Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community

9.02. Supply and use tables are matrices by industry and product describing the domestic production processes and the transactions in products of the national economy in great detail. These tables show:

9.05. Between the supply and use tables, two types of identities hold good (provided supplies and uses are valued consistently, see tables 9.5 and 9.6): These identities by industry and product can be used to check and improve the consistency and completeness of estimates (see paragraph 9.11).

9.06. Supply and use tables are the central framework for all tables by industry, e.g. those on employment, gross fixed capital formation and capital stock.

9.07. The supply and use tables contain all the flows in the following accounts:

9.10. Most statistical information that can be obtained from producer units indicates what type of products they have produced/sold and, usually less detailed, what type of products they have bought/used. The format of the supply and use tables is designed to fit in with this type of statistical information (i.e. industry by product). By contrast, information of a product by product or industry by industry nature as required by the symmetric input-output table is not often available. For example, surveys of industries usually provide information about the type of products used and about the products produced. However, information on the inputs in terms of products and value added components for each product produced is usually not collectable. Ideally, the administration of an enterprise should show all costs allocated to the various types of output and, simultaneously, show the composition of intermediate consumption by type of product. In practice, information arranged in the form of supply and use tables is therefore a practical starting point for constructing the more analytic information in the symmetric input-output tables. The industry by product information in the supply and use tables can be converted into product by product or industry by industry statistics by adding extra statistical information on the input structures, or by assuming constant input structures by product or by industry (see paragraphs 9.54—9.60).

9.11. The supply and use tables serve both statistical and analytical purposes. Important statistical purposes are:

9.12. The supply and use tables and symmetric input-output tables give a detailed picture of the composition of the supply and use of goods, services and labour and the primary incomes involved. These tables and the ratios that can be derived from them, such as productivity figures, are an important subject for economic analysis.

9.13. The supply and use tables and symmetric input-output tables can also be used as tools of economic analysis. Both types of tables have different merits. For calculating direct and indirect effects, the supply and use tables need to be accommodated with specific assumptions or extra statistical information. For calculating cumulative effects, these assumptions and extra data requirements are the strongest. In fact, the requirements for calculating cumulative effects with a supply and use table amount to constructing a symmetric input-output table. Therefore, for calculating cumulative effects, the symmetric input-output table is the preferable tool. However, for calculating direct effects and first-order effects, the supply and use tables adjusted with a selected amount of assumptions (or extra statistical information) is in general to be preferred, because: These features are also helpful when the supply and use tables are integrated in a macro-economic model: the resulting overall model is closer to real statistics, can show a lot of detail and can relatively easily be linked to areas on which other statistical data are available, e.g. on the labour market or the environment.

9.14. The supply and use tables and symmetric input-output tables can be used to calculate: The calculations can show indirect as well as direct effects. For example, a significant increase in energy prices will affect not only those industries that use energy intensively, but also those industries that use the outputs of the energy-intensive producers. With the aid of some assumptions, estimates of the size of such indirect effects can be deduced from the supply and use and symmetric input-output tables. Examples of common assumptions are: These assumptions are rather rigid as they imply that relative prices do not change, that the production processes remain technically the same and that no substitution occurs between categories of final consumption expenditure by households. However, these general assumptions can be modified by allowing first for changes in relative prices, e.g. the Leontief-price model. This can then be extended with econometric or other estimates of the influence of relative prices and other variables on technical coefficients or final consumption expenditure by households. The calculations need to be confined to the supply and use of goods and services. They could also be applied to the supply and use of labour and the components of value added.

9.15. The supply and use tables and the symmetric input-output table can be integrated into macro-economic models to provide the latter with a detailed meso-economic foundation. Specific types of analysis served by supply and use tables and the symmetric input-output table are, for example:

SUPPLY AND USE TABLES

9.16. Tables 9.5 and 9.6 show the supply and use tables in more detail.

9.17. The classification used for industries in the  NACE Rev. 2 and the classification employed for products is the CPA; these classifications are fully aligned to each other: at each level of aggregation, the CPA shows the principal products of the industries according to the  NACE Rev. 2.

9.18. In the supply and use tables, the classification for products is at least as detailed as the classification for industries, e.g. the three digit-level of the CPA and the two digit-level of the  NACE Rev. 2.

9.19. The distinction between market output, output for own final use and other non-market output is only to be used for the total output by industry; the distinction is not required for each product group.

9.20. The distinction between market producers and producers for own final use on the one hand and other non-market producers on the other hand should only be used by industry when both types of producers are present within one industry. In general, this distinction will therefore only be used for subclassifying a very limited number of industries, e.g. health care and education (see paragraph 3.66.).

