Measurement of National Income and the Construction of Social Accounts

Table of contents :
Contents (3)
Editorial Note (4)
Preface (5)
Method of Approach (7)
Usefulness of an Over-all System of Social Accounts (9)
Tabular Framework (9)
Basis for International Comparison (18)
Advantages of the Recommended System of Accounts (19)
Appendix: Definition and Measurement of the National Income and Related Totals — Memorandum submitted by Richard Stone (21)
Contents (21)
1. Introduction (23)
2. The Social Accounts (26)
3. A Working System of Social Accounting (37)
4. The Content of the System of Accounts (54)
5. The National Income and Other Aggregates of Transactions (79)
6. Methods for extending the System in Detail (87)
7. Some Economic Problems involved in defining and interpreting Accounting Systems (91)
8. Statistical Sources and Practical Problems of Measurement (94)
9. The Advantages of a Social Accounting Approach (112)
Index to Appendix (115)

Citation preview

STUDIES AND REPORTS ON STATISTICAL METHODS No. 7

NlEASURElViENT OF NATIONAL INCOME AND THE CONSTRUCTION 10F SOCIAL ACCOUNTS REPORT OF THE SUB-COMMITTEE ON NATIONAL INCOME STATISTICS OF THE LEAGUE OF NATIONS COMMITTEE OF STATISTICAL EXPERTS

Appendix : DEFINITION AND MEASUREMENT OF THE NATIONAL INCOME AND RELATED TOTALS By RICHARD STONE

UNITED NATIONS GENEVA 1947

United Nations Publications

Sales Number 1947" IL 6

CONTENTS

Ed,tonal Note

4

Pre/ace

5

ME1HOD or, APPROACH

7

USEl'ULNESS OF AN OVER-All. SYSTEM OF SOCIAL ACCOUNTS

9

TABULAR FRAMEWORK

9 18

B:\SIS FOR INTERNAHONAI COMPARISON ADVANTAGES Of, THE RECOMl\IENDED SYSTEM OF AcCOUN"lS Append!:,. DEFINIT!ON AND ME·\SUREMENT OF HIE NATIONAI INCOME AND RE!.ATED ImALS - Memorandum submitted Index to Appenc/.1:,

by

Richard STONE

2I II5

EDITORIAL NOTE The present document is one among three methodological studies undertaken by the Committee of Stcttistical Experts of the League of Nations which were in process at the time the League's functions and activities in the field of statistics were taken over by the United Nations Dealing with the interrelated problems of (i) Measurement of National Income ancl the Construction of Social Accounts, (ii) Banking Statistics and (iii) Bahrnce-of-Pctyments Statistics, the three studies are essentially complementary In its Reports of rS February 1947, the Statistical Commission of the United Nations, desirous of seeing the three studies made available to specialists, recommended that they should be published under the iniprint of the League of Nations " as the last in the League series - S·r UDIES AND REPORT$ ON STA1ISTICAt MEl HODS " This recommendation was further amplified by the following statement: "The Commission wishes it to be understood that these reports are published as valuable technical documents They do not carry the Commission's endorsement in detail The Commission, moreover, wishes to assert its continuing interest in the deve­ lopment of statistical methodology in these and other subjects " Taking note of the recommendation of the Statistical Commission the Economic and Social Council, by resolution adopted on 29 March 19+7, requested the Secretary­ General to arrange for the publication of the three studies, to collate any comments received or to be received from Governments on them, and in consultation with the appropriate agencies to make these comments available in connexion with any work undertaken in the fields to which these studies relate

