COUNCIL REGULATION (EC) No 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 213 thereof,

Having regard to the draft Regulation submitted by the Commission,

Having regard to the opinion of the European Parliament (1),

Having regard to the opinion of the European Monetary Institute (2),

Having regard to the opinion of the Economic and Social Committee (3),

(1) Whereas the implementation and supervision of Economic and Monetary Union require comparable, up-to-date and reliable information on the structure and developments in the economic situation of each country and/or region;

(2) Whereas the Commission must play a part in the administration of Economic and Monetary Union and, in particular, report to the Council on the progress made by the Member States in fulfilling their obligations for the achievement of Economic and Monetary Union;

(3) Whereas economic accounts are a basic tool for analysing the economic situation of a country and/or region on condition that they are drawn up on the basis of a single set of principles that are not open to differing interpretations;

(4) Whereas the Commission must use aggregates of national accounts for Community administrative and, in particular, budgetary calculations;

(5) Whereas in 1970 an administrative document entitled 'European System of Integrated Economic Accounts` (ESA) was published, covering the field governed by this Regulation, which had been drawn up solely by the Statistical Office of the European Communities and on its responsibility alone; whereas that document was the outcome of several years' work by the Statistical Office of the European Communities, together with Member States' national statistical institutes, to devise a system of national accounts meeting the requirements of the European Communities' economic and social policy, and whereas it constituted the Community version of the United Nations System of National Accounts which had been used by the Community up to that time;

(6) Whereas in order to update the original text a second edition of the document was published in 1979 (hereinafter referred to as 'ESA Second edition`) (4);

(7) Whereas the United Nations Statistical Commission adopted in February 1993 the new System of National Accounts (SNA) so that the results in all member countries of the United Nations should be internationally comparable;

(8) Whereas attention should be paid in the case of environmental accounts to the communication from the Commission to the European Parliament and the Council of 21 December 1994 entitled 'Directions for the European Union on environmental indicators and green national accounting`;

(9) Whereas the Community cooperates with third countries to mutual advantage, particularly those in the European Economic Area (EEA);

(10) Whereas a European System of Accounts must be established to meet the requirements of Economic and Monetary Union and will have to be used for compiling the national and regional accounts provided for by Community legislation;

(11) Whereas the results of the accounts and tables of all the Member States drawn up according to the system set up by this Regulation must be made available by the Commission to users on precise dates, particularly with regard to monitoring the economic convergence and achieving the closest coordination of the Member States' economic policies;

(12) Whereas the system set up by this Regulation is gradually to replace all other systems as a reference framework of common standards, definitions, classifications and accounting rules for drawing up the accounts of the Member States for the requirements of the Community, so that results that are comparable between the Member States can be obtained;

(13) Whereas these statistical results, must be accessible to citizens in accordance with the principle of transparency;

(14) Whereas the system established by this Regulation, which constitutes a version of the SNA adapted to the structures of the Member States' economies, must follow the layout of the SNA so that the Community's data are comparable with those compiled by its main international partners;

(15) Whereas the dates must be grouped according to broad category of the accounts and tables, and whereas only the information essential to the requirements of the Community must be processed and communicated to the Commission on precise dates;

(16) Whereas, however, in view of the volume and size of the accounts concerned, the level of detail and the geographical coverage, as well as the situation in this respect in the Member States, certain extra periods of time for forwarding data shall be granted exceptionally and temporarily to Member States which objectively are unable to meet the deadlines laid down by this Regulation;

(17) Whereas a decision on how financial intermediation services indirectly measured (Fisim) are to be broken down should be taken at a later date;

(18) Whereas, according to the principle of subsidiarity, the creation of common statistical standards so that comparable information can be produced is a task that can only be dealt with effectively at Community level and whereas such standards will be implemented in each Member State under the aegis of the organizations and institutions responsible for compiling official statistics;

(19) Whereas it is necessary to set up a procedure to adapt and update the provisions of this Regulation in cooperation with the Statistical Programme Committee of the European Community (SPC), established by Council Decision 89/382/EEC, Euratom (5); whereas that adaptation procedure will be limited to amendments which do not increase own resources;

(20) Whereas the Statistical Programme Committee and the Committee on Monetary, Financial and Balance of Payments Statistics (CMFB), established by Decision 91/115/EEC (6), have declared themselves in favour of the draft of this Regulation;

(21) Whereas Council Directive 89/130/EEC, Euratom of 13 February 1989 on the harmonization of the compilation of gross national product at market prices (GNPmp) (7) stipulates that GNPmp can be comparable only if the definitions and accounting rules of the European System of Integrated Economic Accounts are applied, and whereas Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax (8) provides that, in order to calculate the weighted average rate of VAT, the breakdown of transactions liable to tax shall be effected by means of national accounts prepared in accordance with the European System of Integrated Economic Accounts, and whereas for those instruments, and in the context of Council Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol on the excessive deficit procedure (9), Council Decision 94/728/EC, Euratom of 31 October 1994 on the system of the European Communities' own resources (10) and Council Decision 94/729/EC of 31 October 1994 on budgetary discipline (11), a transitional period for implementing the system set up by this Regulation should be provided,

HAS ADOPTED THIS REGULATION:

Article 1

Purpose

1. The purpose of this Regulation is to set up the European System of Accounts 1995 hereinafter referred to as 'ESA 95`, by providing for:

(a) a methodology on common standards, definitions, classifications and accounting rules, intended to be used for compiling accounts and tables on comparable bases for the purposes of the Community, together with results as required under the terms of Article 3;

(b) a programme for transmitting for Community purposes on precise dates the accounts and tables compiled according to the ESA 95.

2. Taking into account Articles 7 and 8, this Regulation shall apply to all Community acts that refer to the ESA or its definitions.

3. This Regulation does not oblige any Member State to use the ESA 95 in compiling accounts for its own purposes.

Article 2

Methodology

1. The methodology of the ESA 95 referred to in Article 1 (1) (a) is set out in Annex A.

2. Amendments to the ESA 95 methodology which are intended to clarify and improve its content shall be adopted by Commission Decision in accordance with the procedure provided for in Article 4, provided that they do not change its underlying concepts, do not require additional resources for their implementation and do not cause an increase in own resources.

3. In accordance with the relevant provisions of the Treaty, the Council shall, not later than 31 December 1997, take a decision on introducing the system for breaking down the financial intermediation services indirectly measured (Fisim) described in Annex I of Annex A, and shall, if appropriate, adopt the necessary measures for the implementation thereof.

Article 3

Transmission to the Commission

1. The Member States shall transmit to the Commission (Statistical Office) the accounts and tables set out in Annex B within the time limits specified for each table.

The extra periods of time granted to certain Member States in accordance with Annex B shall expire not later than 1 January 2005.

The Commission, after consulting the Statistical Programme Committee, shall report to the Council not later than 1 July 2003 on the application of the extra periods of time granted in order to verify whether they are still justified. This report shall, if necessary, be accompanied by a Commission proposal again granting extra periods of time to those Member States requiring them.

2. The Member States shall transmit the results of Annex B, including the data which have been declared confidential by Member States in accordance with national legislation or practice concerning statistical confidentiality, under the provisions of Council Regulation (Euratom, EEC) No 1588/90 of 11 June 1990 on the transmission of data subject to statistical confidentiality to the Statistical Office of the European Communities (12), which governs the confidential treatment of information.

Within the limits set in Article 2 (2), any changes - new tables, countries and/or regions concerned - in the data requested from the Member States may be the subject of Commission Decisions in accordance with the procedure provided for in Article 4.

Article 4

Procedure

1. The Commission shall be assisted by the Statistical Programme Committee, hereinafter referred to as 'the Committee`.

2. The representative of the Commission shall submit to the Committee a draft of the measures to be taken. The Committee shall deliver its opinion on the draft, within a time limit which the chairman may lay down according to the urgency of the matter. The opinion shall be delivered by the majority laid down in Article 148 (2) of the Treaty in the case of decisions which the Council is required to adopt on a proposal from the Commission. The votes of the representatives of the Member States within the Committee shall be weighted in the manner set out in that Article. The chairman shall not vote.

3. The Commission shall adopt measures which apply immediately. However, if these measures are not in accordance with the opinion of the Committee, they shall be communicated by the Commission to the Council forthwith. In that event:

(a) the Commission shall defer application of the measures it has decided by three months from the date of communication;

(b) the Council, acting by a qualified majority, may take a different decision within the time limit laid down in point (a).

Article 5

The Committee's tasks

The Committee shall examine all matters that are raised by its chairman relating to the implementation of this Regulation either on his own initiative or at the request of a Member State.

Article 6

Cooperation with other committees

1. On all matters falling within the competence of the Committee on Monetary, Financial and Balance of Payments Statistics (CMFB), the Commission shall request the opinion of that Committee in accordance with Article 2 of Decision 91/115/EEC.

2. The Commission shall communicate to the Committee on Gross National Product, set up by Directive 89/130/EEC, Euratom any information concerning the implementation of this Regulation which is necessary for the performance of its duties.