9.22. In the supply table, flows of goods and services are valued at basic prices. In the use table, the flows of goods and services are valued at purchasers' prices. In order to attain identities between supply and use, table 9.5 also shows the transition of supply at basic prices to supply at purchasers' prices. As supply should be equal to use, the table reveals also the transition of uses at purchasers' prices to uses at basic prices. As a consequence, two identities can be derived from this transition:

9.23. Value added is recorded at basic prices. It is the net result of output valued at basic prices less intermediate consumption valued at purchasers' prices.

9.24. Value added at factor cost is not a concept in the ESA. Nevertheless, it could be derived from value added at basic prices by subtracting other taxes less subsidies on production.

9.25. GDP is valued at market prices. This aggregate can be derived from the supply and use tables in three different ways:

9.26. The use table 9.6 also contains some supplementary information: gross fixed capital formation, stocks of fixed asssets and labour inputs by industry. This information is crucial for productivity analysis and may also serve several other types of analyses, e.g. analysis of employment.

9.27. In the ESA, the stocks of fixed assets are valued at the market prices prevailing on the data of the balance sheet. For fixed assets bought in earlier years, this implies that consumption of fixed capital of the foregoing years is to be deducted from the current market prices of new assets of the same type and quality. This net concept of fixed capital stock could be used in calculating capital intensity. However, for productivity analysis more often a specific gross concept of fixed capital stock is used. According to this gross concept all fixed assets should be valued at the current market prices of new assets of the same type and quality; no deduction should be made for capital consumption in the last and earlier years. This gross concept of fixed capital stock is not a standard concept in the ESA, but can easily be calculated with the aid of the Perpetual Inventory Method. Considering the great use of such gross figures, it is recommended that both gross and net figures on fixed capital stock be included as supplementary information.

9.28. For productivity analysis, hours worked is the preferable labour input variable. In drawing inferences about employed persons, however, the number of jobs may also be relevant. Both variables can be subclassified, e.g. into the part pertaining to employees and to self-employed persons.

9.29. For a proper compilation and understanding of the supply and use tables, it is important to recall some of the accounting conventions employed in the ESA:

9.30. In the supply and use tables, two adjustment items should be introduced for reconciling the valuation of imports in the supply and use tables and in the sector accounts (see also tables 9.5 and 9.6). In the supply table, imports of goods are valued at cif values. This is an overstatement of the costs of imports when the transport and insurance services incorporated in the cif value are provided by residents (e.g. own-account transport or transport by specialized resident carriers). In order to obtain the right balance between imports and exports, exports of services should thus also be increased by amount of this overstatement of imports. In the sector accounts, imports of goods are valued at fob values. This is an overstatement of imports as in the case of cif valuation. However, in the case of fob valuation the overstatement is smaller, which implies that the imputed increase in exports is smaller too. The results of employing different valuation principles is thus that net total imports are the same, but that both total imports and total exports are larger for cif valuation. The two valuation principles can be reconciled in the supply and use tables by introducing adjustment items for imports as well as exports. The adjustment items should be equal to the value of the transport and insurance services by residents incorporated in the cif value but not in the fob value, i.e. referring to the transport and insurance from the border of the exporting country to the border of the importing country. These adjustment items, once incorporated in the supply and use tables, need no special treatment in the input-output calculations.

9.31. The transfer of existing goods is recorded in the use table as a negative expenditure for the seller and a positive expenditure for the purchaser. For the product group involved, the transfer of an existing good amounts to a reclassification among uses. Only the transaction costs are not a reclassification: they are recorded as a use of business or professional services. For the purposes of description and analysis, it can be useful to show for some product groups the relative size of the transfer of existing goods separately, e.g. the importance of second-hand cars or the importance of recycled paper.

9.32. Direct purchases abroad by residents and purchases on the domestic territory by non-residents are commonly estimated as a special exercise in the statistical compilation process. They are introduced as adjustments to initial estimates of imports, exports and, by amount of the consumption part of the purchases abroad, final consumption expenditure. In order to obtain a balance between supply and use by product, all these purchases should be split over the various product groups involved. For the product groups where these types of purchases are important, they could be shown as a subcategory, e.g. expenditure on accommodation.

9.33. Throughout the supply and use tables, the  NACE Rev. 2 industry classification is extended with a nominal industry for the use of financial intermediation services indirectly measured. In the supply table, no transactions are recorded at all for this industry. In the use table, the total use of financial intermediation services indirectly measured is recorded as the intermediate consumption of this nominal industry. As this nominal industry does not have any other transactions, its net operating surplus is negative by the amount of its intermediate consumption; all other components of its value added are zero. As a consequence, its total gross value added is equal to its (negative) net operating surplus.

