Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union Text with EEA relevance

• (a) if the manufacturer transports the goods himself, such transportation costs are included in the basic prices of the manufacturer's output; this transport represents an ancillary activity and the individual costs of transport are not identifiable as transportation costs;

• (b) if the manufacturer arranges for the goods to be transported without a separate invoice for the transport services, such transportation costs are included in the basic prices of the manufacturer's output; such transportation costs are identifiable as such and are recorded as part of the manufacturer's intermediate consumption;

• (c) if wholesale and retail traders arrange for goods to be moved from where they take delivery of them to where another purchaser takes delivery, the costs involved are included in the trade margin if no separate charge is made for transportation to the purchaser. Again, as with manufacturers, such costs represent an ancillary activity of wholesale and retail traders or the purchase of an intermediate service, thus entering trade margins but not transport margins;

• (d) if a household buys goods for final consumption purposes and arranges for transport by a third party, the transport costs involved are recorded as final consumption expenditure on transport services and not included in trade or transport margins.

• 9.39Table 9.7 shows a somewhat simplified picture of a trade and transport margins matrix, for the following reasons.

• (a) In transforming the uses, a distinction needs to be made between wholesale trade and retail trade in order to take account of the differences in their prices. In drawing up the tables, it should be borne in mind that wholesale traders sell directly to households as well as industries, for example furniture, and that retail traders sell to industries such as cafes and restaurants, as well as households.

• (b) In calculating and analysing trade margins on products for final consumption expenditure by households, for each product group the most important distribution channels may also be distinguished in order to take account of the differences in their prices; the distinction between wholesale trade and retail trade is not detailed enough. For example, goods and services can be bought by households in a supermarket, a grocery, flower shop, department store, abroad or obtained as income in kind. For some products, secondary sales are important, as in the case of cigarette sales by cafes, restaurants and petrol stations. Sales by retailers are adjusted to obtain the value of sales to households, for example sales to businesses, government and tourists should be deducted. Of course, such distinctions can only be introduced if the available data sources provide sufficient information for estimates of the importance of each of the distribution channels. Even for one trader or transporter, different products generally have different margins. Data on margins by type of product are the most appropriate and used when available.

• (c) In calculating transport margins, a distinction by type of transport such as rail, air, sea and inland waterway, and road, is useful.

Taxes less subsidies on production and imports

• 9.40Taxes on production and imports consist of:

• (a) taxes on products (D.21):
• (1) value added type taxes (VAT) (D.211);
• (2) taxes and duties on imports excluding VAT (D.212);
• (3) taxes on products, except VAT and import taxes (D.214);

• (b) other taxes on production (D.29).

• Similar categories are distinguished for subsidies.

• 9.41Supply at basic prices includes other taxes less subsidies on production. In order to make the transition from basic prices to purchasers' prices, the various taxes on products are added and the subsidies on products deducted.

Table 9.8 —  Taxes less subsidies on products

Taxes less subsidies on supply

	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Taxes less subsidies on product supplies	Total taxes less subsidies on products
	VAT	Taxes on imports		Other taxes on products	Subsidies on imports		Other subsidies on products	Total taxes less subsidies on products
Products (CPA) 1 2 3 4								Taxes less subsidies on total supply by product and by use
Totals

Table 9.8 —  Taxes less subsidies on products (continued)

Taxes less subsidies on uses

	Total taxes less subsidies on products	Taxes less subsidies on product uses
	Total taxes less subsidies on products	Industries (NACE)
Products (CPA) 1 2 3 4	Taxes less subsidies on products for final uses: Final consumption (a) households (b) NPISH (c) government Gross capital formation: (d) gross fixed capital formation (e) changes in valuables (f) changes in inventories Exports	Taxes less subsidies on intermediate consumption of products by industry

• 9.42Table 9.8 on taxes less subsidies on products is simplified, in the following ways:

• (a) for the use of products, the different types of taxes on products are not distinguished and subsidies are not shown separately; for the supply of products, only three types of taxes on products and two types of subsidies are distinguished. In general, it is useful to show each major type of tax or subsidies on products separately, and then allocate the total to the various product groups;

• (b) different tax rates and subsidies can apply to different distribution channels; the latter should therefore also be distinguished when relevant and sufficient information exists.

• 9.43Taxes and subsidies on products are the amounts due for payment only when evidenced by tax assessments, declarations, etc. or the amounts actually paid. In compiling supply and use tables, taxes and subsidies on products are usually estimated by product by applying the official tax or subsidy rates to the various demand flows. Afterwards an assessment should be made of the differences with the tax assessments or the amounts actually paid.

• (a) Some of these differences indicate that the initial estimate of taxes on products in the supply and use tables does not comply with the ESA definitions:
• (1) in case of exemption the initial estimate of taxes on products is therefore lowered;
• (2) in case of hidden economic activities or evasion of the payment of taxes on products, such as when the payment of taxes is compulsory but there is no tax assessment, the estimate of taxes on products is therefore lowered.

• (b) In some instances, the differences may indicate that the initial estimate for taxes and subsidies on products erroneous, for example because the output of some product is underestimated. Modifications of the estimates of the flows of goods and services can then be made.