Article 7

Date of application and of first transmission of data

1. The ESA 95 shall be applied for the first time to data established in accordance with Annex B to be transmitted in April 1999.

2. The data shall be transmitted to the Commission (Statistical Office) in accordance with the time limits laid down in Annex B.

3. In accordance with paragraph 1, until the first transmission based on the ESA 95, Member States shall continue to send to the Commission (Statistical Office) the accounts and tables established by applying the ESA second edition.

4. Without prejudice to Article 19 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (13) implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources, the Commission and the Member State concerned shall check that this Regulation is being applied and shall submit the outcome of those checks to the Committee provided for in Article 4 (1) of this Regulation.

Article 8

Transitional provisions

1. For budgetary and own resources purposes and by way of derogation from Article 1 (2) and Article 7, the European system of integrated economic accounts in force within the meaning of Article 1 (1) of Directive 89/130/EEC, Euratom and the legal acts relating thereto, in particular Regulations (EEC, Euratom) No 1552/89 and No 1553/89 and Decisions 94/728/EC, Euratom and 94/729/EC, shall be the ESA second edition while Decision 94/728/EC, Euratom remains in force.

2. For the purpose of the Member States' reports to the Commission under the excessive deficit procedure laid down in Regulation (EC) No 3605/93, the European system of integrated economic accounts shall be the ESA second edition until the 1 September 1999 reports.

3. Application of the ESA second edition as laid down in paragraphs 1 and 2 of this Article shall be ensured by adjusting the data received by virtue of Article 7 (1) on the basis of the ESA 95 to take account of the changes resulting from any differences in concepts, definitions or nomenclatures between the ESA second edition and the ESA 95.

Implementation of this principle shall be established in accordance with the procedure laid down in Article 6 of Council Directive 89/130/EEC, Euratom by December 1996 at the latest.

Article 9

This Regulation shall enter into force on the 20th day following its publication in the Official Journal of the European Communities.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 25 June 1996.

For the Council

The President

M. PINTO

(1) OJ No C 287, 30. 10. 1995, p. 114.

(2) Opinion delivered on 21. 6. 1995 (not yet published in the Official Journal).

(3) OJ No C 133, 31. 5. 1995, p. 2.

(4) Eurostat: 'European System of Integrated Economic Accounts` (ESA), second edition, Statistical Office of the European Communities, Luxembourg, 1979.

(5) OJ No L 181, 28. 6. 1989, p. 47.

(6) OJ No L 59, 6. 3. 1991, p. 19.

(7) OJ No L 49, 21. 2. 1989, p. 26. Directive as last amended by the 1994 Act of Accession.

(8) OJ No L 155, 7. 6. 1989, p. 9.

(9) OJ No L 332, 31. 12. 1993, p. 7.

(10) OJ No L 293, 12. 11. 1994, p. 9.

(11) OJ No L 293, 12. 11. 1994, p. 14.

(12) OJ No L 151, 15. 6. 1990, p. 1. Regulation as amended by the 1994 Act of Accession.

(13) OJ No L 155, 7. 6. 1989, p. 1. Regulation as last amended by Regulation (EEC, Euratom) No 2729/94 (OJ No L 293, 12. 11. 1994, p. 5).

ANNEX A

EUROPEAN SYSTEM OF ACCOUNTS ESA 1995

CONTENTS

Page

CHAPTER 1.

GENERAL FEATURES . 18

THE USES OF THE ESA . 18

Framework for analysis and policy . 18

Eight characteristics of ESA concepts . 19

The 1995 ESA and the 1993 SNA . 25

The 1995 ESA and the 1970 ESA . 25

THE ESA AS A SYSTEM . 26

Statistical units and their groupings . 26

Institutional units and sectors . 27

Local kind of activity units and industries . 27

Resident and non-resident units; total economy and rest of the world . 27

Flows and stocks . 28

Flows . 28

Transactions . 28

Properties of transactions . 29

Interactions versus intra-unit transactions . 29

Monetary versus non-monetary transactions . 29

Transactions with and without counterparts . 29

Rearranged transactions . 29

Rerouting . 29

Partitioning . 30

Recognizing the principal party to a transaction . 30

Borderline cases . 30

Other changes in assets . 30

Other changes in the volume of assets and liabilities . 30

Holding gains and losses . 31

Stocks . 31

The system of accounts and the aggregates . 31

Rules of accounting . 31

Terminology for the two sides of the accounts . 31

Double entry/quadruple entry . 32

Valuation . 32

Special valuations concerning products . 32

Valuation at constant prices . 33

CHAPTER 1.

(cont'd)

Page

Time of recording . 33

Consolidation and netting . 33

Consolidation . 33

Netting . 34

Accounts, balancing items and aggregates . 34

The sequence of accounts . 34

The goods and services account . 35

The rest of the world account . 35

Balancing items . 35

Aggregates . 35

The input-output framework . 35

CHAPTER 2.

UNITS AND GROUPING OF UNITS . 37

THE LIMITS OF THE NATIONAL ECONOMY . 37

THE INSTITUTIONAL UNITS . 39

THE INSTITUTIONAL SECTORS . 40

Non-financial corporations (S.11) . 42

Subsector: Public non-financial corporations (S.11001) . 43

Subsector: National private non-financial corporations (S.11002) . 44

Subsector: Foreign controlled non-financial corporations (S.11003) . 44

Financial corporations (S.12) . 44

Subsector: The central bank (S.121) . 46

Subsector: Other monetary financial institutions (S.122) . 47

Subsector: Other financial intermediaries, except insurance corporations and pension funds (S.123) . 48

Subsector: Financial auxiliaries (S.124) . 48

Subsector: Insurance corporations and pension funds (S.125) . 49

General government (S.13) . 50

Subsector: Central government (S.1311) . 50

Subsector: State government (S.1312) . 50

Subsector: Local government (S.1313) . 50

Subsector: Social security funds (S.1314) . 51

Households (S.14) . 51

Subsector: Employers (including own-account workers) (S.141 + S.142) . 52

Subsector: Employees (S.143) . 52

Subsector: Recipients of property incomes (S.1441) . 52

Subsector: Recipients of pensions (S.1442) . 52

Subsector: Recipients of other transfer incomes (S.1443) . 52

Subsector: Others (S.145) . 52

Non-profit institutions serving households (S.15) . 53

Rest of the world (S.2) . 53

Sector classification of producer units for main standard legal forms of ownership . 54

CHAPTER 2.

(cont'd)

Page

LOCAL KIND-OF-ACTIVITY UNITS AND INDUSTRIES . 56

The local kind-of-activity unit . 57

The industry . 57

CLASSIFICATION OF INDUSTRIES . 58

UNITS OF HOMOGENEOUS PRODUCTION AND HOMOGENEOUS BRANCHES . 58

The unit of homogeneous production . 58

The homogeneous branch . 58

THE CLASSIFICATION OF HOMOGENEOUS BRANCHES . 59

CHAPTER 3.

TRANSACTIONS IN PRODUCTS . 60

PRODUCTION AND OUTPUT . 61

Principal, secondary and ancillary activities . 62

Output (P.1) . 62

Time of recording and valuation of output . 68

INTERMEDIATE CONSUMPTION (P.2) . 73

Time of recording and valuation of intermediate consumption . 75

FINAL CONSUMPTION (P.3, P.4) . 75

Final consumption expenditure (P.3) . 75

Actual final consumption (P.4) . 76

Time of recording and valuation of final consumption expenditure . 78

Time of recording and valuation of actual final consumption . 78

GROSS CAPITAL FORMATION (P.5) . 79

Gross fixed capital formation (P.51) . 79

Time of recording and valuation of gross fixed capital formation . 81

Changes in inventories (P.52) . 82

Time of recording and valuation of changes in inventories . 83

Acquisitions less disposals of valuables (P.53) . 84

IMPORTS AND EXPORTS OF GOODS AND SERVICES (P.6 AND P.7) . 84

Imports and exports of goods (P.61 and P.71) . 85

Imports and exports of services (P.62 and P.72) . 87

TRANSACTIONS IN EXISTING GOODS . 89

CHAPTER 4.

DISTRIBUTIVE TRANSACTIONS . 91

COMPENSATION OF EMPLOYEES (D.1) . 91

Wages and salaries (D.11) . 91

Wages and salaries in cash . 91

Wages and salaries in kind . 91

Employers' social contributions (D.12) . 93

Employers' actual social contributions (D.121) . 93

Employers' imputed social contributions (D.122) . 93

CHAPTER 4.