9.34. The transition from supply and use at basic prices to purchasers' prices involves: The estimation of this transition is an important part of the balancing process. Separate tables can show the transition in more detail (see tables 9.7 and 9.8). These tables can also serve important analytical purposes, e.g. analysis of prices and analysis of the consequences of changes in the rates of taxes on products.

9.35. In general, when preparing supply and use tables and making the proper balancing between the two sides, there is always a choice of emphasis between two opposite ways of adjusting statistical data:

9.36. In practice, both types of balances may be needed to build up a supply and use table. Both alternatives deal with or require similar kinds of adjustments, i.e. for taxes less subsidies on products and trade and transport margins by products. In fact, the first alternative is not possible without the second, since it is usually not possible to know the columns of taxes on products, subsidies on products and trade and transport margins broken down by products in the supply table unless the distribution among uses of the individual products is known from the use table at purchaser's prices (table 9.6).

9.37. Thus, the following tables are involved in the balancing process:

9.38. The transition of supply and use from basic prices to purchasers' prices (see paragraph 9.34) amounts to reallocating trade margins: valuation at basic prices implies that the trade margins are recorded as part of the product trade, while valuation at purchasers' prices implies that the trade margins are allocated to the products to which they pertain. An analogous situation holds for transport margins.

9.40. The transport margins include transportation costs paid separately by the purchasers and included in the use of products at purchasers' prices but not in the basic prices of a manufacturers' output or in the trade margins of wholesale or retail traders. Such transport margins include in particular: All other costs of transporting goods are not recorded as transport margins, e.g.:

9.41. Table 9.7 shows a somewhat simplified picture of a trade and transport margins matrix, because:

9.42. Taxes on production and imports consist of: Similar categories are distinguished for subsidies on production and imports. Subsidies are treated as if they were negative taxes on production and imports. The definitions of all these categories are given in paragraphs 4.14 to 4.39.

9.43. Supply at basic prices includes net other taxes on production, i.e. less other subsidies on production. In order to make the transition from basic prices to purchasers' prices (or vice versa; see paragraph 9.34), the various taxes on products should be added and the subsidies on products should be deducted (or vice versa).

9.44. VAT may be deductible, non-deductible or just not applicable:

9.45. VAT is recorded net in the ESA: all supplies are valued at basic prices, i.e. excluding invoiced VAT; intermediate and final uses are recorded at purchasers' prices, i.e. excluding deductible VAT.

9.46. Table 9.8 on taxes less subsidies on products is simplified, because:

9.47. The way of recording taxes and subisidies on products is defined in points 4.27 and 4.40 respectively. Taxes (and subsidies) on products are usually estimated by product by applying the official tax (subsidy) rates to the various flows. Afterwards an analysis should be made of the differences with the tax assessments or the amounts actually paid. Changes in the estimates of taxes on products have concomitant effects on variables estimated by adding up or deducting the estimates of taxes on products. For example, output at basic prices of a specific product group may be estimated by deducting inter alia taxes on products from the estimated use at purchasers's prices. However, an estimate of output at basic prices may also be combined with inter alia estimates of taxes on products to arrive at an estimate of uses at purchasers' prices. In the transition from uses by product at purchasers' prices to basic prices, the modification of the initial estimate of taxes and subsidies on products may be shown as a separate item. However, for all input-output calculations it will be necessary to allocate this modification by product, even if this can only be based on a simple mathematical device, e.g. proportional allocation.

9.48. The use table 9.6 does not show to what extent the goods and services used have been produced domestically or imported. This information is necessary for all analyses in which the link between supply and use of goods and services within the national economy plays a role. A case in point is the analysis of the impact of changes in exports or final consumption expenditure on imports, domestic production and related variables such as employment. In fact, it applies to most analyses indicated in paragraphs 9.14 and 9.15. The input-output framework therefore contains also a use table for imported products and one for domestically produced goods and services (see tables 9.9 and 9.10).

9.49. The use table for imported products should be compiled by exploiting all information available on the uses of imports, e.g. for some products the major importing enterprises may be known and for some producers information on the amount of imports may exist. However, in general, direct statistical information on the use of imports in scarce. This information has therefore usually to be supplemented by assumptions by product group.

9.51. In order to serve more specific purposes, the supply and use tables presented above can be modified by introducing alternative and supplementary classifications. Important cases in point are:

TABLES LINKING THE SUPPLY AND USE TABLES TO THE SECTOR ACCOUNTS

9.52. The information in the supply and use tables should be linked to the sector accounts, to ensure that the supply and use table is consistent with the sector accounts. This is achieved by introducing a table with variables cross-classified by industry and by sector (see table 9.11).

SYMMETRIC INPUT-OUTPUT TABLES

9.53. In the ESA, the product-by-product input-output table is the most important symmetric input-output table and this table is described here.