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

• (a) deductible VAT applies to most of intermediate consumption, most of gross fixed capital formation and part of changes in inventories;

• (b) non-deductible VAT often applies to final consumption expenditure by households, part of gross fixed capital formation such as new owner-occupied dwellings, part of changes in inventories and part of intermediate consumption, for example intermediate consumption of government units and financial corporations;

• (c) VAT is in general not applicable to:
• (1) exports to countries outside the EU;
• (2) the sale of any goods or services subject to a zero rate of VAT regardless of their use; however, a zero rate of VAT implies that the VAT paid on purchases can still be reclaimed; intermediate consumption and gross capital formation of these producers is therefore corrected by the amount of the VAT reclaimed;
• (3) any producers exempted from VAT registration, such as small businesses and religious organisations; in this situation, the right to claim back the VAT on purchases is generally restricted.

• 9.45VAT is recorded net: 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.

Other basic concepts

• 9.46In the supply and use tables, two adjustment items are used in reconciling the valuation of imports in the supply and use tables and the valuation found in the institutional sector accounts.

• In the supply table, in order to achieve a comparable valuation with domestic production in the same product group, imports of goods are valued at CIF values. The CIF value includes the transport and insurance services provided by residents, such as own-account transport or transport by specialised resident carriers. In order to achieve a consistent valuation between imports and exports, exports of services should include this value.

• In the institutional sector accounts, imports of goods are valued at FOB values, i.e. in line with the valuation for exports of goods. However, in the case of FOB valuation the value of transport and insurance services provided by residents, which is included in the export of services, will be smaller, since it only covers those services provided inside the exporting country. The result 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. Such adjustment items, once incorporated in the supply and use tables, need no special treatment in the input-output calculations.

• 9.47The 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 treated as a reclassification: they are recorded as a use of services, for example 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, for example the importance of second-hand cars in the market for both new and second-hand cars, or the role of recycled paper in the supply of paper products.

• 9.48For a good understanding of supply and use tables, it is helpful to recall some of the accounting conventions employed in the ESA:

• (a) industries constitute of a group of kind-of-activity units (KAUs) engaged in the same or similar kind-of-activity. An important feature of supply and use tables is that they record secondary activities separately. This implies that KAUs need not to be homogeneous in their production activities. The concept of KAUs is explained in more detail in Chapter 2. A completely homogeneous unit of production is used in a symmetric product by product input-output table;

• (b) if an establishment undertaking purely ancillary activities is statistically observable, in that separate accounts for the production it undertakes are readily available, or if it is in a geographically different location from the establishments it serves, it is recorded as a separate unit and allocated to the industrial classification corresponding to its principal activity, in both national and regional accounts. In the absence of suitable basic data being available, the output of the ancillary activity may be estimated by summing costs. If neither of these two conditions is met, all inputs consumed by an ancillary activity such as materials, labour, and consumption of fixed capital, are treated as inputs to the principal or secondary activity which they support;

• (c) goods or services produced and consumed within the same accounting period and within the same local KAU are not separately identified. They are therefore not recorded as part of the output or intermediate consumption of that local KAU;

• (d) minor processing, maintenance, servicing or repair on behalf of other local KAUs is to be recorded net, i.e. excluding the value of the goods involved;

• (e) imports and exports occur when there is a change of ownership between residents and non-residents. Physical movement of goods across national borders does not by itself imply an import or export of these goods. Goods sent abroad for processing are not recorded as exports and imports. In contrast, buying and reselling goods with non-residents without the goods entering the merchant's economy are recorded as exports and imports in the accounts of the producer and final purchaser, and a net export of goods under merchanting is shown in the accounts of the merchant economy;

• (f) durable goods can be rented or be subject to operating leasing. In such instances, they are recorded as fixed capital formation and fixed capital stock in their owner's industry; in the industry of the user intermediate consumption by amount of the rental paid is recorded;

• (g) persons working via temporary agencies are recorded as being employed in the industry of those agencies and not in the industries in which they actually work. As a consequence, in the latter industries, the fees paid to the agency for the supply of labour are recorded as intermediate consumption and not as compensation of employees. Labour contracted out is treated as services provided;

• (h) employment and compensation of employees are broad concepts:
• (1) employment for social reasons is also counted as employment; this applies, for example, to work placements for disabled people, employment projects for people who have been unemployed for a long time and employment programmes for young people seeking jobs. As a consequence, the people involved are employees and receive employee compensation and not social transfers, though their productivity may be lower than that of other employees;
• (2) employment includes cases where the persons involved are not expected to work at all, e.g. persons dismissed but receiving, for a given period, payments from their former employer. However, employment in terms of hours worked is not distorted by this convention, as no hours are actually worked.