(cont'd)

Page

TAXES ON PRODUCTION AND IMPORTS (D.2) . 94

Taxes on products (D.21) . 95

Value added type taxes (VAT) (D.211) . 95

Taxes and duties on imports excluding VAT (D.212) . 95

Taxes on products, except VAT and import taxes (D.214) . 96

Other taxes on production (D.29) . 96

Taxes on production and imports paid to the institutions of the European Union . 97

SUBSIDIES (D.3) . 98

Subsidies on products (D.31) . 98

Import subsidies (D.311) . 99

Other subsidies on products (D.319) . 99

Other subsidies on production (D.39) . 99

PROPERTY INCOME (D.4) . 101

Interest (D.41) . 101

Interest on deposits, loans and accounts receivable and payable . 101

Interest on securities . 101

Interest on bills and similar short-term instruments . 101

Interest on bonds and debentures . 101

Interest rate swaps and forward rate agreements . 102

Interest on financial leases . 102

Other interest . 102

Time of recording . 103

Distributed income of corporations (D.42) . 103

Dividends (D.421) . 103

Withdrawals from the income of quasi-corporations (D.422) . 104

Reinvested earnings on direct foreign investment (D.43) . 105

Property income attributed to insurance policy holders (D.44) . 105

Rents (D.45) . 106

Rents on land . 106

Rents on sub-soil assets . 106

CURRENT TAXES ON INCOME, WEALTH, ETC. (D.5) . 106

Taxes on income (D.51) . 107

Other current taxes (D.59) . 107

SOCIAL CONTRIBUTIONS AND BENEFITS (D.6) . 108

Social contributions (D.61) . 110

Actual social contributions (D.611) . 110

Imputed social contributions (D.612) . 111

Social benefits other than social transfers in kind (D.62) . 112

Social security benefits in cash (D.621) . 112

Private funded social benefits (D.622) . 113

CHAPTER 4.

(cont'd)

Page

Unfunded employee social benefits (D.623) . 113

Social assistance benefits in cash (D.624) . 113

Social transfers in kind (D.63) . 113

Social benefits in kind (D.631) . 113

Social security benefits, reimbursements (D.6311) . 114

Other social security benefits in kind (D.6312) . 114

Social assistance benefits in kind (D.6313) . 114

Transfers of individual non-market goods or services (D.632) . 114

OTHER CURRENT TRANSFERS (D.7) . 115

Net non-life insurance premiums (D.71) . 115

Non-life insurance claims (D.72) . 116

Current transfers within general government (D.73) . 116

Current international cooperation (D.74) . 117

Miscellaneous current transfers (D.75) . 118

Current transfers to NPISHs . 118

Current transfers between households . 118

Fines and penalties . 118

Lotteries and gambling . 119

Payments of compensation . 119

GNP based fourth own resource . 119

Other . 119

ADJUSTMENT FOR THE CHANGE IN THE NET EQUITY OF HOUSEHOLDS IN PENSION FUNDS RESERVES (D.8) . 120

CAPITAL TRANSFERS (D.9) . 121

Capital taxes (D.91) . 121

Investment grants (D.92) . 122

Other capital transfers (D.99) . 123

CHAPTER 5.

FINANCIAL TRANSACTIONS . 125

CLASSIFICATION OF FINANCIAL TRANSACTIONS . 127

Monetary gold and special drawing rights (SDRS) (F.1) . 129

Monetary gold (F.11) . 129

Special drawing rights (SDRS) (F.12) . 130

Currency and deposits (F.2) . 130

Currency (F.21) . 130

Transferable deposits (F.22) . 131

Other deposits (F.29) . 131

Securities other than shares (F.3) . 132

Securities other than shares, excluding financial derivatives (F.33) . 132

Short-term securities other than shares, excluding financial derivatives (F.331) . 133

Long-term securities other than shares, excluding financial derivatives (F.332) . 133

Financial derivatives (F.34) . 134

CHAPTER 5.

(cont'd)

Page

Loans (F.4) . 135

Short-term loans (F.41) . 135

Long-term loans (F.42) . 135

Shares and other equity (F.5) . 137

Shares and other equity, excluding mutual funds shares (F.51) . 138

Quoted shares, excluding mutual funds shares (F.511), and unquoted shares, excluding mutual funds shares (F.512) . 138

Other equity (F.513) . 139

Mutual funds shares (F.52) . 139

Insurance technical reserves (F.6) . 139

Net equity of households in life insurance reserves and in pension funds reserves (F.61) . 140

Net equity of households in life insurance reserves (F.611) . 140

Net equity of households in pension funds reserves (F.612) . 141

Prepayments of insurance premiums and reserves for outstanding claims (F.62) . 142

Other accounts receivable/payable (F.7) . 142

Trade credits and advances (F.71) . 143

Other accounts receivable/payable, excluding trade credits and advances (F.79) . 143

Memorandum item: direct foreign investment (F.m) . 144

ACCOUNTING RULES FOR FINANCIAL TRANSACTIONS . 144

Valuation . 144

Time of recording . 147

Compiling financial transactions from changes in balance sheets . 147

Annex 5.1: Link with measures of money . 147

CHAPTER 6.

OTHER FLOWS . 149

CONSUMPTION OF FIXED CAPITAL (K.1) . 149

ACQUISITIONS LESS DISPOSALS OF NON-FINANCIAL NON-PRODUCED ASSETS (K.2) . 149

OTHER CHANGES IN ASSETS (K.3 to K.12) . 150

OTHER CHANGES IN VOLUME (K.3 to K.10 AND K.12) . 150

ECONOMIC APPEARANCE OF NON-PRODUCED ASSETS (K.3) . 151

ECONOMIC APPEARANCE OF PRODUCED ASSETS (K.4) . 151

NATURAL GROWTH OF NON-CULTIVATED BIOLOGICAL RESOURCES (K.5) . 151

ECONOMIC DISAPPEARANCE OF NON-PRODUCED ASSETS (K.6) . 152

CATASTROPHIC LOSSES (K.7) . 152

UNCOMPENSATED SEIZURES (K.8) . 152

OTHER VOLUME CHANGES IN NON-FINANCIAL ASSETS N.E.C. (K.9) . 152

OTHER VOLUME CHANGES IN FINANCIAL ASSETS AND LIABILITIES N.E.C. (K.10) . 153

CHAPTER 6.

(cont'd)

Page

CHANGES IN CLASSIFICATIONS AND STRUCTURE (K.12) . 154

Changes in sector classification and structure (K.12.1) . 154

Changes in classification of assets and liabilities (K.12.2) . 154

NOMINAL HOLDING GAINS/LOSSES (K.11) . 155

Neutral holding gains/losses (K.11.1) . 156

Real holding gains/losses (K.11.2) . 156

Holding gains by type of financial asset . 157

Currency and deposits (AF.2) . 157

Loans (AF.4) and other accounts receivable/payable (AF.7) . 157

Securities other than shares (AF.3) . 157

Shares and other equity (AF.5) . 158

Insurance technical reserves (AF.6) . 158

Financial assets in foreign currency . 158

CHAPTER 7.

BALANCE SHEETS . 159

TYPES OF ASSETS . 160

Non-financial produced assets (AN.1) . 160

Non-financial non-produced assets (AN.2) . 160

Financial assets and liabilities (AF) . 161

VALUATION OF ENTRIES IN THE BALANCE SHEETS . 163

General valuation principles . 163

NON-FINANCIAL ASSETS (AN) . 164

Produced assets (AN.1) . 164

Fixed assets (AN.11) . 164

Tangible fixed assets (AN.111) . 164

Intangible fixed assets (AN.112) . 164

Inventories (AN.12) . 164

Valuables (AN.13) . 165

Non-produced assets (AN.2) . 165

Tangible non-produced assets (AN.21) . 165

Land (AN.211) . 165

Subsoil assets (AN.212) . 165

Other natural assets (AN.213 and AN.214) . 165

Intangible non-produced assets (AN.22) . 165

Financial assets and liabilities (AF) . 166

Monetary gold and SDRs (AF.1) . 166

Currency and deposits (AF.2) . 166

Securities other than shares (AF.3) . 166

Loans (AF.4) . 167

Shares and other equity (AF.5) . 167

CHAPTER 7.

(cont'd)

Page

Insurance technical reserves (AF.6) . 167

Other accounts receivable/payable (AF.7) . 168

Memorandum items . 168

Consumer durables (AN.m) . 168

Direct foreign investment (AF.m) . 168

Financial balance sheets . 169

Annex 7.1: Definition of each asset category . 170

Annex 7.2: A map of entries from opening balance sheet to closing balance sheet . 178

CHAPTER 8.

SEQUENCE OF ACCOUNTS AND BALANCING ITEMS . 181

SEQUENCE OF ACCOUNTS . 184

Current accounts . 184

Production account (I) . 184

Distribution and use of income accounts (II) . 184

Primary distribution of income accounts (II.1) . 186

Generation of income account (II.1.1) . 186

Allocation of primary income account (II.1.2) . 186

Entrepreneurial income account (II.1.2.1) . 186

Allocation of other primary income account (II.1.2.2) . 192

Secondary distribution of income account (II.2) . 192

Redistribution of income in kind account (II.3) . 200

Use of income account (II.4) . 200

Use of disposable income account (II.4.1) . 200

Use of adjusted disposable income account (II.4.2) . 200

Accumulation accounts (III) . 202

Capital account (III.1) . 202

Change in net worth due to saving and capital tranfers account (III.1.1) . 202

Acquisitions of non-financial assets account (III.1.2) . 202

Financial account (III.2) . 202

Other changes in assets account (III.3) . 202

Other changes in volume of assets account (III.3.1) . 209

Revaluation account (III.3.2) . 209

Neutral holding gains and losses account (III.3.2.1) . 209

Real holding gains and losses account (III.3.2.2) . 209

Balance sheets (IV) . 218

Opening balance sheet (IV.1) . 218

Changes in balance sheet (IV.2) . 218

Closing balance sheet (IV.3) . 218

CHAPTER 8.