9.54. The product-by-product input-output table (see tables 9.4 and 9.12) can be compiled by converting the supply and use tables, both at basic prices. This involves a change in format, i.e. from two asymmetric tables to one symmetric table (see paragraph 9.09). The conversion can be divided into three steps:

9.55. Step (a) involves transfers of outputs in the form of secondary products in the supply table. Since secondary products appear as ‘off-diagonal’ entries in the supply table, this kind of transfer is a comparatively simple matter. These secondary products are treated as additions into the industries for which they are principal and removed from the industries in which they were produced.

9.56. Step (b) is more complicated, as the basic data on inputs relate to industries and not to each individual product produced by each industry. The kind of conversion to be made here entails the transfer of inputs associated with secondary outputs from the industry in which that secondary output has been produced to the industry to which they principally (characteristically) belong. In making this transfer, two different approaches might be taken:

9.58. The assumptions used to transfer outputs and associated inputs hinge on two types of technology assumptions: The choice of the best assumption to apply in each case is not an easy one. It must, in fact, depend on the structure of national industries, e.g. the degree of specialization, and on the homogeneity of the national technologies used to produce products within the same product group. For example, boots may be made from leather and from plastic. Assuming the same product technology for all boots (or, when a higher level of aggregation is used, e.g. footwear) can thus be problematic; assuming industry technology can then be a better alternative. Simple application of the product technology assumption has often shown results that are unacceptable, insofar as the input-output coefficients sometimes generated are improbable or even impossible, for example, negative coefficients. Improbable coefficients may be due to errors in measurement and to heterogeneity (product-mix) in the industry of which the transferred product is the principal product. This might be overcome by making adjustments based on supplementary information or exploiting informed judgment to the fullest extent possible. Of course, another solution is to apply the alternative assumption of industry technology. In practice, employing mixed technology assumptions combined with supplementary information is the best strategy for compiling symmetric input-output tables.

9.59. The importance of the role played by the assumptions depends on the extent of secondary production, which in turn depends not only on how production is organized in the economy but also on the product breakdown. The more detailed the product breakdown, the more secondary output can be expected.

9.60. Step (c) involves the aggregation of the products in the new use table to the industries that generate them according to step (a) and this results in a symmetric input-output table with products cross-classified against by-products. While these amendments start from data based on local KAUs, the resulting entries are made to conform to those of ‘homogeneous units of production’.

9.61. The classifications in the symmetric input-output table coincide with those in the supply and use tables, as the former is a transformation of the latter (except of course the classification by industry/homogeneous branch).

CHAPTER 10

PRICE AND VOLUME MEASURES

10.01. In a system of economic accounts, all the flows and stocks are expressed in monetary units. The monetary unit is the only common denominator which can be used to value the extremely diverse transactions recorded in the accounts and to derive meaningful balancing items. The problem when using the monetary unit as a measuring unit is that this unit is neither a stable nor an international standard. A major concern in economic analysis is to measure economic growth in volume terms between different periods. It is then necessary to distinguish, in the value changes for certain economic aggregates, the changes arising solely from price changes from the remainder which is called the change in ‘volume’. Economic analysis is also concerned with comparisons in space, i.e. between different national economies. These focus on international comparisons in volume terms of the level of production and income, but the level of prices is also of interest. It is therefore necessary to factor the differences in value of economic aggregates between pairs or groups of countries into components, which reflect the differences in volume and the differences in price.

10.02. When time comparisons of flows and stocks are concerned, equal importance should be attached to the accurate measurement of changes in prices and in volumes. In the short term, observation of price changes is of no less interest than the measurement of the volume of supply and demand. On a longer term basis, the study of economic growth has to take account of movements in the relative prices of the different types of goods and services. The primary objective is not simply to provide comprehensive measures of changes in prices and volumes for the main aggregates of the system but to assemble a set of interdependent measures which make it possible to carry out systematic and detailed analyses of inflation and economic growth and fluctuations.

10.03. The general rule for comparisons in space is that accurate measures must be made for both the volume and the price components of the economic aggregates. As the spread between the Laspeyres and Paasche formulae is often significant in spatial comparisons, the Fisher index formula is the only acceptable one for this purpose.

10.04. The economic accounts have the advantage of providing a suitable framework for constructing a system of volume and price indices as well as ensuring the consistency of the statistical data. The advantages of an accounting approach can be summarized as follows:

10.05. Despite the advantages of an integrated system based on the balance, both overall and by industry, of transactions in goods and services, it has to be acknowledged that the price and volume indices thus obtained do not meet all needs or answer all possible questions on the subject of change in prices or volume. Accounting constraints and the choice of price and volume index formulae, although essential for the construction of a coherent system, can sometimes be a hindrance. There is also a need for information for shorter periods such as months or quarters. In these cases, other forms of price and volume indices may prove useful.