PREFACE At its eighth session, held in April 1939, the Committee of Statistical Experts decided, in accordance with its general mandate under the International Convention relating to Economic Statistics, to include in its programme the statistical measurement of national income 1 The Committee observed on that occasion that a need for guidance in this matter, to which reference bad been made in the recommendations of the 1928 Conference', was being increasingly felt in a number of countries The activities of the Comrnittee were interrupted by the outbreak of the war later in 1939, and it was only possible to resume them in the course of r94j In the autumn of that year, the present Sub-Committee was set up to study and report on the problem of measuring national income. The members of the Sub-Committee were chosen primarily from among those experts in a representative selection of countries who are directing the computation of national income and related estimates The Inter-American Slctlistical Institute was invitee! to send a representative to the meetings of the Sub-Committee The Sub-Committee met !or four days, 17-20 December 194j, at Princeton, New Jersey. The following members participated: Mr Richa1cl S10NE, Chairman of the Sub-Committee, Director of the Department of Applied Economics, University of Cambridge ( United l{t .ngdoni) JVli H P. BROWN, Senior I{esea1ch Officer, Common wealth Bureau of Census and Statistics, Canbena (A1tstralia) D, J B. D DERKSEN, Professor at the Rotterdam School of Economics, Chief of Division for Business Cycle Research, Central Bureau of Statistics, The Hague (Netherlands) Dr C. M !sBtSTER. Seniot Economist, Dominion Bmeau of Statistics, Ottawa (C,mada). Mr George jASZI, Chief, National Accounts Section, National Income Unit, Department of Commerce, Washington ( United States of Anwnw) Dr Hilcleg:ude KNEE1-AND, Principal Economist, .Division of St�1tistical Standards, Bureau of the Budget, Executive Offrces of the President, Washington (Representatwe of the Intel'-American 5tatistmrl Institute) Mr Raul Ortiz MENA, Chief, lfational Income Unit, Research Department, Bank of Mexico (Mexi'co) Dr Arne SKAUG, Commercial Counsellor, Norwegian Embassy, Washington; formerly Chief o[ Division, Central Bureau of Statistics, Oslo (alternate for Dr Gunnar Jahn, Member of tire main Committee) (Norway) Dr Julius WYL.rn, Professor of Economics and Stcctistics, Graduate Faculty, New School for Social Research, New York; formerly Chief of Division, Federal Bureau of Statistics, Herne; (alterno.te for Dr C . Hruschweiler, Member of the Main Committee) (Switzerland) [he meeting was attended, in addition, by i\'1iss Agatha CH·\PMAN, Economist on the Staff of the Bank of Canada, who took part in the discussions The Sub-Committee had before it a preparatory memorandum drawn up by Mr Stone at the request of the Secretariat to serve as a basis of discussion This memorandum as subsequently revised in the light of the discussions which took place at the meeting is appended to the Sub­ Committee's Report The Report itself is confined to the main conclusions reached in these dis-· cussions The Sub-Committee hopes that the guiding principles and recommendations formulated in the Report and [utther elaborated in the Appendix will be applied to the widest possible extent in each country in the computation of national income and relaled account:> in order to secure greater intermttional comparability than in the past 1 C/ Document C 133 i.\l $5 19y;.l l . .\ (C ES q5). Geneva. '2.7 April 1939 � Recommendations V(1) of the Final Act of the Internatioual Conference relating" to Economic Statistics, Gem:va_ q December 1928

MEASUREMENT OF NATIONAL INCOME AND THE CONSTRUCTION OF SOCIAL ACCOUNTS: REPORT BY THE SUB-COMMITTEE

METHOD OF APPROACH I It has come to be realized in recent years that national income studies which had their origin in an attempt to measure certain broad totals have a much more general interest and usefulness it they provide information on the structure of the constituent transactions and on the mutual interdependence of these transactions This is particularly true where national income studies are used in connexion with the formulation of economic policy, since, in this case, it is the interrelationship of transactions that is important rather than individual totals, such as the national income or gross national product. Vie are therefore in full accord with the general treat­ ment embodied in the appended memorandum by Mr Richard STONE, which approaches national income studies by setting out the economically distinct transactions among different branches of the economic system and obtains national aggregates, such as the national income and the gross national product, by a suitable combination of these constituent transactions The social accounting approach, of which a full discussion will be found in the Appendix, 1rn1y be described briefly as follows: Instead of seeking to build up a single total, such as the national income, an investigation is first made of the classification of accounting entities, of the types of accounts that they keep and of the transactions into which they enter . In this way, all the transacting entities of an eco­ nomic system are classified into broad sectors such as productive enterprises, financial interme­ diaries and final consumers, and a series of accounts for each of these sectors is set up, in which the separate entries represent economically distinct categories of transaction Economic activity is represented by 1110ney flows and related bookkeeping transactions, actual or imputed, between CLccounts The national income and other similar aggreg'1tes are obtained from the system by selecting and combining the constituent entries in the accounts z The process just described of setting out the distinct types of transaction in an economic system may be regarded as a significant way of summarizing transactions and presenting a picture of the structure of an economic s.vstem In this way, a logical framework is presented into which the greater part of economic statistics can be fitted This framework should prove useful in show­ ing how far statistics actually available at any time fall short of a complete coverage of economic activity .3 The approach referred to above has not only shown itself to be useful in practical eco­ nomic analysis, but even if all its details cannot be elaborated statistically, it has been found a convenient aid in thinking through the complicated interrelationships of different transactions and branches of activity. Experience shows that these ideas can be expounded and presented more lucidly if the elementary transactions of an economic system rather than the final aggregates of transactions, such as the national income, are made the starting-point of the enquiry Transactions whether actual or imputed take place between such accounting entities as business enterprises and individuals, and the accounts of these entities are much easier to grasp than the consolidated

