Australian Bureau of Statistics. An Analytical Framework for Price Indexes in Australia, Information Paper, Catalogue 6421.0, 1997.
Commission of the European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, and World Bank, System of National Accounts. 1993 United Nations: New York, 1993.
International Labor Organization, ISCO-88: International Standard Classification of Occupations, International Labor Organization: Geneva, 1990.
United Nations, Central Product Classification (CPC), Version 1.0, Statistical Papers Series M, No. 77, Ver. 1.0. United Nations: New York: 1998.
United Nations, Classifications of Expenditure According to Purpose. Statistical Papers Series M, No. 84, United Nations: New York, 1999.
United Nations, International Standard Industrial Classification of All Economic Activities, Statistical Papers Series M, No. 4, Rev.3. United Nations: New York. 1990.
This is the first in a series of articles deriving from lectures on price statistics delivered in courses and seminars provided by the Statistics Department. An earlier version was presented at the ECE/ILO Meeting on the Consumer Price Index, Geneva, November 3-5, 1999, portions of which will contribute to new international manuals on the CPI and PPI being developed by the Intersecretariat Working Group on Price Statistics.
Price indices may be used for various purposes as deflators and general economic indicators, but also in the calculation of escalators for the adjustment of payments in contracts and of government pensions and transfer payments. In this article, we distinguish between a price index, which is defined in this chapter as the price component of relative change in a value aggregate, and an escalator, which is considered in a subsequent article in this series as one of the uses of a price index. While an escalator may be chosen as equal to a selected price index, the optimal determination of escalators can lead to more complex functions of price indices than a simple identity relationship.
Readers familiar with textbook macroeconomics will note a minor variation in the conventional notation for the capital formation component of expenditure on GDP. In the conventional notation, capital formation is designated as I for Investment. This article adopts the international standard nomenclature of the 1993 SNA, which uses the term Capital formation rather than Investment, and the symbol K for non-financial accumulation flows rather than I.
For example, this is determined by physical domicile for households, according to whether the household has been living within the geographic boundaries of a country for a year or more.
The 1993 SNA classification or sectoring of institutional units does not strictly follow the legal status of institutional units, but rather their function. Hence, a government-owned non-financial enterprise producing output sold at prices substantially covering its costs and for which a balance sheet can be compiled would be classified as a non-financial corporation, along with non-financial legal corporations. For further details, see 1993 SNA, Chapter IV.
To understand how subsectors S.141 and S.142 of households are formed, an explanation of the term Mixed income is in order. This, in turn, requires consideration of the national accounts income concept of Operating surplus. The Operating surplus of an enterprise is the residual of the value of output less purchases of goods and services inputs, wages and salaries, employers’ social contributions (social security and pension payments), and taxes net of subsidies payable on production that are unrelated to products. The Mixed income of household unincorporated enterprises is algebraically defined identically with the Operating surplus of other enterprises. However, for unincorporated household enterprises, the compensation of the owners or proprietors of the enterprise may not be included in the recorded compensation of employees item, and thus the difference between output and operating cost will include compensation for the owners’ labor. The distinct terminology merely recognizes that the owners’ wages are often inextricably mixed with the operating surplus for these units.
Compensation of employees comprises wages and salaries and the employer-provided benefits comprising employers’ social contributions.
Property income comprises interest, dividends, and rent.
We use the term receivable to indicate that the price refers to an accrued transaction for the seller, and the term payable to indicate a transaction that has accrued to the purchaser.
The 1993 SNA distinguishes between taxes on products and other taxes on production. Taxes net of subsidies on products T includes all taxes payable per unit or as a fraction of the value of goods or services transacted. Included in T are excise, sales, and the non-refundable portion of value added taxes, duties on imports, and taxes on exports. Subsidies on products include all subsidies receivable per unit or as a fraction of the value of goods or services produced, including in particular subsidies paid on imports and exports. Other taxes on production comprise, for example, taxes on real property and taxes on profits. Other subsidies on production include, for example, regular payments by the government to cover the difference between the costs and revenues of loss-making enterprises. Of total taxes and subsidies on production, only taxes and subsidies on products are considered in defining basic and purchasers’ prices. By implication, there are no taxes payable on products included in either of the aggregates Y or M, while subsidies receivable on products are included in these aggregates.
