III. FLOWS, STOCKS AND ACCOUNTING RULES
C. Flows
| 3.9. | Economic flows reflect the creation, transformation, exchange, transfer or extinction of economic value; they involve changes in the volume, composition, or value of an institutional unit's assets and liabilities. Mirroring the diversity of the economy, economic flows have specific natures as wages, taxes, interest, capital flows, etc., that record the ways in which a unit's assets and liabilities are changed. |
| 3.10. | All entries in the accounts have to be measured in terms of money, and therefore the elements from which the entries are built up must be measured in terms of money. In some cases, the amounts entered are the actual payments that form part of flows that involve money; in other cases the amounts entered are estimated by reference to actual monetary values. |
| 3.11. | Economic flows are of two kinds. Most flows are transactions. Flows included in the System that do not meet the characteristics of transactions as described below are called "other flows". Transactions appear in all of the accounts and tables in which flows appear except two; other flows appear only in these two. The two are accumulation accounts, the other changes in the volume of assets account and the revaluation account. More meaning can be given to the definition of flows by describing the two kinds. |
1. Transactions
| 3.12. | 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 analytically useful to treat like a transaction, often because the unit is operating in two different capacities. |
| 3.13. | Institutional units, referred to in the definition, are the fundamental economic units of the System (see chapter IV). The following are the main attributes of institutional units that are relevant to their engaging in transactions:
(a) They are entitled to own goods or assets in their own right, and therefore are able to exchange them;
(b) They are able to take economic decisions and engage in economic activities for which they are held to be directly responsible and accountable at law;
(c) They are able to incur liabilities on their own behalf, to take on other obligations or future commitments and to enter into contracts. |
| 3.14. | 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. This does not mean, however, that both units necessarily enter a transaction voluntarily, because some transactions are imposed by force of law, such as payments of taxes or other compulsory transfers. Although individual institutional units are not free to fix the amounts of taxes they pay, there is nevertheless collective recognition and acceptance by the community of the obligation to pay taxes. Thus, payments of taxes are considered transactions despite being compulsory. |
| 3.15. | Transactions take so many different forms that, even with these explanations, any general definition is inevitably rather imprecise. To give more precision, the various kinds of transactions have to be systematically described and classified. A first distinction is between monetary and non-monetary transactions. Other distinctions, such as between transactions with and without counterparts, are drawn within each of these kinds of transactions. Frequently the individual, identifiable transactions of everyday economic life are simply grouped together in the accounts; sometimes they are subdivided and rearranged in order to form the transaction categories of the System. |
Monetary transactions
| 3.16. | A monetary transaction is one in which one institutional unit makes a payment (receives a payment) or incurs a liability (receives an asset) stated in units of currency. In the System, all flows are recorded in monetary terms, but the distinguishing characteristic of a monetary transaction is that the parties to the transaction express their agreement in monetary terms. For example, a good is purchased/sold at a given number of units of currency per unit of the good, or labour is hired/provided at a given number of units of currency per hour or day. |
| 3.17. | All monetary transactions are interactions between institutional units; that is, all monetary transactions are two-party transactions. The following is a list of common monetary transactions:
Expenditure on consumption of goods and services
Acquisition of a security
Wages and salaries
Interest, dividends and rent
Taxes
Social assistance benefits in cash. |
Transactions with and without counterparts
| 3.18. | The expenditure on consumption of goods and services, the acquisition of a security, the wages and salaries, and the interest, dividends, and rent are two-party transactions in which one party provides a good, service, labour or asset to the other and receives a counterpart in return. This kind of transaction is sometimes called a "something for something" transaction or a transaction with a quid pro quo. Exchanges consist of such transactions. |
| 3.19. | Taxes and social assistance benefits are examples of two-party transactions in which one party provides a good, service or asset to the other but does not receive a counterpart in return. This kind of transaction, sometimes called a "something for nothing" transaction or a transaction without a quid quo pro, is called a transfer in the System. |
