§ 6 Defining Final Uses of GDP

6.1 Final Uses in the National Accounts

6.2 Households‟ Final Consumption Expenditure

6.3 Final Consumption Expenditure by General Government

6.4 Final Consumption Expenditure of NPISHs

6.5 Moving from Consumption Expenditure to Actual Consumption

6.6 Gross Fixed Capital Formation (GFCF)

6.7 Changes in Inventories

6.8 Net Acquisition of Valuables

6.9 Exports and Imports of Goods and Services

Bibliography:

Lequiller, F. / Blades, D. (2014): Understanding National Accounts. 2nd ed. Paris, Chapter 5. http://www.oecd.org/std/UNA-2014.pdf

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Final uses of GDP = demand (net)

• Domestic demand

• Consumption

• Investment

• External demand (net) = exports (net of imports)

Relevance:

Implication:

Exercise 1

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6.1 Final Uses in the National Accounts

(1) Terminology: “uses”

• Refers to the uses of resources placed on the market

•

the term “uses” often replaced by “expenditures”

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(3) Terminology: final uses

• Distribution of uses of resources:

• Intermediate use: goods and services consumed

… in a production process

... Within the economic terretory

... During the accounting period

• Final use: all other uses of resources

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• Example:

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(4) Conventions for the classification of uses

(a) Households

• General rule: all the goods and services they buy are final

• Application of this rule: goods or service purchased by a household,

considered to have been entirely consumed

• Examples:

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(b) General government and non-profit institutions

• General rule: all the goods and services they buy are final

• All expenditures are classified as final

• Reason: impossible to say how much of the services of government

contribute to the output of firms

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(c) Firms

- General rule: all spending on goods and services is intermediate

- Exceptions: investment (GCF) considered as final use

- GFCF:

- Changes in inventories:

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(d) Exports

• Final use because not used within its economic territory

• Perspective of importing country:

• Has to be subtracted from the total of final goods and services to obtain

GDP

• Is included either in final uses or in intermediate ones

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6.2 Households „Final‟ Consumption Expenditure

(1) First component:

purchases of good and services to meet households‟ everyday needs

(a) Examples:

(b) Purchase on credit,

transaction broken down into three parts:

• Price of the goods:

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• Administrative expenses of the financial company making the loan

• Payment of interest:

(b) Purchase under a financial lease or hire-purchase arrangement

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(c) Purchase of dwellings

• included in GFCF

• reason:

• Purchase of the house = capital formation

• Expenditure for repair = intermediate consumption

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(d) Expenditures of sole proprietorships

• Sole proprietorships

• As far as their expenditures are intended for consumption in production, it is

considered intermediate consumption

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(2) Second component: partial payments or goods and services provided by

general government

• Examples:

• Parts not carried by households = government expenditure

part of households‟ actual consumption (see below)

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(3) Third component: imputed expenditures

(a) Definition

expenditures that have not really taken place but for which values are

assigned (“imputed”)

(b) Motivation

(c) Main imputed items of expenditure

• Owner-occupier‟s imputed rents:

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• Own-account consumption:

consumption of goods (not of services!) produced by people for themselves

• Income in kind:

Goods and services employees receive as part of their wages

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• Financial intermediation services indirectly measured (FISIM)

• Imputed income for bank services provided free of charge or at prices

below production costs

• FISIM on loans from banks = difference between interest banks receive

and a reference rate

debit rate reference rate credit rate

I------------------------------------------I-----------------------------------I

= interest rate = interest rate

paid on deposits received by banks

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• FISIM on bank deposits

= difference between reference rate and debit rate

(4) Fourth component: Consumption made outside the home territory

• Expenditures of tourists abroad:

• Likewise: consumption recorded on home territory reduced by the value of

purchases of foreign tourists

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(5) Price system applied to final uses

(a) General rule:

prices agreed to by the parties to the transaction

(b) Some details:

• Prices include taxes on products:

• Prices include transport costs and marketing costs

• Prices are net of rebates

• Prices include tips

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(6) Classification of household expenditure

(a) “Classification of Individual Consumption by Purpose” (COICOP)

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(b) Empirical results for UK

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6.3 Final Consumption Expenditure by General Government

(1) Convention

• Expenditures considered as final uses of general government itself

• Reason

• Advantage:

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(2) Calculation as cost of producing government services:

Compensation of employees of the government

+ purchases by government of intermediate consumption items

+ consumption of government fixed capital

+ purchase of goods and services by the government for the benefit of

households

+ other taxes on production

- partial payments of households or firms for services provided by

government

- own-account production of GFCF

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(3) Distribution within general government consumption expenditure

(a) Individual consumption expenditure of general government

• Clearly carried out for the benefit of individual households

• Empirical results for the UK

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• Important components:

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(b) Collective consumption expenditure

• Next to individual households the corresponding government activities also

benefit firms

• Examples:

(c) Important economic distinction

• Cost to government of (a) depends on number of households making use of

the services

• Cost of collective services depends much less on number of “customers”

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6.4 Financial Consumption Expenditure of NPISHs