Supplementary information

• 9.49The use Table 9.6 contains supplementary information: gross fixed capital formation, stocks of fixed assets and employment by industry. A breakdown into employees and own-account workers is valuable additional information. The information on gross fixed capital formation and stocks of fixed assets by industry is needed to derive consumption of fixed capital by industry and for recording non-deductible VAT on gross fixed capital formation. Showing employment by industry is important for compilation purposes:

• — employment figures are often used for grossing up values of output, compensation of employees, intermediate consumption and mixed income,

• — key-ratios such as output, compensation of employees and mixed income per unit of labour such as hours worked, can be compared over time and by industry to check the plausibility of the estimates,

• — it helps to ensure consistency between the values by industry and employment data by industry. For example, without an explicit link to employment data, the balancing process may result in changes in the values by industry without corresponding changes in the employment figures.

• Adding information on employment by industry is also helpful for the analysis of employment and productivity.

DATA SOURCES AND BALANCING

• 9.50For compiling output by industry and product, the major data sources are usually enterprise economic surveys, production surveys and annual reports or business accounts from major companies. The surveys are generally exhaustive for large companies while a sample survey is carried out for small size companies. For some specific activities, different data sources may be relevant, for example for supervisory bodies, accounts of local and central government or social security funds.

• 9.51Such data are used to prepare a first incomplete set of supply and use tables. These are balanced in various steps. Balancing manually at a low level of aggregation provides important checks on the errors in data sources, system errors, and at the same time modifications of the basic data can be made, to correct for conceptual differences and missing units. If the reconciliation takes place at a higher level of aggregation, using an automatic balancing process or a very strict sequential balancing process, most of those checks are absent as errors cancel out and the causes of error cannot be traced.

TOOL FOR ANALYSIS AND EXTENSIONS

• 9.52For analysis, three types of tables can be used:

• — supply and use tables,

• — symmetric input-output table industry by industry,

• — symmetric input-output table product by product.

• Symmetric input-output tables can be derived from the supply and use tables, in current prices, and also in previous years' prices.

• 9.53Use 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 analyses in which the link between supply and use of goods and services within the national economy plays a role. An example is the analysis of the impact of changes in exports or final consumption expenditure on imports, domestic production and related variables such as employment. The input-output framework, therefore, would benefit from separate use tables for imported products and domestically produced goods and services.

• 9.54The use table for imported products is compiled by exploiting all information available on the uses of imports, for example 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 is scarce. This information has therefore usually to be supplemented by assumptions over the allocation of product group to use.

• 9.55The use table for goods and services produced domestically can then be obtained by deducting the use table for imported products from the use table for the whole economy.

• 9.56In theory, four basic models exist for the transformation of a supply and use table to a symmetric input-output table. Those models are based on either technology or fixed sales structure assumptions. Most often used is the product technology assumption: each product is produced in its own specific way, irrespective of the industry where it is produced. This assumption is often used to derive a product-by-product input-output table. The second common model uses the fixed product sales structure assumption (market share assumption): each product has its own specific sales structure, irrespective of the industry which produces it; this approach is often used to derive an industry-by-industry input-output table. Hybrid models which mix these assumptions are possible. Models based on either industry technology or fixed industry sales structure assumptions are of less practical relevance due to their low probability of occurrence in practice. A discussion of the alternative models and transformation processes is given in Chapter 11 of Eurostat Manual of Supply, Use and Input-output Tables (2008 edition) ([^E0012]).

• 9.57The choice of the best assumption to apply in each case is not an easy one. It depends on the structure of national industries, e.g. the degree of specialisation, and on the homogeneity of the national technologies used to produce products within the same product group and not the least on the level of detail of the basic data.

• Simple application of the product technology assumption gives results that are unacceptable, insofar as the input-output coefficients sometimes generated are improbable or even impossible, in the form of negative coefficients. Improbable coefficients may be due to errors in measurement and to heterogeneity of product-mix in the industry of which the transferred product is the principal product. This can be tackled by making adjustments based on supplementary information or exploiting informed judgement to the fullest extent possible. Another solution is to apply the alternative assumption of fixed product sales structure. In practice, employing mixed technology assumptions combined with supplementary information has proven to be a useful approach for compiling symmetric input-output tables.

• 9.58The symmetric input-output table can be broken down into two tables:

• (a) a matrix showing the use of imports; the format of this table is the same as that of the import table supporting the supply and use tables, except that a symmetric structure with the same classification on both axes is used;

• (b) a symmetric input-output table for domestic output.

• The latter table should be used in calculating the cumulated coefficients, i.e. the Leontief inverse. The Leontief inverse is the inverse of the difference between the identity matrix I and the matrix of technical input coefficients obtained from the matrix of domestic output used as intermediate consumption. The Leontief inverse can also be derived for imports. It should then be assumed that the imports have been produced in the same way as the competing domestic products.

• 9.59Supply and use tables and symmetric input-output tables can be used as tools of economic analysis. Both types of tables have different merits. Symmetric input-output tables are readily available for calculating not only direct but also indirect and cumulative effects. They can also be of good quality when expert knowledge and various types of statistical information have been used in deriving the tables from the supply and use tables.

• 9.60Industry-by-industry tables are well suited for analyses related to industries, e.g. tax reform, impact analysis, fiscal policy and monetary policy; they are also closer to the various statistical data sources. Product-by-product tables are well suited for analyses related to homogeneous production units, e.g. productivity, comparison of cost structures, employment effects, energy policy and environmental policy.

