Eurostat
ESTP course on National Accounts – Introductory course
Statistics Finland, Helsinki,
7–10 April 2014
Lesson 2: Introduction to National Accounts II
Katri Soinne
Eurostat
The System of National Accounts...
• … describes all the economic activities in the economy
• … is based on the theory of economics
• … includes a lot of definitions and agreements
• … gives a possibility to comparisons between years and countries
• … does not describe well-being
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Eurostat
Content
• Production boundary
• Statistical units and their grouping
• Centre of economic interest; resident vs. non-resident
• Flows and stocks
• Basic equations
• Supply: GDP and three approaches for calculation
• Demand: consumption, investments, net exports
• Rules of accounting
• Sequence of accounts; balancing item
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Eurostat
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The circular flow of income in a closed system
Production Primary income
Commodity Income
expenditures redistribution
Eurostat
Definition of Production
• “An activity carried out under the control and responsibility of an institutional unit that uses inputs of labour, capital and goods and services to produce outputs of goods and services. Production does not cover purely natural processes without any human involvement or direction,…” (ESA95 3.07)
• Same definition in ESA 2010
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Eurostat
Production Boundary
• Includes all individual or collective goods and services that are supplied to the market as well as the own-account production of all goods for own final consumption or gross fixed capital formation
• Case: forests - trees and other products
• Case: housing
• Defines the activities which are counted in NA
• Hidden economy & illegal activities
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Eurostat
Exercise 1: Production or not in SNA (part I)
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YES NO
A) Growing potatoes to be sold to the factory…………
B) Growing potatoes for your own use..…………………
C) Natural growing of Baltic herrings at sea……………
D) Growing of trout at a trout farm.......……..…………
E) Selling beer at the restaurant with a receipt………
F) Selling beer at the restaurant without recording it…
G) Polluting the environment……………………………………
H) Gathering mushrooms in the woods……………………
I) Smuggling of alcohol or tobacco……………………………
Eurostat
Statistical units and their grouping: two types of units
• Institutional units and sectors in order to describe income, expenditure, financial flows and
balance sheets economic entities having certain rights and possibilities and
making their own decisions
• Local kind-of-activity units and industries in order to describe processes of production and for input-
output analysis; local KAUs are grouped into industries on the basis of their activity unit/ producer/ location/ activities and products
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Eurostat
Sector classification
• SNA 1993 and ESA 1995: identical hierarchy and numbering
• SNA 2008 and ESA 2010: more sub-sectors to financial corporations (S12) compared to previous versions
• ESA-classification = modified for the needs of the EU (for example sub-division of the rest of the world sector)
• Also a possibility to have sub-divisions for national needs
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Eurostat
Classification of institutional sectors
• S11 Non-financial corporations
• S12 Financial corporations
• S13 General government
• S14 Households
• S15 Non-profit institutions serving households
• S2 Rest of the world
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Eurostat
ISIC and NACE
• UN: ISIC (International Standard Industrial Classification)
• EU: NACE (European Classification of Economic Activities)
• National level: National versions of NACE
• Updates needed every now and then: latest from 2006-08
• The classification is hierarchical and coded (sections - divisions - groups - classes)
• Units having similar features make up an industry (production process, goods and services used in process, produced goods and services)
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Eurostat
Other classifications
• Classification of Products by Activity (CPA)
• Classification of individual consumption by purpose (COICOP)
• Classification of the functions of the government (COFOG)
• Classification of the Purposes of Non-Profit Institutions Serving Households (COPNI)
• Classification of assets (A)
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Eurostat
Links between statistical units and classifications
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• Institutional unit (company, bank, municipality, household, association,...)
