A User Guide to the Canadian System of National Accounts

Note to readers

This document is a guide to the various components of the Canadian System of National Economic Accounts, describing frameworks, major concepts, definitions and the purpose of each component. It was published in 1989. Most of the information does not change. However, the Canadian System of National Economic Accounts is constantly making important improvements. For more information see Latest developments in the Canadian economic accounts.

Chapter 2

An Overview of the Components of the System of National Accounts

The principal components of the system

Four major bodies of statistical data constitute the principal components of the national accounts. With the recent publication of the national balance sheets, the Canadian system now has all components in place. Their development has occurred over many decades, depending on the pace of progress in the theoretical field of national accounting, the demands from policy makers and analysts, and the degree of sophistication in the statistical collection system. Although the system is formally in place and statistical links have been forged, there is still much to be learned before a full understanding of the economy is reached, particularly regarding the relationship between production and financial transactions.

The four components, devoted to different aspects of the Canadian economy, are the input-output tables and their major derivatives, industry real output and productivity; the income and expenditure accounts; the financial flow statements and national balance sheets; and the balance of payments and international investment position.

a) Input-output tables

Input-output tables measure productive activity occurring in the economy, focussing particularly on commodity transactions of industries and the role of producers and purchasers in the economy. Tables show the total output of commodities by industry and the use of commodities by industries; in addition, the system provides a measure of value added by industry, the flow of commodities to final demand sectors and the cost of primary inputs to industries - the three alternative ways of measuring gross domestic product. Both current price and constant price series are available. Input-output tables are also an important ingredient in producing Canadian productivity estimates; the constant price domestic industry outputs are divided by labour inputs. Provincial input-output data are available on an occasional basis.

b) Income and expenditure accounts

Income and expenditure accounts, as the name suggests, focus on income generated by productive activity and final expenditure on that production. The main tables are designed to show the principal components of final demand and the main types of income arising from production; in that respect they yield the same gross domestic product aggregate as may be found in parts of the input-output tables. The accounts however, disaggregate the main tables into four major institutional sectors of the economy, (persons and unincorporated business, government, corporate and government business enterprises, and non-residents), providing estimates of current income and expenditure and capital accumulation for each sector.

These estimates record not only income arising from production but also show the redistribution of income which takes place through intersectoral transfer payments and receipts. The capital finance accounts which measure saving and non-financial investment yield, as a balancing item, the lending capacity or borrowing requirements of the sector. Supplementary data covering geographical distributions, selected components of the system distributed industrially, and constant price estimates form part of the Canadian accounts.

c) Financial flow and national balance sheet accounts

The financial flow accounts reveal the financing of economic activity by focussing on transactions in assets and liabilities for a number of institutional sectors. The transactions are classified by type of financial instrument. The system basically shows the way in which funds move from those sectors with saving in excess of their capital spending programmes to those whose capital programmes exceed their saving (the lending and borrowing sectors). The sectoral disaggregation places particular emphasis on financial intermediaries such as banks, near-banks, insurance companies and other financial institutions because of their importance in the process of matching the needs of borrowers and lenders. In addition, the system reflects portfolio adjustments occurring through trading in outstanding financial instruments and other credit market activities. Saving, non-financial investment, lending and borrowing estimates flow into this system from the capital finance accounts of the income and expenditure component of the system.

The national balance sheet accounts are structured in the same way as the financial flows but are intended to show the level rather than change in assets and liabilities; institutional sectors and item classifications are matching. The amount by which a sector's total assets exceeds its liabilities provides an estimate of its net worth. At the aggregate level the national balance sheet provides an estimate of net national wealth by summing the net worth of each domestic sector. The main table also provides an alternative derivation of net national wealth. In an economy with no international transactions financial assets and liabilities are equal, being opposite sides of the same coin, and national wealth is equal to its stock of nonfinancial capital assets; because of international connections Canada's stock of non-financial capital must be adjusted by net claims of non-residents in deriving net national wealth. The difference in yeartoyear national balance sheet levels reflects not only the changes recorded in the financial flow accounts but re-evaluation due to price fluctuations and unforeseen events, as well as conceptual, structural and classification changes.