The alert reader will note that transportation, insurance, and distribution margins have somehow disappeared after having been introduced. Whether these services are included with the good or invoiced separately does not affect the total expenditure on goods and services by the purchaser. For the economy as a whole, these transactions cancel out, but when we consider industry/activity and product detail, they will have redistributive effects among goods and services products. This point is revisited in the discussion of the Supply and Use Table below.
As indicated in Table 3, The 1993 SNA recommends use of the International Standard Industrial Classification (ISIC) for activities or industries, the Central Product Classification (CPC) for domestic products, and the closely related Harmonized Commodity Description and Classification System (HS) for exported and imported products. Each country may adapt the international standard to its specific circumstances. If the adaptation amounts to adding further detail, the classification is said to be derived from the international standard. The Nomenclature génerale des Activités économiques dans les Communautés Européennes (NACE), or the General Industrial Classification of Economic Activities within the European Communities, is an industrial classification derived from the ISIC. If the adaptation reorganizes the way in which detailed categories are grouped compared with the international standard, but provides for a cross-classification at some level of detail, it is said to be related. The North American Industrial Classification System (NAICS) being implemented by Canada, Mexico, and the United States is an industrial classification related to the ISIC. The European Union’s PRODCOM classification of industrial products is derived from its Classification of Products by Activity (CPA) which, in turn, is related to the international standard CPC through a cross-classification defined at a high level of product detail.
Although the discussion in this chapter maintains a consistent, product classification of expenditure across all goods and services accounts, alternative, functional classifications of expenditure have been developed for each institutional sector for specific purposes. The international standard versions of these classifications included in the 1993 SNA comprise the Classification of Individual Consumption by Purpose (COICOP), the Classification of the Purposes of Non-profit Institutions Serving Households (COPNI), the Classification of the Functions of Government (COFOG), and the Classification of the Purposes of Producers (COPP). The first column of Tables 5 and 6 is often compiled from household expenditure survey data, which are collected using functional classifications such as COICOP rather than product classifications. To facilitate constructing the cross-economy framework of the 1993 SNA considered in this chapter, there is a concordance between the CPC and the COICOP.
By definition, corporations have no final consumption in the 1993 SNA. Thus, item P.3 and its subdivisions appear with nonzero entries only for household, government, and NPISH units.
The 1993 SNA derives disposable income in a sequence of accounts producing the balancing items Value added B. 1 (production account), Operating surplus B.2 and Mixed income B.3 (generation of income account), Balance of primary incomes B.5 (allocation of primary income account), and Disposable income B.6 (secondary distribution of income account). Collapsing all of these steps, Disposable income B.6 is Value added B. 1 less (net) Taxes on production and imports (payable) D.2 plus (net) Subsidies D.3 (receivable), plus (net) Property income (receivable) D.4, less (net) Taxes on income and wealth (payable) D.5, less (net) Social contributions (payable) D.61, plus (net) Social benefits (receivable) D.62, less (net) Other transfers (payable) D.7.
Other individual consumption expenditure includes all imputed consumption. Such consumption includes, for example, selected non-market goods from own production of households, comprising the housing services consumed by homeowners and the agricultural produce consumed from own production by farm households. It may include an imputation for the consumption of indirectly measured financial services for any of the sectors, and does include the consumption expenditure undertaken on behalf of households by NPISHs and General government, in the use of income accounts for those institutional sectors. The 1993 SNA also contains an alternative presentation, denoted by codes P.4n, wherein all individual consumption is shown in the institutional sector account for Households S.14 only, regardless of the institutional sector actually undertaking the expenditure. The differences between the two classifications disappear at the total economy level.
This adjustment reflects the treatment by the 1993 SNA of privately funded pensions as owned by the household beneficiaries of such plans. It maintains consistency between the income and accumulation accounts in the system. It is not relevant to price and volume measurement, and the reader is referred to the System of National Accounts 1993, Chapter IX, Section a.4 for further details.