• Local kind of activity unit (establishment)
• Product
• Sector classification
• Industrial classification Nace (Rev.2 )
• Product classification CPA
Eurostat
Institutional unit and local kind-of-activity unit (LKAU)
• One institutional unit contains one or more KAUs
• A local KAU belongs to one and only one institutional unit
• For theoretical purposes also so called homogenous unit
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Institutional unit A
LKAU 1 LKAU 2
Institutional unit B
LKAU 3
Eurostat
Examples of industries of LKAU(s) and Institutional Units
LKAU(s) IU
Amusement park (one location) =
Frozen French Fries Company + = (two locations)
Company producing shoes, motor bikes and + + = cleaning services
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932 932
103 103 103
152 (VA 45%)
291 (VA 40%)
960 (VA 15%)
152 (as IU)
Eurostat
Statistical units and their grouping: two types of units
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Industry/ Sector S11 S13 S14
014 Animal production X X
13 Manufacture of textiles X
41 Construction of buildings X X X
55 Accommodation X X
84 Public administration X
862 Medical and dental practice activities
X X X
97 Activities of households as employers of domestic personnel
X
Eurostat
Exercise 2: industries (LKAUs and institutional units)
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NACE (3-digit) of LKAU(s)
NACE (3-digit) of institutional unit
Unit 1: Potato farmer
Unit 2: Trout farmer
Unit 3: Company producing bikes and televisions (bikes 45% and televisions 55% of value added)
Unit 4: Gas-station with bakery (gas 25% and bakery 75% of value added)
Unit 5: Bank (part of bigger corporation)
Eurostat
Exercise 2: industries (LKAUs and institutional units)
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NACE (3-digit) of LKAU(s)
NACE (3-digit) of institutional unit
Unit 6: Insurance company
Unit 7: Embassy of Ever-Ever-land
Unit 8: University
Unit 9: Health care centre
Unit 10: Choir
Eurostat
Centre of Economic Interest
• One of the basic principles of the SNA and ESA defines whose activities are counted for the
national economy in a country
• Unit has a centre of economic interest in a country
• when a unit engages in economic activities for one year or more
OR
• when a unit carries out a construction activity in a country for a period of less than one year if the output is gross fixed
capital formation
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Eurostat
Resident - non-resident - notional resident
• A unit is resident in a country when it has a centre of economic interest on the territory of that country
• Some special cases: airplanes, international organisations, ...
• Also treated as institutional units (notional residents):
• those parts of non-resident units which have a centre of economic interest in a country
• non-resident units in their capacity as owners of land or buildings on the economic territory of the country
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Eurostat
Total economy and the rest of the world
• Total economy comprises of all resident units (incl. notional)
• Resident units engage in transactions with non-resident units external transactions in the rest-of-the world account
• The calculations are made from the point of view of the rest of the world (except for exports and imports)
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Eurostat
Exercise 3: resident/ non-resident/ notional resident
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Additional information R
esid
en
t
No
n-
resid
en
t
No
tion
al
resid
en
t
Unit 1: Potato farmer Travelling abroad one a year for vacation
Unit 2: Trout farmer Never-Never-landish, foreign trade with Ever-Ever-land
Unit 3: Company producing bikes and televisions (bikes 45% and televisions 55% of value added)
Foreign branch office (residency as a institutional unit)
Unit 4: Restaurant Gas-station with bakery (gas 25% and bakery 75% of value added)
Accepting all international credit cards
Unit 5: Bank (part of bigger corporation) Selling also foreign money
Eurostat
Additional information
Resid
ent
Non-
resid
ent
Notio
nal
resid
ent
Unit 6: Insurance company Selling also travel insurance
Unit 7: Embassy of Ever-Ever-land Based in Never-Never-land
Unit 8: University Having foreign students
Unit 9: Health care centre Serving tourists, too
Unit 10: Choir Performing also abroad
Unit 11: Household From Never-Never-land, owning a cottage in Ever-Ever-land
Exercise 3: resident/ non-resident/ notional resident
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Eurostat
Two basic kinds of information in the system:
• Stocks: holdings of assets and liabilities at a point of time --> recorded in balance sheets
• Flows: reflect creation, transformation, exchange, transfer or extinction of economic value --> recorded in all other accounts of the system --> two kinds of economic flows:
– transactions
– other changes in assets
