I. INTRODUCTION
I. Links with business accounting and economic theory
| 1.58. | The accounting rules and procedures used in the System are based on those long used in business accounting. The traditional double-entry bookkeeping principle, whereby a transaction gives rise to a pair of matching debit and credit entries within the accounts of each of the two parties to the transaction, is a basic axiom of economic or national accounting. For example, recording the sale of output requires not only an entry in the production account of the seller but also an entry of equal value, often described as the counterpart, in the seller's financial account to record the cash, or short-term financial credit, received in exchange for the output sold. As two entries are also needed for the buyer, the transaction must give rise to four simultaneous entries of equal value in a system of macroeconomic accounts covering both the seller and the buyer. In general, a transaction between two different institutional units always requires four equal, simultaneous entries in the accounts of the System - i.e., quadruple entry accounting - even if the transaction is a transfer and not an exchange and even if no money changes hands. These multiple entries enable the economic interactions between different institutional units and sectors to be recorded and analysed. However, 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. |
| 1.59. | The design and structure of the System draws heavily on economic theory and principles as well as business accounting practices. Basic concepts such as production, consumption and capital formation are meant to be rooted in economic theory. When business accounting practices conflict with economic principles, priority is given to the latter, as the System is designed primarily for purposes of economic analysis and policy-making. The difference between business accounting and economic theory can be illustrated by the concept of cost of production used in the System. |
| 1.60. | Business accounts commonly (but not invariably) record costs on an historic basis, partly to ensure that they are completely objective. Historic cost accounting requires goods or assets used in production to be valued by the expenditures actually incurred to acquire those goods or assets, however far back in the past those expenditures took place. In the System, however, the concept of opportunity cost as defined in economics is employed. In other words, the cost of using, or using up, some existing asset or good in one particular process of production is measured by the amount of the benefits that could have been secured by using the asset or good in alternative ways. Opportunity cost is calculated with reference to the opportunities foregone at the time the asset or resource is used, as distinct from the costs incurred at some time in the past to acquire the asset. The best practical approximation to opportunity cost accounting is current cost accounting, whereby assets and goods used in production are valued at their actual or estimated current market prices at the time the production takes place. Current cost accounting is sometimes described as replacement cost accounting, although there may be no intention of actually replacing the asset in question after it has been used. |
| 1.61. | When there is persistent inflation, even moderate inflation, the use of historic costs tends to underestimate the opportunity costs of production in an economic sense so that historic cost profit may be much greater than the operating surplus as defined in the System. Profits at historic costs are liable to give very misleading signals as to the profitability of the production processes to which they relate by systematically undervaluing inputs compared with outputs. They can lead to mistaken decisions at both a microeconomic and macroeconomic level. |
| 1.62. | Current cost accounting has ramifications that permeate the entire System. It affects all the accounts and balance sheets and their balancing items. A fundamental principle underlying the measurement of gross value added, and hence GDP, is that output and intermediate consumption must be valued at the prices current at the time the production takes place. This implies that goods withdrawn from inventories by producers must be valued at the prices prevailing at the times the goods are withdrawn and not at the prices at which they entered inventories. This method of recording changes in inventories is not commonly used in business accounting, however, and may sometimes give very different results - especially when inventory levels fluctuate while prices are rising. Similarly, consumption of fixed capital in the System is calculated on the basis of the estimated opportunity costs of using the assets at the time they are used, as distinct from the prices at which the assets were acquired. When there is persistent inflation, the value of consumption of fixed capital is liable to be much greater than depreciation at historic costs, even if the same assumptions are made in the System and in business accounts about the service lives of the assets and their rates of wear and tear and obsolescence. To avoid confusion, the term "consumption of fixed capital" is used in the System to distinguish it from "depreciation" as typically measured in business accounts, just as the term "operating surplus" is used instead of "profit" or "operating profit". |