accounts of the whole system By studying the different classes of accounting entity in an economy and the different types of transaction in which these entities engage, we shall at once obtain a clearer picture of how the national totals are built up and, at the same time, cxhi6it the rela­ tionship between the constituent transactions and the implications of elaborating the accounts in one way rather than another This approach will also ensure consistency in the treatment of clifferent transactions and will show the implications to other pctrts ·of the system of any treatment proposed 4 The system of transactions set out. i n the Appendix is drawn up in the main in terms of concepts which are believed to be those currently in use and therefore to form a basis of economic decisions The system of social accounts presented does not, it is true, attempt to meet all the requirements which might be suggested on the basis of pure economic theory The consequences of various clianges which might be proposed in order to bring the system nearer to some theoretical ideal are discussed in Chapter VII of the Appendix We are, l1owever, in favour, for practical purposes, of the familiar basis adopted here, and this for two reasons : In the first place, a system of social accounts drawn up on the basis of farniJiar concepts wi11 be presented in those terms and with those distinctions that may be supposed to pby an important part in actual decisions Secondly, a more recondite system will give rise fo the necessity of measurement in areas where statistical data are l.icking and where in many cases even the operations of measurement: are unclear \Ve are not unmindful of the need for certain additional information in connexion vvith some uses of the system, but we think that most of the practical uses are best served in the present state of knowledge by avoiding as far as possible those types of estimate for which the operational basis of calculation is obscure 5 We think it important to emphasize that the approach as described in the Appendix is no radical innovation, but a logical development of recent investigations in the field of national income The difficulties of definition in this field have naturally led investigators to attempt to set out the relationships between the constituent items of the national aggregates, and the set of accounts developed in the Appendix extends this approach to describe the transac­ tions in a complete economic system Not only is this method not new, but it is also not untried and has been used successfull.Y by investigators i n many countries in which national income stu­ dies have been developed to a high degree In recent years, official estimates on substantially the lines suggested here have been compiled in several countries, notably Australia, Canada, Eire, the Netherlands, the United Kingdom and the United States The extent to which it has been thought profitable to present numerical estimates in the detail suggested in the Appendix varies from country to country, but i n each one there is observable a tendency to make avaiLlble more detailed information as time goes on 1 1 The following references indicate the published sources from which information may be obt.a.incd in the different countries : A 11stmlia Official cstim;1tes \\'ere given for the first tirne if) a Budget Paper entitled E. �timafrs of Naliona1 h1coi11e and Public .·l uthority I ncomc and E., p,md.it.rue presented in Sept.ember 19·!5 A second issue. entitled National l11comc E�ti11urtc,. I9JS-39 lo I9.15-46. appea1·ed in 19.16 and a third. entitled National Income and Expcrnlitw,:. r9 46-..J7. appeared in 1 �1-\ 7 Cmwrla Official estimates prepared by the Dominion Burean of Statistics have recently become available in n. publication entitled National A ccowlls. Incoow and E:i:pemlitun:. 1 9 J8-r944 These bavc subsequently been brought up to date i n issues for tbe years 1938-19.16 and for 1947 £in: Official estimates prepared by the Department of Industry and Commerce have recently become available in a publication entitled National J11come all(l Expenditm·e. I9JS-r944 (P No 7356), presented to the Oireaclltas by the Minister for Finance. March 1916 Nct/tc'l"i111uls Of1icbl estimates have appeared i u a pamphlet issned by the Central Bureau of Statistics entit.led Nationa.lt! boeldwwling doelciwl,:11, problcmcn 1111 rcr;ultale11 An account of this system in English is available in Occasional Pap(!!" X entitled ;J System of National Bookkeeping, illustrated by the Expai1mc1; of the Nctho1a nds Eco1:.omy by Professor J B. D. Derksen. in the series of Occasional Papers issued by the National Institute of Eco­ nomic and Social Rm,earch. London United J{ing{i.om Official estimates prepared by the Central Statistical Office have been puhl i.':>hed annually for .the l":,�t se ven years in a \Vhitc Paper. the latest issue of which is entitleLI National ]Hco111e and Expwdifttrc of th (: Un:bl Iu.ni;u.om. r9}c','-I9.;6 Cmd 7099, which appe;trcd at the time of the 1 g.J 7 budget and prnsented estimates up to th� cud of the calendar year 19+6 . . Umtcd States �fficial estimates arc published regularly in the Survey of C11ncnt Busiiws,;, prepared by the �atmnal Income Duit of the Department of Commerce See in particular the National J11comc SHpflcme·nt to the issue for J uly 19 .1 7