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Eurostat
Different kind of transactions
• Transactions in goods and services (=products) (codes starting with P)
• Distributive transactions (codes starting with D)
• Transactions in financial instruments (codes starting with F)
• Other accumulation entries (codes starting with K)
=> Balancing items (codes starting with B)
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Eurostat
Basic equations
• The basic idea: supply and demand are equal GDP + M = C + G + I + X <=> GDP = C + G + I + (X - M)
• Also: output + import = IC + C + G + I + X
• Production = Income = Expenditure
• Definitional equations:
• transaction identity (for transactions between units): total uses = total resources
• budget identity (for sectors and units): total uses = total resources
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Eurostat
Gross domestic product (GDP)
• … describes the value of production (=value added)
• … includes the production of domestic production units
• … includes taxes and subsidies on production
• … also includes the hidden economy
• … should also include illegal activities
• … is counted both at current price and at fixed price
• … does not include household production
• … is one of the most important economic indicators and very widely used in comparisons (GDP/capita)
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Eurostat
Exercise 4: Production or not in SNA (part II)
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YES NO
J) You are eating at a restaurant……………...………….....
K) You are preparing a meal for your family.……………
L) You are cleaning your house…………………………........
M) You are hiring a cleaner for your house.………………
N) You are cleaning the house of your mother-in-law
O) You are hiring a cleaner for your mother-in-law...
P) You are painting the outside of your home…………..
Q) You are painting the inside of your home…………….
R) You are hanging wallpaper at your home…………….
Eurostat
Gross domestic product (GDP), cont’d
• Three methods for estimation A: production approach = output (P.1)- intermediate consumption (P.2) B: income approach = compensation of employees (D.1) + gross operating surplus (B.2G) (+ net taxes on production (D.29-D.39)) C: expenditure approach = final consumption expenditure (P.3)+ gross capital formation (P.5) + exports (P.6) – imports (P.7)
• Production inside one country
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Eurostat
Gross national income (GNI)
= gross domestic product
+ primary income received from the rest of the world - primary income paid to the rest of the world
• Primary income wages and salaries, social contributions (these together equal
compensation of employees)
interest, dividends
taxes on production and imports
subsidies
• Income one population
• Used in the EU context
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Eurostat
Exercise 5: From GDP to GNI
GDP of Ever-Ever-land for year X is 1155. • Compensation of employees paid to Never-Never-land: 20
• Wages and salaries received from Never-Never-land: 25
• Social contributions received from Never-Never-land: 5
• Interest, net (=received - paid): -8
• Dividends from Never-Never-land: 18
• Dividends, payable to the RoW: 9
• Subsidies, receivable: 6
• Subsidies, payable: 7
• Imports: 400
• Exports: 540
• Taxes on production and imports paid to the RoW: 5
Calculate the GNI of Ever-Ever-land:
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Eurostat
Output (P.1)
• Output = value of produced commodities (=goods and services) during the accounting period
• Types of output:
• market output (P.11)
• non-market output
output produced for own final use (P.12)
other non-market output (P.13)
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Eurostat
Intermediate consumption (P.2)
• Intermediate consumption = value of goods and services used as inputs in the production process (excluding fixed assets)
• Division: • FISIM (= Financial Intermediate Services Indirectly Measured)
(P.21)
• other intermediate consumption (P.22)
• Examples: raw materials, semi-finished goods, fuels and energy, small tools, purchased services, repairs and maintenance
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Eurostat
Value added (gross) (B.1G)
= difference between output and intermediate consumption
= income generated with production
= compensation of employees » wages and salaries
» social contributions
+ operating surplus and mixed income
+ consumption of fixed capital
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Eurostat
Consumption of Fixed Capital (CFC) (K.1)
• In the system most of the time the difference between gross and net concepts is the consumption of fixed capital
• CFC is a cost for using fixed capital
• CFC is a cost in production account and a resource in accumulation account
• CFC has an impact on value added in the production accounts of non-market producers
• CFC has an impact on operating surplus/ mixed income of market producers