• 9.61However, the analytical properties of product-by-product tables and industry-by-industry tables do not differ significantly. The differences between product-by-product tables and industry-by-industry tables are caused by the existence of a generally limited amount of secondary production. In practice, analytical uses of input-output tables implicitly assume an industry technology, no matter how the tables have originally been compiled. Furthermore, in practice, any product-by-product table is a manipulated industry-by-industry table, as it still contains all the KAU and enterprise characteristics of the supply and use tables.

• 9.62In general, many specific types of analysis are served by supply and use tables and symmetric input-output tables, for example:

• (a) analysis of production, cost structures and productivity;

• (b) analysis of prices;

• (c) analysis of employment;

• (d) analysis of the structure of capital formation, final consumption, exports, etc.;

• (e) analysis of economic growth by using the cumulated costs shares to allocate imports to the various final uses;

• (f) analysis of the contribution to economic growth and employment of exports to other (blocks) of countries;

• (g) analysis of imports of energy required;

• (h) analysis of the impact of new technologies;

• (i) analysis of the effects of changes in tax rates (e.g. VAT) or the introduction of a national minimum wage;

• (j) analysis of the relationship between domestic production and the environment, e.g. focusing on the use of specific products like fuel, paper and glass or the emission of pollutants.

• A macro model may also only include the cumulated costs-shares calculated from the input-output tables. In this way, information from the input-output table on direct and indirect effects, e.g. the importance of labour costs or imports of energy for private consumption or exports, is incorporated in the macro model and can be used for analysis and forecasting.

• 9.63In order to serve more specific purposes, the supply and use tables and symmetric input-output tables can be modified by introducing alternative and supplementary classifications. The most important examples are as follows:

• (a) more detailed product and industry classifications based on national classifications or to take account of specific purposes, e.g. for the analysis of the role of research and development in the national economy;

• (b) more detailed geographical breakdown of imports and exports, e.g. intra-EU trade sub classified by country and extra-EU trade sub classified by economic regions and some specific countries such as China, India, Japan and the United States;

• (c) classification of imports into:
• (1) imports of products that are also domestically produced ('competitive imports');
• (2) imports of products that are not domestically produced ('complementary imports'). Both types of imports can be expected to have a different relationship with and importance for the national economy. Competitive imports can be the subject of analysis and economic policy as they may be a substitute for domestic output; they could therefore be incorporated as a separate category of potential final use in the use tables. For complementary imports, for example in the case of a sudden rise in energy prices, analyses will mainly focus on the impact of changes in their prices and the national economy;

• (d) classification of compensation of employees by criteria such as level of education, part-time/full-time, age and gender. This classification could then also be applied to the supplementary information on employment. In this way, the supply and use tables can also be used for analyses of the labour market;

• (e) breakdown of compensation of employees into:
• (1) wages and salaries, including social contributions by employees
• (2) employers' social contributions. This breakdown permits analysis of the role of social contributions for the price of labour inputs and the shifting of this burden towards gross operating surplus;

• (f) classification of final consumption by purpose, which for households is Coicop, for NPISH it is COPNI and for government it is COFOG. The functional classification of this expenditure enables the impact of each function of the rest of the economy to be assessed. For example, the importance of public and private expenditure on health care, transport and education can then be assessed.

CHAPTER 10

PRICE AND VOLUME MEASURES

• 10.01In 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.

• 10.02When time comparisons of flows and stocks are concerned, equal importance is to 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.

• 10.03The 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 often is significant in spatial comparisons, the Fisher index formula is the only acceptable one for this purpose.

• 10.04Economic 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 summarised as follows.

• (a) On a conceptual level, the use of an accounting framework covering the entire economic system requires the prices and physical units for the different products and flows in the system to be specified consistently. In a framework of this type, the price and volume concepts for a given group of products are defined identically in both resources and uses.

• (b) On a statistical level, the use of the economic accounts framework imposes accounting constraints which must be respected at both current prices and in volume terms and will normally require some adjustments to be made to ensure consistency of the price and volume data.

• (c) Furthermore, the creation of an integrated system of price and volume indices in the context of a system of economic accounts provides the national accountant with extra checks. Assuming the existence of a balanced system of supply and use tables at current prices, the construction of such balanced tables in volume terms means that a system of implicit price indices can be automatically derived. Examination of the plausibility of these derived indices can lead to revision and correction of the data in volume terms and even, in some cases, of the values at current prices.

• (d) The accounting approach permits the measurement of price and volume changes for certain balancing items in the accounts, the latter being derived by definition from the other elements in the accounts.

• 10.05Despite 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 such cases, other forms of price and volume indices may prove useful.

SCOPE OF PRICE AND VOLUME INDICES IN THE NATIONAL ACCOUNTS

• 10.06Amongst 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.

• Where the flows in the accounts 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, it is sufficient to know the breakdown of the flow into its components in order to determine changes in price and volume over time.

• Where a flow comprises 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.

• 10.07The objective and the procedure followed when measuring the real purchasing power of income estimates are different from those followed when deflating goods and services and balancing items. For flows of goods and services an integrated system of price and volume indices can be established, which provides a consistent framework for measuring economic growth. The valuation in real terms of flows of income uses price indices which are not strictly linked to the income flow. So the choice of price for income growth can differ according to the objectives of the analysis: there is no unique price identified in the integrated system of price and volume indices.