In addition to the real estate, rental and leasing services of homeowners the 1993 SNA treats financial services consumption expenditure as the sum of measured and imputed components. Measured expenditures comprise explicit service charges levied by financial institutions for deposit, loan, advisory services and the like, while imputed expenditures reflect the income foregone because the household does not lend (keep deposits with a financial institution) and/or borrow at a reference rate. See Chapter 14. In principle, these imputed expenditures, as well as those for other imputed consumption, are of the same market-equivalent valued type as for owner-occupied housing services and could be covered in the CPI.
In addition to the Central Product Classification, version 1.0 shown here, the 1993 SNA, Annex V contains a Non-financial assets classification identifying the specific tangible, intangible, produced, and non-produced fixed assets, as well as inventory and valuables items, recognized by the 1993 SNA
As we will see in a subsequent article of this series, the flow of services from residential dwellings can be alternatively estimated using “rental equivalence” and “user cost” approaches.
Conceptually, all consumer durables such as automobiles and even certain clothing articles should be treated this way, but reliable data on their rental or equivalent rental values has historically been so difficult to obtain that they are treated in the system as consumed when purchased.
1993 SNA asset code AN. 13 Valuables. Excludes intangible assets, land, constructions, and construction services.
1993 SNA asset code AN.111 Tangible fixed assets. Excludes intangible assets, land, and construction services.
1993 SNA asset code AN. 112 Intangible fixed assets. Excludes land, constructions, and construction services.
1993 SNA asset code AN.2 Non-produced assets. Excludes intangible assets, constructions, and construction services.
This rather roundabout approach to imports by product is taken because, as a practical matter, it has been often difficult to obtain insurance and freight charges on imports from customs administrative data systems at the product level of detail. See 1993 SNA, paragraphs 14.40-14.41. Recent developments in computerized customs documentation have made the itemization of insurance and freight more straightforward, and the 1993 SNA does also allow for the possibility of determining imports by product at their fob values, consistent with the aggregate valuation of imports. Were this the case, insurance and freight on imports could be shown as trade and transport margins analogously with such margins on domestically produced goods. Figure 1 gives an example of how import detail would be shown at fob values.
Trade and transport margins do not appear in the standard sequence of accounts in the 1993 SNA because these accounts are not shown with product detail. Although these margins are nonzero for individual products, they sum to zero in total, because the amount added to the domestic supply of goods comes from the domestic supply of distribution, insurance, and transport services. Margins are thus shown in Figure 1, separately for margins on domestic production and imports, because it displays product detail down the columns. In the aggregate, of course, these adjustments for trade and transport margins on domestic production and the cif/fob adjustment for imports, vanish.
The 1993 SNA values imports fob. However, it allows for the fact that while fob valuation by product would be consistent and preferred, compiling such data may be problematic at the product level of detail. Imports of goods cif by product may be all that is available because the insurance and freight data are often not separately compiled by product in customs systems. See 1993 SNA paragraph 15.68. Totals for these data may be obtained instead from resident and nonresident shippers in the process of compiling the Balance of Payments. Insurance and freight services provided by residents on imports are a services export.
Regarding goods and services valuations in the import price and volume indices, see MPI in Tables 11 and 12 below, where it is explained that both fob and purchasers’ price valuations are important in constructing the MPI as a deflator for imports fob. Imports at purchasers’ prices would be imports cif plus import tariffs as well as domestic insurance and freight for delivery to the first domestic owner.
Construction services only.
Construction services only.
The sum of items in this column is zero. It appears in the SUT but does not appear in any 1993 SNA account. Included in this adjustment are transportation, insurance, and distribution charges on goods within the geographical boundaries of the national economy only.
