The SNA : Some Outstanding Issues Peter Hill

1
The SNA Some Outstanding IssuesPeter Hill
2
The paper focuses on three broad issues.

• The structure and scope of the SNA accounts. The
  different roles played by monetary and
  non-monetary transactions and the
  inter-relationships between the real and the
  financial accounts of the system.
• The potential conflict of interest between the
  needs of short and long term analysts.
• The need to reconstruct the production account
  and to record the interest payable on the current
  value of the fixed and other assets used in
  production.

3
A recurring theme is the extent to which it is
desirable, necessary or feasible to record
internal transactions in the SNA.

• Internal transactions occur when the same
  economic unit, such as an enterprise or
  household, acts in two different capacities and
  engages in two different types of economic
  activity.
• For example, an economic unit may choose to
  consume or add to its stock of assets something
  that it has produced itself, instead of selling
  it on the market.
• In order to record this production an internal
  transaction is deemed to take place in which the
  producer sells the output to itself in its
  capacity as a consumer or asset owner.

4
Internal transactions involve real flows of goods
and services.

• Although prices have to be estimated, or imputed,
  for the quantities transacted, the quantities are
  real and observable.
• If internal transactions are ignored, real
  economic activities and their associated costs
  and benefits go unrecorded. Not only production
  but consumption ad capital formation are missed.
• These activities interact with market activities
  and may have a considerable impact on welfare and
  growth potential.

5
Transactions accounts, real accounts and the
financial account

• Transactions accounts are defined here simply as
  accounts that record transactions. In the SNA,
  therefore, they consist of the sequence of
  accounts from the production account to the
  financial account.
• Transactions accounts other than the financial
  account are described here as real accounts,
  although this term is not used in the SNA.
• The real accounts record transactions related to
  the real economic activities of production,
  consumption and capital formation. In the SNA
  they consist of the sequence of accounts from the
  production account to the capital account.

6
Monetary transactions

• The great majority of the entries in the SNA
  accounts refer to monetary transactions although,
  a few refer to certain types of internal
  transactions and other non-monetary transactions.
• In a monetary transaction a good, service or
  asset is exchanged for cash or the creation of a
  short term financial asset or liability.
• For each of the parties concerned, a monetary
  transaction leads to a pair of matching entries
  in the accounts one in a real account and one
  in the financial account.

7
Net lending or borrowing

• The net change in an economic units real
  resources resulting from its monetary
  transactions as recorded in the real accounts
  must be matched by an equal change in financial
  asset/liabilities in the financial account.
• This identity emerges in the SNA in the form of
  the identity between net borrowing/lending as
  recorded in the capital and the financial
  accounts respectively.
• The identity holds because the transactions
  accounts as a whole constitute a closed
  inter-dependent system of accounts.

8
The transactions accounts form an inter-dependent
system of accounts.

• The capital account includes net saving carried
  over from the preceding sequence of real
  transactions accounts and not just transactions
  in capital assets.
• Net saving therefore links the capital account to
  the other real accounts. The net
  lending/borrowing requirement shown in the
  capital account is generated by all the real
  economic activities in which a unit engages.
• The identity between net lending/borrowing in the
  capital and financial account reflects the
  inter-dependence between the real and financial
  sectors of the economy.

9
The SNAs accounting structure

• In the SNA the accounts are grouped into current
  accounts and capital accumulation accounts. The
  capital and financial accounts are hived off from
  the other transactions accounts.
• Thus, the SNA effectively ignores the fact that
  the transactions accounts form an integrated
  inter-dependent system.
• The structure of the SNA accounts plays down the
  inter-dependence between the real and the
  financial accounts and is therefore not ideal at
  a time of financial crisis.

10
Demands on the accounts for short and lone term
analysis

• Until very recently, it seemed that the main
  objective of monetary and fiscal policy in most
  countries was no longer short term economic
  stabilization but promoting long term growth.
• This has led to demands to expand the accounts to
  include more non-market activities and
  non-monetary transactions.
• However, restoring stability in real and
  financial markets has suddenly become the
  over-riding priority of economic policy
  throughout the world.