The integrated system of price and volume indices

• 10.08The 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 and in the supporting supply and use framework. It is carried out both for the data relating to individual industries and products, and for those relating to the total economy. Flows which are balancing items, such as 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) the balance of the goods and services account must for any sequence of two years be obtained at both current prices and in volume terms;

• (b) each flow at the level of the total economy must be equal to the sum of the corresponding flows for the various industries.

• 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 those three requirements are fulfilled, valuation of the goods and services accounts and production accounts in volume terms means that an integrated set of price and volume indices can be obtained.

• 10.09The items to be considered when constructing such an integrated set are as follows:

Transactions in products

Output	P.1
Market output	P.11
Output for own final use	P.12
Non-market output	P.13
Intermediate consumption	P.2
Final consumption expenditure	P.3
Individual final consumption expenditure	P.31
Collective final consumption expenditure	P.32
Actual final consumption	P.4
Actual final individual consumption	P.41
Actual final collective consumption	P.42
Gross capital formation	P.5
Gross fixed capital formation	P.51
Changes in inventories	P.52
Acquisition less disposals of valuables	P.53
Exports of goods and services	P.6
Exports of goods	P.61
Exports of services	P.62
Imports of goods and services	P.7
Imports of goods	P.71
Imports of services	P.72
Taxes and subsidies on products	Taxes and subsidies on products
Taxes on products, excluding VAT	D.212 and D.214
Subsidies on products	D.31
VAT on products	D.211
Balancing items	Balancing items
Value added	B.1
Gross domestic product	B.l*g

Other price and volume indices

• 10.10In addition to the price and volume measures considered above, the following aggregates can also be subdivided into their own price and volume components. The objectives for these measures vary.

• Inventories at the beginning and at the end respectively of each period may have to be calculated in volume terms in order to have the balance sheet aggregates. The stock of produced fixed assets has to be calculated in volume terms to estimate capital output ratios, as well as to obtain a basis for estimating consumption of fixed capital in volume terms. Compensation of employees can be calculated in volume terms for purposes of measuring productivity and in some instances also when outputs have been estimated by using data in volume terms on inputs. Consumption of fixed capital, other taxes on production and other subsidies on production must also be estimated in volume terms when calculating costs in volume terms.

• 10.11Compensation 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

Definition of prices and volumes of market products

• 10.12Volume and price indices can only be derived for variables that have price and quantity elements. The notions of price and quantity are closely linked to that of homogeneous products, i.e. products for which it is possible to define units which are all considered equivalent and which can thus be exchanged for the same monetary value. It is thus possible to define the price of a homogeneous product as the amount of money for which each product unit can be exchanged.

• For each homogeneous product flow, e.g. output, it is thus possible to define a price (p), a quantity (q) corresponding to the number of units and a value (v) defined by the equation:

Image omitted; see official source

Quality, price and homogeneous products

• 10.13Another way of defining a homogeneous product is to say that it consists of units of the same quality.

• Homogeneous products play an essential role in national accounts. Indeed, output is valued at basic price determined by the market at the time when it takes place, i.e. very often before sale. The units produced have therefore to be valued, not at the price at which they will actually be sold, but at the price at which equivalent units are sold at the time of production of the units concerned. This is possible in a rigorous way only for homogeneous products.

• 10.14In practice, however, two units of a product with identical physical characteristics may be sold at different prices for two types of reasons.

• (a) Two units with identical physical characteristics can be considered as not being equivalent if they are sold in different places, at different periods or according to different conditions. In this case, the units have to be regarded as corresponding to different homogeneous products.

• (b) Two units with identical physical characteristics can be sold at different prices, either due to lack of information, or to restrictions brought to purchase freedom, or to the existence of parallel markets. In this case, the units have to be regarded as belonging to the same homogeneous product.

• A homogeneous product can thus also be defined as a product of which all units would be sold at the same price in perfect competition. In the absence of perfect competition, the homogeneous product price is defined by the average price of its units. Therefore, in national accounts, for each homogeneous product there is one price and only one price, so that it is possible to apply general rules of valuation of products.

• 10.15Lack 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.

• 10.16Price 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 such 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, i.e. when different prices are charged for the same homogeneous product. 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 those 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, e.g. in transportation, producers may charge lower prices to groups of individuals with typically lower incomes, such as pensioners or students. If such individuals are free to travel at whatever time they choose, this must be treated as 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 since transportation with conditions and transportation without conditions can be considered as different homogeneous products.

• 10.17Parallel 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.

• 10.18Thus, if quality is defined by all the characteristics common to all units of a homogeneous product, differences in quality are reflected by the following factors:

• (a) physical characteristics;

• (b) deliveries in different locations;

• (c) deliveries at different times of the day or at different periods of the year;

• (d) differences in conditions of sale or the circumstances or environment in which goods or services are supplied.

