of the world. These players engage in a variation of activities such as production, consumption and accumulation of assets, (re-)distirbution of income, as well as borrowing and lending. The system of national accounts measures the values associated with all of these activities of the economies players.
Why measure the economy?
The economy is generally measured for the purpose of economic analysis, and decision taking and policy making. More specifically:
- To allow the government to prepare and implement its budget -- by giving a basis on which to forecast government revenue so that spending plans can be made;
- To compare "our" performance with other countries;
- To help the government to "manage" the economy, by formulating policies and monitoring progress, so that individuals can judge whether government is doing a good or bad job in increasing the welfare of the nation - this can inform the democratic process of choosing a new government;
- To enable private business to take strategic decisions in the light of general economic conditions;
- To allow individual consumers to take decisions in the light of prevailing economic conditions e.g. whether to buy or rent housing.
The links with economic theory
The basic concepts of the System such as production, value added, final consumption, intermediate consumption, capital formation etc., are firmly rooted in economic theory. When economic theory clashes with the principles adopted in business accounting, the System gives priority to the former, not the latter. For this, and other reasons, national accounts are not simply the aggregations of the accounts of all the companies and other institutional units of the economy.
The System is designed essentially for market economies in which prices are determined and resources allocated mainly by the interplay of market forces. It is not geared to any particular school of economic thought - Keynesian, neo-classical, monetarist, etc. In particular, it must be emphasized that the System is designed to accommodate the needs of both developing and developed market economies, whatever the stage of economic development they may have reached.
The priority accorded by the System to economic theory over conventional business accounting practices is best illustrated by the concept of cost of production. The System uses the concept of opportunity cost as distinct from historic cost which is widely ( but by no means exclusively ) used in business accounting. Opportunity cost implies that the cost must be reckoned in terms of alternative opportunities which are foregone at the time the good or service is used, irrespective of the price which may have been paid for it when it was acquired in the past.
The principle of opportunity cost, which translates into "current cost" accounting in practice, influences the measurement of all the major flows of the System, including gross value added and GDP, consumption of fixed capital, operating surplus, income and saving. It has ramifications which run throughout the system. Substantial differences may be recorded for operating surplus, or profits, between national accounts and business accounts, especially during periods of high inflation, as a result of the different way in which they measure costs.
Specific Uses of the System of National Accounts ( SNA )
The general purpose of the SNA is to provide the conceptual and accounting framework which can be used to create macro-economic data suitable for analyzing and evaluating the performance of an economy. The existence of such data is a prerequisite for informed, rational policy-making and decision taking.
Monitoring the Behavior of the economy
National accounts data provide information covering both different types of economic activities and the different institutional sectors of the economy. It is possible to monitor the behavior of many economic variables such as household consumption, government consumption, capital formation, exports, imports, wages, operating surplus, taxes, lending, borrowing and so on. Moreover, information is provided about certain key balancing items or ratios which can only be defined and measured within an accounting framework, for example: the budget surplus or deficit, the share of income which is saved, or invested, by individual sectors of the economy or the economy as a whole, the trade balance etc.
Furthermore, national accounts provide the background against which movements of short-term indicators, such as monthly indices of industrial production or of consumer or producer prices can be interpreted and evaluated. The monitoring of the behavior of the economy may be significantly improved if at least some of the main aggregates of the System are compiled quarterly as well as annually, although the majority of the accounts, tables or balance sheets of the System not usually are compiled more frequently than once a year.
Macro-economic analysis
National accounts are also used to investigate the causal mechanisms at work within the economy. Such analysis usually takes the form of the estimation of the parameters of functional relationships between different economic variables by applying econometric methods to time series of data compiled within a national accounting framework. The types of the macro-economic models used for such investigations may vary according to the school of economic thought of the investigator as well as the objectives of the analysis, but the System is designed to accommodate the requirements of different economic theories or models, as already stated.
Advances in computer technology have made it possible for the econometric analysis of large macro-economic models to be carried out on micro-computers. Many econometric software packages have been developed for this purpose so that this kind of modeling is no longer confined to a few government departments, research institutes or universities with large mainframe computers. It is increasingly being undertaken by private companies or institutions with quite modest research or computing facilities.
Economic policy making and decision taking
Economic policy in the short term is formulated on the basis of an assessment of the current state of the economy and a view, to be more precise a forecast, about likely future developments. Short-term forecasts are typically made using econometric models of the type just described. Over the medium or long term, economic policy has to be formulated in the context of a broad economic strategy which may need to be quantified in the form of a plan. Most of the elements which make up a medium or long-term economic plan consist of flows within the national accounts, and it may be impossible to draw up such plans without national accounts data. A good macro-economic model which accurately reflects the past performance of the economy may be indispensable for planning as well as for forecasting.
Economic policy making and decision-taking take place at all levels of government and also within large public and private corporations. Large corporations such as multi-national companies, have the capability to build their own macro-economic models tailored to their own requirements for which they need national accounts data. The long-term investment programs of major corporations cannot be formulated without some kind of macro-economic forecasts. There are also specialist agencies who provide forecasts for individual clients in return for fees. Such agencies may require national accounts data which are very detailed.
International comparisons
The SNA is the system used for reporting national accounts data to international organizations in a standard internationally comparable form. The resulting data are widely used for international comparisons of major aggregates, such as GDP (or GNP) or GDP (or GNP) per head. They are also used for the comparison of structural statistics such as ratios of investment, or government expenditures to GDP.
Such comparisons are used by economists, journalists or other analysts to evaluate the performance of one economy against that of similar economies. They can influence judgments about the relative success of economic policies as much as simply considering the developments over time within a single country. Databases consisting of sets of national accounts for groups of countries can also be used for econometric analyses in which time series and cross-section data are pooled to provide a broader range of observations for the estimation of functional relationships.
Levels of GDP or GNP per head in different countries are also used by international organizations to determine eligibility for aid or other funds, or to determine the terms and conditions on which such loans, aid or funds are made available. When the objective is to compare the volumes of goods and services produced or consumed per head, data in national currencies should preferably be converted into a common currency by means of purchasing power parities, rather than exchange rates.
It has been conclusively shown that market exchange rates do not reflect the relative internal purchasing powers of the different currencies. When exchange rates are used to convert GDP, or other statistics, into a common currency, there is a strong and systematic tendency for the average prices of goods and services in high income countries to be higher than in low income countries, even though all prices are expressed in the same currency units. Exchange rate converted data on production or consumption cannot therefore be interpreted as measures of the relative volumes of goods and services concerned.
Levels of GDP, or GDP per head, in different countries are also used to determine in whole or in part, the size of the contributions which the Member countries of an international organization make to finance the operations of the organizations. As contributions have to be paid in a common currency, it may be appropriate to compare GDP or GDP per head at market exchange rates for this purpose. The contributions of member states of the European Community to the budget each year, is partly linked to the level of GNP of the country concerned.
International organizations need the SNA in order to be able to collect internationally comparable national accounts data in a standard format. They have also assumed overall responsibility for the present revision of the SNA. However, the SNA has not been created for the benefit of international organizations. It has become the standard, and universal, system used with little or no modification for their own national purposes by virtually all countries in the world with market economies. Thus statistical offices and government agencies within individual countries have a strong vested interest in ensuring that the SNA meets their own analytical and policy requirements, and national accounts experts from many different countries throughout the world have taken an active part in the present revision.
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