| 3.20. | The scope of the counterparts mentioned in describing exchanges and transfers does not cover entitlement to contingent benefits or collective services. Such benefits are generally uncertain or not quantifiable, or both. Moreover, the amount of benefit that may eventually be received by an individual unit is not proportional to the amount of the previous payment and may be very much greater or smaller than the latter. Thus, payments such as a social insurance contribution or a non-life insurance premium may entitle the unit making the payment to some contingent future benefits, and a household paying taxes may be able to consume certain collective services provided by government units, but these payments are regarded as transfers rather than exchanges. |
| 3.21. | Transfers may be either monetary or non-monetary (see the discussion below of non-monetary transfers). When transfers that are otherwise the same may be either monetary or non-monetary, as is true for social assistance benefits mentioned as an example, the two kinds are distinguished by calling the former a transfer in cash and the latter a transfer in kind. Actually, "in cash" is not fully descriptive because these transfers may provide either currency or a transferable deposit. |
| 3.22. | Another distinction is made within transfers - a distinction between current and capital. A capital transfer is one in which the ownership of an asset is transferred or which obliges one or both parties to acquire, or dispose of, an asset. Capital transfers, which may be either in cash or in kind, redistribute saving or wealth. They include, for example, capital taxes and investment grants. Other transfers are described as current. Current transfers, which also may be either in cash or in kind, redistribute income. They include, for example, taxes on income and social benefits. |
Rearrangements of transactions
| 3.23. | Monetary transactions may not always be recorded in the accounts in the same way as they appear to the institutional units involved. The values of these actual, or observed, transactions are already available in the accounts of the units concerned, but the System rearranges certain transactions to bring out the underlying economic relationships more clearly. The three kinds of rearrangements affect the channels in which the transactions are seen as taking place, the number of transactions that are seen as taking place, or the units that are seen as being involved. The three sections below illustrate the main characteristics of these rearrangements and the kind of analytical purpose they serve. |
Rerouting transactions
| 3.24. | Rerouting records a transaction as taking place in channels that differ from the actual ones or as taking place in an economic sense when it actually does not. In the first kind of rerouting, a direct transaction between unit A and unit C is recorded as taking place indirectly through a third unit B, usually, however, with some change in the transaction category. |
| 3.25. | The recording of the payment of social security contributions is an example of the first kind of rerouting. Employees' social security contributions are recorded in the System as paid by employees out of their wages and salaries, while employers' social security contributions are recorded as constituting a part of compensation of employees. However, neither the employees' nor the employers' contributions are usually paid out to employees. Instead, they are paid directly by employers to social security funds. This arrangement is administratively convenient and efficient. However, as social security contributions are actually payable out of compensation of employees, they are shown as such in the accounts. Social security contributions are thus recorded strictly according to the general principles governing the recording of transactions in the System to bring out the economic substance behind arrangements adopted for administrative convenience. As a result of the rerouting, employers' social contributions are included as a part of labour cost. |
| 3.26. | An example of the second kind of rerouting is provided by the treatment of the retained earnings of foreign direct investment enterprises. The retention of some or all of the earnings of a foreign direct investment enterprise within that enterprise can be regarded as a deliberate investment decision by the foreign owners. Accordingly, the retained earnings are rerouted in the System by showing them as first remitted to the foreign owners as property income and then reinvested in the equity of the direct investment enterprise. |
| 3.27. | Similarly, the property income earned on the reserves of certain life insurance funds is deemed to be paid out to policyholders and then paid back again as premium supplements even though in actuality the property income is retained by the insurance enterprises. As a result, the saving of persons or households includes the amount of the rerouted property income while the saving of insurance enterprises does not. This alternative picture of saving is indeed the purpose of the rerouting. |
Partitioning transactions
| 3.28. | Partitioning records a transaction that is a single transaction from the perspective of the parties involved as two or more differently classified transactions. For example, the rental actually paid by the lessee under a financial lease is not recorded as a payment for a service; instead, it is partitioned into two transactions, a repayment of principal and a payment of interest. This partitioning of the rental payment is part of a treatment that implements an economic view of financial leasing in the System. Financial leasing is viewed as a method of financing the purchase of capital equipment, and a financial lease is shown in the System as a loan from the lessor to the lessee. |
