Eight characteristics of ESA concepts

1.05 In order to establish a good balance between data needs and data possibilities, the concepts in the ESA have eight important characteristics. They are:

1. internationally compatible;
2. harmonised with those in other social and economic statistics;
3. consistent;
4. operational;
5. different from most administrative concepts;
6. well-established and fixed for a long period;
7. focused on describing the economic process in monetary and readily observable terms;
8. flexible and multi-purpose.

1.06 The concepts are internationally compatible because:

1. for EU Member States, the ESA is the standard for submitting national accounts data to all international organisations. Only in the national publications is strict adherence to the ESA not obligatory;
2. the concepts in the ESA are in all respects consistent with those in the world-wide guidelines on national accounting, i.e. the SNA.

International compatibility of concepts is crucial when comparing statistics for different countries.

1.07 The concepts are harmonised with those in other social and economic statistics because:

1. the ESA employs many concepts and classifications (e.g. NACE rev. 1) that are also used for the other social and economic statistics of EU Member States, e.g. in statistics on manufacturing, statistics on external trade and statistics on employment; conceptual differences have been kept to a minimum. Furthermore, these EU concepts and classifications are also harmonised with those of the United Nations;
2. like the SNA, the concepts in the ESA are also harmonised with those in the major international guidelines on some other economic statistics, in particular the IMF Balance of Payments Manual (BPM), the IMF Government Finance Statistics (GFS), the OECD Revenue Statistics and the ILO resolutions on the concepts of employment, hours worked and labour costs.

This harmonisation with other, social and economic statistics greatly aids the linkage to and comparison with these figures. As a consequence, better national accounts figures can be compiled. Furthermore, the information contained in these specific statistics can now be better related to the general statistics on the national economy, i.e. the national accounts figures like GNP or value added per industry and sector.

1.08 The identities in the accounting framework enforce the consistency of the concepts used to describe the different parts of the economic process (production, income distribution, use of income, accumulation). As a result of this internal consistency, statistics from different parts of the accounting framework can be usefully related to each other. So, for example, the following ratios can be calculated:

1. productivity figures, such as value added per hour worked (this figure requires consistency between the concepts of value added and hours worked);
2. National disposable income per capita (this ratio requires consistency between the concepts national disposable income and population);
3. fixed capital formation as a percentage of fixed capital stock (this ratio requires consistency between the definitions of these flows and stocks);
4. government deficit and debt as percentages of gross domestic product (these figures require consistency between the concepts of government deficit, government debt and gross domestic product).

This internal consistency of concepts also allows some estimates to be derived by residual, e.g. saving can be estimated as the difference between disposable income and final consumption expenditure .

1.09 The concepts in the ESA are operational concepts since they are designed with their measurement in mind. The operational character of the concepts is revealed in several ways:

1. some activities or items have only to be described when significant in size. This pertains, for example, to own-account production of goods by households: weaving cloth and the production of pottery are not to be recorded as production, because these types of production are deemed to be insignificant for EU countries. Another case in point is that small inexpensive tools and appliances are only recorded as fixed capital formation when the purchaser's expenditure on such durables exceeds ECU 500 (at 1995 prices) per item (or, when bought in quantities, for the total amount bought); when this expenditure does not exceed this threshold, these items are recorded as intermediate consumption;
2. some concepts are accompanied by clear indications of how to estimate them. For example, in defining capital consumption reference is made to linear depreciation and for estimating fixed capital stock the Perpetual Inventory Method is recommended. Another case in point is the valuation of own-account production: in principle, it should be at basic prices, but if necessary the basic prices may be approximated by adding up the various costs involved;
3. some simplifying conventions have been adopted. For example, by convention, the collective services provided by government are all final consumption expenditure;
4. the concepts are harmonised with those in social and economic statistics used as inputs for compiling the national accounts.

1.10 However, at the same time, the concepts are not always easy to put into operation as they usually diverge in some respects from those employed in administrative data sources. Cases in point are business accounts, data on various types of taxes (VAT, personal income tax, import levies, etc.), social security data and data from supervisory boards on banking and insurance. These administrative data often serve as inputs for compiling the national accounts. In general, they will therefore have to be transformed in order to comply with the ESA.

