1. Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the System of National Accounts (SNA) Lesson 10 Some special estimation methods 1

2. Copyright 2010, The World Bank Group. All Rights Reserved. What are special estimation methods? This lesson looks at five estimation techniques that countries have developed to deal with difficult components of GDP(P) and GDP(E): – Informal (or “hidden”, “non-observed”) activities – Imputed rents of owner occupiers – Subsistence – Building and construction – Machinery and equipment 2

3. Copyright 2010, The World Bank Group. All Rights Reserved. The Italian Method (1) The Italian statistical office (ISTAT) developed a procedure for estimating the contribution to GDP of the informal, hidden, or non-observed economy. This is often referred to as the “Italian Method” To apply the Italian Method you need: – An estimate of the total employment by kind of activity – An enterprise survey collecting data on value added and numbers employed by kind of activity 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. The Italian Method (2) The next step is to estimate informal employment for each kind of activity. This is just the difference between the estimate of total employment and employment as recorded in the enterprise survey. Informal value added is then obtained as : – informal employment times – enterprise survey value added divided by enterprise survey employment Countries calculate informal output and intermediate consumption in the same way 4

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6. Imputed rents of owner occupiers SNA suggests that rents of owner-occupiers should be imputed using rents actually paid for comparable dwellings In many countries there are few dwellings for rent – Not representative of the dwelling stock – Only available in the capital – Mostly rented by expatriates – Traditional – own-built - dwellings rarely rented 6

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8. User cost User cost is an alternative to the SNA method User cost simulates rents by adding up the costs of renting a dwelling Costs are: – Repairs and maintenance – Insurance – Taxes on dwellings – Consumption of fixed capital – Operating surplus Capital gain is a negative “cost”. 8

9. Copyright 2010, The World Bank Group. All Rights Reserved. Data Sources Repairs and maintenance – Household expenditure surveys Insurance – National accounts (premiums less claims) Taxes on dwellings – Government accounts Consumption of fixed capital – dwelling stock and depreciation rate Operating surplus – dwelling stock and rate of return Capital gain expected – dwelling stock and rate of inflation. 9

10. Copyright 2010, The World Bank Group. All Rights Reserved. Stock of dwellings (1) Consumption of fixed capital and operating surplus require an estimate of the stock of dwellings at current market prices. SNA recommends the Perpetual Inventory Method. An alternative is a short-cut method that only requires: – Number of dwellings by type of dwelling – Price of new dwellings. For own-constructed houses, the new price is the time taken to build it times the current average wage of unskilled labour 10

11. Copyright 2010, The World Bank Group. All Rights Reserved. Stock of dwellings (2) Remember that what we need is the current market value of the stock of dwellings. To get this we assume that: – Growth of dwellings since the census equals the population growth rate. – Average current market price of all the dwellings of a particular type equals half the price of a newly-built dwelling. This second assumption in turn assumes that: – Prices of dwellings fall by the same amount each year; and – The stock of dwellings is stable – neither increasing nor decreasing. 11

12. Copyright 2010, The World Bank Group. All Rights Reserved. Consumption of Fixed Capital and Net Operating Surplus Geometric depreciation – Multiply the capital stock by D / T where D is the declining balance rate and T is the service life Examples: – if the service life is 70 years and D is set at 1.6, the annual depreciation rate is D / T = 0.02 – if the service life is only 8 years and D is set at 1.6,the annual depreciation rate is D / T=0.2. Net operating surplus could be calculated using: – 0.025 for modern dwellings – 0.000 for traditional dwellings 12

13. Copyright 2010, The World Bank Group. All Rights Reserved. Subsistence The SNA production boundary covers production for own use of all goods. Here we will consider the two type of goods, which are important in low income countries with a large farming sector: – Crops – Livestock products 13

14. Copyright 2010, The World Bank Group. All Rights Reserved. Food crops (1) Estimates of subsistence crop output and consumption should cover the main food crops. In many countries, 3 or 4 crops may account for 90% of the total. The SNA does not require separate estimates for subsistence output and subsistence consumption. 14

15. Copyright 2010, The World Bank Group. All Rights Reserved. Food crops (2) All crop production is valued at basic price. All crop consumption is valued at purchasers’ prices. Purchasers’ prices are the same as basic prices for subsistence consumption, so if you are valuing total consumption of, say, maize or cassava, you should use a weighted average of basic and purchasers prices. The weights are the subsistence and market share respectively. 15

16. Copyright 2010, The World Bank Group. All Rights Reserved. Livestock products The main livestock products are: – eggs from chickens and guinea fowl; – meat from animals and fowl; – milk from cows, camels, goats, sheep, yaks, horses and buffaloes. For each type of animal that is important in your country you will need an estimate of: – the total numbers of animals or birds – rates of production or slaughter – basic and purchasers’ prices as in the case of crops. 16

17. Copyright 2010, The World Bank Group. All Rights Reserved. Estimating Building and Construction by the mark-up method (1) Basic data: cement, bricks, building steel, … Value of construction output equals: – Measured intermediate inputs – Plus mark-up for unmeasured intermediate inputs – Plus mark-up for labor inputs – Plus mark-up for operating surplus – Plus mark-up for product taxes 17

18. Copyright 2010, The World Bank Group. All Rights Reserved. Estimating Building and Construction by the mark-up method (2) Data Sources – Production data – Imports – Analysis of a sample of construction projects to determine mark-ups. Public works departments will have some of this information. When to use the mark-up method – This method can be used to obtain a bench-mark estimate although direct survey information is usually better. – More often, the mark-up method is used to update a bench-mark estimate based on more accurate survey data. 18

19. Copyright 2010, The World Bank Group. All Rights Reserved. Commodity Flow Estimates of GFCF Imported Machinery and Equipment In many countries, most machinery and equipment is imported. Only a few countries – Germany, USA, Japan, China, Russia, France, India, Brazil for example - have developed an industrial base capable of producing machine tools, motor vehicles, construction equipment and so on. Most countries import their machinery from a limited number of producing countries. If you are one of these, your import statistics are the starting point for estimating GFCF in machinery and equipment. 19

20. Copyright 2010, The World Bank Group. All Rights Reserved. Worksheet for GFCF in Imported Machinery and Equipment Transport equipment Other machinery and equipment C.i.f. value of imports + Customs duties + VAT or other product taxes + Trade margins + Transport costs + Installation costs = Gross Fixed Capital Formation 20

21. Copyright 2010, The World Bank Group. All Rights Reserved. What have we learned? The labor force or “Italian” method is one way to cover small unincorporated enterprises. Many countries with a large informal sector now use it. The dwelling services provided by all dwellings must be included in the GDP. Estimates can be based on costs rather than on rents actually paid. For subsistence, focus on the main food crops and livestock products. Try to get the totals right: the split between market and subsistence is interesting but not essential. GFCF should ideally be based on expenditure surveys of producers but the mark-up method is sometimes used for construction and a commodity flow method for imported machinery. 21