| 3.29. | Another example is the treatment of certain financial services. For example, the System recommends partitioning interest payable and receivable by financial intermediaries into two components whenever possible. One component represents the System's notion of interest while the remainder represents the purchase of intermediation services for which the intermediaries do not charge explicitly. This partitioning to make the service item explicit affects intermediate and final consumption of particular industries and institutional sectors - indeed, that is a purpose of the reclassification - and also affects gross domestic product. However, the saving of all the units concerned, including the financial intermediaries themselves, is not affected. |
| 3.30. | The System's recording of transactions for wholesalers and retailers does not mirror the way in which those involved view them. The purchases of goods for resale by wholesalers and retailers are not recorded explicitly, and they are viewed as selling, not the goods, but the services of storing and displaying a selection of goods in convenient locations and making them easily available for customers. This partitioning implements the System's measure of output for traders, which is by the value of the margins on goods they purchase for resale. |
Recognizing the principal party to a transaction
| 3.31. | When a unit carries out a transaction on behalf of another unit, the transaction is recorded exclusively in the accounts of the principal. Some service output may be recognized with the intermediary. 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. |
| 3.32. | For example, purchases a commercial agent makes under the orders of, and at the expense of, another party are directly attributed to the latter. The accounts of the agent only show the fee charged to the principal for intermediation services rendered. |
| 3.33. | A second example is the collection of taxes and the payment of subsidies, social benefits, etc., by one government unit on behalf of another. A central government may, for example, serve as an intermediary for local governments in collecting taxes. Then, if the central government lacks discretion about the amount of collection or distribution of the relevant monies, the transactions are recorded directly in the accounts of the local government. In general, tax revenues will be allocated directly to the non-collecting government when (a) it has full or partial authority over the setting of the tax, or (b) it receives automatically under the provisions of tax law a given percentage of the tax collected or arising in its territory. |
Non-monetary transactions
| 3.34. | Non-monetary transactions are transactions that are not initially stated in units of currency. The entries in the System therefore represent values that are indirectly measured or otherwise estimated. In some cases, the transaction may be an actual one, and a value has to be estimated to record it in the accounts. Barter is an obvious example. In other cases, the entire transaction must be constructed and then a value estimated for it. Consumption of fixed capital is an example. (In the past, the estimation of a value has sometimes been called imputation, but it is preferable to reserve that term for the kind of situation that involves not only estimating a value but also constructing a transaction.) |
| 3.35. | The amounts of money associated with non-monetary transactions are entries whose economic significance is different from cash payments as they do not represent freely disposable sums of money. The various methods of valuation to be employed for non-monetary transactions are dealt with in the general section on valuation. |
| 3.36. | Non-monetary transactions can be either two-party transactions or actions within an institutional unit. The two-party transactions consist of barter, remuneration in kind, payments in kind other than compensation in kind and transfers in kind. These two-party transactions will be discussed first, followed by a discussion of internal transactions. |
Barter transactions
| 3.37. | Barter transactions involve two parties, with one party providing a good, service or asset other than cash to the other in return for a good, service or asset other than cash. As mentioned above, barter is an example of an actual transaction for which a value must be estimated. Barter transactions in which goods are traded for goods have always been important. The barter of goods may be systematically organised on proper markets or, in some countries, may occur only sporadically on a small scale. Barter between nations - thus involving exports and imports - also occurs. |
Remuneration in kind
| 3.38. | Remuneration in kind occurs when an employee accepts payment in the form of goods and services instead of money. This practice is extensive in most economies for reasons ranging from the desire of employers to find captive markets for part of their output, to tax avoidance or evasion. There are various forms, and the following list includes some of the most common types of goods and services provided without charge, or at reduced prices, by employers to their employees:
Meals and drinks
Housing services or accommodation of a type that can be used by all members of the household to which the employee belongs
The services of vehicles provided for the personal use of employees
Goods and services produced as outputs from the employer's own processes of production, such as free coal for miners.
