National Income and Social Accounting

Ronald Cooper, Profesor Harold C Edey, Harold C. Edey, Professor Sir Alan T Peacock, Alan T. Peacock

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135033057
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

'A very useful introduction to the techniques of social accounting' Bankers' Magazine. 'Remarkable feat of compression and expositionit will surely remain for a long time the best summary of macro-accounting techniques' Accounting Research. This volume covers developments both in the scope and content of official economic statistics of national income and expenditure and in their use for short-term and long-term economic planning.

Part I

The Framework of Social Accounting

1

The Nature of National Income and Social Accounting

1. Introduction

Before an economist can make useful general statements about economic activity, he must have some suitable description or picture of this activity. This is so whether he is called upon to advise politicians; to advise business men about the effect on one or more sections of the economy of possible changes in other sections ; or to perform the not unimportant task of helping students and others to understand more about the nature of the complex economic relationships which govern our lives in the present-day world.

Description can take the form, on the one hand, of minute examination of individual parts of a system or, on the other, of studies of a more abstract character. Much of economics is, indeed, concerned with the description of the growth and form of particular social institutions. However, for the purpose of understanding the network of relationships which make up the economy as a whole, a more abstract approach is required. In applied economics this study is associated, among other things, with the study of national income or social accounting. (In this book, except where the context requires otherwise, we shall assume that ‘social accounting’ embraces ‘national income accounting’.) Social accounting, then, is concerned with the statistical classification of the activities of human beings and human institutions in ways which help to us understand the operation of the economy as a whole.

The field of studies summed up by the words ‘social accounting’ embraces, however, not only the classification of economic activity, but also the application of the information thus assembled to the investigation of the operation of the economic system. Accordingly, in this volume we shall be concerned with the analytical as well as the statistical elements of the study, and thus with the connexions between (a) social accounting statistics in the narrow sense; (b) theoretical ‘models’ of the economic system which are intended to help us visualise the working of the system and as an aid to the informed guesses about the economic future which we like to call ‘predictions’ ; and (c) the real world. We can, in fact, regard the preparation of social accounts, for some purposes at least, as an attempt to assign magnitudes to some of the symbols of theoretical models, just as a natural scientist attempts to fit numerical values, determined by his observations of phenomena, to symbols in the theoretical mathematical expressions which (approximately) describe these phenomena, though the nature of the data imposes on the economist a very much rougher approximation and much cruder ‘models’ than would satisfy most natural scientists.

2. A General Description of Economic Activity

One general description of the economic activity of a given region is provided by a numerical statement of the results of that activity in the form of a statistical estimation of the value of total ‘production’ of goods and services over a particular period of time and of its allocation as between ‘consumption’ on the one hand and ‘adding to wealth’ or ‘investment’ on the other. (The significance of ‘value’ in this context will be discussed later. For the time being, the reader should assume that ‘value’ means ‘market value’.)

By ‘production’ we mean the organisation of human activity with the object of bringing into existence, at given places and times, valuable goods and services. ‘Production’ in this sense does not necessarily imply the making of the commodity: it is ‘production’ to move a commodity already in existence—perhaps a natural gift of nature—to another place, or to hold it through time if, thereby, value is added.

By ‘consumption’ we mean the enjoyment, usually accompanied by some measure of physical destruction, of the fruits of production in a way that satisfies the wants of members of the community. (It is necessary, however, to point out here that, as a matter of statistical convenience, it is usual to assume that commodities have been ‘consumed’ as soon as they pass into the hands of the ‘consumer’— the person whose wants, or whose dependents’ wants, they will satisfy—even though the physical process of consumption may last days, weeks or even years.)¹ Consumption may take the form of enjoyment of commodities by the members of individual households or of public consumption in which certain needs, such as those for education, street cleaning, or defence, are paid for collectively through the medium of the State rather than by direct purchases by individuals in their personal capacity.

‘Adding to wealth’ or ‘investment’ or ‘capital formation’ arises to the extent that commodities produced in a given period are not consumed in that period, thus remaining available for future consumption, or for use in the production of other goods and services for future consumption. It is to be noted that when we speak of ‘investment’ we must be clear whether we are thinking of a ‘net’ or a ‘gross’ addition to the national wealth. In the course of a given period, some of the economic resources in existence at the beginning of the period will be used up through a running down of the stocks of raw materials or finished or partly finished goods available at the beginning of the period; and by the physical deterioration of the type of goods used for production that we call ‘capital equipment’ or ‘fixed capital’, such as plant and machinery; and both kinds of resources may lose value through ‘obsolescence’—that is, changes in tastes of final consumers, or improvements in methods of production of competitors.