USEFULNESS OF AN OVER-ALL SYSTEM O F SOCIAL ACCOUNTS 6 The great stimulus to this branch of investigation which has arisen out of its utility for purposes of economic policy bas resulted in a very rapid development in recent years both of the concepts involved and of the methods of statistical estimation The most rapid period of develop­ ment has been during the second world war, and we see no re;ison to believe that this process will slacken In particular, the need for ii-ivestigations of this kind in connexion with peace-time economic policy and especially with reconstruction and employment policies seems likely to ensure a continned process of development for some years to come In many countries, additional sti. mulus may also be given to work in this 11eld through the need for national income estimates in connexion with the problems of various international organizations now being established, 7 This system of analysis has grown out of the needs of economic policy and is therefore besi adapted to certain types of economic analysis wltich have recently become of practical import­ ance Since the structure of the economic system is present,r::d as far as possible in commonly adopted terms, the approach is not ideal for all classes of investigation 1\'I oreover, strict interna­ tional comparability in all respects is not possible, since wide institutional variations between countries involve among other things a cleg1ee of imputation of income on a basis which must necessarily be highly uncertain However, the system of accounts here presented provides a framework within which true comparability can be developed as time goes on and also estimates for a number of component items which are comparable among all cduntries These problems are discussed in more detail in Chapter VIlI of the Appendix. Gre()f legitimat elyin som e ca sesm ay, h owev er, prov e of do ubt ful ben efit If , f or exam ple, a.com pa­ ··"j:i sOn i s bein gm ade bet ween th e pr oportion o f cun ent pro duct dev ot ed to war ex pen dit ur ein t wo :countri es, an ana lysi s ba sed on th e con stit uent s of th e gr oss nati ona l pro duct m ay pr ov e hi gh ly · �i slea din g Th e princi pa lr ea so n i sthat th et woc ountri esma rh av e av er ycli tfor ent di stri buti on of in dir ect .. · " .':fax� t ion On eco untr y m ay lev ya llit sin dir ect taxati on on th eit em s of c on sum er s' ex pen dit ur e, (:):;,, ·-_.:whi le th e oth er ma y a do pt an in {.lir ect Lax syst em in which th e tax es ar e spr ea d mor e or less f;,�iJi',,;,:;;()t;."\�\ren ly ov er th e who le of f ina l out pul In th e fir st ca se, it ma yin practic e m ake an a• ppr ec ai ble ;t}t}\:e ing im1,de fo r the no rm,llh azards o fe xis tence Equ al ly, the yp artake o f the n atu re o ff in anc ial as ach annel fo rs aving and as pro viders o f fin ance ') �te rmedianes n i t h at t h e y a c t t o so m e ex t e n t ; · i c pi al ''\{?F: P_o rrowe rs Bu t ne ithe r o f these p ar allels see ms impor tan t co mpared w ith the ir pr n ';�strv ,ty,wh ci h si to o rg an si e the red si tribu tio n o fce rtain types o f funds Thus,pub lic lycon tro led o. _cial secu rity u f nds, wh ci h eng age n i nc tivity s imilar to th at under taken b y pr ivate pens oi n -�_nds u!1d s ci kness and wor kmen s' co mpens atio n n i sur ance,c an h nrdl y be reg ard ed as p roduc tive �Je rpnses, although o fcou rse the s taff eng aged ni the m do pro vide aser vice to the co mmun ity ):}_: , I r:isur ance co mp an ei s, l ike fin anc ial in te rmed iar ei s, a.re p artl y fin anc ed fro m sources, in ves t•. -�n. t rnco me, o h t e r th an p aymen ts fo r the ser vci es the yrender Bu t there si als o an add ition al }>,n>p hc atio n .due to the fac t,th at the p aymen ts made b y po lic y-holde rs, premiu ms, co mp rise n i :,f.:�� a p aymen t of r se rvices and n i p art s aving. These cons di er ations p ro vide an add ition al i sur ance and soc ial secu rity agenc ei s sep ar ate fro m o the r types o f econo mic ,f.��on of r keep ni g n n ;1ty i! ''"1' ' ::::_The abo ve fac to rs are ref lec ted n i the accoun ting s ys te m by show n i g re venue, ope1 :1.tmg, ri c_lt oi n, and c ap ital and reser ve accoun ts of r ni su rance co mp an ei s a1,1cl so cie ties The B�op . . 1�-,; . · . ''i i, ' • ' · :