d) Balance of payments and international investment position

Balance of payments accounts are devoted entirely to the economy's transactions with non-residents or the rest of the world. The basic statement is divided into two accounts, one covering current and the other capital transactions. The current account records payments and receipts for goods and services traded, investment income flows and transfer payments; the capital account covers transactions in financial assets and liabilities recording the inflows and outflows of capital. The two accounts are always conceptually in balance, any excess of receipts on current account being offset by the net acquisition of financial assets or net reduction in liabilities and vice versa. In condensed form, the balance of payments estimates appear in other components of the System of National Accounts as the non-resident sector, the current account being part of the income and expenditure system and the capital account being reflected in the financial flow accounts. Components of the current account of the balance of payments appear in an expanded form in the input-output system where detailed figures of trade in goods and services are presented on a commodity basis.

The international investment position measures the claims of residents of the nation on non-residents and the nation's liabilities to non-residents. In effect, the system is a special purpose balance sheet for the residents of the country in which are recorded assets and liabilities resulting from all previous dealings with the rest of the world. Insofar as flow transactions constantly affect the level of assets and liabilities, the international investment position bears the same relationship to the capital account of the balance of payments as the national balance sheet bears to the financial flows. The international investment position estimates, in condensed form, are embodied in the national balance sheets and become the rest of the world sector. However, in making this transition the balance sheet is recorded as if seen through the eyes of non-residents, hence assets and liabilities are reversed.

Common features and concepts

In writing about the framework, concepts and definitions of the System of National Accounts it is difficult to convey the vitality of the system. The end result tends to be a rather dusty account of what appear to be a series of unrelated esoteric statistical exercises. To overcome this, it is essential that the reader retain an image of the system as a series of connected living pictures of the workings of the economy, illustrating the nation and its residents going about their business.

The system portrays the 'what we do' and 'how we do it', and the 'where we are' and 'where we've been' of economic transactions; in so doing, it unlocks the door to understanding much about the economic standards and lifestyles of the country's population. It creates for the country as a whole a set of accounts not unlike those maintained by a business or a budget-conscious individual, and in this respect it comes to life in a personal way.

Two key concepts dominate in the system of accounts. In the case of the input-output and income and expenditure components it is production, where as in the financial flow and balance sheet accounts it is financing and wealth accumulation. The balance of payments and international investment position accounts straddle both concepts, the balance of payments current account falling into the production sphere and the capital account and international investment position into the financial sphere.

Each component is structured to reveal the principal transactors and their main transactions or activities. Transactors are grouped either on the basis of behaviour and/or motivation, or on the type of service or good that they provide, while the transactions reflect commodities produced and sold, consumption and investment activities, incomes generated and the flows and levels of financial claims.

The next few sections are devoted to terms and concepts that occur frequently and are central to the system, including the concept of economic production, gross and net measures, definitions of national and domestic and market prices and factor costs. Clearly an understanding of these terms is necessary to interpret the most central measure of the system, gross domestic product at market prices. The main sectors and principal transactions are also briefly noted in this introductory chapter - detailed definitions are included in the chapters dealing with individual components of the system.

a) Production

The term production, or economic activity, is at the very heart of the System of National Accounts. The accepted definition in the Canadian accounts takes a middle-of-the-road approach between those who, for example, would like to see the definition broadened to include a value for unpaid household services and those who prefer a narrower concept which would exclude imputed items that do not pass through the money exchange market Some of the controversial issues concerning an extension or contraction of the generally accepted boundaries of production are outlined in the final chapter.

The presently accepted definition of production in the national accounts is largely made up of goods and services produced and exchanged for money. This broad definition includes not only the output of physical goods but the value of the activities of service industries such as transportation, retail trade, institutions and government. This core concept is also referred to as the market or money-exchange economy. It is more frequently used in the context of production of final unduplicated output but it may also refer to the broader measure of gross supply of commodities in which intermediate-use commodities are also counted. There are, however, two important exceptions to the money-exchange core concept, one which contracts and the other which extends the boundary.

Although falling within the accepted conceptual boundary of production, illegal activities are, by convention, not included in the Canadian accounts because of the difficulty of arriving at accurate statistical estimates. In view of a palpable increase in drug trafficking, this omitted portion of production may have become relatively more important than in former years.

Illegal activity must be distinguished from the small part of the legal money-exchange economy that has gone 'underground' in an attempt to evade taxes.