The concepts in the ESA usually differ in some respects from their administrative counterparts because:

1. administrative concepts differ between countries. As a consequence, international compatibility cannot be attained through administrative concepts;
2. administrative concepts change over time. As a consequence, comparability in time cannot be attained through administrative concepts;
3. the concepts underlying administrative data sources are usually not consistent with each other. However, linking and comparing data, which is crucial for compiling national accounts figures, is only possible with a consistent set of concepts;
4. the administrative concepts are generally not optimal for economic analysis and the evaluation of economic policy.

Nevertheless, sometimes, administrative data sources meet the data needs of national accounts and other statistics very well, because:

1. concepts and classifications originally devised for statistical purposes may also be adopted for administrative purposes, e.g. the classification of government expenditure by type;
2. administrative data sources may explicitly take account of the (separate) data needs of statistics; this applies, for example, to the INTRASTAT system for providing information about deliveries of goods between EU-Member States.

1.11 The main concepts in the ESA are well-established and fixed for a long period, because:

1. they have been approved as the international standard for the next decades;
2. in the successive international guidelines on national accounting most of the basic concepts have hardly been changed.

This conceptual continuity reduces the need to recalculate time series and to learn new concepts. Furthermore, it limits the vulnerability of the concepts to national and international political pressure. For these reasons, the national accounts figures have been able to serve as an objective data base for economic policy and analysis for decades.

1.12 The ESA concepts are focused on describing the economic process in monetary and readily observable terms. For the most part, stocks and flows that are not readily observable in monetary terms, or that do not have a clear monetary counterpart are not taken into account.

This principle has not been applied strictly, because account should also be taken of the requirement of consistency and the various data needs. For example, consistency requires that the value of collective services produced by government is recorded as output, because the payment of compensation of employees and the purchase of all kinds of goods and services by government are readily observable in monetary terms. Furthermore, for the purposes of economic analysis and policy, describing the collective services of government in relation to the rest of the national economy increases also the usefulness of the national accounts as a whole.

1.13 The scope of the concepts in the ESA can be illustrated by considering some important borderline issues.

The following fall within the production boundary of the ESA (see paragraphs 3.07. - 3.09.):

1. production of individual and collective services by government;
2. the own-account production of housing services by owner-occupiers;
3. production of goods for own final consumption, e.g. of agricultural products;
4. own-account construction, including that by households;
5. the production of services by paid domestic staff;
6. breeding of fish in fish farms;
7. production forbidden by law, e.g. prostitution and production of drugs;
8. production from which the revenues are not declared in full to the fiscal authorities, e.g. clandestine production of textiles.

The following fall outside the production boundary:

1. domestic and personal services produced and consumed within the same household, e.g. cleaning, the preparation of meals or the care of sick or elderly people;
2. volunteer services that do not lead to the production of goods, e.g. caretaking and cleaning without payment;
3. natural breeding of fish in open seas.

In general, the ESA records all outputs that result from production within the production boundary. However, there are some specific exceptions to this rule:

1. the outputs of ancillary activities are not to be recorded; all inputs consumed by an ancillary activity - materials, labour, consumption of fixed capital, etc. - are treated as inputs into the principal or secondary activity which it supports;
2. outputs produced for intermediate consumption in the same local kind-of-activity unit (KAU, see paragraph 1.29.) are not to be recorded; however, all outputs produced for other local KAUs belonging to the same institutional unit are to be recorded as output.

The accounting logic of the ESA implies that if activities are regarded as production and their output is to be recorded, then the concomitant income, employment, final consumption, etc. are also to be recorded. For example, as the own-account production of housing services by owner-occupiers is recorded as production, so is the income and final consumption expenditure it generates for these owner-occupiers. The reverse holds when activities are not recorded as production: domestic services produced and consumed within the same household do not generate income and final consumption expenditure and according to the ESA concepts, no employment is involved.

The ESA also contains many specific conventions, e.g.:

1. the valuation of government output;
2. the valuation of the output of insurance services and financial intermediation services indirectly measured;
3. recording all the collective services provided by government as final consumption expenditure and none as intermediate consumption;
4. allocating the use of financial intermediation services indirectly measured (FISIM) to user sectors/industries.

1.15 The detail in the conceptual framework of the ESA offers the opportunity for flexible use: some concepts are not explicitly present in the ESA but can nevertheless easily be derived from it. For example, value added at factor cost can be derived by subtracting net other taxes on production from value added at basic prices. Another case in point is the creation of new sectors by rearranging the sub-sectors defined in the ESA.

1.16 Flexible use is also possible by introducing additional criteria which do not conflict with the logic of the system. For example, these criteria might be the scale of employment for producer units or the size of income for households. For employment, subclassification by level of education, age and sex can be introduced.

