I. INTRODUCTION
H. Implementation of concepts and classifications
| 1.48. | The contents of the accounts are determined not only by the conceptual framework, definitions and classifications of the System but also by the ways in which they are interpreted and implemented in practice. However simple and precise concepts and classifications may appear in principle, there are inevitably difficult borderline cases which cannot easily be fitted into predetermined categories. These points may be illustrated by considering a fundamental distinction in economics and in the System, namely, the distinction between consumption and gross fixed capital formation (or gross fixed investment, as it is often described in other contexts). |
1. Final consumption, intermediate consumption and gross fixed capital formation
| 1.49. | Consumption is an activity in which institutional units use up goods or services. There are two quite different kinds of consumption. Intermediate consumption consists of inputs into processes of production that are used up within the accounting period. Final consumption consists of goods and services used by individual households or the community to satisfy their individual or collective needs or wants. The activity of gross fixed capital formation, on the other hand, is restricted to institutional units in their capacity as producers, being defined as the value of their acquisitions less disposals of fixed assets. Fixed assets are produced assets (mostly machinery, equipment, buildings or other structures but also including some intangible assets) that are used repeatedly or continuously in production over several accounting periods (more than one year). |
| 1.50. | The general nature and purpose of the distinction between gross fixed capital formation and consumption, whether intermediate or final, is clear. The distinction is fundamental for economic analysis and policy-making. Nevertheless, the borderline between consumption and gross fixed capital formation is not always easy to determine in practice. Certain activities contain some elements that appear to be consumption and at the same time others that appear to be capital formation. In order to try to ensure that the System is implemented in a uniform way decisions have to be taken about the ways in which certain difficult, even controversial, items are to be classified. Some examples are given below. |
Training, research and development
| 1.51. | Expenditures by enterprises on activities such as staff training or research and development are not the type of intermediate inputs whose consumption is determined by the level at which production is carried out in the current period but are designed to raise productivity or increase the range of production possibilities in the future, in much the same way as expenditures on machinery, equipment, buildings and other structures. However, expenditures on training and research or development do not lead to the acquisition of assets that can be easily identified, quantified and valued for balance sheet purposes. Such expenditures continue to be classified as intermediate consumption, therefore, even though it is recognized that they may bring future benefits. In fact, many other expenditures undertaken by enterprises may also have impacts in future periods as well as the current period - for example, market research, advertising and expenditures on health and safety that affect the well-being and attitudes of the workforce. |
Education
| 1.52. | It is often proposed that expenditures on education should also be classified as gross fixed capital formation as a form of investment in human capital. The acquisition of knowledge, skills and qualifications increases the productive potential of the individuals concerned and is a source of future economic benefit to them. However, while knowledge, skills and qualifications are clearly assets in a broad sense of the term, they cannot be equated with fixed assets as understood in the System. They are not produced because they are acquired through learning, studying and practising - activities that are not themselves processes of production. The education services produced by schools, colleges, universities, etc. are consumed by students in the process of their acquiring knowledge and skills. Education assets are embodied in individuals as persons. They cannot be transferred to others and cannot be shown in the balance sheets of the enterprises in which the individuals work (except in rare cases when certain highly skilled individuals are under contract to work for particular employers for specified periods). Education assets could possibly be shown in balance sheets for the individuals in which they are embodied, but individuals are not enterprises. They would be difficult to value, bearing in mind that the remuneration received by a skilled worker depends upon the amount of time and effort expended and is not simply a return payable to the owner of an asset. |
| 1.53. | It may also be noted that final consumption consists of the use of goods and services for the direct satisfaction of human needs or wants, individually or collectively. Education services are undoubtedly consumed in this sense. They increase the welfare and improve the general quality of life of those consuming them. Moreover, they are not the only services consumed by individuals to bring long- as well as short-term benefits. For example, the consumption of health services brings long-term benefits and even the consumption of basic items such as food and housing is necessary in order to keep an individual in good health - and good working order. |
Repairs, maintenance and gross fixed capital formation
| 1.54. | Another, less familiar, example of the intrinsic difficulty of trying to draw a dichotomy between consumption and gross fixed capital formation is provided by repairs and maintenance. Ordinary maintenance and repairs undertaken by enterprises to keep fixed assets in good working order are intermediate consumption. However, major improvements, additions or extensions to fixed assets, both machinery and structures, which improve their performance, increase their capacity or prolong their expected working lives count as gross fixed capital formation. In practice it is not easy to draw the line between ordinary repairs and major improvements, although the System provides certain guidelines for this purpose. Some analysts, however, consider that the distinction between ordinary repairs and maintenance and major improvements and additions is neither operational nor defensible and would favour a more "gross" method of recording in which all such activities are treated as gross fixed capital formation. |
2. Interpretation of the distinction between consumption and gross fixed capital formation
| 1.55. | The examples given above show that a simple dichotomy between consumption and gross fixed capital formation inevitably presents problems when dealing with flows of goods and services that do not fit comfortably under either heading. The issue is not simply how to classify certain flows, but also how to achieve an economically meaningful and feasible set of accounting procedures for the assets acquired through gross fixed capital formation within an integrated, coherent set of accounts encompassing past and future periods as well as the present. |
| 1.56. | Some care and sophistication is needed in using the accounts. For example, goods and services "consumed" by households - i.e., acquired for the satisfaction of their needs or wants - are not suddenly "used up" and do not "vanish" at the moment of acquisition. In particular, households "consuming" services such as health and education may continue to derive benefits over long periods of time. The "consumption" of such services therefore has points of similarity with "investment" in assets. Similarly, enterprises may continue to benefit over long periods of time from the intermediate consumption of services such as maintenance and repairs, training, research and development, market research, etc. Thus, while the acquisition of fixed assets by enterprises - that is, gross fixed capital formation - is undertaken specifically to enhance future production possibilities, they are not the only types of expenditure that may be expected to bring future benefits. |
| 1.57. | The decision whether to classify certain types of expenditure by households or government, such as education or health services, as final consumption expenditures or gross fixed capital formation does not affect the size of GDP, as both are final expenditures. On the other hand, the decision to classify certain expenditures by enterprises as intermediate consumption rather than gross fixed capital formation does reduce the gross value added and operating surplus of the enterprise and hence GDP as a whole. However, treating certain expenditures as intermediate reduces not only gross fixed capital formation but also consumption of fixed capital in subsequent periods. It is therefore an open question as to how net value added and net domestic product (NDP) are affected in the longer term, depending upon the pattern of the relevant expenditures over time. |
|