'

\�r- · •·,

t�i.• ' ,·1:'"-

. 1 See pages 87-90 bc.lcm

fi rst of these, the reve nue accou nt, is itself su bdi vided so th at tr ans actio ns with differe nt t ypes of polic y-holder are kept disti nc t I n the prese nt ex ample, sep ar ate reve nue accou nts are sho wn for e nter prises of all forms, final co nsumers and the rest of the world I nto these reve nue accou nts are p aid, not o nl y premiums, but also imputed ch arges equ al to the i nvestme nt i ncome accrui ng i n respect of busi ness lco ne with the dif ef re nt disti nct cl asses of polic y-holder Si nce it is o nl yi n the c ase of li ef assur ance th at l arge reserves are built up by i nsur ance comp anies and si nce this form of assur ance is almost wholl y a tr ans actio n with i ndividu als, most of the imputed ch arge will be de bited to final co nsumers The opposite sides of the reve nue accou nts sho wthe p ayme nts i n respect of cl aims and sur re nders, tr ansf ers to •reserve i n respect of the i ncre ase i n accrui ng li abilit y and atr ansfer to oper ati ng accou nt of the bal ance which represe nts the tot al co ntri butio n of the differe nt cl asses of polic y-holder, whether f rom premiums or from the i nvestme nt i ncome of the i nsur ance comp anies themselves, to wards the cost of co nducti ng i ns 1�r ance busi ness The receipts of the o per ati ng accou nt ar c m ade up e ntirel y of the tr ansfers just me ntio ned . The p ayme nts are simil ar to those appe ari ng i n any other type of busi ness The appropri atio n accou nt sho ws the surplus from the oper ati ng accou nt together with the i nterest and divide nds received by i nsur ance comp anies On the p ayme nts side the imputed i ncome to polic y-holders, by defi nitio n e qu al to the ch arge imputed to polic y-holders, appe ars alo ng with divide nds and withdr awals, direct t axes and t ransfers of surplus to the c apit al and reserve accou nt It will be see n th at this arr ang cme nt e nsures th at i n the relev ant p articul ars i nsur ance comp anies and societies are tre ated like financi al i ntermedi aries It also m akes possi ble the co nst ructio n of an accou nt of perso nal i ncome and ou tl ay This is o bt ai ned by co nsolid ati ng the su b-accou nt for final co nsumers, i nthis ex ample restricted toperso ns,i nthe reve nue accou nts of i nsur ance comp anies ;;i.nd societies with the reve nue accou nt for perso ns These accou nts are num bered (re a.) and (20) i n the ex ample gi ve n belo w I n this way, an amou nt equ al to the imputed i ncome of perso nal po ilc y-holders is su bstituted o nthe receipts side of the reve nue accou nt of pe rso ns fo r the cl aims, surre nders and annuities received . On the p ayme nts side, t wo items are su bstit �te lc for the premiums and co nsider atio nfor annuities p aid These are, first, an amou nt equ al to the cost of tr ans acti ng i nsur ance busi ness for perso nal polic y-holders which is an item of co nsumers ' expe nditure and, seco nd, an amou nt equ al to the sums tr ansferred to i nsur anc e. reserves i n respect of perso nal busi ness which is an item of perso nal s avi ng m ade through the medium of i nsur ance comp anies Most " of this s avi ng will of course arise i n co nncixio n with life assur ance The reve nue accou nt for pri vate pe nsio ns lur,cls (r6),i nthe ex ample,m ay also be co nsolid ated with the reve nue accou nt for perso ns i n arrivi ng at an accou nt of pe rso nal i ncome and outl ay It will be noticed th at i n c arr yi ng through these co nsolid atio ns no disti nctio n is m ade bet wee n lump -sum and re curre nt be nefits If it were thought desir able to i nclude the l atter i n i ncome a more refi ned tre atme nt woul d be necess ar y I nthe c �tse of soci al securit yfu nds, the co nsolid atio n would not norm all y be m ade si nce it is usu al to tre at the co ntri butio ns as t axes and the cl aims and be ne fits as tr ansfer p ayme nts Further re fineme nts are, ho weve I , cle arly possi ble and for some purposes might be thought desir able.. The effect of this co nsolid atio n o n co nsumers' outl ay m ay be rest ated as follo ws I f o ne co nsiders o ne t ype of busi ness, s ay, life assur ance, it is cle ar th at the tot al of premiums, etc , and i nterest flo wi ng i nto this br anch of activit y c an be divided i nto three p arts First, there is the amou nt necess ar y to p ay curre nt cl aims, annuities, etc This represe nts atr ans ef r from o ne set of perso ns to another Seco nd, there are the sums nee lce cl to meet the costs and ch arges of all ki nds i ncurred i n curre nt oper atio ns, i ncludi ng the pro fits, dist ri buted and u ndistri buted, of this br anch of activity. This is the cost of assur ance ser vices and c an be tre ated as an item i n co n­ sumers ' expe nditure o n goods and services The rem ai nder is the net additio n to the assur ance fu nd and represe nt sthe s avi ng of perso ns as a whole through the medium of life assur ance rre ­ mium p ayme nts arc not simpl y ap ayme nt f or good s and ser vices, nor are the y sim J)l y afo rm of s avi ng, but a mixtur e of the t wo

