Manual de configuración

2.1. The role of market prices

7. The starting point for measuring economic performance is market transactions. A

fundamental merit of market transactions is that they provide ‘objective’ prices that serve to value quantities of goods and services, making it possible to add up ‘apples’ and ‘oranges’. Macro-economic and fiscal policies require monitoring of market transactions. Indeed, current metrics originated out of an attempt to monitor market production, following the

development of Keynesian economics2.

8. When markets are competitive and in the absence of externalities, relative prices of

goods and services mirror the relative values that individuals puts on these commodities. So, in principle, weighting products with their prices implies weighting them with their value for each individual in society. In addition, economic theory (Weitzman 1976) tells us that, in a world where all transactions take place in competitive markets and where economic well- being depends only on consumption of marketed goods, changes in net domestic product (NDP, i.e. GDP adjusted for depreciation) are a good gauge of changes in economic well- being: this holds because an individual’s or a country’s ‘wealth’ can be viewed as the present discounted value of consumption. Under these conditions, NDP turns out to be like an interest payment (a ‘return’) on this wealth. This establishes – albeit under restrictive conditions – a direct link between NDP and economic well-being. It also constitutes the basic framework for considerations about sustainability.

9. In reality, prices may not exist for some goods and services and, even where they exist,

they may deviate from society’s underlying valuation. In particular, in the presence of externalities, GDP, and indeed pure market-based measures, will not track well-being. Environmental damage caused by production or consumption activities that is not reflected in market prices is a well-known example for a negative externality.

1. The latter are captured, for example, in the work by Krueger et al. (2008) or by Sen (1985).

2. Keynes (1940) undertook national income calculations, using earlier work by Colin Clarke, with a view to analysing the effects of wartime expenditure and inflation. Meade and Stone (1941) present a more complete version of income, expenditure, savings and investment accounts.

10. While it is straightforward to talk about ‘prices’ and ‘quantities’ in theory, defining and measuring prices and quantities in practice is altogether a different matter. Two variables are observed by statisticians: the value of transactions (i.e. the product of prices and quantities); and the prices for different types of products, which are used to construct price indices. In many instances, these price indices are used to ‘deflate’ values and to obtain a measure of ‘volume’ or ‘quantity’. However, constructing price indices is only possible if the products whose prices are observed do not change over time – otherwise like would not be compared with like. As it happens, many products change over time – they disappear entirely or new features are added to them. In other words, there is quality change and it can be very rapid in areas like information and communication technologies. And there are products whose quality is complex, multi-dimensional and hard to measure such as medical services, education services, research activities or financial services.

11. Capturing quality change correctly is a tremendous challenge for statisticians and yet it

is vital to measure real income and real consumption, some of the key determinants of people’s well-being. Under-estimating quality improvements is equivalent to over-estimating the rate of inflation and under-estimating real income. For instance, a report reviewing the measurement of inflation in the United States (Boskin Commission Report) estimated that insufficient accounting for quality improvement of goods and services led to an annual over- estimation of inflation by 0.6%. Since then, the U.S Bureau of Labor Statistics – the agency responsible for the CPI – has followed up with a series of measures to address the issues

raised by the Boskin Commission. A more recent report by the Panel on Conceptual,

Measurement, and other Statistical Issues in Developing Cost-of-Living Indexes (Schultze

and Mackie 2002) devotes significant space to the quality change and new goods problem in the U.S. consumer price index.

12. The debate in Europe has tended to go the opposite way, in particular following the

introduction of the Euro: official measures of inflation (Italy, France, Belgium, Germany and others) have been criticized for under-estimating inflation, thereby painting too rosy a picture of the real income situation of citizens. Capturing quality change in prices and volumes is a recurring issue (see the discussion on government-provided services in section 2.1) without a

single methodological solution.3

13. A more subtle issue arises in conjunction with market power. When price discrimination

by firms with market power increases, these firms’ profits will rise. What is not measured by conventional economic statistics is the loss in consumer surplus that households face. The effect of imperfect competition on the reliability of GDP to gauge real living standards of consumers is difficult to determine and can only be assessed in a general equilibrium setting, where both changes in volumes and substitution effects by consumers are taken into account. Similar conceptual issues are posed by profits that are generated by abusive practices, e.g. exploiting consumer ignorance. Most likely, the loss of consumer well-being exceeds the profit gain of firms; while the latter are captured in our GDP measure, the former are not.

14. The proportion of goods and services that come along with externalities may change

over time and differ across countries. Thus, in temporal and spatial comparisons, price signals have to be interpreted with care. For a number of purposes, they do not always provide a useful vehicle for aggregation of quantities: a case in point is the use of market prices in

calculations of sustainability indicators and more is said about this in another chapter of this report.

