I. INTRODUCTION
J. The aggregates of the system as indicators of economic activity and welfare
1. Introduction
| 1.68. | The SNA consists of a coherent, consistent set of macroeconomic accounts and tables designed for a variety of analytical and policy purposes. Nevertheless, certain key aggregates of the System, such as GDP and GDP per head of population, have acquired an identity of their own and are widely used by analysts, politicians, the press, the business community and the public at large as summary, global indicators of economic activity and welfare. Movements of such aggregates, and their associated price and volume measures, are used to evaluate the overall performance of the economy and hence to judge the relative success or failure of economic policies pursued by Governments. |
| 1.69. | GDP is a measure of production. The level of production is important because it largely determines how much a country can afford to consume and it also affects the level of employment. The consumption of goods and services, both individually and collectively, is one of the most important factors influencing the welfare of a community, but it is only one of several factors. There are also others, such as epidemics, natural disasters or wars, that can have major negative impacts on welfare, while others, such as scientific discoveries, inventions or simply good weather, may have significant positive impacts. These factors obviously do not enter into the measurement of GDP, which refers only to the flow of goods and services produced within a given period. Thus, movements of GDP on their own cannot be expected to be good indicators of changes in total welfare unless all the other factors influencing welfare happen to remain constant, which history shows is never the case. These points are elaborated further in this section because of common misunderstandings about GDP as an indicator of welfare. |
| 1.70. | There are two aspects that need to be separated. The first is the adequacy of the main aggregates of the System as summary indicators of economic activities taking place within the economy as a whole and flows of goods and services produced or consumed. The second is the more general question of the validity of using measures of aggregate production or consumption as indicators of welfare. |
2. The coverage of GDP and the role of estimates and imputations
| 1.71. | A distinction needs to be drawn between activities such as production and consumption taking place in the economy and the transactions associated with those activities that are recorded in the accounts. As noted, transactions are interactions between institutional units, such as the exchange of ownership of a good. The physical process by which a good is produced is quite separate from the subsequent transaction in which it may be sold or supplied to another unit. |
| 1.72. | When goods and services produced are sold in monetary transactions, their values are automatically included in the accounts of the System. Many goods or services are not actually sold but are nevertheless supplied to other units: for example, they may be bartered for other goods or services or provided free as transfers in kind. Such goods and services must be included in the accounts even though their values have to be estimated. The goods or services involved are produced by activities that are no different from those used to produce goods or services for sale. Moreover, the transactions in which the goods and services are supplied to other units are also proper transactions even though the producers do not receive money in exchange. It is misleading to describe such output as "imputed". For example, the services of financial intermediaries which are indirectly measured in the System are not imputed. However, their values have to be estimated. |
| 1.73. | When goods or services are retained for own use, no transactions with other units take place. In such cases, in order to be able to record the goods or services in the accounts, internal transactions have to be imputed whereby producers allocate the goods or services for their own consumption or capital formation and values also have to be estimated for them. Nevertheless, as in the case of non-monetary transactions between units, the goods and services themselves are not imputed. |
| 1.74. | Thus, estimates and imputations are needed in order to be able to record in the accounts productive activities whose outputs are not disposed of in monetary transactions with other units. Such estimates and imputations should therefore not be interpreted as introducing hypothetical activities or flows of goods and services into the System. Their purpose is the opposite - namely, to capture in the accounts major flows of goods and services actually taking place in the economy that would otherwise be omitted. In order to obtain comprehensive measures, values have to be estimated for all outputs of goods and services that are not sold but disposed of in other ways. |
| 1.75. | In practice the System does not record all outputs, however, because domestic and personal services produced and consumed by members of the same household are omitted. Subject to this one major exception, GDP is intended to be a comprehensive measure of the total gross value added produced by all resident institutional units. GDP is, of course, confined to outputs produced by economic activities that are capable of being provided by one unit to another. Not all activities that require the expenditure of time and effort by persons are productive in an economic sense - for example, activities such as eating, drinking or sleeping cannot be produced by one person for the benefit of another. Consistent with this principle, the activity of studying and learning also does not qualify as production, as already noted. Pupils and students are consumers of the educational services produced by teachers and educational establishments. |
3. Changes in welfare