• CFC is an imputed transaction
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Eurostat
Stiglitz-Sen Commission: Net Concepts
• NDP instead of GDP: difference is the depreciation of capital goods (CFC)
• Changes in the structure of production
• CFC does not include running out of scarce natural resources nor degradation in quality of the environment
• Net national disposable income – there might be a big difference between income of the citizens and measures of domestic production
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Eurostat
Final expenditure: Consumption (C + G)
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Final consumption expenditure (P.3):
Actual final consumption (P.4):
• In the economy as total: final consumption expenditure = actual final consumption
• Actual individual consumption is used for international comparisons
Private consumption Government consumption
Individual consumption Collective
consumption
Eurostat
Final expenditure: Gross capital formation (I) (P.5)
• Gross fixed capital formation (investments)
• acquisition less disposals of fixed assets
• SNA2008/ ESA2010: military equipment
• special attention: delineation with intermediate consumption
• Division: private/ government
• Changes in inventories
• Valuables
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Eurostat
Final expenditure: Net exports (X-M) = export (P.6) – imports (P.7)
• Transactions in goods and services
exports: from residents to non-residents
imports: from non-residents to residents
• Criterion: change of ownership (not crossing the border)
• Some agreed specialities:
• goods and services while travelling
• significant processing
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Eurostat
Exercise 6: final consumption or IC or GFCF?
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Action Final consumption
Intermediate consumption
Gross fixed capital formation
Potato farmer buys pesticides
Mr Smith buys pesticides for his garden
Restaurant buys potatoes
Mrs Smith buys potatoes for her family
Ms Williams buys a car for herself
A restaurant buys a car for the company
Mr Brown drives the car owned by restaurant, restaurant pays
Police keeps an eye on demonstration
Police works as security officer in a concert
Company buys tickets to a concert for it’s customers
Eurostat
Final consumption
Intermediate consumption
Gross fixed capital formation
You buy tickets to the same concert (as the company) for the rest of your family
Government is building a library
Library is buying books to be borrowed
You are buying old, removed books from library sale
You are buying materials to paint your home (inside)
Company providing cleaning services is buying materials to paint inside of the building
Company providing cleaning services is buying materials to paint outside the building
Company providing painting services is buying materials to paint outside of the library
Exercise 6: final consumption or IC or GFCF?
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Eurostat
Market producers
• Price of sold products covers the production costs (50% rule) => market output by market producers
• Counting from top to bottom - starting with output, ending with operating surplus/ mixed income:
output - intermediate consumption
= value added (gross) - CFC
= value added (net) - compensation of employees
- taxes + subsidies
= operating surplus/ mixed income
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Eurostat
Market producer: example
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Output
Market output
Output for own final use
Intermediate consumption
Value added, gross
Cosumption of fixed capital
Value added, net
Wages and salaries
Operating surplus/ mixed income
100
20
55
5
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Eurostat
Non-market producers
• Products are free or the price does not cover the expenses
• Different valuations
• Counting from bottom to top: output = sum of costs (no operating surplus/ mixed income)
compensation of employees + taxes - subsidies
= value added (net) + CFC
= value added (gross) + intermediate consumption
= output
• General government and non-profit institutions
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Eurostat
Non-market producers: example
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Output
Market output/ sales of non-market ouput
Output for own final use
Other non-market output
Intermediate consumption
Value added, gross
Consumption of fixed capital
Value added, net
Wages and salaries
Operating surplus/ mixed income
50
10
40
15
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Eurostat
Exercise 7: GDP in three approaches
• Four different industries in Ever-Ever-land (figures are given per industry)
• Market output/producer: income covers at least 50% of costs, calculated from the top to the bottom
• Non-market output/producer: income does not cover costs, calculated from the bottom to the top (value of output = sum of costs)