- 43 Social se curi ty funds ope rated by gove rnmen t a gen cies bein g n on p - r ofit-m akin g can con vc­ nien t1y be se t up fr om an a ccoun tin g p oin t of view in a simpler way. The f oll owin g differen ces may be n oted As a rule, the con tribu it ons are compuls ory, and, for this reas on, are frequen tly i·e garcle lc as taxes. Se cond, spe cial con tribu ti ons ou t of revenue are of ten made by governmen t a gen cies Third and m os t imp or tan t, they ar c oper ated on a n ot-for-profi t basis and are in n o sense commer cial in chara cter, s o tha t they sh ow nei ther a pr of it n or a l oss in addi ti on to their opera tin g expenses They may 01 may n ot be opera ted on an a ctuarial basis, bu t they have the finan cial s tren gth of the gove rnmen tbehind them and n my readily devel op ne ga tive reserves a fter, for example, several years of severe unempl oymen t Unempl oymen t funds in par it cular tend to a ct as a p owerful s tabili zin g influen ce, sin ce they tax and save in good times and clissave a1!d dis tribu te pur chasin g p ower in bad times The four th se ctor comprises final consumers, whe ther pers ons and n on p - rof it-r ha ),in g b odie s or publi c au th ori ties p rovidin g comm on goods and servi ces I t will readily be seen tha t in the case ofpers ons the a ccoun ts could be trea te d on the pa tte rn ofa pr odu ctive en terprise. The ope­ ratin g a ccoun t of an individual w ould sh ow on the re ceip ts side paymen ts for servi ces rendered , toge ther wi th the v ,due of re ceip ts in kind, pensi o11 payme rrts by empl oyers, cash all owan ces, e tc The paymen ts side w ould sh ow the cos ts in curred in renderin g the servi ces in ques ti on and the individual's " ope ratin gsu rplus " The cos ts dedu cted in arrivin ga t this surplus mi gh tsimply be confined to the expense of ob tainin g tools, w or kin g e quipmen t, e tc, whi ch, by cus tom, the empl oyee is expe cted to buy ou t of his ea rnin gs. Al te rna tively, an a ttemp t mi gh t be made to •asse ss all the cos ts of ob tainin g the earnin gs sh own on the re ceip ts side Su ch a br oad trea tm en t of " cos t " in this connexi on is n ot usually ad op ted, mainly be cause of the pra cti cal imp ossibili ty of de cidin g h ow mu ch of wha t individuals buy is a cos t of their w ork and h ow mu ch represen ts en joymen t or tbe cos t of merely s tayin g al vi e For this reas on, i t is usual for wa ges and · other lab onr in come to be s o def ined :is to in clu de cos ts to the empl oyer whi ch benef it the individual and to ex clude cos t i tems cus tomarily char ged to wa ges ;;i.nd to s tar t the se t of pers onal a ccoun ts wi th wha tis really an appr opria ti on a ccoun t In i tis sh own the other curren t re ceip ts ofpers ons, whe ther arisin g from pr oper ty or fr om trans ef rs of one s or t or an oth er and the way in whi ch th e sum tota l of re ceip ts is laid ou t in buyin g consumers ' goods and servic es, mee tin g insuran ce char ges and dire ct taxa ti on, and ma kin g transfers to capi tal a ccoun t Publi c au th ori ti e s in their prin cipal e con omi c aspe ct as the or gani zers of comm on servi Ges are als o trea ted as final consumers,ra ther than as pr odu cers This is sa ti s fa ctor y fr om s ome p oin ts of view, sin ce they are the las t in the chain of e con omi c transa cti ons leadin g up to these servi ces and i tis clearly desir ::tblc in connexi on wi th e con omi cp oli cy tha t governmen t transa cti ons sh ould appear separa tely A dif fi cul ty due l o th e fa ct tha t s ome of the servi ces th ey supply a rc in ter­ media te ra ther than final and are there fore all oca ted to t he wron g ca te gory has already been n oted 1 I t mi gh t be th ou gh t, h owever, th cit as a gen ts only they sh ould be elimina te d As l on g as one i s dealin g wi th the e con omy as a wh ole there w ould be n opra cti cal advan ta ge in this, bu t i t be comes imp or tan t in a s tudy of the redis tribu ti on of in come where the ex ten t to whi ch clif­ feren t comm on servi ces benefi t the members of, say, differen t in come gr oups is as imp or tan t in de terminin g the ne t advan ta ge of ea ch of these gr oups as are the taxes they pay f or their pr o­ visi on 2 I t sh ould b e n oted tha.t, for ,mmy purp oses, the elimina ti on of publi c au th ori ties in the way pr op osed is hi ghly undesirable be cause governmen t expendi ture is n otin fl\1en ced by the same fa ctors as pers onal or business expendi ture and i t is imp or tan t in in terpre tin g and an ti cipa tin g e con omi c chan ge tha ti tsh ould be trea ted separa tely . This frts in wi th the p oin t ofview fre quen tly appearin gin this mem orandum tha t,f or many purp oses,i tis desi rable to keep the s ocial a ccoun ts in su ch a way as to exhibi t clea rly the di fieren t cfasses of de cisi on m - akin guni ts in the real w orld and the type of dis tin cti on they have in mind in arrivin g a t their de cisi ons The fif th se ctor , the res t of the w orld, bein g the las t a ccoun t, brin gs toge ther the lo ose ends remainin g in all th e p re cedi ng a ccoun ts I t con tains n othin g new : i t is n ot an ind epen den t 1 See page 33 ,1 bovc See a recent study on these lines b) r lhru�A . entitled Thi: Redistribution of liiconw through Public Finance ( 1 0 15) This study. which deals witb the United Kingdom in 1 937. was published by the O:dord University Press '.!