| 1.76. | In a market economy, the prices used to value different goods and services should reflect not only their relative costs of production but also the relative benefits or utilities to be derived from using them for production or consumption. This establishes the link between changes in aggregate production and consumption and changes in welfare. However, changes in the volume of consumption, for example, are not the same as changes in welfare. The distinction between the quantity of some good or service and the utility derived from consuming it is clear enough at the level of an individual good or service. For example, the quantity of sugar consumed by households is measured in physical units. It is measured quite independently of any utility that the households may, or may not, derive from consuming it. |
Interaction with non-economic factors
| 1.77. | As already noted, total welfare depends on many other factors besides the amounts of goods and services consumed. Apart from natural events such as epidemics, droughts or floods, welfare also depends on political factors, such as freedom and security. Obviously, as a measure of production, GDP is not intended to embrace non-economic events, such as political revolutions, wars, natural disasters or epidemics. |
| 1.78. | Consider the effects of an exceptionally severe winter combined with an influenza epidemic. Other things being equal, the production and consumption of a number of goods and services may be expected to rise in response to extra demands created by the cold and the epidemic; the production and consumption of fuels, clothing and medical services will tend to increase. As compared with the previous year, people may consider themselves to be worse off overall because of the exceptionally bad weather and the epidemic, notwithstanding the fact that production and consumption may have increased in response to the additional demand for heating and health services. Total welfare could fall even though GDP could increase in volume terms. |
| 1.79. | This kind of situation does not mean that welfare cannot be expected to increase as GDP increases, other things being equal. Given the occurrence of the cold and the epidemic, the community presumably finds itself much better off with the extra production and consumption of heating and health services than without them. There may even be a general tendency for production to rise to remedy the harmful effects of events that reduce people's welfare in a broad sense. For example, production may be expected to increase in order to repair the damage caused by such natural disasters as earthquakes, hurricanes and floods. Given that the disaster has occurred, the extra production presumably increases welfare. |
| 1.80. | GDP may also be expected to rise in response to disasters other than natural ones. In particular, the production and consumption of goods and services typically rises as a result of wars. The same reasoning applies as for natural disasters. Given that a state of war exists, any consequential increase in the production and consumption of armaments or defence services may well increase welfare by affording extra protection to the community. Whether such increased welfare is sufficient to compensate for the loss of welfare caused by the war itself is quite another matter. The fact that the volume of GDP may increase as a result of the outbreak of war when the consumption of individual goods and services by households may be falling does not expose a deficiency in national accounts' concepts, as is sometimes maintained. It has been argued that collective defence services should be classified as intermediate rather than final consumption, but there are in fact no further processes of production in which such services are consumed. It is clear that the total level of production in the economy is likely to rise in response to the community's increased consumption of collective defence services, even though the community would presumably prefer the output to be used for other purposes if there were no war. |
| 1.81. | Similar considerations arise with respect to so-called "regrettable necessities" in general. When production and consumption increase in order to compensate for the loss of welfare created by damage or "bads" that did not previously exist, the community may be no better off than if the damage had not occurred. However, this should not be allowed to obscure the fact that without the extra production and consumption the community would actually be worse off still. The extra production and consumption, in itself, actually increases welfare. Goods and services are consumed by households to satisfy their needs and wants. Some of these needs or wants may be created or increased by factors or events over which households have little or no control and which they may resent - bad weather, natural disasters, pollution, etc., - but this in no way diminishes the fact that they do derive benefits from consuming the goods and services in question. Quite ordinary consumer goods such as food and drink could be characterized as "regrettable necessities" which merely satisfy the recurrent basic needs of hunger and thirst without leaving the individuals any better off than before the onset of the hunger and thirst. Pushed to its logical conclusion, scarcely any consumption improves welfare in this line of argument. |
Welfare, economic analysis and policy-making
| 1.82. | Although movements in GDP and other aggregates for the total economy can be useful indicators of changes in both economic activity and welfare, the calculation of such aggregates is not the main reason for compiling national accounts. The SNA is an integrated system of accounts embracing different kinds of activities and sectors. It is intended for purposes of economic analysis, decision-taking and policy-making. It is a multi-purpose system designed to meet the requirements of different kinds of users: governments, businesses, research institutes, universities, the press and the general public. No single user, or group of users, can take priority over all others. The use of one or two aggregates to gauge changes in welfare may be one of the more important uses of the System, but it is only one use. The System is primarily intended to provide data at different levels of aggregation to meet the needs of analysts and policy makers interested in the behaviour of the economy and the factors responsible for major market disequilibria, such as inflation and unemployment. The System is inevitably a compromise intended to yield the maximum benefits to different kinds of users and may not therefore be optimal for any one purpose taken in isolation. |
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