SCOPE OF PRICE AND VOLUME INDICES IN THE ACCOUNTS SYSTEM

10.06. Among the flows which appear in economic accounts at current prices, there are some (mainly concerning products) where the distinction between changes in price and volume is similar to that made at microeconomic level. For many other flows in the system, the distinction is far less obvious. In the former case, the flows cover a group of elementary transactions in goods and services, the value of each being equivalent to the product of a number of physical units and their respective unit price. In this case it is sufficient to know the breakdown of the flow in question into elementary transactions in order to determine its average variation in price and volume. In the latter case, which concerns a number of transactions relating to distribution and financial intermediation as well as to balancing items such as value-added, it is difficult or even impossible to separate directly current values into price and volume components and special solutions have to be adopted. There is also a need to measure the real purchasing power of a number of aggregates, such as compensation of employees, disposable income of households or national income. This can be done, for example, by deflating them by means of an index of the prices of the goods and services which can be bought with them.

10.07. It must be emphasized that the objective and the procedure followed when measuring the real purchasing power are fundamentally different from those followed when deflating goods and services and balancing items. For these an integrated system of price and volume indices can be established, which is useful, among other things, for measuring economic growth. The valuation in real terms of flows of the last type uses price indices of flows other than those considered, which may differ according to the objectives of the analysis: it can only be a convention and cannot be done in a unique way within an integrated system of price and volume indices.

10.08. The systematic division of changes in current values into the components ‘changes in price’ and ‘changes in volume’ is restricted to flows representing transactions, recorded in the goods and services accounts (0) and in the production accounts (I); it is carried out both for the data relating to individual industries and for those relating to the total economy. Flows representing balancing items, for example value added, cannot be directly factored into price and volume components; this can only be done indirectly using the relevant flows of transactions. The use of the accounting framework imposes a double constraint on the calculation of the data: A third constraint, not inherent in the use of an accounting framework but resulting from a deliberate choice, is that every change in the value of transactions must be attributed either to a change in price or to a change in volume, or to a combination of the two. If these three requirements are fulfilled, valuation of the goods and services accounts and production accounts at constant prices means that an integrated set of price and volume indices can be obtained.

10.11. Compensation of employees is an element of income. For the purpose of measuring purchasing power it can be valued in real terms by deflating with an index reflecting the prices of products purchased by employees. Other income elements too, such as disposable income of households and national income, can be measured in real terms in the same general way.

GENERAL PRINCIPLES OF MEASURING PRICE AND VOLUME INDICES

10.12. The creation of an integrated system of price and volume indices is based on the assumption that, at the level of a single homogeneous good or service, value (v) is equal to the price per unit of quantity (p), multiplied by the number of quantity units (q), that is

10.14. For transactions in goods it is in many cases easy to define the physical unit involved in the transaction and hence the price per unit. In a number of cases, for example for unique capital goods, it is more difficult and special solutions have to be adopted. For transactions in services it is frequently more difficult to specify the characteristics which determine the physical units and differences of opinion on the criteria to be used may arise. This may concern important industries such as financial intermediation services, wholesale and retail trade, services to enterprises, education, research and development, health or recreation. In view of the growing importance of the service industries, it is essential to find common solutions to the problem of the choice of physical units, even if they are only conventional ones.

10.15. The physical and other characteristics to be taken into consideration when identifying products constitute differences in quality and play an important role, while at the same time raising difficult statistical problems. The fact is that for many goods and services intended for a specific purpose there exist several varieties of differing qualities, each with its own price.

10.16. Differences in quality are reflected by the following factors: With given physical characteristics, the differences in the other factors imply that the physical units are not identical in an economic sense, and that the value differs among the units. These differences in unit values are considered to be differences in volume and not as differences in price. In reality, the payment made when a good is purchased covers not only the price of a good but also the price of the services associated with the supply of goods. This means that in principle identical goods sold at different prices and in different circumstances should be considered to be different products. This conclusion is explicitly acknowledged in the supply and use tables, where the value of trade and transport margins (which represent the main services associated with the provision of goods) is recorded separately.

10.17. Within a given market and in a single period, the coexistence of several unit values can, except in the cases described in paragraph 10.19, be considered as evidence of the existence of quality differences. Accordingly, the various models of cars and even different versions of the same model must be treated as different products: similarly, a distinction must be made between first-class and second-class railway journeys. For the purposes of calculating price and volume measures, it is necessary to use as detailed a product classification as possible so that each product identified has maximum homogeneity, regardless of the level of detail used in the presentation of results.