Also, some employees may be willing, or obliged, to accept part of their compensation in the form of financial or other assets. |
Payments in kind other than remuneration in kind
| 3.39. | Payments in kind other than remuneration in kind occur when any of a wide variety of payments are made in the form of goods and services rather than money. For example, a doctor may accept payment in wine instead of money. Or, instead of paying rent or rentals in money, the user of land or fixed capital, respectively, may pay the owner in goods or services. In agriculture, for example, the "rent" may be paid by handing over part of the crops produced to the landlord - i.e., share cropping. Tax payments, too, may be paid in kind; for example, inheritance taxes may be paid by making donations of paintings or other valuables. |
Transfers in kind
| 3.40. | Transfers in kind also are two-party transactions, but - in contrast to those just mentioned - one party provides a good, service or asset other than cash to the other without receiving a counterpart in return. Parallel to transfers in cash, these are called sometimes "something for nothing" transactions or transactions without a quid pro quo. |
| 3.41. | The System records a variety of transfers in kind, including government international cooperation, gifts, charitable contributions and social transfers in kind. The last consist of social security and social assistance benefits in kind together with goods and services provided to individual households outside any social insurance scheme by non-market producers owned by government units or non-profit institutions (NPIs). Government international cooperation, gifts, and charitable contributions are often made in kind for convenience, efficiency, or tax purposes. For example, international aid after a natural disaster may be more effective and delivered faster if made directly in the form of medicine, food, and shelter instead of money. Charitable contributions in kind sometimes avoid taxes that would be due if the item in question were sold and the money given to the charity. |
| 3.42. | For various reasons, many social security and social assistance benefits are provided in kind rather than in cash. Rather than provide a specified amount of money to be used to purchase medical and educational services, the services are often provided in kind to make sure that the need for the services is met. Sometimes the recipient purchases the service and is reimbursed by the insurance or assistance scheme. Such a transaction is still treated as being in kind because the recipient is merely acting as the agent of the insurance scheme. Social transfers in kind, other than social security or social assistance benefits, consist mostly of education, health, housing and other services provided to individual households by non-market producers owned by government units or NPIs. |
| 3.43. | Social transfers in kind involve two sets of transactions. The expenditures on the final consumption goods and services provided as social transfers in kind are recorded as being incurred by the government units (including social security schemes) or NPIs that incur the costs. These may be either monetary or non-monetary transactions depending upon whether the goods or services are purchased from market producers or produced by non-market producers owned by the government units or NPIs. The social transfers in kind, as such, are then recorded as a set of non-monetary transactions between the government units or the NPIs and the households who actually consume the goods or services, the goods and services being valued by the expenditures already incurred on them. The value of these goods and services is then added to the final consumption expenditures of households to obtain their actual consumption. |
Internal transactions
| 3.44. | The System treats as transactions certain kinds of actions within a unit to give a more analytically useful picture of final uses of output and of production. These transactions that involve only one unit are called internal, or intra-unit, transactions. |
| 3.45. | Many institutional units - households, NPIs serving households (NPISHs) and general government - operate as producers and as consumers. When an institutional unit engages in both production and final consumption, it may choose to consume some or all of the output it has produced itself. In such a case, no transaction takes place between institutional units, but it is useful to construct a transaction and estimate its value to record such output and consumption in the accounts. |
| 3.46. | For households, the principle in the System is that all goods produced by persons that are subsequently used by the same persons, or members of the same households, for purposes of final consumption are to be included in output in a manner analogous to that for goods sold on the market. This means that transactions are assumed in which the persons responsible for the production of the goods are deemed to deliver the goods to themselves, or members of their own households, and then values have to be associated with them in order to enter them in the accounts. |
| 3.47. | Establishments owned by governments or NPISHs commonly provide education, health, or other kinds of services to individual households without charge or at prices that are not economically significant. The costs of providing these services are incurred by the governments or NPISHs, and the values are recorded as internal transactions: that is, as final expenditures by governments or NPISHs on outputs produced by establishments they own themselves. (As already explained, the acquisition of these services by households is recorded separately under social transfers in kind, another form of non-monetary transactions that take place between the government units or NPISHs and the households in question.) |