Taxes and subsidies on products are shown in the 1993 SNA Allocation of primary income account for the General government institutional sector S.13, which derives B.5 Balance of primary incomes as the balancing item. (1993 SNA, Annex V, Table A.V.5). B.5 is the sum of B.2 Operating surplus, D.2 Taxes on production and imports less d.3 Subsidies plus D.4 Property income (net). This account is the source of data for construction of this column in the SUT when exploded to show product detail for the items D.21 and D.31, Taxes and Subsidies on products.
As noted elsewhere, the 1993 SNA values goods imports cif at the product level of detail but fob in total. Thus, the 1993 SNA presentation of goods imports in the supply matrix is the sum of P.7 Imports fob and the cif/fob adjustment on goods imports shown in Figure 1. To simplify the presentation of this diagram of the SUT and clarify the nature of the negative adjustment to services, we assume that insurance and freight provided on imports can be compiled by product and thus imports fob can be compiled by product. Insurance and freight provided on imports by residents are already included in the insurance and transportation rows of the P. 1 matrix.
The sum of items in this column is zero. It appears in the SUT but does not appear in any 1993 SNA account.
Insurance and freight on imports of goods by product provided by both residents and nonresidents.
Including insurance and freight on imports provided by nonresidents. Insurance and freight provided on imports by residents are included in the insurance and transportation rows of the P.1 matrix.
Covering the Individual consumption expenditure P.31 of the Household sector S.13 only and excluding consumption of goods produced by households for own final use, with the exception of imputed rental of dwellings of owner occupants.
Covering the finished goods component of Change in inventories (P.52).
However, this notwithstanding, in defining the import price index the price index maker would, in fact, first consider an economic input price index valuing imported goods and services at the purchaser’s price payable by their first resident owner (following the change of ownership principle of accrual). This valuation would include not only international and domestic insurance and freight for the delivery of goods, but also import tariffs for both goods and services. The import price index would be obtained by adjusting (multiplying) the import purchasers’ price index by a “markdown” index tracking the movement in the ratio of imports fob with imports at purchasers’ prices. This is required for it to be properly matched in valuation with imports fob and yield the conceptually correct import volume index when used as an imports fob deflator.
These margins only matter when developing supply price indices at purchasers prices for individual products and product sub-aggregates. For all products they cancel out, leaving only taxes less subsidies on products contributing to the total markup on total supply at basic prices.
and the weight on the YPFs, t is
Note that in the international comparisons case the superscripts s and t of the price and volume decompositions in section I of this chapter refer to two countries rather than two time periods.
P. 11 = Market output, P.12 = Output for own final use, D.21 = Taxes on products, and D.31 = Subsidies on products.
The four major price indices are shown in bold.
This category comprises public services output provided free of charge or at economically insignificant prices by general government and NPISHs, This output is valued at cost because it has no market comparator. a price index cannot be directly constructed for this aggregate because there are no economically significant prices for Other non-market output The implicit deflator for Other non-market output P. 13 is derived by dividing a directly-compiled volume indicator into the value of other non-market output.
The four major price indices are shown in bold.
Unlike our other aggregations of indices that involve the combination of two component indices, we show the FP1 as a simultaneous aggregation of six price indices for the components of final uses. Again,f can be any of the indices introduced in this chapter and given by (13), (15), or (10), with the weight of the first item, here of Individual consumption P.31, determined as one minus the rest of the weights, and the price relatives given by the list of index arguments.
The negative weights of the second index arguments of both of these formulae for GDP is an indication that they represent a “double deflation-type” price index. See 1993 SNA, Chapter XVI, Section E.
In the ECI, the price of labor services comprises all of the components of Compensation of employees, including Employers’ social contributions (benefits) as well as Wages and salaries. The Wages and salaries subindex of the ECI would be another example of a price index adjusted by a markup index. Analogously with the price index for Total supply at purchasers’ prices in Table 12, the ECI would be adjusted in this case by a “markdown index” taking off Employers’ social contributions.
From the Production account.
Taxes on production unrelated to products.
Subsidies on production unrelated to products.
Balancing item of the Generation of income account.
Shown are Major groups of the International Standard Classification of Occupations 1988 (ISC0-88), ILO.
From the Production account.
Balancing item of the Generation of income account.