There is a certain ambiguity in the terms ‘gross investment’ and ‘net investment’. When used in a technical sense—as it will be in the rest of this book—‘gross investment’ refers to the gross investment in fixed capital, as defined above, plus, or minus, as the case may be, the net change in stocks of all kinds. (This convention is probably due to the statistical difficulty of ascertaining the gross addition to stocks in a given period.) If, however, a deduction is made for ‘wear and tear’ and obsolescence of capital equipment—that is, of ‘fixed capital’—the resulting figure is called ‘net investment’. Such a deduction is commonly called ‘depreciation’.

If we neglect transactions with foreigners, we can summarise the economic activity of a region by using the following simple identities (an identity is an equation which must always be true, whatever values are given to the individual symbols) where all the quantities relate to values:

Production, or, in technical language, gross national product= consumption plus gross investment=consumption plus net investment plus depreciation.

This can also be written:

Gross national product minus depreciation=net national product=national income=consumption plus net investment.

One of the main statistical problems arising from any attempt to assign numerical magnitudes in this kind of description of economic activity is associated with the attempt to reduce all the various components of the gross national product, consisting of a multifarious variety of goods and services from bus rides to seismographs, to value terms. However, the fact that, in developed economies at least, commodities are, in general, not consumed or disposed of by the persons who individually produce them, but are exchanged for a common medium, money, simplifies the problem to some extent, for there are a multitude of records of such exchanges expressed in value terms.

The idea of a general description of economic activity in terms of a record of national production or output, and its disposal, is part of the classical tradition in economics whereby ‘economic welfare’ is related to changes in the ‘real’ output of goods and services, that is to the value of the output, adjusted for changes in the general price level. Thus the first quarter of this century saw, on the one hand, the famous studies of national income statistics by Sir Arthur Bowley and the late Lord Stamp and, on the other hand, the attempts of Professor A. C. Pigou to formulate the concepts of economic welfare more precisely than had formerly been the case. From these pioneer studies, many interesting developments have taken place, such as attempts to make international comparisons of output and productivity, standards of living, distribution of incomes, and so on. The emphasis in this kind of study is on the historical development of the economy and thus on changes over time in such important variables as the production per head of the community, the distribution of incomes, the level of gross and net investment, and so on. This part of social accounting still receives a good deal of attention and we shall devote a chapter of this work to the discussion of the statistical measurement of changes in real product. But while historically, at least, studies of this sort have pride of place among those concerned with the description of economic activity in the aggregate, they have become absorbed by another, related, but wider, type of study which we must now consider.

3. A Simple System of National Income Accounts

Studies of the national product are concerned with obtaining a measurement of the aggregate results of economic activity in a given period. A more recent development has been the statistical description of economic activity in such a way that the formation and disposal of national product is traced to the decisions of persons grouped in accordance with their functions. The complexities of the modern economy which result from the elaborate division of labour, and the use of money, make it difficult without some kind of statistical framework of this kind to assess even in rough quantitative terms the results of given political, business or personal activity in the aggregate.

In their simplest forms, as shown in this chapter, national income accounts are no more than measurements of production, consumption and investment arranged in such a way as to emphasise the distinction between the decisions of people concerned with, on the one hand, the production of commodities, and on the other the consumption of what has been produced. In a developed economy these are different groups of persons, though, of course, many people are members of both groups.

The reader at this stage may perhaps think that he is being asked to concern himself with trivialities, for, after all, it is fairly obvious that if you produce goods you have only two alternatives open: to consume them or not to consume them. For the following reasons, however, this view is probably unjustified. First, it is possible to under-estimate the importance of the form in which statements are made. By emphasising, in statistical terms, the dual nature of transactions attention is drawn to the possibility that, in the aggregate, the plans of consumers of commodities may be inconsistent with the plans of producers: this is of importance in relation to the study of problems of business fluctuations and economic policy generally. Secondly, analysis of the results of economic transactions in terms of the activities of classes of decision-makers (commonly called transactors) can, as will appear later in this book, be carried a good way beyond the simple example discussed in this chapter, the comprehension of which is only the first step towards the understanding of more complex systems.

In a certain sense the close connexion between the development of social accounting and the earlier concept of national product, or national income, has perhaps been unfortuna...