11
The SNA is meant to be a multi-purpose system.

• However, there has long been pressure to change
  or expand the system to include various
  non-market activities, such as household
  production for own consumption or capital
  formation.
• The inclusion of non-monetary transactions does
  not disturb the identity between net
  lending/borrowing in the capital and financial
  accounts. However, the inclusion of slow moving
  non-market activities may tend to dampen down
  short term fluctuations in the aggregates.
• Their inclusion may be important for certain
  types of analysis but it could actually detract
  from the usefulness of the accounts for purposes
  of monitoring and analysing short-term
  fluctuations and market disequilibria.

12
Recent events suggest that the present SNA should
continue to be based mainly on monetary
transactions.

• However, a convincing case has been made that
  there maybe a need over the longer term to
  construct more comprehensive measures of economic
  growth and also additional series to explain
  growth.
• The best way to meet the needs of short and long
  term analysis may be to have two sets of
  accounts the existing accounts plus some
  extended accounts
• In the past it has been argued that users would
  be confused by having two set of accounts, but it
  is doubtful whether this is the case today.

13
Interest and capital services

• There is one way in which the usefulness of the
  accounts for analysis and policy could be
  improved with minimal disturbance to the system,
  namely by recording in the production account the
  interest payable on the current value of fixed
  asset used in production.
• In the early days of the SNA interest used to be
  recorded as a cost in the production account but
  it was dropped from the account in the 1968
  revision.

14
Leasing and rentals

• When fixed assets are rented under a lease, the
  rentals payable are recorded as costs in the SNA
  production account.
• For the leasing to be viable, the rentals must
  cover not only the lessors maintenance and
  administrative costs but also the depreciation on
  the asset and the interest payable or foregone on
  the current value of the asset.
• The interest represents the opportunity cost of
  using the funds to acquire fixed assets instead
  of investing them in financial assets.

15
Imputed rentals on assets owner by the user

• When an enterprise using a fixed asset owns it an
  internal transaction should be recorded in which
  the enterprise pays a rental to itself its
  capacity as an asset owner.
• The rentals may be estimated using corresponding
  market rentals, but if there is no suitable
  rental market, the rentals can be estimated from
  their costs, including depreciation and the
  interest payable.
• However, the SNA only records the depreciation
  and not the interest.

16
The SNA net operating surplus is not all primary
income

• The SNA net operating surplus is not the surplus
  from production if there are outstanding
  liabilities that have been incurred purely as a
  result of engaging in production that have not
  been charged against the production.
• The interest payable is an inescapable cost of
  production that needs to be accounted for in the
  SNA production account. It is not some kind of
  discretionary payment made out of an operating
  surplus.

17
Estimating capital services

• The total interest payable plus depreciation
  should provide a close approximation to the cost
  of the capital services used in production.
• There is substantial literature in favour of
  using an exogenous or endogenous rate of return
  on the fixed assets instead of the interest
  payable on their value.
• However, that it should be possible to value the
  costs of the inputs into a process of production
  independently of the value of the output. The
  interest paid or foregone represents an integral
  part of the opportunity cost to an enterprise of
  using its own assets in production.

18
Depreciation and interest

• Enormous advances have been made in developing a
  theoretically satisfactory and practical
  methodology for estimating stocks of fixed asset
  by means of the perpetual inventory method, or
  PIM.
• Depreciation can be estimated within the general
  framework of the PIM, but nevertheless it remains
  much more difficult to estimate than the interest
  payable on the current value of the asset.
• A case can be made on practical grounds for not
  calculating depreciation, and the 1993 SNA
  explicitly allows for this possibility, but if
  depreciation can be calculated and recorded there
  is no case for not recording the interest payable
  as well.