1.17 This flexible use may be incorporated in a Social Accounting Matrix (SAM). The SAM is a matrix presentation which elaborates the linkages between supply and use tables and the sector accounts (see paragraphs 8.133. - 8.155.). A SAM commonly provides additional information on the level and composition of (un)employment, via a subdivision of compensation of employees by type of person employed. This subdivision applies to both the use of labour by industry, as shown in the use tables, and the supply of labour by socio-economic subgroup, as shown in the allocation of primary income account for sub-sectors of the sector households. In this way, the supply and use of various categories of labour is shown systematically.

1.18 For some specific data needs the best solution is to draw up separate satellite accounts. Cases in point are the data needs for e.g.:

1. the analysis of the role of tourism in the national economy;
2. the analysis of the costs and financing of health care;
3. the analysis of the importance of research & development and human capital for the national economy;
4. the analysis of the income and expenditure of households on the basis of micro-oriented concepts of income and expenditure;
5. the analysis of the interaction between the environment and the economy;
6. the analysis of production within households;
7. the analysis of changes in welfare;
8. the analysis of the differences between national accounts and business accounts figures and their influence on stock and exchange markets;
9. the estimation of tax revenues.

1.19 Satellite accounts can serve such data needs by:

1. showing more detail where necessary and leaving out superfluous detail;
2. enlarging the scope of the accounting framework by adding non-monetary information, e.g. on pollution and environmental assets;
3. changing some basic concepts, e.g. by enlarging the concept of capital formation by amount of the expenditure on research & development or the expenditure on education.

1.20 An important feature of the satellite accounts is that in principle all basic concepts and classifications of the standard framework are retained. Only when the specific purpose of the satellite account definitely requires a modification, are changes in the basic concepts introduced. In such instances, the satellite account should also contain a table showing the link between the major aggregates in the satellite account and those in the standard framework. In this way, the standard framework retains its role as a framework of reference and at the same time justice is done to more specific needs.

1.21 The standard framework does not pay much attention to stocks and flows which are not readily observable in monetary terms (or without a clear monetary counterpart). By their nature, the analysis of such stocks and flows is usually also well served by compiling statistics in non-monetary terms, e.g.:

1. production within households can most easily be described in terms of hours allocated to the alternative uses;
2. education can be described in terms of type of education, the number of pupils, the average number of years of education before obtaining a diploma, etc.;
3. the effects of pollution are best described in terms of changes in the number of living species, the health of the trees in the forest, the volume of refuse, the amounts of carbon-monoxide and radiation, etc.

The satellite accounts offer a possibility to link such statistics in non-monetary units to the standard national accounts framework. The linkage is possible by using for these non-monetary statistics, as far as possible, the classifications employed in the standard framework, e.g. the classification by type of household or the classification by industry. In this way, a consistent extended framework is drawn up. This framework can then serve as a data base for the analysis and evaluation of all kinds of interactions between the variables in the standard framework and those in the extended part.

1.22 The standard framework and its major aggregates do not describe changes in welfare. Extended accounts can be drawn up which include also the imputed monetary values of, e.g.:

1. domestic and personal services produced and consumed within the same household;
2. changes in leisure time;
3. amenities and disadvantages of urban life;
4. inequalities in the distribution of income over persons.

In this way, one could try to construct a very rough and very imperfect indicator of changes in welfare. However, welfare has many dimensions, most of which are best not expressed in monetary terms. A better solution for measuring welfare is therefore to use, for each dimension, separate indicators and units of measurement. The indicators could be, for example, infant mortality, life expectancy, adult literacy and national income per capita. These indicators could be incorporated in a satellite account.

1.23 In order to attain a consistent, internationally compatible framework, administrative concepts are not employed in the ESA. However, for all kinds of national purposes, obtaining figures based on administrative concepts can be very useful. For example, for estimating tax revenues statistics of taxable income are required. These statistics can be provided by making some modifications to the national accounts statistics.

A similar approach could be taken for some concepts used in national economic policy, e.g. for:

1. the concept of inflation used for increasing pensions, unemployment benefits or compensation of employees for civil servants;
2. the concepts of taxes, social contributions, government and the collective sector used in discussing the optimal size of the collective sector;
3. the concept of 'strategic' sectors/industries used in national economic policy or the economic policy of the EU;
4. the concept of 'business investments' used in national economic policy.