10.18. The dimension of quality has to be taken into account also when changes over time are to be recorded. The change in quality due, for example, to the modification of the physical characteristics of a product must be considered to be a change in volume and not in price. Also the effects of aggregation have to be considered. Variations in the composition of a flow which imply, for example, a shift in favour of higher average quality have to be recorded as a volume increase and not as a price increase. It follows that for outputs, the effect of shifts between markets with differing prices, for example domestic versus external, or industrial uses versus markets for consumer products, will be treated as changes in volume and not as changes in price. It also follows that a price change for a given flow can occur only as result of changes in prices at the level of individual transactions.

10.20. Lack of information means that purchasers may not always be properly informed about existing price differences and may therefore inadvertently buy at higher prices. This, or the opposite, may occur also in situations where individual buyers and sellers negotiate or bargain over the price. On the other hand, the difference between the average price of a good purchased in a market or a bazaar, where such bargaining often occurs, and the price of the same good sold in a different type of retail outlet, such as a department store, should normally be treated as reflecting differences in quality due to different sales conditions.

10.21. Price discrimination implies that sellers may be in a position to charge different prices to different categories of purchasers for identical goods and services sold under exactly the same circumstances. In these cases, there is no or limited freedom of choice on the part of a purchaser belonging to a special category. The principle adopted is that variations in price are to be regarded as price discrimination when different prices are charged for identical units sold under exactly the same circumstances in a clearly separable market. Price variations due to such discrimination do not constitute differences in volume. The possibility of the retrading of goods in a given market implies that price discrimination for these types of products in most cases can be assumed to be insignificant. The price differences that may exist for goods can normally be interpreted as due to lack of information or to the existence of parallel markets. In service industries, for example in transportation, producers may charge lower prices to groups of individuals with typically lower incomes, such as pensioners or students. If these are free to travel at whatever time they choose, this must be treated as a price discrimination. However, if they are charged lower fares on condition that they travel only at certain times, typically off-peak times, they are being offered lower-quality transportation.

10.22. Parallel markets may exist for several reasons. Buyers may be unable to buy as much as they would like at a lower price because there is insufficient supply available at that price, and a secondary, parallel market, where higher prices are quoted, may exist. There is also the possibility that a parallel market exists, where sellers can charge lower prices because they can avoid certain taxes. In these cases too, a price variation constitutes a difference in price and not in volume.

10.23. A change in the structure of a flow affecting its total value may occur when in the circumstances of lack of information, price discrimination and the existence of parallel markets identical products are sold at different prices. Suppose that a certain quantity of a particular good or service is sold at a lower price to a particular category of purchaser without any difference whatever in the nature of the good or service offered, location, timing or conditions of sale, or other factors. A subsequent decrease in the proportion sold at the lower price raises the average price paid by purchasers of the good or service. This must be recorded as a price and not a volume increase.

10.24. The establishment of a comprehensive system of price and volume indices covering all supply and uses of goods and services encounters a particular difficulty when measuring the output of non-market services. These services differ from market services in that they are not sold at a market price and their value at current prices is calculated by convention as the sum of the costs incurred. These costs are intermediate consumption, compensation of employees, other taxes less subsidies on production and consumption of fixed capital.

10.25. In the absence of a unit market price, the change in the ‘unit cost’ of a non-market service can be considered as an approximation of the change in the price. If non-market services are consumed on an individual basis, it is in principle possible to estimate quantities which are homogeneous and which reflect the utilization of these services and apply the unit costs of a base year to obtain data in constant prices. By such type of output-measurement it will be possible to analyse changes in productivity for individual non-market services. For collective services it is generally not possible to establish unit costs and quantities reflecting their utilization. If attempts are made to account for changes in productivity for collective services by indirect methods, users should be made aware of this.

10.26. In the context of the economic accounts, it is of prime importance to adopt the principle that the production and consumption of non-market services, like the production and consumption of goods and market services, must be defined in terms of the actual flows of these goods and services and not in terms of final results obtained from their use. As these results depend on several other factors as well, it is not possible to measure, for example, the volume of teaching services by the rise in the level of education, or the volume of health services by the improvement in the health of the population.

10.27. Value-added, the balancing item in the production account, is the only balancing item to form part of the integrated system of price and volume indices. The very special characteristics of this item must, however, be emphasized, as must the significance of its related volume and price indices. Unlike the various flows of goods and services, value-added does not represent any single category of transaction. It cannot, therefore, be directly broken down into a price component and a volume component.