Prices and volume

• 10.19The introduction of the notion of volume in national accounts rests on the desire to eliminate the effect of price variation in the pattern of values expressed in monetary units, and it thus appears as an extended use of the notion of quantity for groups of products. In fact, for a given homogeneous product the equation

Image omitted; see official source allows the change of a value over time to be broken down into change of price and change of quantity. In practice, however, there are too many homogeneous products to be dealt with individually, with the result that national accountants have to work at a more aggregated level. At this aggregated level, however, the equation

Image omitted; see official source is no longer useful since, while it is possible to aggregate values, it is not meaningful to aggregate quantities in order to derive prices.

• 10.20There is however a simple way of breaking down the change in the value of a set of homogeneous products between two periods, one of which is considered the base period and the other the current period. The effect of change in price can be offset by calculating what the value of the set of products would have been if there had been no change in prices, i.e. by applying the prices of the base period to the quantities of the current period. This value at prices of the base period defines the notion of volume.

• In this way, the value of a set of products in the current period may be written as:

Image omitted; see official source

• Where exponent 1 refers to the current period and index i to a specific homogeneous product. The volume of the set of products for the current period is thus defined in relation to the base period by the formula:

Image omitted; see official source

• Where exponent 0 refers to the base period. By comparing the volume of the set of products for the current period and their overall value for the base period it is possible to measure a change which is not affected by any price variation. A volume index can thus be calculated by the formula:

Image omitted; see official source

• The volume index which is thus defined is a Laspeyres index of quantities in which each basic index is weighted by the proportion of the basic product in the overall value of the base period.

Once the notion of volume has been defined, it is possible to define by analogy with the equation

Image omitted; see official source

not a price but a price index. The price index is thus defined by the ratio between the value for the current period and the volume, i.e. by the formula:

Image omitted; see official source

• This index is a Paasche price index in which each base price index is weighted by the proportion of the base product in the overall value for the current period.

• The volume and price indices defined in this way prove the equation:

• Value index = price index × volume index

This equation is a more general version of the equation

Image omitted; see official source

and it allows any change in the value of a set of products to be broken down into a change in volume and a change in price.

• In the calculation of the volume, quantities are weighted up by prices of the base period, so that the result depends on the price structure. Changes in price structure are likely to be less important for short periods than for long periods. Therefore, the calculation of the volume is made only for two successive years, i.e. the volume is calculated at the prices of the previous year.

• For comparisons over longer periods of time, the Laspeyres volume indices and the Paasche price indices are calculated first in relation to the previous year and then the chain indices are determined.

• 10.21The main advantages of using Paasche price indices and Laspeyres volume indices are the interpretation and calculation simplicity and the additivity property in the supply and use balances.

• 10.22Chained indices present the drawback that they lead to volumes having no additivity so that they cannot be used in the balancing procedures of products based on supply and use tables.

• 10.23The non-additive volume data calculated with chain indices are to be published without any adjustment. This method is transparent and indicates to users the extent of the problem. This does not preclude the possibility that there may be circumstances in which compilers may judge it preferable to eliminate the discrepancies in order to improve the overall consistency of the data. When reference year values are extrapolated by chain volume indices, an explanation has to be provided to users concerning the absence of additivity in the tables.

• 10.24In practice, since it is impossible to measure prices and quantities for all the homogeneous products of an economy, volume or price indices are calculated using samples of representative homogeneous products, the underlying idea being that the volumes or prices of products not included in the sample change in the same way as the sample average. It is therefore necessary to use a product classification which is as detailed as practicable so that each product identified has maximum homogeneity, regardless of the level of detail used in the presentation of results.

• 10.25In view of the equation linking the value, price and volume indices, only two indices need to be calculated. Usually, the value index is obtained directly by simply comparing the overall values for the current and base periods. It is then a matter of choosing between a price index and a volume index to be calculated. In most cases the assumption of parallel change which underlies the method is proven more by prices than by volumes because the prices of different products are often significantly influenced by certain common factors such as the cost of raw materials and wages. In this case, the price index is to be calculated using a sample of products of constant quality over time, with quality being determined not only by the physical characteristics of the product but also by the conditions of sale, as explained above. In this way all the variations in the overall value caused by structural changes among the various products will appear as variations in volume and not in price.

• In some cases, however, it will be easier to calculate a volume index and to use it to derive a price index. Occasionally it may even be preferable to calculate the value index on the basis of a price index and a volume index.

New products

• 10.26The method of calculating price and volume indices outlined above assumes that the products exist in both successive years. In actual fact, however, many products appear and disappear from one year to the next and the price and volume indices need to reflect this. Where volume is defined using the prices of the previous year, there is no particular difficulty in the case of products which existed in the previous year but which no longer exist in the current year, since they are simply linked to a zero quantity for the current year. The problem is more complicated in the case of new products, since for the previous year it is not possible to measure the price of a product which does not exist.

• There are two types of approaches in such a case for estimating the price for the previous year: the first supposes that the price of the new product changes like the price of similar products, while the second attempts to calculate directly what the price of the new product would have been if it had existed in the base period. The first approach amounts simply to using a price index calculated on the basis of a sample of homogeneous products existing in both successive years, and in practice this is the method used for most new products since new products are generally too numerous to be explicitly specified, especially when the definition of homogeneous products is strictly applied. With the second approach, the methods which are most commonly used are the hedonic method which consists of determining the price of a product on the basis of its main characteristics and the input method which uses the cost of a product to calculate its price.