(cont'd)

Page

REST OF THE WORLD ACCOUNTS (V) . 218

Current accounts . 223

External account of goods and services (V.I) . 223

External account of primary incomes and current transfers (V.II) . 223

External accumulation accounts (V.III) . 223

Capital account (V.III.1) . 223

Financial account (V.III.2) . 223

Other changes in assets account (V.III.3) . 223

Balance sheets (V.IV) . 224

GOODS AND SERVICES ACCOUNT (0) . 232

INTEGRATED ECONOMIC ACCOUNTS . 233

AGGREGATES . 243

Gross domestic product at market prices (GDP) . 243

Operating surplus of the total economy . 243

Mixed income of the total economy . 243

Entrepreneurial income of the total economy . 243

National income (at market prices) . 243

National disposable income . 244

Saving . 244

Current external balance . 244

Net lending (+) or borrowing ( ) of the total economy . 244

Net worth of the total economy . 244

MATRIX PRESENTATION . 244

Matrix presentation of ESA accounts . 245

Properties of accounting matrices . 248

Adaptation of the reduced format matrix to specific types of analysis . 249

CHAPTER 9.

INPUT-OUTPUT FRAMEWORK . 264

SUPPLY AND USE TABLES . 268

TABLES LINKING THE SUPPLY AND USE TABLES TO THE SECTOR ACCOUNTS . 282

SYMMETRIC INPUT-OUTPUT TABLES . 282

CHAPTER 10.

PRICE AND VOLUME MEASURES . 287

SCOPE OF PRICE AND VOLUME INDICES IN THE ACCOUNTS SYSTEM . 288

The integrated system of price and volume indices . 288

Price and volume indices for other aggregates . 289

GENERAL PRINCIPLES OF MEASURING PRICE AND VOLUME INDICES . 290

Definition of prices and volumes of market products . 290

Differences in quality and differences in price . 290

CHAPTER 10.

(cont'd)

Page

Principles for non-market services . 291

Principles for value added and GDP . 292

PROBLEMS IN THE APPLICATION OF THE PRINCIPLES . 292

General application . 293

Application to specific flows . 293

Flows of goods and market services . 293

Flows of non-market services . 294

Taxes and subsidies on products and imports . 295

Consumption of fixed capital . 296

Compensation of employees . 296

Stocks of produced fixed assets and inventories . 296

Measures of real income for the total economy . 297

CHOICE OF INDEX NUMBER FORMULAE AND THE BASE YEAR . 298

INTERSPACIAL PRICE AND VOLUME INDICES . 298

CHAPTER 11.

POPULATION AND LABOUR INPUTS . 300

TOTAL POPULATION . 300

ECONOMICALLY ACTIVE POPULATION . 301

EMPLOYMENT . 302

Employees . 302

Self-employed persons . 303

Employment and residence . 303

UNEMPLOYMENT . 304

JOBS . 305

Jobs and residence . 305

TOTAL HOURS WORKED . 305

FULL-TIME EQUIVALENCE . 306

EMPLOYEE LABOUR INPUT AT CONSTANT COMPENSATION . 307

CHAPTER 12.

QUARTERLY ECONOMIC ACCOUNTS . 308

CHAPTER 13.

REGIONAL ACCOUNTS . 310

REGIONAL TERRITORY . 310

UNITS AND RESIDENCE . 310

METHODS OF REGIONALIZATION . 311

AGGREGATES BY INDUSTRY . 312

HOUSEHOLD ACCOUNTS . 314

Page

ANNEXES

I. FINANCIAL INTERMEDIATION SERVICES INDIRECTLY MEASURED (Fisim) . 315

Changes to be made in the ESA chapters if Fisim is to be allocated . 315

II. LEASING AND HIRE PURCHASE OF DURABLE GOODS . 321

Definitions . 321

Leasing . 321

Operating leasing . 321

Financial leasing . 321

Hire purchase . 322

Treatment in the accounts . 322

Operating leasing . 322

Financial leasing . 322

Hire purchase . 323

III. INSURANCE . 325

Introduction . 325

Definitions . 325

Social insurance . 325

Social security schemes of government . 325

Private funded social insurance schemes . 326

Unfunded social insurance schemes operated by employers . 326

Other insurance . 326

Other life insurance . 326

Other non-life insurance . 326

Reinsurance . 327

Insurance auxiliaries . 327

Treatment in the accounts . 327

Social insurance . 327

Social security schemes of government . 327

Private funded social insurance schemes . 328

Unfunded social insurance schemes operated by employers . 329

Other insurance . 330

Other life insurance . 331

Other non-life insurance . 331

Reinsurance . 333

Insurance auxiliaries . 333

Insurance numerical example . 334

IV. CLASSIFICATIONS AND ACCOUNTS . 339

Classifications . 339

Classification of institutional sectors (S) . 339

Page

Classification of transactions and other flows . 340

Classification of balancing items (B) . 343

Classification of assets (A) . 344

Regrouping and coding of industries (A), products (P) and investments (fixed capital formation) (Pi) . 346

Classification of individual consumption by purpose (Coicop) . 354

Classification of the functions of the government (Cofog) . 355

Accounts . 357

Tables

2.1

Sectors and sub-sectors . 40

2.2

The type of producer, the principal activities and functions classified by sector . 42

2.3

Sector classification of producer units for main standard legal forms of ownership . 55

3.1

The distinction between market producers, producers for own final use and other non-market producers for institutional units . 64

3.2

Institutional units, local KAUs and output and the distinction between market, for own final use and other non-market . 67

3.3

The distinction market, for own final use and other non-market for local KAUs and their output . 68

3.4

The treatment of transportation of exported goods . 88

3.5

The treatment of transportation of imported goods . 89

5.1

Classification of financial transactions . 128

8.1

Synoptic presentation of the accounts, balancing items and main aggregates . 182

8.2

Account I: Production account . 185

8.3

Account II.1.1: Generation of income account . 187

8.4

Account II.1.2.: Allocation of primary income account . 189

8.5

Accounts II.1.2.1: Entrepreneurial income and II.1.2.2: Allocation of other primary income . 193

8.6

Account II.2: Secondary distribution of income account . 196

8.7

Account II.3: Redistribution of income in kind account . 199

8.8

Account II.4.1: Use of disposable income account . 201

8.9

Account II.4.2: Use of adjusted disposable income account . 203

8.10

Account III.1.1: Change in net worth due to saving and capital transfers account . 204

8.11

Account III.1.2: Acquisition of non-financial assets account . 205

8.12

Account III.2: Financial account . 207

8.13

Account III.3.1: Other changes in volume of assets account . 210

8.14

Account III.3.2: Revaluation account . 214

8.15

Account IV: Balance sheets . 219

8.16

Full sequence of accounts for rest of the world (external transactions account) . 224

8.17

Account 0: Goods and services account . 232

8.18

Integrated economic accounts . 234

8.19

Matrix presentation of the full sequence of accounts and balancing items for the total economy . 250

8.20

Schematic presentation of a Social Accounting Matrix . 257

8.21

Example of a more detailed Social Accounting Matrix . 260

8.22

Example of a detailed submatrix: Net value added (basic prices) . 262

Page

9.1

A simplified supply table . 264

9.2

A simplified use table . 264

9.3

A simplified combined supply and use table . 265

9.4

A simplified symmetric input-output table (product by product) . 266

9.5

A supply table at basic prices, including a transformation into purchaser's prices . 269

9.6

A use table at purchaser's prices . 270

9.7

A simple trade and transport margins table . 274

9.8

A simple taxes less subsidies on products table . 275

9.9

A use table for imports . 279

9.10

A use table at basic prices for domestic output . 280

9.11

Table linking the supply and use tables to the sector accounts . 282

9.12

A symmetric input-output table at basic prices (product by product) . 284

9.13

A symmetric input-output table for domestic output (product by product) . 286

A.I.1

Effect of allocating Fisim to institutional sectors, including changes for non-market producers . 318

A.I.2

Effect of allocating Fisim to nominal sector only . 319

A.III.1

Social security schemes of Government . 334

A.III.2

Private funded social insurance schemes . 335

A.III.3

Unfunded schemes operated by employers . 336

A.III.4

Other life insurance . 337

A.III.5

Other non-life insurance . 338

A.IV.1

Account 0: Goods and services account . 357

A.IV.2

Full sequence of accounts for the total economy . 357

A.IV.3

Full sequence of accounts for non-financial corporations . 371

A.IV.4

Full sequence of accounts for financial corporations . 380

A.IV.5

Full sequence of accounts for general government . 390

A.IV.6

Full sequence of accounts for households . 401

A.IV.7

Full sequence of accounts for non-profit institutions serving households . 412

CHAPTER 1

GENERAL FEATURES

1.01. The European System of National and Regional Accounts (1995 ESA, or simply: ESA) is an internationally compatible accounting framework for a systematic and detailed description of a total economy (that is a region, country or group of countries), its components and its relations with other total economies.