The term includes such activities as working "off-the-books", moonlighting and bartering. Although the subject has generated a lot of discussion, the estimation methods used in Canada limit the risks of missing production. Because of the methodology which includes built-in allowances, unreported legal activity is not thought to seriously affect the level of the estimates.

The major expansion of the production measure beyond the 'money-exchange' economy occurs in the case of non-market activities which parallel market activities, and for which there automatically exists a satisfactory basis of valuation. In such instances the non-market activity is considered productive and the production boundary extended.

The principal example of a value being placed on a non-market activity is in the case of the occupation of a dwelling by the owner; in this situation there is no payment for the rental of the dwelling, but there is a value in the services provided equivalent to the net income that could be derived from renting the property commercially. A figure based on this valuation is imputed and included in the production measure. The argument for including this imputation is that the value of the shelter is the same regardless of the type of occupant and the imputation renders the production measure invariant to shifts in the ratio of tenant-to owner-occupied dwellings.

Other imputations are made covering the value of farm products consumed directly in farm households, food provided to employees in lieu of wages, and other income-in-kind such as lodging provided to hotel, camp workers and domestic servants. Values are also imputed for the services of government fixed assets owned and used, equivalent to the value of capital consumed; unlike business, government accounting records make no charge against production for the consumption of capital. Finally, a value is imputed for the services rendered by banks and other financial institutions for which they make no explicit charge; the assumptions and methodology underlying this particular imputation are described in the following chapter.

b) Gross and net

Production may be expressed on a gross or net basis depending upon whether it is measured before or after allowance for capital consumption. These allowances are charges against production that cover depreciation or the using-up of fixed capital in the process of production. Net production recognizes the fact that part of current output is simply required to replace depreciating fixed durable goods.

The reader may more frequently encounter the gross than the net measure of production simply because the expenditure based measure does not lend itself to the deduction of capital cost allowances. It has also been argued that the gross measure is more useful for some analysis because the replacement of capital can be deferred, and therefore in the short run it is gross production that is available for final consumption. The continued consumption of gross production, however, would gradually erode the wealth of the country.

Gross domestic production is itself a net concept to the extent that it covers only final output and is not equal to the total value of commodities produced and recorded in the input-output 'make matrix'; the latter estimate includes the production of both intermediate and final commodities.

c) National and domestic

The terms national and domestic appear throughout the system and qualify many of the aggregate measures. The national concept relates to activities of residents of a country and the domestic concept to activities occurring within the geographical boundaries of a country.

National income and product relate to residents' earnings attributable to activity both in Canada and outside, and exclude the earnings of non-residents from their activities in Canada. In the Canadian accounts the adjustment to move from domestic to national aggregates is confined to investment income, with interest and dividends due to Canadian residents from their foreign investments being added and those earned in Canada by non-residents being deducted.

The earnings of other factors should be taken into account, such as wages earned on one side of the border by someone residing on the other, but they are omitted because they are both small and counter balancing.

Domestic production refers to production occurring within the geographical boundaries of Canada. It is largely attributable to persons, enterprises and institutions regarded as Canadian residents but a relatively small part is due to non-residents, such as the return to capital invested in Canada by non-residents and the income of non-residents working in Canada but residing in the United States. Earnings of Canadian residents from their productive activities abroad is excluded from domestic production. Residency becomes irrelevant in the domestic concept where the overriding factor is geographical boundary; all production is included if it occurred in Canada.Determining residency for purposes of deriving national statistics does not present problems except in those limited situations where there is frequent trans-border crossing such as occurs with mobile equipment. Normally any person residing in the country for more than a year is considered a resident. Government employees, no matter where they reside, are regarded as residents of their home country.