| 3.48. | The System recognizes several other transactions within enterprises to give a fuller view of production. For example, when enterprises produce fixed assets for their own use, the System records deliveries by the enterprises to themselves as the subsequent users. Also, when enterprises use fixed assets - whether own-account or purchased - during production, the System charges the decline in the value of the asset during the period of production as a cost. |
| 3.49. | Further, when a single enterprise consists of two or more establishments, the System records transactions when goods or services produced in one establishment are delivered to another establishment belonging to the same enterprise for use as intermediate consumption. (On the other hand, when goods or services produced within a single establishment are fed back into intermediate consumption within the same establishment, no intra-unit transactions are recorded.) |
Externalities and illegal actions
| 3.50. | The above sections described the kinds of actions that are considered transactions in the System. This section focuses on externalities and illegal actions, explaining why externalities are not considered transactions and distinguishing among kinds of illegal actions that are and are not considered transactions. |
Externalities
| 3.51. | Certain economic actions carried out by institutional units cause changes in the condition or circumstances of other units without their consent. These are externalities: they can be regarded as unsolicited services, or disservices, delivered without the agreement of the units affected. It is an uncooperative action, usually with undesirable consequences, which is the antithesis of a market transaction. A typical example is the pollution by a producer of air or water used by other units for purposes of production or consumption. If the producer is allowed to pollute without charge or risk of being penalized, the private costs of production of the polluter will be less than the social costs to the community. |
| 3.52. | It is necessary to consider, however, whether values should be assigned to such externalities. Economic accounts have to measure economic functions such as production or consumption in the context of a particular legal and socio-economic system within which relative prices and costs are determined. Some countries, at least at certain points in their history, may choose to frame their laws so that some producers are permitted to reduce their private costs by polluting with impunity. This may be done deliberately to promote rapid industrialization, for example. The wisdom of such a policy may be highly questionable, especially in the long run, but it does not follow that it is appropriate or analytically useful for economic accounts to try to correct for presumed institutional failures of this kind by attributing costs to producers that society does not choose to recognize. |
| 3.53. | Further, there would be considerable technical difficulties involved in trying to associate economically meaningful values with externalities when they are intrinsically non-market phenomena. As externalities are not market transactions into which institutional units enter of their own accord, there is no mechanism to ensure that the positive or negative values attached to externalities by the various parties involved would be mutually consistent. Moreover, accounts including values for externalities could not be interpreted as representing equilibrium, or economically sustainable, situations. If such values were to be replaced by actual payments the economic behaviour of the units involved would change, perhaps considerably. For example, the whole purpose of trying to internalize some externalities by imposing taxes or other charges on the discharge of pollutants is to bring about a change in production methods to reduce pollution. A complete accounting for externalities also would be extremely complex as it is not sufficient merely to introduce costs into the accounts of the producers. It also would be necessary to introduce various other adjustments of questionable economic significance to balance the accounts. |
Illegal actions
| 3.54. | Illegal actions that fit the characteristics of transactions - notably the characteristic that there is mutual agreement between the parties - are treated the same way as legal actions. The production or consumption of certain goods or services, such as narcotics, may be illegal but market transactions in such goods and services have to be recorded in the accounts. If expenditures on illegal goods or services by households were to be ignored on grounds of principle, household saving would be overestimated and households presumed to obtain assets that they do not in fact acquire. Clearly, the accounts as a whole are liable to be seriously distorted if monetary transactions that in fact take place are excluded. Of course, it may be difficult, or even impossible, to obtain data about illegal transactions, but in principle they should be included in the accounts if only to reduce error in other items, including balancing items. |
| 3.55. | However, many illegal actions are crimes against persons or property that in no sense can be construed as transactions. For example, theft can scarcely be described as an action into which two units enter by mutual agreement. Conceptually, theft or violence is an extreme form of externality in which damage is inflicted on another institutional unit deliberately and not merely accidentally or casually. Thus, thefts of goods from households, for example, are not treated as transactions and estimated values are not recorded for them under household expenditures. |