The 1995 ESA, replaces the European System of Integrated Economic Accounts published in 1970 (1970 ESA; a second, slightly modified, edition appeared in 1978).

The 1995 ESA is fully consistent with the revised world-wide guidelines on national accounting, the System of National Accounts (1993 SNA, or simply: SNA; these guidelines have been produced under the joint responsibility of the United Nations, the IMF, the Commission of the European Communities, the OECD and the World Bank). However, the ESA is focused more on the circumstances and data needs in the European Union. Like the SNA, the ESA is harmonized with the concepts and classifications used in many other, social and economic statistics. Cases in point are statistics on employment, statistics on manufacturing and statistics on external trade. The ESA can therefore serve as the central framework of reference for the social and economic statistics of the European Union and its Member States.

1.02. The ESA framework consists of two main sets of tables:

(a) the sector accounts (1);

(b) the input-output framework (2) and the accounts by industry (3).

The sector accounts provide, by institutional sector, a systematic description of the different stages of the economic process: production, generation of income, distribution of income, redistribution of income, use of income and financial and non-financial accumulation. The sector accounts also include balance sheets to describe the stocks of assets, liabilities and net worth at the beginning and the end of the accounting period.

The input-output framework and the accounts by industry describe in more detail the production process (cost structure, income generated and employment) and the flows of goods and services (output, imports, exports, final consumption, intermediate consumption and capital formation by product group).

The ESA encompasses concepts of population and employment (4). These concepts are relevant for both the sector accounts and the input-output framework.

The ESA is not restricted to annual national accounting, but applies also to quarterly accounts (5) and regional accounts (6).

THE USES OF THE ESA

Framework for analysis and policy

1.03. The ESA framework can be used to analyse and evaluate:

(a) the structure of a total economy. Cases in point are:

1. value added and employment by industry;

2. value added and employment by region;

3. income distributed by sector;

4. imports and exports by product group;

5. final consumption expenditure by product group;

6. fixed capital formation and fixed capital stock by industry;

7. the composition of the stocks and flows of financial assets by type of asset and by sector.

(b) Specific parts or aspects of a total economy. Cases in point are:

1. banking and finance in the national economy;

2. the role of government;

3. the economy of a specific region (in comparison to that of the nation as a whole).

(c) The development of a total economy over time. Cases in point are:

1. the analysis of GDP growth rates;

2. the analysis of inflation;

3. the analysis of seasonal patterns in household expenditure on the basis of quarterly accounts;

4. the analysis of the changing importance of particular types of financial instruments over time, e.g. the increased importance of options;

5. the comparison of the industrial structures of the national economy over the long term, e.g. over a period of 30 years.

(d) A total economy in relation to other total economies. Cases in point are:

1. the comparison of the roles of government in the Member States of the European Union;

2. the analysis of the interdependencies between the economies of the European Union;

3. the analysis of the composition and destination of the exports of the European Union;

4. the comparison of GDP growth rates or disposable income per capita in the European Union and in the United States and Japan.

1.04. For the European Union and its Member States, the figures from this framework play a major role in formulating and monitoring their social and economic policy.

Furthermore, there are some very important specific uses:

(a) for monitoring and guiding European monetary policy: the criteria of convergence for the European Monetary Union have been defined in terms of national accounts figures (government deficit, government debt and GDP);

(b) for granting monetary support to regions in the European Union: the expenditure for the Structural Funds of the European Union is partly based on regionalized national accounts figures;

(c) for determining the own resources of the European Union. The latter depend on national accounts figures in three ways:

1. the total resources for the European Union are determined as a percentage of the Member States' gross national products (GNP);

2. the third own resource of the European Union is the VAT own resource. The contributions by the Member States for this resource are largely affected by national accounts figures, because they are used to calculate the average VAT rate;

3. the relative sizes of the contributions by the Member States for the fourth own resource of the European Union are based on their gross national products.

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:

(a) internationally compatible;

(b) harmonized with those in other social and economic statistics;

(c) consistent;

(d) operational;

(e) different from most administrative concepts;

(f) well-established and fixed for a long period;

(g) focused on describing the economic process in monetary and readily observable terms;

(h) flexible and multi-purpose.

1.06. The concepts are internationally compatible because:

(a) for European Union Member States, the ESA is the standard for submitting national accounts data to all international organizations. Only in the national publications is strict adherence to the ESA not obligatory;

(b) 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 harmonized with those in other social and economic statistics because:

(a) the ESA employs many concepts and classifications (e.g. NACE rev. 1) that are also used for the other social and economic statistics of European Union 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 European Union concepts and classifications are also harmonized with those of the United Nations;

(b) like the SNA, the concepts in the ESA are also harmonized 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 harmonization 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:

(a) productivity figures, such as value added per hour worked (this figure requires consistency between the concepts of value added and hours worked);

(b) national disposable income per capita (this ratio requires consistency between the concepts national disposable income and population);

(c) fixed capital formation as a percentage of fixed capital stock (this ratio requires consistency between the definitions of these flows and stocks);

(d) 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 (7).

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:

(a) 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 European Union 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;

(b) 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;

(c) some simplifying conventions have been adopted. For example, by convention, the collective services provided by government are all final consumption expenditure;

(d) the concepts are harmonized 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:

(a) administrative concepts differ between countries. As a consequence, international compatibility cannot be attained through administrative concepts;

(b) administrative concepts change over time. As a consequence, comparability in time cannot be attained through administrative concepts;

(c) 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;

(d) 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:

(a) concepts and classifications originally devised for statistical purposes may also be adopted for administrative purposes, e.g. the classification of government expenditure by type;

(b) 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 European Union Member States.

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

(a) they have been approved as the international standard for the next decades;

(b) 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. to 3.09.):

(a) production of indiviual and collective services by government;

(b) the own-account production of housing services by owner-occupiers;

(c) production of goods for own final consumption, e.g. of agricultural products;

(d) own-account construction, including that by households;

(e) the production of services by paid domestic staff;

(f) breeding of fish in fish farms;

(g) production forbidden by law, e.g. prostitution and production of drugs;

(h) 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:

(a) 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;

(b) volunteer services that do not lead to the production of goods, e.g. caretaking and cleaning without payment;

(c) 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:

(a) 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;

(b) 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.:

(a) the valuation of government output;

(b) the valuation of the output of insurance services and financial intermediation services indirectly measured;

(c) recording all the collective services provided by government as final consumption expenditure and none as intermediate consumption;

(d) recording the use of financial intermediation services indirectly measured as the intermediate consumption of a nominal sector or a nominal industry.

1.14. The concepts in the ESA are multi-purpose: for a great range of uses the ESA concepts will be acceptable, though they may need to be supplemented for some uses (see paragraph 1.18.).

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 subsectors 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. to 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 subsectors 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.:

(a) the analysis of the role of tourism in the national economy;

(b) the analysis of the costs and financing of health care;

(c) the analysis of the importance of research & development and human capital for the national economy;

(d) the analysis of the income and expenditure of households on the basis of micro-oriented concepts of income and expenditure;

(e) the analysis of the interaction between the environment and the economy;

(f) the analysis of production within households;

(g) the analysis of changes in welfare;

(h) the analysis of the differences between national accounts and business accounts figures and their influence on stock and exchange markets;

(i) the estimation of tax revenues.

1.19. Satellite accounts can serve such data needs by:

(a) showing more detail where necessary and leaving out superfluous detail;

(b) enlarging the scope of the accounting framework by adding non-monetary information, e.g. on pollution and environmental assets;

(c) 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.:

(a) production within households can most easily be described in terms of hours allocated to the alternative uses;

(b) 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.;

(c) 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.:

(a) domestic and personal services produced and consumed within the same household;

(b) changes in leisure time;

(c) amenities and disadvantages of urban life;

(d) inequalities in the distribution of income over persons.

They can also reclassify the final expenditure on regrettable necessities (e.g. defence) as intermediate consumption, i.e. as not contributing to welfare. Similarly, the damage due to floods and other natural disasters could be classified as intermediate consumption, i.e. as a reduction in (absolute) welfare.

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:

(a) the concept of inflation used for increasing pensions, unemployment benefits or compensation of employees for civil servants;

(b) the concepts of taxes, social contributions, government and the collective sector used in discussing the optimal size of the collective sector;

(c) the concept of 'strategic` sectors/industries used in national economic policy or the economic policy of the EU;

(d) the concept of 'business investments` used in national economic policy.