Businesses are residents of the country in which they carry on productive activity regardless of the residency of their owners; the residency of owners becomes important only when factor payments are distributed by the business. In the case of agents in Canada operating on behalf of principals in the United States, the transaction undertaken on behalf of the principal is regarded as a transaction with a nonresident, but the service provided by the agent is considered to be that of a resident. The concept of residency is critical in the balance of payments accounts and further discussion is deferred until that chapter.

d) Market price and factor cost

Two levels of valuation are frequently referred to in the production accounts, market price and factor cost. The two concepts are designed to meet different needs and can be linked through the addition or subtraction of net indirect taxes. The 'net' in this instance indicates that subsidies have been subtracted from the indirect tax total. Market price valuation is more appropriately applied to final demand analysis where the concern is with prices which the purchaser actually pays. The factor cost valuation is more appropriate for analysis where the concern is with resources embodied in different commodities or resource allocation. Market prices include that broad spectrum of taxes levied on expenditure and generally referred to as indirect taxes. The basic distinction between direct and indirect taxes in national accounting is whether the tax is levied on income received by a factor of production or whether it is considered a cost. The sort of indirect taxes embodied in the market price valuation are sales, property and excise taxes, and customs duties.

Factor cost valuation represents the sum of incomes of factors of production as measured by the cost of labour and capital inputs in the production process.

Direct taxes levied on incomes are a part of the factor cost valuation as incomes are measured before tax deductions. The factor cost measure reflects earnings before transfers have had a redistributive effect. In economic terms the factor cost concept is regarded as most useful for the analysis of production and relative primary resource allocation between industries or embodied in commodities.

Although indirect taxes are a cost to producers and are included in market prices, they do not form part of the income of factors of production, or factor costs. In an accounting sense, as indirect taxes raise market prices above factor costs, subsidies tend to reduce the difference and can be thought of as negative taxes. In essence, subsidies help defray factor costs and other charges against production, so that the market prices are not as high as they might otherwise have been. The market price concept is regarded as more appropriate for welfare comparisons on the basis of the equality of relative marginal utilities and relative prices.

Paradoxically, direct taxes may affect market prices indirectly while indirect taxes may affect them directly. However, the two way classification of taxes used in national accounting is not based on the incidence of the tax because insufficient evidence exists to determine who bears the ultimate burden; rather, the national accounts classification is in general based on a distinction between taxes levied on income and wealth and those levied on expenditure.

e) Transactors

One of the most common threads running through the system of accounts is the grouping of participants in the economy into four sectors, each of which contains units having broadly similar motivations and patterns of behaviour. These are known as the institutional sectors and represent persons and unincorporated business, government, corporate and government business enterprises, and non-residents. Each component of the system with the exception of the balance of payments and international investment position, which represent only the non-resident sector, classify transactors according to these four main sectors.

The emphasis attached to the institutional sectors varies by component of the accounts. In the input-output system they play a secondary role to industrial classifications, while in the financial components they form the basis against which the sectoring is expanded to display the role of financial businesses. The four institutional sectors reign supreme in the income and expenditure where they are the central focus of the system.

The sectors play a vital role in the integration of the System of National Accounts; without such a common thread the ability to link the components would be severely impaired.

f) Transactions

To bring order to the myriad activities of the sectors, their transactions are structured around a number of different classification schemes. Transactions in the production components display type of commodity made and used and the main types of demand and income generated by production. The financial systems present transactions in financial instruments classified according to the issuer, the liquidity or the currency of the instrument. The classification of international transactions is unique and focuses on groupings important for the analysis of balance of payments and international investment - at a highly aggregated level there is a common meeting point with the other parts of the system of accounts where international transactions are grouped into four categories, goods, services, investment income and transfers.

Interrelationship of components

Before a more detailed description of each component, readers may wish to refer to the schematic presentation of the national accounts outlined in Chart 1. For those who are familiar with the accounts the chart will present no difficulty, but for those encountering national accounts for the first time, it is recommended that they defer study of the diagram until they have read the more detailed description of components of the Canadian System of National Accounts.

The chart presents each of the branches as a major block with a series of arrows indicating the links between the blocks. For example, the linking lines with arrow heads at both ends indicate the equivalence of measures of final demand and factor cost estimates in the input-output system and the income and expenditure accounts, and between the capital finance accounts of the income and expenditure system and the financial flows transactions.

The positioning of three of the blocks in vertical juxtaposition indicates that there is a logical flow between production, income, consumption, saving, financing and wealth accumulation. The positioning of the balance of payments and international investment accounts in a horizontal relationship indicates that these systems feed into the others as component parts.

Within each of the major blocks, a simplified example of the principal tables or matrices to be found in each component of the national accounts is given. Readers familiar with the Canadian system will have no difficulty in recognizing them, even though the statistical presentation of the Canadian input-output system differs slightly in design from the diagram.