10.29. In some cases, where the statistical data remain incomplete or not sufficiently reliable, it may be necessary to use a single indicator. If there are good data on value-added at current prices, one alternative to double deflation is to deflate current value-added directly by a price index for output. This implies the assumption that prices for intermediate consumption change at the same rate as for output. Another possible procedure is to extrapolate value-added in the base year by a volume index for output. This volume index can be calculated either directly from quantity data or by deflating the current value of output by an appropriate price index. This method in fact assumes that the volume changes are the same for output and for intermediate consumption. For certain market and non-market service industries, such as finance, business services, education or defence, it may not be possible to obtain satisfactory estimates of price or volume changes for output. In these cases the movements of value-added at constant prices can be estimated by means of changes in compensation of employees at constant wage rates and consumption of fixed capital at constant prices. Compilers of data may be forced to adopt such expedients, even when there is no good reason to assume that labour productivity remains unchanged in the short or long term.

10.30. By their very nature, therefore, the indices of volume and price for value-added are different from the corresponding indices for the flows of goods and services. The same applies to price and volume indices of aggregate balancing items such as gross domestic product. The latter is equivalent to the sum of all the values added minus Fisim, i.e. to an addition of balancing items, plus taxes less subsidies on products and from another point of view can be seen to represent the balancing item between total final uses and imports.

PROBLEMS IN THE APPLICATION OF THE PRINCIPLES

10.31. To apply the principles of price and volume to the different flows in the system it is necessary to specify the solutions to be adopted for a number of problems which arise in this connection.

10.32. The need to determine which of the various factors described in the previous section explain differences in price arises whenever one studies time series of value data and has to separate price changes and volume changes. It follows that, even at a fine level of detail, series of quantity data may give only crude measures of volume changes, as they do not properly reflect changes that may have occurred in the mix of different qualities. This means that, for example, a constant number of physical units, recorded for a certain flow, understates the volume change if the composition has changed in favour of units with higher quality. This shift implies a change in average quality and must be registered as an increase in the volume index. In general, the best method of estimating volume changes for flows of goods and services is deflating value data with price indices. Since all changes in average quality are correctly reflected in the value series, dividing by a representative price index, which is adjusted for quality changes, gives a correct volume index.

10.33. Deflation with price indices may not always be best in practice and other methods have to be adopted. Value series may, for example, have been established by multiplying price and quantity data and constant price data can then be obtained by using prices from the base year. Alternatively, some value series may be of an inferior quality or difficulties may exist in obtaining reliable price indices. Estimates can then be made on the basis of quantity indicators. In these cases care must be taken that the quantities refer to products that are as homogeneous as possible. If none of the methods described above are applicable, constant price data on outputs may have to be based on estimates of inputs at constant prices.

10.34. For non-market services the possibility of deflating values by using price indices does not exist and other solutions have to be applied. These are described in paragraphs 10.41 to 10.46.

10.35. Of all the flows in the economy, the changes in the value of the flows of goods and market services are the most readily broken down into price and volume changes. In this context a clear distinction should be made between:

10.36. The flows in category (a) are by far the most numerous and commonplace. Changes in the values of these flows can, by their very nature, be split into volume and price changes. The general method of deflating the current value of these flows by price indices is applicable in all cases where goods and services can be expressed in units, the majority of which are homogeneous from one year to the next.

10.37. The flows in category (b), which are notional transactions, are typified by the absence of an actual price for the transaction. This is the case for such goods as agricultural products for own final use and goods for fixed capital formation on own-account. For services, the most important type refers to owner-occupied dwellings. Values for these imputed flows are to be obtained by applying prices of similar products when marketed and the deflator should therefore be the same. Since it is usually necessary to value output of own-account construction by costs of production rather than prices, the deflator has to be adjusted in this respect.

10.38. The most important flows in category (c) are those whose value at current prices is obtained as a difference between the values of two flows of goods. This arises in the case of trade margins, whose value at current prices is defined as the difference between the actual or imputed price realized on a good purchased for resale by the wholesale and retail trades and the price that would have to be paid by the distributor to replace the good at the time it was sold or otherwise disposed of. By one method, estimates of trade margins at constant prices can therefore also be made by difference, by subtracting the constant-price value of goods bought for resale from the constant-price value of goods resold by these trades. An alternative method of measurement would be to extrapolate the trade margins of the base year either by the volume of sales or by the volume of purchases made by the wholesale and retail trades. To be correct, this alternative has to take into account the fact that trade margins vary among different products and uses. This is explicitly acknowledged in the supply and use tables.

10.39. Category (c) also includes output of travel agency services measured as the value of service charges of agencies (fees and commission charges). These services can also be measured as the difference between two flows: the full payment made by the purchaser and the expenditure made for transport and accommodation by the producer. The volume measure can be obtained as the difference between these flows calculated at constant prices. Alternatively, the fee or commission can be defined as the price per unit of the type of transportation or accommodation arranged and the volume indicator for the service charge would therefore move in the same way as these flows.