• The matter of new products has particular importance in certain fields. Many capital goods are produced only as a single item and thus appear as new products. This is also the case of many services which are never provided in exactly the same way, e.g. research and development services.

• 10.27For transactions in services it is frequently more difficult to specify the characteristics which determine the physical units, and differences of opinion may arise concerning the criteria to be used. This difficulty may concern important industries such as financial intermediation services, wholesale and retail trade, services to enterprises, education, research and development, health or recreation. The choice of physical units for such activities is presented in Handbook on prices and volume measures in national accounts ([^E0013]).

Principles for non-market services

• 10.28The establishment of a comprehensive system of price and volume indices covering all supply and uses of goods and services involves a particular difficulty when measuring the output of non-market services. Such services differ from market services in that they are not sold at a market price and their value at current prices is calculated as the sum of the costs incurred. Those costs are: intermediate consumption, compensation of employees, other taxes less subsidies on production and consumption of fixed capital.

• 10.29In the absence of a unit market price, the unit cost of a non-market service can be considered as the equivalent to the price. In fact, the price of a market product corresponds to the expenditure which the purchaser must incur in order to take possession of it, while the unit cost of a non-market service corresponds to the expenditure which society must incur in order to make use of it. Thus, where it is possible to define units of quantity for non-market services, it is also possible to apply the general principles for calculating volume and price indices which are outlined above.

• It is generally possible to define units of quantity for non-market services which are consumed on an individual basis, such as education and health services, which means that the general principles must be routinely applied in the case of such services.

• The method consisting of calculating volume by applying unit costs of the previous year to the quantities of the current year is called the output method.

• 10.30It is difficult, however, to define units of quantity for collective non-market services, such as services in connection with general government, justice or defence. In this case, therefore, other methods need to be used by analogy with the general method. This method defines volume on the basis of prices of the previous year, i.e. it defines volume as the expenditure which purchasers would have incurred if prices had not changed. This latter definition may be used when it is not possible to define a unit of quantity provided that it is applied, not to a unit of product, but to the expenditure as a whole. Since the value of a non-market service is determined by the costs involved, it is thus possible to calculate the volume by the value of the costs at base period prices, i.e. by the value at base period prices of intermediate consumption, compensation of employees, other taxes net of production subsidies and consumption of fixed capital. This method is known as the input method. The calculation in volume terms of the compensation of employees, consumption of fixed capital, taxes and subsidies on production is covered in the paragraphs which follow.

• Even in the most favourable case of non-market services consumed on an individual basis, such as those of education and health, it is not always easy to distinguish homogeneous products. Indeed, the characteristics of such services are seldom defined in a sufficiently precise way for it to be possible to determine with certainty whether two different service units can be considered as being equivalent, i.e. if they have to be regarded as correspondent with one same homogeneous product or with two separate products. Two equivalence criteria can be retained by the national accountants.

• (a) The unit cost criterion: two units of non-market services being considered equivalent if they have the same unit cost. This criterion is based on the idea that, collectively, those who benefit from public services are also those who decide and pay for them. For example, citizens decide on public services via their representatives and pay for them by their taxes. Under such conditions, citizens cannot be expected to pay different prices for service units that they consider equivalent. Thus, according to this criterion, two service units of different cost have to be regarded as corresponding to different products, and a non-market homogeneous product is characterised by the unicity of its unit cost.

• (b) The outcome criterion: two units of non-market services being considered equivalent if they give the same outcome. This criterion is based on the idea that two service units considered by citizens to be equivalent can however be produced at different costs because citizens do not check completely the production process of the services. The unit cost criterion is no longer then relevant and has to be replaced by a criterion corresponding to the usefulness of the non-market services for society.

• As the outcome criterion often seems more relevant, a large amount of work has been completed to develop methods based on this criterion and research to improve them continues. In practice, such methods often result in the introduction to the volume calculation of correction coefficients applied to quantities; they take then the name of methods with explicit correction for quality.

• The principal difficulty of implementation of such methods is related to the definition and the measurement of outcome. Indeed, measuring outcome presupposes having defined objectives, which is not so simple in the field of non-market services. For example, what are the objectives of the public health service: improving the state of public health or extending lifetime? Certainly the two, but then how are various objectives weighed up when they are not equivalent? For example, what is the best treatment, that which makes it possible to live an additional year in good health or that which makes it possible to live two additional years in bad health? In addition, outcome estimates are often controversial, hence, in numerous countries, the controversies on improvement or deterioration of pupils' school performance are recurrent.

• In the European Union, given the conceptual difficulties and the absence of consensus on output methods adjusted for quality (based on outcome), such methods are excluded from the central framework in order to preserve the comparability of the results. Such methods are reserved on an optional basis for supplementary tables, while continuing research. Thus, in the field of non-market health and education, the estimates of production and of consumption in volume terms have to be calculated on the basis of direct output measures — not adjusted for quality — by weighing up the quantities produced by the previous year unit costs of those services, without applying any correction to them in order to take account of quality. Such methods have to be applied to a sufficient level of detail, the minimum level being defined by Eurostat's Handbook on price and volume measures in national accounts.