- 44 accoun t It i s assum ed that w e are onl y in terested in tran saction sb etw een ther est of the worl d an d the coun try stu di ed, an d no t in tran saction s taking pl ace wi thin the rest of the wo rl d T he accoun tm ay therefo reb ep resen tedin con soli datedfo rm For som ep ro bl em s it rn c>yb en ecessary to sub divi de thi s accoun t, the mo st u su al sub divi sion n eededb eing on a g eograp hi cal b asi s T he following accoun ts rel ate to a system simplifi ed in the m ann er ju st describ ed T he figu res u sed are inv en ted, an d thei rpu rpo se i s to p ro vi de ar eady demon stration of certain equ a­ li ti es T he i tem s in thi s set of accoun ts will b e di scu ssed in detail , as al so will the deriv ation of agg reg ates su ch as the n ation al in com e an d exp en di tu re The system m ayb e summ ari zed thu s : Sector l - Productive Enterprises PERSONS { H o U!H>O-..\' N E IISlll l')

BUSINESS ENTEBPHISES (1)

Operating account ;

(2)

Appropriation account ;

(3)

Capital acco u n t ;

(1l)

B.escrvc account

(5)

Sector II

Ope1at.ing account

- Financial Intcnncdiaries

B A N K I NG SYSTEM

OTllEH FI NANCIAL l NTEHi\l E DI A R l E S

(G)

Opera t i n � account ;

(7)

Appropriation occuuut ;

( 1 0)

Appropriation aceou n t ;

(8)

Capital and reserve accouuL

(11)

Capital and reserve account

(9)

Sector III

Opernling account ;

- Insurance and Social Security Agencies,

INsunANCE Coi'IH',\ NIES AND SocrnTrns ( 1 2)

Hevenuc accuur1ts : (a) Enterprises, etc. ;

(b) Final consumers ;

Pmv.\.TE PENS I O NS FumJs ( 1 6)

ReYenue accoun t ;

(17)

Capital a n d reserve account.