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Eurostat
Exercise 7: GDP in three approaches
• Based on an assumption: non-market producers do not have any operating surplus/ mixed income
• Other non-market production (= output - market production - production for own final use - sales of non-market products) is final consumption
• Final expenditure includes net exports (=export – import)
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
8.3.2013
1(1)
Industry A Per indus-try
Industry C Per in-dustry
Imports of raw materials 400 Purchase from industry A 420
Wages and salaries 120 Wages and salaries 800
Sales of products to industry C 420 Sales of products to industry O 200
Sales of products to industry O 110 Sales of products to industry P 280
Sales to consumers 300
Export 540
Exercise 7: GDP in three approaches
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
26.4.2012
1(1)
Industry O Per in-dustry
Industry P Per in-dustry
Purchase from industry A 110 Purchase from industry C 280
Purchase from industry C 200 Purchase from industry O 80
Wages and salaries 75 Wages and salaries 50
Sales of products to industry P 80
Exercise 7: GDP in three approaches
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
26.4.2012
1(1)
Industry A
Uses Resources
Imports Sales to industry C
Wages and salaries Sales to industry O
Profits / operating surplus
Total Total
Exercise 7: GDP in three approaches
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
26.4.2012
1(1)
Industry C
Uses Resources
Purchase from industry A Sales to consumers
Wages and salaries Sales to industry O
Profits / operating surplus Sales to industry P
Exports
Total Total
Exercise 7: GDP in three approaches
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
26.4.2012
1(1)
Industry O
Uses Resources
Purchase from industry A Sales to industry P
Purchase from industry C Other non-market production
Wages and salaries
Profits / operating surplus
Total Total
Exercise 7: GDP in three approaches
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Eurostat
YKSIKKÖ
Nimi
Yhteystiedot
MUISTIO
26.4.2012
1(1)
Industry P
Uses Resources
Purchase from industry C Other non-market production
Purchase from industry O
Wages and salaries
Profits / operating surplus
Total Total
Exercise 7: GDP in three approaches
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Eurostat
Exercise 7: GDP in three approaches
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Approach A: Production
Industry A
Industry C
Industry O
Industry P
GDP
Eurostat
Exercise 7: GDP in three approaches
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Approach B: Income
Industry A
Industry C
Industry O
Industry P
GDP
Eurostat
Exercise 7: GDP in three approaches
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Approach C: Expenditure
Industry A
Industry C
Industry O
Industry P
GDP
Eurostat
Rules of accounting of the system
• Double entry / quadruple entry: each transaction must be recorded twice - in practice recorded four times!
• Valuation: flows and stocks are measured at their exchange value, i.e. the value at which they are, or could be, exchanged for cash
• Imputing: the system includes both actual and imputed transactions
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Eurostat
Rules of accounting, cont’d
• Time of recording: accrual basis = when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled
• Consolidating: elimination of transactions between units in the same (sub)sector from both uses and resources or from assets and liabilities
• Netting: elimination of the same kinds of transactions for a unit (sales and acquisitions, etc.)
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Eurostat
Sequence of Accounts
Basic accounts the national accounts:
• Production account
• Distribution and use of income accounts
• Accumulation accounts
• Balance of payments account (rest of the world)
Balance sheets
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Eurostat
The Balancing Item
• Accounts balance out, either because of the definitions used or because of the balancing item
• Balancing item is calculated based on existing information and the theory of economics
carries the system forward
is an interesting indicator as such
• The balancing item of the previous account is the opening resource of the next account
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Eurostat
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Uses
Account X:
45
10
X
-----------------------
Account X+1:
20
Y
-----------------------
Resources
Account X:
50
30
--------------------------
Account X+1:
X
15
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Eurostat
The quality of the national accounts?
• Meaningful aggregation
• Proper level of consolidation
• Double-entry bookkeeping
• Cross-checking the source statistics
• Well-being
• Delineation with reality?
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