| 3.56. | If thefts, or acts of violence (including war), involve significant redistributions, or destructions, of assets, it is necessary to take them into account. As explained below, they are treated as other flows, not as transactions. Less significant redistributions, such as shoplifting, may be included in change of inventories and therefore need not be recorded separately. |
2. Other flows
| 3.57. | Other flows are changes in the value of assets and liabilities that do not take place in transactions. Although these entries, which are all in the other changes in the volume of assets account and the revaluation account (which make up the other changes in assets accounts), do share the characteristic that they record changes that are not the result of transactions, they cover very different kinds of changes in assets and liabilities. The first kind consists of changes due to factors such as discoveries or depletion of subsoil resources, destruction by war or other political events or destruction by natural catastrophes, all of which actually change the volume of assets. The second kind consists of changes in the value of assets, liabilities, and net worth due to changes in the level and structure of prices, which are reflected in holding gains and losses. |
Other changes in the volume of assets
| 3.58. | Other changes in the volume of assets fall into three main categories. The reason that these flows are not transactions is linked to their not meeting one or more of the characteristics of transactions - for example, the institutional units involved may not be acting by mutual agreement, as with an uncompensated seizure of assets. |
| 3.59. | The first category relates to entrances and exits of assets and liabilities to or from the System in the normal course of events other than by transactions. Some of these may relate to naturally occurring assets, such as subsoil assets, so that the entrances and exits come about as interactions between institutional units and nature. Others relate to assets created by human activity, such as valuables. For valuables, for example, the capital account records their acquisition as newly produced goods or imports in transactions, and it records transactions in existing goods already classified as valuables. It is the recognition of a significant or special value for goods that are not already recorded in the balance sheets that is considered an economic appearance to be recorded as another - that is, non-transaction - flow. These valuables may not be in the balance sheets for any of several reasons: they antedate the accounts, or they were originally recorded as consumption goods. |
| 3.60. | The second category relates to the effects of exceptional, unanticipated events that affect the economic benefits derivable from assets (and corresponding liabilities). One such event is one institutional unit's effectively removing an asset from its owner without the owner's agreement, an action that is not considered a transaction because the element of mutual agreement is absent. These events also include those that destroy assets, such as natural disaster or war. In contrast, transactions, such as consumption of fixed capital or change in inventories, refer to normal rates of loss or damage. |
| 3.61. | The third category relates to changes in assets and liabilities that reflect changes in the classification of institutional units among sectors and in the structure of institutional units, or in the classification of assets and liabilities. For example, if an unincorporated enterprise becomes more financially distinct from its owner and takes on the characteristics of a quasi-corporation, it and the assets and liabilities it holds move from the household sector to the non-financial corporations sector; movements of the assets and liabilities are considered other flows in this category. |
Holding gains and losses
| 3.62. | Positive or negative nominal holding gains may accrue during the accounting period to the owners of financial and non-financial assets and liabilities as a result of a change in their prices. Holding gains are sometimes described as "capital gains", but "holding gain" is preferred here because it emphasizes that holding gains accrue purely as a result of holding assets over time without transforming them in any way. Holding gains include not only gains on "capital" such as fixed assets, land and financial assets but also gains on inventories of all kinds of goods held by producers, including work-in-progress, often described as "stock appreciation". Holding gains may accrue on assets held for any length of time during the accounting period, not only on assets held at the beginning or end of the period. |
| 3.63. | Nominal holding gains depend upon changes in the prices of assets and liabilities over time. The prices in question are the prices at which the assets may be sold on the market. Nominal holding gains may be further decomposed into neutral holding gains that reflect changes in the general price level and real holding gains that reflect changes in the relative prices of assets. |
3. Balancing items in the flow accounts
| 3.64. | 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 for 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. It does not relate to any specific set of transactions, and so it cannot be expressed in terms of its own price or quantity units. |
| 3.65. | Balancing items are not simply 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 by the examples of balancing items for the accounts containing flows reproduced below:
Value added/domestic product
Operating surplus
Disposable income
Saving
Net lending/net borrowing
Current external balance. |
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