• Although the use of input-based methods is generally to be avoided, it is possible, in the field of health, to apply the input method when the variety of the services is such that it is practically impossible to determine homogeneous products. In addition, explanatory information has to accompany the national accounts estimates that draw users' attention to the methods of measurement.

Principles for value added and GDP

• 10.31Value 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 emphasised, 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 transactions. It cannot, therefore, be directly broken down into a price component and a volume component.

• 10.32 Definition: value added in volume terms is defined as the difference between output in volume terms and intermediate consumption in volume terms.

Image omitted; see official source

• where P and Q are prices and quantities for output and p and q are prices and quantities for intermediate consumption. The theoretically correct method to calculate value added in volume terms is by double deflation, i.e. deflating separately the two flows of the production account (output and intermediate consumption) and calculating the balance of those two revalued flows.

• 10.33In some cases, where the statistical data remain incomplete or insufficiently 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 outputs and for intermediate consumption.

• For certain market and non-market service industries, such as finance, business services or defence, it may not be possible to obtain satisfactory estimates of price or volume changes for output. In such cases the movements of value added in volume terms can be estimated by means of changes in compensation of employees at wage rates of the previous year and consumption of fixed capital in volume terms. 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.

• 10.34By 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 value of the latter is equivalent to the sum of all the values added of all industries, 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.

SPECIFIC PROBLEMS IN THE APPLICATION OF THE PRINCIPLES

• 10.35Although 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.

Taxes and subsidies on products and imports

• 10.36The possibility mentioned above 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 those taxes and subsidies 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:

• (a) taxes on products, excluding VAT (D.212 and D.214);

• (b) subsidies on products (D.31);

• (c) VAT on products (D.211).

• 10.37The 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 upon:

• (a) the quantity of products involved in the transaction;

• (b) the amount levied per unit, i.e. the taxation price.

• 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.

• 10.38A 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 upon:

• (a) the quantity of products involved in the transaction;

• (b) the price of the products involved in the transaction;

• (c) the tax rate (as a percentage).

• 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).

• 10.39The amount of taxes on products, excluding VAT (D.212 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.

• 10.40Similarly, the amount of subsidies on products (D.31) is measured in terms of volume by applying to the quantities of products produced or imported the subsidy prices of the base-year or by applying to the value of output or imports, revalued at the prices of the base-year, the rates of subsidy of the base-year, taking into account different subsidy prices for different uses.

• 10.41VAT on products (D.211) is, both for the whole economy and for individual industries and other users, calculated on a net basis and refers only to non-deductible VAT. This is defined as the difference between VAT invoiced on the products and VAT deductible by the users of these products. Alternatively, it is also possible to define VAT on products as the sum of all non-deductible amounts which have to be paid by users.

• Non-deductible VAT in volume terms can be calculated by applying the VAT rates in force in the previous year to the flows expressed in the prices of the previous year. Any change in the rate of VAT for the current year will therefore be reflected in the price index and not in the volume index of non-deductible VAT.

• The fraction of deductible VAT in invoiced VAT and hence non-deductible VAT may change:

• (a) either because of a change in the right to deduct VAT, resulting from a change in tax laws or regulations, taking effect with or without a time lag;

• (b) or because of changes in the pattern of uses of the product (e.g. increase in the proportion of uses on which VAT may be deducted).

• A change in the amount of deductible VAT resulting from a change in the right to deduct VAT will, by the method described, be treated as a change in the taxation price, as will a change in the rate of invoiced VAT.

• On the other hand, a change in the amount of deductible VAT resulting from a change in the pattern of uses of the product constitutes a change in the volume of deductible VAT to be reflected in the index of the volume of VAT on products.

Other taxes and subsidies on production

• 10.42The treatment of other taxes (D.29) and subsidies (D.39) on production raises a particular difficulty, to the extent that, by definition, it is not possible to assign them directly to units which are produced. In the case of non-market services, this difficulty is compounded by the fact that they are used only when it is not possible to define units of quantity. However, it is generally possible to get around this difficulty by defining other taxes and subsidies on production in volume terms, by the amount to which they would have risen if there had been no change in the tax rules and prices as a whole in relation to the previous year. For example, taxes on property or the use of an asset can be evaluated in volume terms by applying to the current period the rules and the price of assets of the previous year.

Consumption of fixed capital

• 10.43The calculation of volume measures of the consumption of fixed capital poses few problems when good data on the composition of the stock of fixed capital goods are available. The perpetual inventory method, used by most countries, already implies, for the estimation of the consumption of fixed capital at current prices, the need to firstly carry out a calculation of the stock of fixed capital goods in volume terms. To go from a valuation at historic cost to one at replacement cost, it is necessary firstly to value capital goods acquired over a number of different periods on a homogeneous basis, i.e. base-year prices. The price and volume indices derived in the process can therefore be used to calculate the value of the consumption of fixed capital in volume terms and the associated price index.