Satellite accounts or simple supplementary tables could meet such, usually specifically national, data needs.

The 1995 ESA and the 1993 SNA

1.24. The ESA (the 1995 ESA) is fully consistent with the revised System of National Accounts (the 1993 SNA), which provides guidelines on national accounting for all countries throughout the world. Nevertheless, there are several differences between the 1995 ESA and the 1993 SNA:

(a) differences in presentation, e.g.:

1. in the ESA there are separate chapters on transactions in products, distributive transactions and financial transactions. In contrast, in the SNA these transactions are explained in seven chapters arranged by account, e.g. chapters on the production account, the primary distribution of income account, the capital account and the Rest of the World account;

2. the ESA describes a concept by providing a definition and a listing of what is included and what is excluded. The SNA describes concepts usually in more general terms and endeavours also to explain the rationale behind the conventions adopted;

3. the ESA also contains chapters on regional accounts and quarterly accounts;

4. the SNA also contains a chapter on satellite accounts.

(b) The ESA concepts are in several instances more specific and precise than those of the SNA, e.g.:

1. the SNA does not contain very precise definitions on the distinction between market, for own final use and other non-market for institutional units, local KAUs and their outputs. This implies that in this respect the valuation of output and the classification by sectors are not defined sufficiently precisely. The ESA has therefore introduced several extra clarifications and also added in some specific instances the criterion that the sales of a market producer should cover at least 50 % of the production costs (see Table 3.1);

2. the ESA specifies concrete recording thresholds, e.g. for recording small tools and appliances devices as intermediate consumption;

3. the ESA assumes that several types of household production of goods, such as the weaving of cloth and the making of furniture, are not significant in European Union Member States and therefore need not be recorded;

4. the ESA makes explicit reference to specific institutional arrangements in the European Union, such as the Intrastat system for recording intra-European Union flows of goods and the contributions by the Member States to the European Union;

5. the ESA contains European Union-specific classifications, e.g.: CPA for products and NACE rev. 1 for industries (specific but harmonized with the corresponding UN classifications);

6. the ESA contains an additional classification for all external transactions: they should be divided into those between residents of the European Union and those with residents from outside the European Union.

The ESA can be more specific than the SNA, because the ESA primarily applies to the European Union Member States. For the data needs of the European Union, the ESA should also be more specific.

The 1995 ESA and the 1970 ESA

1.25. The 1995 ESA differs in scope as well as in concepts from the 1970 ESA. Most of these differences correspond to differences between the 1968 SNA and 1993 SNA. Some of these major differences in scope are:

(a) the inclusion of balance sheets;

(b) the inclusion of other changes in assets accounts, i.e. the introduction of the concepts other changes in volume, nominal holding gains and real holding gains;

(c) the introduction of a subsectoring of households;

(d) the introduction of a new concept of final consumption: Actual Final Consumption;

(e) the introduction of a new price-adjusted income concept: real national disposable income;

(f) the inclusion of the concept of purchasing power parities.

Some of the major differences in concepts are:

(a) literary-artistic work (writing books, composing music) is now regarded as production; payments for literary-artistic work are therefore payments for services and not property income;

(b) the valuation of the output of insurance services has changed in some respects, e.g. the revenues from the investment of technical reserves are now also taken into account in valuing the output of non-life insurance;

(c) more detailed treatment of trade and transport margins;

(d) the introduction of chain linking for calculating constant prices;

(e) the concept of financial leasing has been introduced (the 1968 SNA and 1970 ESA contained only the concept of operational leasing);

(f) expenditure on mineral exploration and on computer software is now recorded as capital formation (instead of as intermediate consumption);

(g) capital consumption should also be recorded for infrastructural works of government (roads, dikes, etc.);

(h) identification of new financial instruments, such as repurchase agreements, and derivative financial instruments such as options.

There are also differences that do not result from changes in the SNA, e.g.:

(a) the introduction of supply and use tables (this was already included in the 1968 SNA);

(b) the introduction of some registration thresholds and the reference to specific institutional arrangements in the European Union (see paragraph 1.24.);

(c) a clear choice in favour of valuing output at basic prices (the 1970 ESA, the 1968 SNA and the 1993 SNA also accept valuation at producer's prices);

(d) the introduction of the concepts of economically active population and unemployment (these concepts are absent in the 1968 and 1993 SNA).

THE ESA AS A SYSTEM

1.26. The main features of the system are:

(a) statistical units and their groupings;

(b) flows and stocks;

(c) the system of accounts and the aggregates;

(d) the input-output framework.

STATISTICAL UNITS AND THEIR GROUPINGS (8)

1.27. A characteristic feature of the system is the use of two types of unit and two ways of subdividing the economy which are quite different and serve separate analytical purposes.

In order to describe income, expenditure and financial flows, and balance sheets, the system groups institutional units into sectors on the basis of their principal functions, behaviour and objectives.

In order to describe processes of production and for input-output analysis, the system groups local kind-of-activity units (local KAUs) into industries on the basis of their type of activity. An activity is characterized by an input of products, a production process and an output of products.

Institutional units and sectors

1.28. Institutional units are economic entities that are capable of owning goods and assets, of incurring liabilities of engaging in economic activities and transactions with other units in their own right. For the purposes of the system, the institutional units are grouped together into five mutually exclusive institutional sectors composed of the following types of units:

(a) non-financial corporations;

(b) financial corporations;

(c) general government;

(d) households;

(e) non-profit institutions serving households.

The five sectors together make up the total economy. Each sector is also divided into subsectors.The system makes provision for a complete set of flow accounts and balance sheets to be compiled for each sector, and subsector if desired, as well as for the total economy.

Local kind-of-activity units and industries

1.29. Most institutional units in their capacity as producers carry out more than one activity; to emphasize relationships of a technico-economic kind, they have to be partitioned with regard to the type of activity.

Local kind-of-activity units are intended to meet this requirement as an operational approach. A local KAU groups all the parts of an institutional unit in its capacity as producer which are located in a single or closely located sites, and which contribute to the performance of an activity at the class level (four digits) of the NACE rev. 1.

In principle, as many local kind-of-activity units must be registered as there are secondary activities; however, if the accounting documents that would be necessary to describe such activities are not available, a local kind-of-activity unit may include one or several secondary activities.

The group of all local KAUs engaged on the same, or similar, kind-of-activity constitutes an industry.

There is a hierarchical relationship between institutional units and local KAUs. An institutional unit contains one or more entire local KAUs; a local KAU belongs to one and only one institutional unit.

For more refined analysis of the production process, use is made of an analytical unit of production. This unit, which is not observable (except in the case of a local KAU only producing one type of product), is the unit of homogeneous production, defined as covering no secondary activities. Groupings of these units constitute homogeneous branches.

Resident and non-resident units; total economy and rest of the world

1.30. The total economy is defined in terms of resident units. A unit is said to be a resident unit of a country when it has a centre of economic interest on the economic territory of that country - that is, when it engages for an extended period (one year or more) in economic activities on this territory. The institutional sectors referred to above are groups of resident institutional units.

Resident units engage in transactions with non-resident units (that is, units which are residents in other economies). These transactions are the external transactions of the economy and are grouped in the Rest of the World account. So, in the system's accounting structure, the rest of the world plays a role similar to that of an institutional sector, although non-resident units are included only in so far as they are engaged in transactions with resident institutional units. Consequently, as far as coding of classifications is concerned, a specific item for the rest of the world is included at the end of the classification of sectors.

Notional resident units, treated in the system as institutional units, are defined as:

(a) those parts of non-resident units which have a centre of economic interest (that is in most cases which engage in economic transactions for a year or more or which carry out a construction activity for a period of less than a year if the output constitutes gross fixed capital formation) on the economic territory of the country;

(b) non-resident units in their capacity as owners of land or buildings on the economic territory of the country, but only in respect of transactions affecting such land or buildings.

FLOWS AND STOCKS

1.31. The system records two basic kinds of information: flows and stocks. Flows refer to actions and effects of events that take place within a given period of time, while stocks refer to positions at a point of time.

Flows

1.32. Flows reflect the creation, transformation, exchange, transfer or extinction of economic value. They involve changes in the value of an institutional unit's assets or liabilities. Economic flows are of two kinds: transactions, and other changes in assets. Transactions appear in all accounts and tables where flows appear, except the other changes in volume of assets account and the revaluation account. Other changes in the assets appear only in these two accounts.

Elementary transactions and other flows are innumerable. The system groups them into a relatively small number of types according to their nature.