Although not shown in the chart, the input-output and income and expenditure systems contain tables devoted to the presentation of data in constant or fixed prices.

Major parts of the input-output system are reproduced in constant prices whereas in the income and expenditure accounts only the final demand table is presented in fixed prices. Other systems, because of conceptual and practical considerations, contain no constant price estimates.

Also not shown in the chart is a gross domestic product by industry table, a formal sub-component of the input-output tables. Given the industry orientation of the system these estimates are a logical derivative of the input-output framework and result from subtracting the value of commodities used by an industry from those it makes. Aggregative productivity measures are also largely a derivative of the input-output system in Canada.

The chart reveals the emphasis given to the institutional sector disaggregation in the income and expenditure accounts, the financial flow transactions and the national balance sheets. Although only the four main institutional sectors are represented in the chart, in those components of the system devoted to financial data there is a considerable expansion of the corporate and government business enterprises sector with regard to financial institutions.

In the above, the economy has been characterized as performing a number of functions which may be examined independently; they are in fact closely linked. The examination and analysis of components separately is less revealing than when they are considered jointly.

For example, more may be understood about the demand for goods and services when financial market developments are taken into account; equally, more may be understood about financial markets when the various forms in which wealth is held are taken into account.

The links between components have important ramifications for the statistical collection system. If different concepts, classifications or definitions are used in compiling the various components the process of using them jointly is severely hampered and the credibility of the measures suffers. When two divergent estimates purporting to measure the same economic phenomenon are produced it introduces uncertainty at best, and confusion at worst, into any assessment of the economy.

Within a single component of the system, it has always been recognized that consistency is of overriding importance if the estimates are to be of optimum value to users. Discrepancies due to statistical gaps and weaknesses will occur when measures of the same phenomenon result from different approaches, as in the case of measuring production via incomes generated or final expenditure. However, for any single series there will be only one definition, concept and methodology, so that, for example, there is only one estimate of consumer expenditure or business investment in the income and expenditure accounts.

Consistency across the entire system is difficult to achieve for a number of reasons. In the first place, the range and availability of source material varies greatly over the different time periods during which components are developed. Secondly, changing technology has an enormous impact on the methodologies feasible at different times. Finally, the introduction of revisions to standard classification systems frequently presents operational problems.

Most users and all producers of national accounts are well aware of the above problems. They have been emphasized, however, because at the time of the recent comprehensive revision, considerable effort went into eliminating major inconsistencies which existed between components of the Canadian System of National Accounts. Many final demand and income aggregates common to both the input-output and the income and expenditure estimates formerly differed because of source data, methodology or classification variations. Now these differences have been eliminated so that both components use the same estimates. Other differences between the component systems have also largely been eliminated.

Many economic series are common to more than one component of the System of National Accounts but in the following chapters, common concepts, definitions and classifications are described in detail under only one of the systems. Because of the degree of dependency of the input-output and income and expenditure accounts on shared concepts and statistical series it is necessary to read both chapters in order to encounter descriptions of all concepts and definitions common to both systems.

The same is true for the financial flow and balance sheet accounts. For example, the three methods of measuring gross domestic product described in the chapter on input-output also apply in large measure to the income and expenditure accounts, while the final demand and income components of gross domestic product common to both systems, such as wages and salaries, net income of unincorporated business, personal and government expenditure are defined in the income and expenditure chapter. The sectors and transactions common to the financial flow and balance sheet accounts are defined only in the description of the financial flows.

The more detailed descriptions of the components of the system which follow, provide information on the availability of data, a summary of the underlying concepts and structural framework and the integrated nature of the entire system. Each chapter presents a highly condensed version of the main table(s) of each system, using data for 1981 in order to illustrate the degree of statistical integration that exists.

The sequence chosen for describing the entire system of accounts reflects a logical progression of economic events from production through to wealth accumulation, rather than a chronological sequence of the development of the Canadian System of National Accounts or an order of importance.

The descriptions provided are in no way intended to replace the full documentation contained in publications specific to particular components of the national accounts.

This publication is intended to serve as a convenient reference in which all branches of the national accounts are summarised in one publication and to illustrate the integrated nature of the Canadian System of National Accounts.

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