1. Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the System of National Accounts (SNA) Lesson 6 Capital Formation and Trade balance 1

2. Copyright 2010, The World Bank Group. All Rights Reserved. Capital Formation has three components: Gross Fixed Capital Formation Change in inventories Acquisition less disposal of valuables 2

3. Copyright 2010, The World Bank Group. All Rights Reserved. Gross Fixed Capital Formation (GFCF) “Gross fixed capital formation is measured by the total value of a producer’s acquisitions, less disposals, of fixed assets during the accounting period plus certain specified expenditure on services that adds to the value of non-produced assets.” (SNA 2008, 10.33) The SNA definition, of capital formation coincides with that of the 1993 SNA, although the scope of GFCF in the SNA 2008 is wider than that of the 1993 version. 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. 4

5. What does GFCF cover? Machinery and equipment: – Transport equipment – Other machinery and equipment – Animals yielding repeat products – Orchards and plantations Building and construction: – Dwellings – Other buildings – Other construction – Land improvement Other GFCF – Computer software – Data bases – Mineral exploration – Intellectual property products – Research and development 5

6. Copyright 2010, The World Bank Group. All Rights Reserved. Other types of GFCF to be included These items may also be important in some countries: – Animals – Plantations – Computer software – Mineral exploration – Land improvement Other items that are usually quite small: – Data bases – Intellectual property products – Research and development 6

7. Copyright 2010, The World Bank Group. All Rights Reserved. Sources and methods for GFCF Best sources: – Government accounts – Industry surveys and censuses – Agriculture surveys and censuses – Livestock censuses Other “indirect” methods – The dwelling stock grows in line with the population; – Imports of machinery and equipment plus margins; – Inputs of building and construction materials plus markups for labour, other costs and profits. 7

8. Copyright 2010, The World Bank Group. All Rights Reserved. Changes in Inventories “Inventories may be materials and supplies held as inputs by producers, output as yet unsold, or products held by wholesale and retail traders. In all cases, additions to inventories are recorded when products are purchased, produced or otherwise acquired. Deductions from inventories are recorded when products are sold, used up as intermediate consumption or otherwise relinquished.” SNA 1993 para. 3.104 The «output as yet unsold» mentioned above includes semi-finished goods. 8

9. Copyright 2010, The World Bank Group. All Rights Reserved. Practical advice on inventories (1) Focus on the big ones No country manages to cover changes in stocks of every producer. But try to cover these : – Government stocks – Stocks held by power companies – Rice, maize and food crops held by marketing boards – Stocks held by large retailers and manufacturers. 9

10. Copyright 2010, The World Bank Group. All Rights Reserved. Practical advice on inventories (2) The problem of holding gains Depending on how inventories are valued the change in inventories may include holding gains or losses which in principle should be eliminated. In practice it is not possible to do this accurately. If you know the quantities at the beginning and end of the period, revalue them using average or mid- point prices before calculating the change. If you only know the opening and closing values as reported in company accounts, it is sometimes best to do nothing. Accept the change as reported. 10

11. Copyright 2010, The World Bank Group. All Rights Reserved. Acquisitions less disposals of valuables Valuables are precious metals, gem-stones, antiques and other objects that are held as “stores of value”. The owners hope that the object concerned will at least keep its inflation-adjusted value. Valuables were introduced in the 1993 SNA. So far, only a few countries include estimates in their accounts 11

12. Copyright 2010, The World Bank Group. All Rights Reserved. Estimating valuables Household expenditure surveys? – Respondents will not say Commodity flow is one possibility. For example: – Production of gold – Plus Imports of gold – Minus exports of gold – Equals net acquisition of gold by households 12

13. Copyright 2010, The World Bank Group. All Rights Reserved. Trade Balance Imports Merchandise Services Exports Merchandise Services 13

14. Copyright 2010, The World Bank Group. All Rights Reserved. Imports and Exports: points to watch out for Unrecorded exports – Timber – Fish Unrecorded imports – Smuggling – Shuttle trade Mirror statistics? – Country A’s exports to country B are country B’s imports from country A 14

15. Copyright 2010, The World Bank Group. All Rights Reserved. What have we learned? Gross fixed capital is a large part of GDP(E): – Direct measurement through surveys or company and government accounts; – Indirect “commodity flow” methods for building and construction; – Import statistics for machinery and equipment. Change in inventories: – Focus on large inventories; – Correct for holding gains only if practical. Valuable: – You must decide for yourself whether to measure them. Are they important in your country? Imports and exports: – Trade in services is growing in many countries. Don’t overlook it. – Think about unrecorded exports and imports. You may need to make some adjustments to the data reported by customs. 15