Transactions

1.33. A transaction is an economic flow that is an interaction between institutional units by mutual agreement or an action within an institutional unit that it is useful to treat as a transaction, often because the unit is operating in two different capacities. It is convenient to divide transactions into four main groups:

(a) transactions in products: which describe the origin (domestic output or imports) and use (intermediate consumption, final consumption, capital formation or exports) of products (9);

(b) distributive transactions: which describe how value added generated by production is distributed to labour, capital and government, and the redistribution of income and wealth (taxes on income and wealth and other transfers) (10);

(c) financial transactions: which describe the net acquisition of financial assets or the net incurrence of liabilities for each type of financial instrument. Such transactions often occur as counterparts of non-financial transactions, but they may also occur as transactions involving only financial instruments (11);

(d) transactions not included in the three groups above: consumption of fixed capital and acquisitions less disposals of non-produced non financial assets (12).

Properties of transactions

Interactions versus intra-unit transactions

1.34. Most transactions are interactions between two or more institutional units. However, the system records some actions within institutional units as transactions. The purpose of recording these intra-unit transactions is to give a more analytically useful picture of output, final uses and costs.

Consumption of fixed capital, which is recorded as a cost by the system, is an important intra-unit transaction. Most of the other intra-unit transactions are transactions in products, typically recorded when institutional units operating as both producers and final consumers choose to consume some of the output they have produced themselves. This is often the case for households and general government.

1.35. All own-produced output used for final uses within the same institutional unit is recorded. Own-produced output used for intermediate consumption within the same institutional unit is recorded only when production and intermediate consumption take place in different local kind-of-activity units within the same institutional unit. Output produced and used as intermediate consumption within the same local kind-of-activity unit is not recorded.

Monetary versus non-monetary transactions

1.36. Most transactions recorded by the system are monetary transactions, where the units involved make or receive payments, or incur liabilities or receive assets denominated in units of currency.

Transactions that do not involve the exchange of cash, or assets or liabilities denominated in units of currency, are non-monetary transactions. Intra-unit transactions are normally non-monetary transactions. Non-monetary transactions involving more than one institutional unit occur among transactions in products (barter of products), distributive transactions (remuneration in kind, transfers in kind, etc.) and other transactions (barter of non-produced non-financial assets).

The system records all transactions in monetary terms. The values to be recorded for non-monetary transactions must therefore be measured indirectly or otherwise estimated.

Transactions with and without counterparts

1.37. Transactions involving more than one unit are either 'something for something` or 'something for nothing` transactions. The former are exchanges between institutional units, i.e. provision of goods, services or assets in return for a counterpart, e.g. money. The latter typically are payments in cash or in kind from one institutional unit to another without counterpart. 'Something for something` transactions occur in all four transaction groups, while 'something for nothing` transactions occur mainly among distributive transactions, in the form of, for example, taxes, social assistance benefits or gifts.

Rearranged transactions

1.38. The system's treatment of most transactions is straightforward; that is, the transactions are recorded in the same way as they appear to the institutional units involved. However, some transactions are rearranged in order to bring out the underlying economic relationships more clearly. Transactions can be rearranged in three ways: rerouting, partitioning and recognizing the principal party to a transaction.

Rerouting

1.39. A transaction that appears to the units involved as taking place directly between units A and C may be recorded as taking place indirectly through a third unit B. Thus, the single transaction between A and C is recorded as two transactions: one between A and B, and one between B and C. In this case the transaction is rerouted.

As well-known example of a rerouting is employers' social contributions paid directly by employers to social insurance funds. The system records these payments as two transactions: employers pay employer's social contributions to their employees, and employees pay the same contributions to social insurance funds. As with all reroutings, the purpose of rerouting employers' social contributions is to bring out the economic substance behind the transaction. In this case this means to show employer's social contributions as contributions paid for the benefit of employees.

Another type of rerouting is that of transactions recorded as taking place between two or more institutional units, although according to the parties involved no transaction takes place at all. An example is the treatment of property income earned on certain insurance funds, which is retained by insurance enterprises. The system records this property income as being paid by insurance enterprises to policy holders, who then pay the same amount back to the insurance enterprises as premium supplements.

Partitioning

1.40. When a transaction appearing to the parties involved as a single transaction is recorded as two or more differently classified transactions, the transaction is partitioned. Partitioning does usually not imply involving additional units in the transactions.

The payment of non-life insurance premiums is a typical partitioned transaction. Although policy holders and insurers regard these payments as one transaction, the system divides them into two quite different transactions: payments in return for non-life insurance services provided, and net non-life insurance premiums. The recording of trade margins is another important case of partitioning.

Recognizing the principal party to a transaction

1.41. When a unit carries out a transaction on behalf of another unit, the transaction is recorded exclusively in the accounts of the principal. As a rule, one should not go beyond this principle and try, for instance, to allocate taxes or subsidies to ultimate payers or ultimate beneficiaries under the adoption of assumptions.

Borderline cases

1.42. The definition of a transaction stipulates that an interaction between institutional units be by mutual agreement. When a transaction is undertaken by mutual agreement, the prior knowledge and consent of the institutional units is implied. However, this does not mean that all units necessarily enter a transaction voluntarily, because some transactions are imposed by law. This applies mainly to certain distributive transactions, such as payments of taxes, fines and penalties. However, uncompensated seizure of assets is not regarded as a transaction, even when imposed by law.

Illegal economic actions are transactions only when all units involved enter the actions voluntarily. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not.

Other changes in assets

1.43. Other changes in assets record changes that are not the result of transactions (13). They are either:

(a) other changes in the volume of assets and liabilities; or

(b) holding gains and losses.

Other changes in the volume of assets and liabilities

1.44. These changes can be roughly divided into three main categories:

(a) normal appearance and disappearance of assets other than by transactions;

(b) changes in assets and liabilities due to exceptional, unanticipated events;

(c) changes in classification and structure.

1.45. Examples of changes within category (a) are discovery or depletion of subsoil assets, and natural growth of non-cultivated biological resources. Category (b) comprises changes (normally losses) in assets due to natural disasters, war or severe acts of crime (14). Unilateral cancellation of debt and uncompensated seizure of assets also belong to category (b). Category (c) consists of changes as a consequence of reclassification and restructuring of institutional units or of assets and liabilities.

Holding gains and losses

1.46. Holding gains and losses result from changes in the prices of assets. They occur on all kinds of financial and non-financial assets, and on liabilities. Holding gains and losses accrue to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way.

Holding gains and losses measured on the basis of current market prices are called nominal holding gains and losses. These may be decomposed into neutral holding gains and losses, reflecting changes in the general price level, and real holding gains and losses, reflecting changes in the relative prices of assets.

Stocks

1.47. Stocks are holdings of assets and liabilities at a point in time. Stocks are recorded at the beginning and end of each accounting period. The accounts that show stocks are called balance sheets (15).

Stocks are also recorded for population and employment. However, these stocks are recorded as mean values over the accounting period.

Stocks are recorded for all assets within the system's boundaries; that is, for financial assets and liabilities and for non-financial assets, both produced and non-produced. However, the coverage is limited to those assets that are used in economic activity and that are subject to ownership rights. Thus, stocks are not recorded for assets such as human capital and natural resources that are not owned.

Within its boundaries, the system is exhaustive in respect of both flows and stocks. This implies that all changes in stocks can be fully explained by recorded flows.

THE SYSTEM OF ACCOUNTS AND THE AGGREGATES (16)

Rules of accounting

1.48. An account is a means of recording, for a given aspect of economic life, the uses and resources or the changes in assets and the changes in liabilities during the accounting period, or the stock of assets and liabilities existing at the beginning or at the end of this period.

Terminology for the two sides of the accounts

1.49. The system employs the term 'resources` for the right side of the current accounts where transactions appear which add to the amount of economic value of a unit or a sector. The left side of the accounts, which relates to transactions that reduce the amount of economic value of a unit or sector, is termed 'uses`.

The right side of the accumulation accounts is called 'changes in liabilities and net worth` and their left side is called 'changes in assets`.

Balance sheets are presented with 'liabilities and net worth` (the difference between assets and liabilities) on the right side and 'assets` on the left. Comparison of two successive balance sheets shows changes in liabilities and net worth and changes in assets.

Double entry/quadruple entry

1.50. For a unit or sector, national accounting is based on the principle of double entry. Each transaction must be recorded twice, once as a resource (or a change in liabilities) and once as a use (or a change in assets). The total of transactions recorded as resources or changes in liabilities and the total of transactions recorded as uses or changes in assets must be equal, thus permitting a check on the consistency of the accounts.

In practice though, national accounts - with all units and all sectors - are based on a principle of quadruple entry, since most transactions involve two institutional units. Each transaction of this type must be recorded twice by the two transactors involved. For example, a social benefit in cash paid by a government unit to a household is recorded in the accounts of government as a use under transfers and a negative acquisition of assets under currency and deposits; in the accounts of the household sector it is recorded as a resource under transfers and an acquisition of assets under currency and deposits.

On the other hand, transactions within a single unit (such as the consumption of output by the same unit that produced it) require only two entries, whose values have to be estimated.

Valuation

1.51. With the exception of some variables concerning population and labour, the system shows all flows and stocks in monetary terms. The system does not attempt to determine the utility of flows and stocks. Instead, flows and stocks are measured according to their exchange value, i.e. the value at which flows and stocks are in fact, or could be, exchanged for cash. Market prices are thus ESA's basic reference for valuation.