2.2. The role of imputations

15. While market prices and observed market transactions form the centre piece of

measures of economic activity, GDP does not stop at those and, indeed, the System of

National Accounts includes a range of income, expenditure and production items that do not

reflect market transactions. These non-market transactions are generally based on imputations, as leaving them out would provide a biased picture of economic activity and distort comparisons across countries and over time. Some of these imputations bring GDP and income measures closer to an economically meaningful gauge of living standards.

16. Imputations come, however, at a price. Imputations allow attributing a value to

production, income or consumption even when there is no or no explicit economic

transaction. The main reason4 for imputing values is comprehensiveness of measures. Some

of these imputations (such as imputed rents, see below) have been incorporated into GDP. This is not the case for depreciation, for instance, an imputation to account for the loss of value of capital used in production and needed to move from GDP to Net Domestic Product (NDP). Some imputed transactions take place within the market sphere but are implicit and implicitly-priced, such as financial intermediation services (FISIM – see below). Other transactions are explicit and the imputation consists in attributing them to somewhere else in the economy (individual consumption of goods and services provided by government - see below). Leaving out these imputations would mean accepting a very incomplete picture of

economic activity.5

17. Another consequence of imputations is that they help preserving the “invariance

principle” for national accounts. This suggests that the value of main accounting aggregates should not depend on the institutional arrangements in a country. For example, if the same medical services can be provided by either the public or the private sector, overall production should be unaffected by a switch between the two institutional settings. The invariance principle increases comparability, over time and between countries.

18. In the present system of national accounts, the most important imputations are:

• Individual consumption of goods and services provided by government: these goods and services when provided for free (essentially health and education services) are not part of households' consumption expenditures because they are not directly paid by households. Of course, households pay for these services in the form of taxes or social

4. Note that the national accounts also rely on a number of statistical imputations. For example, enterprise surveys are rarely complete and imputations must be made for units not covered in the sample. Or imputations have to be made to deal with non-response by units that have been surveyed. In these cases, economic transactions do occur. Statistical imputations are only needed to correctly estimate their value.

5. Depending on the institutional context, imputations tend to be more or less intensely debated. The topic is, for instance, important in Europe where national accounts data are used for administrative purposes for example to determine countries’ financial contributions to the budget of the European Union or to allocate regional aid flows. All these operations require comparable and reliable figures. Some experts argue that the use of imputations should be minimised in this context so as to maximise reliability. Others support the idea of using imputations to reduce the impact of institutional differences on the comparability of results.

contributions, and measures of disposable income reflect such payments. But if these payments are deducted from household income, it would make sense to also add the value of goods and services to households’ income and consumption. The latter adjustment is not included in conventional measures of household income and expenditures, but is included (through imputations) in the “adjusted” measures recommended by SNA (see Section 2.7).

• Own-account production of goods and services by households: the value of all goods

produced by households for their own consumption is imputed in the national accounts. In rich countries, this tends to be a small share of production and income, whereas the share is larger in developing countries. Own-account goods include, for example, home- grown agricultural products. Own-account services are excluded with one major exception, dwelling services ‘produced’ by owner-occupiers (i.e. imputed rents). Other economic activities of households (cleaning, cooking, child care etc.) are simply omitted from the SNA definition; they will be discussed further in this report in the section on broader measures of household production.

• Financial intermediation services indirectly measured (FISIM): only part of the services provided by financial institutions is explicitly priced, for instance through fees for deposit management. Other services, such as liquidity services or accounting services that a customer receives when opening a current account, are often not invoiced directly. Payment takes place indirectly, through interests paid to depositors are lower than market interest rates so that the interest margin constitutes the implicit price of the service rendered. This affects cross-county comparisons, as what may be implicitly priced in one country may be explicitly priced in another. Pricing may also change within a country over time. Hence, by making an imputation for these implicitly priced services, the overall value of financial services is invariant to changes in the pricing system or to differences in the pricing system between countries. A practical difficulty consists in allocating the overall amount of FISIM to the different sectors in the economy – in particular households and corporations.

• Consumption of non-life insurance services: insurance premiums paid by households and firms comprise a payment into the ‘insurance pool’, which serves to settle claims, and a payment for the service that the insurance company provides by managing premiums and claims (e.g. by advising customers in their choice of policy). Broadly speaking, national accounts separate the two elements by assuming that the value of the insurance service corresponds to whatever is left after claims have been deducted from premiums. This (imputed) insurance service is considered in the SNA as a consumption item for households. Its measurement is fraught with difficulties.