| 1.63. | Measuring consumption of fixed capital at current costs is equivalent to measuring the operating surplus from production after deducting the costs of maintaining intact the stock of fixed assets used in production - that is, after deducting the costs of replacing assets used up in production (as distinct from the costs of replacing assets destroyed by events not connected with production, such as earthquakes or other natural disasters, or acts of war, such losses being recorded elsewhere in the System in the capital accumulation accounts). Even when the fixed assets used up are not actually replaced, the amount of consumption of fixed capital charged as a cost of production should be sufficient to enable the assets to be replaced, if desired. Similarly, the concept of disposable income used in the System is based on the underlying idea that it represents the maximum amount available to a household for purposes of consumption after maintaining its net worth intact, i.e., its assets minus its liabilities valued at current prices. However, the System excludes from the calculation of income any assets received or disposed of as a result of capital transfers that merely redistribute wealth between different units, and also any assets received or disposed of as a result of "other volume changes" as described in chapter XII. It also excludes any real holding gains or losses on assets or liabilities due to changes in their relative prices. At a macro level, the aggregate income of a group of units is not changed by redistributing wealth within the group. The System takes account of capital transfers, other volume changes and real holding gains or losses by recording them in the accumulation accounts of the units concerned and not in their income accounts. |
1. Micro-macro links
| 1.64. | The sequence of accounts and balance sheets of the System could, in principle, be compiled at any level of aggregation, even that of an individual institutional unit. It might therefore appear desirable if the macroeconomic accounts for sectors or the total economy could be obtained directly by aggregating corresponding data for individual units. There would be considerable analytical advantages in having micro-databases that are fully compatible with the corresponding macroeconomic accounts for sectors or the total economy. Data in the form of aggregates, or averages, often conceal a great deal of useful information about changes occurring within the populations to which they relate. For example, economic theory indicates that changes in the size of distribution of income may be expected to have an impact on aggregate consumption over and above that due to changes in the aggregate level of income. Information relating to individual units may be needed not only to obtain a better understanding of the working of the economy but also to monitor the impact of government policies, or other events, on selected types of units about which there may be special concern, such as households with very low incomes. Micro-data sets also make it possible to follow the behaviour of individual units over time. Given the continuing improvements in computers and communications, the management and analysis of very large micro-databases is becoming progressively easier. Data can be derived from a variety of different sources, such as administrative and business records, as well as specially conducted censuses and surveys. |
| 1.65. | In practice, however, macroeconomic accounts can seldom be built up by simply aggregating the relevant micro-data. Even when individual institutional units keep accounts or records the concepts that are needed or appropriate at a micro level may not be suitable at a macro level. Individual units may be obliged to use concepts designed for other purposes, such as taxation. The accounting conventions and valuation methods used at a micro level typically differ from those required by the System. For example, as already noted, the widespread use of historic cost accounting means that the accounts of individual enterprises may differ significantly from those used in the System. Depreciation as calculated for tax purposes may be quite arbitrary and unacceptable from an economic viewpoint. In such situations, it is impractical to try to adjust the individual accounts of thousands of enterprises before aggregating them. It may be much easier to adjust the data after they have been aggregated to some extent. Of course, the data do not have to be aggregated to the level of the total economy, or even complete sectors or industries, before being adjusted and it is likely to be more efficient to make the adjustments for smaller and more homogenous groups of units. This may involve compiling so-called intermediate systems of accounts. At whatever level of aggregation the adjustments are made, the inevitable consequence is to make the resulting macro-data no longer equivalent to simple aggregations of the micro-data form which they are derived. When the micro-data are not derived from business accounts or administrative records but from censuses or surveys designed for statistical purposes, the concepts used should be closer to those required, but the results may still require adjustment at a macro level because of incomplete coverage (the surveys being confined to enterprises above a certain size, for example) and bias from response errors. |
| 1.66. | Most households are unlikely to keep accounts of the kind needed by the System. Micro-data for households are typically derived from sample surveys that may be subject to significant response and reporting errors. It may be particularly difficult to obtain reliable and meaningful data about the activities of small unincorporated enterprises owned by households. Aggregates based on household surveys have to be adjusted for certain typical biases, such as the under-reporting of certain types of expenditure (on tobacco, alcoholic drink, gambling, etc.) and also to make them consistent with macro-data from other sources, such as imports. The systematic exploitation of micro-data may also be restricted by the increasing concerns about confidentiality and possible misuse of such databases. |
| 1.67. | It may be concluded therefore that, for various reasons, it may be difficult, if not impossible, to achieve micro-databases and macroeconomic accounts that are fully compatible with each other in practice. Nevertheless, as a general objective, the concepts, definitions and classifications used in economic accounting should, so far as possible, be the same at both a micro and macro level to facilitate the interface between the two kinds of data. |
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