(1) Non-profit institutions serving households

(a) Definition: units …

• ... formed by groups of households

• ... in the order to supply services to households or to other households

• … on a non-commercial basis

• ... mainly financed by households‟ donations/regular subscriptions

(b) Examples

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(c) Note:

Non-profit institutions not financed by households

(2) Treatment in the accounts

• Similar to treatment of government

• Output value at cost

• Services produced “consumed” by themselves

• All expenditures considered as individual

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6.5 Moving from Consumption Expenditure to Actual Consumption

(1) Actual consumption

• Households‟ consumption expenditure plus individual consumption

expenditure of general government

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Empirical example: UK 2012

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(2) Analytical advantages of actual consumption

(a) Measure that comes closer to the welfare-relevant consumption of

households:

(b) International comparisons

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6.6 Gross Fixed Capital Formation (GFCF)

(1) Important indicator for analysis of demand

• GFCF of households (excluding unincorporated enterprises)

• GFCF of the business sector:

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(2) Characterizing GFCF

(a) Definition: net acquisition of produced fixed assets

(b) Features

• Capital goods

• Assets: yield an income stream for more than one period

• “real” assets: used in production

• “fixed”: changes in inventories are not included

• “net” acquisition of fixed assets on the second-hand marked are

deducted

• “produces” assets: assets generated by nature are not included

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(3) The GFCF borderline

Note: contrast to intermediate consumption

(a) Tangible GFCF

(b) Investment in intangible assets

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(c) Problem: no satisfactory statistical services

• Firms often treat the creation or purchase of intangible assets as

intermediate consumption

• Reasons for this behavior of firms:

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(4) The GFCF Classification

(a) Classification by investing sector

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Empirical example: UK 2012

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(b) Classification by type of asset

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(5) The price system used

• Valued at acquisition prices

• Include all the costs of the purchases of the capital goods

• Price of the asset

• Costs associated with the transfer of ownership

Exercise 2, p. 166

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6.7 Changes in Inventories

= additions to / minus withdrawals from inventories

(1) Components of inventories

(a) Stocks of inputs

(a) Stocks of finished goods

(b) Stocks of merchandise purchased for resale

(c) Strategic stocks of government

(d) “Work in progress”

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(2) Holding gains or losses

• Not included in the “changes in inventories” as part of GDP

• Instead, regarded in a separate “re-evaluation account”

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(2) Ways of evaluating the changes in inventories

(a) Theoretically correct

• Incoming goods evaluated at market prices prevailing at date of entry

• Withdrawals evaluated at market prices ruling at the date of withdrawal

• Impossible to apply

(b) Approximate method

value of inventory change

= (quantities at end-of-period

– quantities at beginning-of-period)

x average price of the period

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(3) Economic analysis of changes in inventories

• Overall change in inventories

= change of inputs plus change of finished goods

• Positive change of inventories of inputs: indicates that producers are

expecting an increase in future production

• Increase in inventories of finished products: signifies that producers are

having difficulty in selling their output

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6.8 Net Acquisition of Valuables

(1) Valuables

= goods bought …

... In the expectation that they will increase (or retain) their value over

time

(2) Examples:

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(3) Treatment in national accounts

• Transactions between households: cancel out

• Transactions of commercial banks: investment

• Gold stocks of central banks: treated as financial assets, not as valuables

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6.9 Exports and Imports of Goods and Services

(1) Degree of openness = (exports + imports) / GDP

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(2) Exports and imports in GDP

• Include goods and services

• Defined using the concepts of “economic territory” and of “residence”

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(3) Economic territory

• Geographic area corresponding to the national state

• Only output taking place within the economic territory is recorded in the

national accounts

(4) Residence

• resident = unit whose “center of economic interest” is situated in that

country‟s economic territory

• Only residents are included in the institutional setors of the national accounts

• “rest of the world”

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(5) Recording imports and exports

(a) Principle of recording

Change in economic ownership

(b) Differing results from merchandise trade statistics

• Register exports and imports (of goods) on the basis of goods crossing the

border

• Problem: “Merchanting”

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• Problem: “Goods for processing”

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(6) Sources of data

(a) Custom authorities

• Established statistics of exports and imports

• Background

(b) Problem: European Union

• No longer any legal control by customs authorities over merchandise moving

within the EU

• Substitute: Surveys of the major exporters and importers

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(7) Prices of trade in goods

(a) Unit values

• Idea: use the very detailed data of customs statistics to separate quantities

and prices

• Unit value = value of an export (or import) / quantity

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(b) Valuation of trade flows

• Imports of goods: prices include “cost, insurance, freight” (cif)

• Exports of goods: Prices include transport and insurance cost up to the

border of the exporting country (“free on board”: fob)

• Note:

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(c) Terms of trade

= index of export prices / index of import prices

Exercise 4, p 167

(8) Trade in services

• Much smaller than trade in goods, but strongly increasing

• Statistical sources:

• Surveys of the principal operators dealing with the rest of the world

• Declarations made by commercial banks to their central banks