19. Imputations are more or less sizeable, depending on the country and on the national

accounts aggregate considered. The table below indicates that the main imputations account for about one third of adjusted disposable income of households in two European countries (France and Finland) and for just over 20% in the United States. Thus, the living standards of French and Finnish households would be understated relative to the United States in the absence of imputations. Figure 1 Imputations in household income and consumption in France, 20071 provides a more detailed picture for France, and relates data on imputations to

both income and consumption. As it turns out, about 20 % of the final consumption

expenditure figure for France can be attributed to the types of imputations described above6.

Figure 1 Imputations in household income and consumption in France, 2007

20. But imputations come at a price. One is data accuracy: imputed values tend to be less

reliable than observed values because they often require assumptions about implicit transactions. The other is the effect of imputations on the comprehensibility of national accounts. Not all of these imputations will be easily understood. For example, people may not recognize the value of owner-occupied housing services as income, and the result may be a discrepancy between the changes in perceived and the changes in measured income. This problem is reinforced when the scope of economic activity is widened to include other services that are not mediated by the market. Our estimates below for household work amount to around 30% of conventionally-measured GDP. And another 80% or so are added when leisure is valued as well. It is undesirable to have assumption-driven data so massively influencing overall aggregates.

Table 1 Major imputed and non-imputed components of adjusted disposable household income *

Source: OECD Annual National Accounts.

* Only financial intermediation services indirectly measured (FISIM) are imputed. Data available at the OECD do not allow distinguishing between FISIM and other financial services.

6. By their very nature, there is some uncertainty associated with imputed values. Part of it reflects differences in methods to derive imputations, for example for owner-occupied rents. See Diewert and Nakamura (2009) for a recent discussion. 1 9 8 5 2 0 0 7 1 9 8 5 2 0 0 7 1 9 8 5 2 0 0 6 Im p u te d re n ts 6 .9 % 1 0 .1 % 8 .8 % 1 0 .1 % 9 .2 % 1 2 .2 % F in a n c ia l s e rvic e s in c lu d in g F IS IM 3 .3 % 1 .5 % 2 .9 % 4 .3 % 1 .9 % 2 .3 % S o c ia l tra n s fe rs in k in d 1 7 .3 % 1 9 .0 % 7 .9 % 8 .3 % 1 9 .5 % 2 2 .3 % T o ta l im p u ta tio n s 2 7 .4 % 3 0 .6 % 1 9 .6 % 2 2 .8 % 3 0 .6 % 3 6 .8 % O th e r d is p o s a b le in c o m e (n o t im p u te d ) 7 2 .6 % 6 9 .4 % 8 0 .4 % 7 7 .2 % 6 9 .4 % 6 3 .2 % T o ta l a d ju s te d d is p o s a b le in c o m e 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % F ra n c e U S A F in la n d 0% 20% 40% 60% 80% 100%

Disposable income Final consumption 

expenditure

Adjusted 

disposable income

Actual final 

consumption

Non‐imputed Imputed rents

Own‐account production of goods FISIM

21. The usefulness of including certain imputations into income and consumption statistics may depend on the countries considered. Deaton (2005) discusses the main income items that are imputed in the national accounts but absent from household surveys: imputed rents for owner-occupied dwellings and financial intermediation services indirectly measured. In India, the value of FISIM increased from close to zero in 1983/84 to 2.5 percent of consumption in 1993/94, accounting for a quarter of a percentage point per year of the difference in annual growth rates between national accounts and survey consumption data. Deaton questions whether, from the perspective of the poor, much of these financial intermediation services are relevant for their living standards. As average income or consumption as measured through the national accounts tends to grow more rapidly than measures drawn from household surveys, there is a danger that SNA measures paint too rosy a picture of the income and consumption of the poor if they benefit disproportionally from the items captured by

imputations7. It may thus be that statistical procedures in poor countries “understate the rate

of global poverty reduction, and overstate growth in the world.” (Deaton 2005).

22. In developed countries, the picture may be different. In France, for instance, the share of

FISIM in total disposable income is small (between 1 and 2%) and has hardly changed since the 1960s. The share of imputed rents, on the other hand, moved between 5% and 10% of disposable income since 1960. This reflects fluctuations of the prices of rents more than a steady trend. Similarly, the share of social transfers in kind in adjusted disposable income has risen steadily in France.

23. There is no easy way out of the tension between comprehensiveness and

comprehensibility except making available to users both elements of information, and distinguishing between core and satellite accounts. A comprehensive household accounts, for example (see below), may not be well placed within the core national accounts system, but could be developed as a satellite account, providing a comprehensive valuation of comprehensive forms of household production.