(c} Rest of the worl d ;

SOCL\ I. , SECURITY FUNDS

( 1 :) )

Operating account ;

(14)

Apprnpriation accou u t ;

(15)

Capital a n d reserve account

( 1 8)

H. evcnnc acco u n t ;

(19)

Capital n n d rcsc1 v c accou n t

Sector I V - Final Consu111ers P E RSONS

P u n u c Cou.-EC1 1 n: PnoY!DEHS

(20)

Revenue account ;

(22)

He venue accou n t ;

( 2. J )

Capit;d aud reserve accnunt

(23)

Capital a n d i csm ve aec(1 u11l

Sector V - The Rest of the \\'orld Au. EcoNOlll l C ENTITIES (24)

Cousolidnt.cd acco1u1t

T he con ten t o f the se accoun ts i s set ou t in the followin gp �lges an d di scussed in detail in the n ex t chcip ter

- 45 Prod uctive Enterprises

Sector

i3 U S I N ESS

.ENlBll l' H I S E S

(J) Opanting Account 50,000

Sales proceeds

5

BO

Snbsiclics Transfer from capital account. in respect o f unsold goods, work in prngiess nnd unused materials

Payment� foi fat:tors o l production : (11) \Vagcs, snlaries, ctc

(b) Intcn!st

J,975 500

(i

Purchases o f goods and services including hank and similar charges, actual and i m puted

7

1n:mrauce premiums and imputed .charges to poliq1 •l10lders

8

Indirect taxes

9

Contributions to socinl sccnrit:y funds

:JO

1.0

Transfer to capital account in respect: o f inventories taken over

SS

70

BO 270

Transfor to capital account in tespect: o f (lepreciation and obsolescence

,J

50,200

Total receipts

1.2

Trunsfcr t.o revenue account: ol persons in respect o f bad debts

25

13

T'ransfor to appropr·iation aceount. o! surplus

1,800

],I.

Total payments

50,200

(2) App ropri:ari.on Acrn11.n1. 15

Transfer from operating acrnunt: of surplus

16. 17

Interest: Receipts in respect of deposits actual and imputed

18

Imputed receipts as policy·hohlcrs

19.

Dividends

20

Insurance claims

21

Transfer 1rom reserve uccounl in respect: of excess provision for taxation

22

Transfox from 1escrve account in respect of realized capital gains

23.

Total receipts

1,800 10

24

DividenJ.s and withdrawals

25

Direct taxes Payments oi contingency claims to employees and third p n r tics (assumed to he handled by in� surance rather than reGcrves) Transfer to capital account m i espcct o f property insurnncc claims Transfer to 1 ese1vc accuunt i n respect o f unpaid accrui n g tnx liability

26

95 5 120 55 2B 5

15 2,105

�9 .

Transfer to reserve account of surplus

30,

Total_payments

1,600 300

IS 35

45 110 2,105

(3) Capital Account 31

Transfer from operating account in rcsp(�Ct of inventories tab�n over

3Z

Transfer f r om operaqng account i n respect of depreciation and obsolescence

33

Trnnsfor from appropdation account i n respect of property insui nucc claim .=.

J,1,

Twnsi'et from reserve account

;35

Total receipts

,J,J.

Transfer from appzopriation account 111 respect of unpaid accruing tax liability

,f,2

Turnsfor from appropriation ac� count of surplus

43

.Receipts from suhseiiption to new issues, etc

4 1J.

Other nc·w borrowing from :

37

Purchases n f goods and services

38

Net purchases of existing erp1ip­ ment and other assets

,}9

Transfor to operating account i n H!spect o f unsold goods, work i n progress and unused materials

55

35 1,020

llO .H5

Receipts from redemptions and rcpaymcutn

40

pro­

,U)

Total payments

,1, 7

Trausfor t o appropriation account in respect of excess provision for ta:.xatiou

1

1-H.

Transfor to appropriation account in respect of rcnlis,�d