10.40. The flows in category (d) consist of financial intermediation services: service charges from insurance and pension funds are also included. Financial intermediation services are provided by banks and other financial corporations and consist of lending money to businesses or households, providing a safe and convenient means of saving, safeguarding money and other valuables, buying and selling foreign currencies, clearing cheques, providing general economic intelligence, dealing in stocks and bonds, and offering investment advice. In some cases these services are easily defined and specifically paid for, for example in the case of renting space in bank vaults, or when fees are charged in connection with issues of stocks, bonds or loans. The current value of transactions can then be defined, as well as prices and quantities necessary for price and volume measurement. However, a breakdown into price and volume components for financial intermediation services indirectly measured and for insurance services can usually only be made on arbitrary grounds and would have to be based on conventions.

10.41. The non-market services produced by general government and non-profit institutions serving households (NPISH) cover a vast range of services both necessary and useful to society. They fall into two main categories:

10.42. The services provided to individuals can be given to single individuals (e.g. medical care) or to groups of individuals (e.g. teaching). By their nature, these services can be supplied on a market or a non-market basis; in many cases, the individual can obtain services of this type either by applying to a market unit (paying the price) or by turning to a non-market unit of general government or NPISH (getting the services free, or almost free). For market units the method of deflating current values by price indices should be used, since the variations in the mix of products with differing prices are then correctly shown as influencing volumes rather than prices. For non-market services provided to individuals, output estimates can be based on quantity indicators. For education these may relate to numbers of hours spent by pupils in classes or in individual tutoring, and for non-market health services the indicators should reflect treatment in hospitals or visits to doctors or nurses. In both cases there is a quality dimension reflected in the amount of resources provided per pupil or patient. Care must be taken to use data with a detailed breakdown so that each indicator for which calculations are made is as homogeneous as possible in respect of costs. It is only then that changes in the mix of products are shown correctly as volume changes. In the case of services provided to individuals, changes in the volume of their output and consumption should, in principle, be measured on the basis of the use which is made of these services; this will avoid using different criteria for the same services depending on whether they are market or non-market. Of course, any change in quality must be treated as a change in volume; but this applies as much to market services as to non-market services provided to individuals.

10.43. The pure collective services are produced by general government for the benefit of the entire population. In fact, they cover a vast range of activities such as general public services, national defence, foreign affairs, justice and the police, town planning and the environment, economic policy, etc. Since these services are consumed collectively, indirectly and continuously, the volume of their output cannot be measured by the extent to which they are utilised.

10.44. It may not be possible in practice to obtain reliable quantity indicators for non-market services provided for individuals and these may therefore have to be measured in terms of volume by the same methods as for pure collective services. It is then necessary to start from a valuation at constant prices of the different cost elements of this output, i.e.: The use of input-measures as proxies for output implies that analysis of productivity is not possible.

10.45. The calculation of intermediate consumption at constant prices poses no particular theoretical problems base-year since intermediate consumption relates to goods and market services. It can be done either by deflating current values by a price index of intermediate consumption or on the basis of quantities revalued at base-year prices.

10.46. Calculation at constant prices of the compensation of employees and the consumption of fixed capital in non-market service industries is done by the general methods described in paragraphs 10.53 and 10.54 for example. Other taxes on production are often of a type that can be related to a volume indicator, for example volume of employment, number of cars used.

10.47. Although essentially limited to transactions involving goods and services, the integrated system of price and volume indices does not exclude the possibility of calculating measures of changes in price and volume for certain other transactions. This possibility exists, in particular, in the case of taxes and subsidies directly linked to the quantity or value of the goods and services which are the subject of certain transactions. In the supply and use tables, the values of these are shown explicitly. By applying the rules described below, it is possible to obtain price and volume measures for the categories of taxes and subsidies which are recorded in the goods and services accounts, namely:

10.48. The simplest case is that of taxes which represent a fixed amount per unit of quantity of the product which is the subject of the transaction. The value of the revenue from such a tax depends on: The breakdown of the value change into its two components presents virtually no difficulties. The variation in volume is determined by the change in the quantities of products taxed; the price variation corresponds to the change in the amount levied per unit, i.e. to the change in the taxation price.

10.49. A more frequent case is that in which the tax represents a certain percentage of the value of the transaction. The value of the revenue from such a tax then depends on: The taxation price is then obtained by applying the rate to the price of the product. The change in value of the revenue from a tax of this type can also be divided into a volume change, determined by the change in the quantities of products taxed, and a price change corresponding to the change in the taxation price (b × c).

10.50. The amount of tax on products (excluding VAT) (D.215 and D.214) is measured in terms of volume by applying to the quantities of products produced or imported the taxation prices of the base year or by applying to the value of output or imports, revalued at the prices of the base year, the tax rates of the base year. Attention has to be paid to the fact that taxation prices may differ among different uses. This is taken into account in the supply and use tables.