1.52. In the case of monetary transactions and cash holdings and liabilities, the values required are directly available. In most other cases, the preferred method of valuation is by reference to market prices for analogous goods, services or assets. This method is used for e.g. barter and the services of owner-occupied dwellings. When no market prices for analogous products are available, for instance in the case of non-market services produced by government, valuation should be made according to production costs. If neither of these two methods are feasible, flows and stocks may be valued at the discounted present value of expected future returns. However, due to the great uncertainty involved, this last method is only recommended as a last resort.

1.53. Stocks should be valued at current prices at the time to which the balance sheet relates, not at the time of production or acquisition of the goods or assets that form the stocks. It is sometimes necessary to value stocks at their estimated written-down current acquisition values or production costs.

Special valuations concerning products (17)

1.54. Because of transport costs, trade margins and taxes less subsidies on products, the producer and the user of a given product usually perceive its value differently. In order to keep as close as possible to the views of the transactors, the system records all uses at purchaser's prices, which include transport costs, trade margins and taxes less subsidies on products, while output is recorded at basic prices, which exclude these elements.

1.55. Imports and exports of products are recorded at border values. Total imports and exports are valued at the exporter's customs frontier, or free on board (fob). Foreign transport and insurance services between the importer's and the exporter's frontiers are not included in the value of goods but are recorded under services. As it may not be possible to obtain fob values for detailed product breakdowns, the tables containing details on foreign trade show imports valued at the importer's customs frontier (cif value). All transport and insurance services to the importer's frontier are included in the value of imported goods. As far as these services concern domestic services a global fob/cif adjustment is made in this presentation.

Valuation at constant prices (18)

1.56. Valuation at constant prices means valuing the flows and stocks in an accounting period at the prices of a previous period. The purpose of valuation at constant prices is to decompose changes over time in the values of flows and stocks into changes in price and changes in volume. Flows and stocks at constant prices are said to be in volume terms.

Many flows and stocks, e.g. income, do not have price and quantity dimensions of their own. However, the purchasing power of these variables can be obtained by deflating the current values with a suitable price index, e.g. the price index for final national uses, excluding changes in inventories. Deflated flows and stocks are said to be in real terms. An example is real disposable income.

Time of recording

1.57. The system records flows on an accrual basis; that is, when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled.

Thus, output is recorded when produced, not when paid for by a purchaser, and the sale of an asset is recorded when the asset changes hands, not when the corresponding payment is made. Interest is recorded in the accounting period when it accrues, regardless of whether or not it is actually paid in that period. Recording on an accrual basis applies to all flows, monetary as well as non-monetary and intra-unit a well as between units.

However, in some cases it is necessary to show flexibility as regards time of recording. This applies in particular to taxes and other flows concerning general government, which are often recorded on a cash basis in government accounts. It is sometimes difficult to carry out an exact transformation of these flows from cash basis to accrual basis. In these cases it might therefore be necessary to use approximations.

Any flow should be recorded at the same point of time for all institutional units involved and in all accounts in question. This principle may seem simple, but its implementation is not. Institutional units do not always apply the same accounting rules. Even when they do, differences in actual recording may occur for practical reasons such as delays in communication. Consequently, transactions may be recorded at different times by the transactors involved. These discrepancies must be eliminated by adjustments.

Consolidation and netting

Consolidation

1.58. Consolidation refers to the elimination, from both uses and resources, of transactions which occur between units when the latter are grouped, and to the elimination of reciprocal financial assets and liabilities.

For subsectors or sectors, flows and stocks between constituent units are not consolidated between constituent units as a matter of principle.

However, consolidated accounts may be built up for complementary presentations and analyses. For certain kinds of analysis, information on the transactions of these (sub)sectors with other sectors and the corresponding 'external` financial position is more significant than overall gross figures.

Moreover, the accounts and tables showing the creditor/debitor relationship provide a detailed picture of financing of the economy and are considered very useful for understanding the channels through which the financing surpluses move from final lenders to final borrowers.

Netting

1.59. Individual units or sectors may have the same kind of transaction both as a use and as a resource (e.g. they both pay and receive interest) and the same kind of financial instrument both as an asset and as a liability.

The system recommends gross recording, apart from the degree of netting which is inherent in the classifications themselves.

In fact, netting is implicit in various transaction categories, the most outstanding example being 'changes in inventories`, which underlines the analytically significant aspect of overall capital formation rather than tracking daily additions and withdrawals.

Similarly, with few exceptions, the financial account and other changes in assets accounts record increases in assets and in liabilities on a net basis, bringing out the final consequences of these types of flows at the end of the accounting period.

Accounts, balancing items and aggregates

1.60. For units (institutional units; local kind-of-activity units) or groups of units (institutional sectors and, by extension, the rest of the world; industries), different sub-accounts record the transactions or other flows which are connected to some specific aspect of economic life (for instance, production). Such a set of transactions usually does not balance; the total amounts recorded as receivable and payable usually differ. Therefore, a balancing item must be introduced. Usually, a balancing item must also be introduced between the total of assets and the total of liabilities of an institutional unit or sector. Balancing items are meaningful measures of economic performance in themselves. When summed for the whole economy, they constitute significant aggregates.

The sequence of accounts

1.61. The system is built around a sequence of inter-connected accounts.

The full sequence of accounts for the institutional units and sectors is composed of current accounts, accumulation accounts and balance sheets.

Current accounts deal with the production, generation, distribution and redistribution of income and the use of this income in the form of final consumption. Accumulation accounts cover changes in assets and liabilities and changes in net worth (the difference for any institutional unit or group of units between its assets and liabilities). Balance sheets present stocks of assets and liabilities and net worth.

1.62. It is not possible to envisage a complete set of accounts, including balance sheets, being compiled for a local KAU, because generally such an entity is not capable of owning goods or assets in its own right or capable of receiving or disbursing income. The sequence of accounts for local kind-of-activity units and industries is shortened to the first current accounts: production account and generation of income account, the balancing item of which is the operating surplus.

The goods and services account

1.63. The goods and services account shows, for the economy as a whole or for groups of products, the total resources (output and imports) and uses of goods and services (intermediate consumption, final consumption, changes in inventories, gross fixed capital formation, acquisitions less disposals of valuables, and exports).

The Rest of the World account

1.64. The Rest of the World account covers transactions between resident and non-resident institutional units and the related stocks of assets and liabilities when relevant.

As the rest of the world plays a role in the accounting structure similar to that of an institutional sector, the Rest of the World account is established from the point of view of the rest of the world. A resource for the rest of the world is a use for the total economy and vice versa. If a balancing item is positive, it means a surplus of the rest of the world and a deficit of the total economy, and vice versa if the balancing item is negative.

Balancing items

1.65. A balancing item is an accounting construct obtained by subtracting the total value of the entries on one side of an account from the total value on the other side. It cannot be measured independently of the other entries; as a derived entry, it reflects the application of the general accounting rules to the specific entries on the two sides of the account.

Balancing items are not only devices introduced to ensure that accounts balance. They encapsulate a great deal of information and include some of the most important entries in the accounts, as can be seen from the following examples of balancing items: value added, operating surplus, disposable income, saving, net lending/net borrowing.

Aggregates

1.66. The aggregates are composite values which measure the result of the activity of the total economy considered from a particular point of view; for example, output, value added, disposable income, final consumption, saving, capital formation, etc. Although the calculation of the aggregates is neither its sole nor its main purpose, the system does recognize their importance as summary indicators and key magnitudes for purposes of macro-economic analysis and comparisons over time and space.

Two types of aggregates can be distinguished:

(a) aggregates which refer directly to transactions in the system, such as the output of goods and services, actual final consumption, gross fixed capital formation, compensation of employees, etc.;

(b) aggregates which represent balancing items in the accounts, such as gross domestic product at market prices (GDP), operating surplus of the total economy, national income, national disposable income, saving, current external balance, net worth of the total economy (national wealth).

1.67. A dimension is added to the usefulness of a number of national accounts figures by calculating these figures per head. For broad aggregates such as GDP or national income or household final consumption, the denominator commonly used is the total (resident) population. When subsectoring the accounts or part of the accounts of the household sector, data on the number of households and the number of persons belonging to each subsector are also necessary (19).

THE INPUT-OUTPUT FRAMEWORK (20)

1.68. The input-output framework consists of supply and use tables by industry, tables linking the supply and use tables to the sector accounts and symmetric input-output tables by homogeneous branch (product).

1.69. Supply and use tables are matrices (rows of products, columns of industries), showing how the output of industries is broken down by type of products and how the domestic and imported supply of goods and services is allocated between various intermediate or final uses, including exports. The use table also shows by industry the structure of production costs and the income generated.

The supply and use tables are the coordinating framework for all tables by industry and (or) by product, which include data on labour inputs, gross fixed capital formation, stocks of fixed assets, detailed pri