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Canada’s System of national economic accounts: An overview

The system of accounts
- 1.1 The main accounts
- 1.2 The satellite accounts
- 1.3 Related products
Uses
Data sources
The conceptual and statistical framework

Schematic of the system of economic accounts

Economic growth, exports, productivity, gross domestic product, government debt, industrial production, consumer credit, purchases of foreign bonds, and economic cycles are some of the terms we read or hear about almost every day. What they have in common is that the underlying statistics that measure these phenomena emerge from the Canadian System of National Economic Accounts (CSNEA).

This section provides a description of the CSNEA, its components, its uses, its conceptual framework and its data sources. Specialized literature and large documents describing the CSNEA already exist. The objective here is to provide an overview for those who are not familiar with the CSNEA.

Let us start by examining the term “System of National Economic Accounts”. In its simple expression, the CSNEA is a set of statistical statements, or accounts, each one providing an aggregated portrait of economic activity during a given period. Each account differentiates itself from the others by providing a different perspective of the economy, whether it be industrial, financial, or environmental or whether it gives information on productivity or from the point of view of transactors (such as consumers and governments). Because these accounts all use a common set of definitions, concepts and classifications, and are explicitly related to each other, they form an integrated system. As a result, the economic stories assembled from the CSNEA data are coherent and credible. The word “national” is somewhat misleading as it gives the impression that only the national economy is examined, however, in Canada, the provincial and territorial dimension also forms part of the CSNEA.

A schematic overview of the Canadian System of National Economic Accounts.

1. The system of accounts

Let’s examine the constituent parts of the Canadian System of National Economic Accounts.

1.1 The main accounts

The following four major sets of statistical data constitute the main components of the National Economic Accounts:

The sequence chosen for describing the main accounts reflects a logical progression of economic events from production through to wealth accumulation, rather than a chronological sequence of the development of the CSNEA or an order of importance.

The input-output accounts

The annual input-output accounts measure productive activity occurring in the economy. They measure this activity according to both the commodities produced (covering goods and services) and the industries that produce them and use them as intermediate inputs. The input-output (I-O) accounts show, by industry, the total value of output by commodity and the use of such commodities in an industry’s production process. The I-O accounts provide the detailed structural picture of the economy, with more than 700 commodities and 300 industries.

Gross domestic product, probably the most quoted economic statistic, can be computed in three ways using the I-O accounts, by summing (1) the incomes generated by production; (2) the final expenditures; and (3) the value added by industry.

The accounts allow for the calculation of so-called “multipliers” which are used in economic models for simulating the impact of a specific event on the economy - for example an increase in investment by a certain industry, or higher spending by government on roads. Finally, the I-O accounts, with their estimates of GDP by industry, are the basis for the productivity measurements.

The accounts are calculated at the national and provincial and territorial level, but on an annual basis only. They are available about two and half years after the end of the reference year; this is because of the delay in obtaining the needed source data and by the complex nature of producing such a detailed account. As a means of providing more up-to-date information to users for current analysis, two industry-based programs - one producing the country’s current monthly GDP figures, the other annual provincial estimates – have been set up. These two programs, which can be viewed as extensions of the I-O accounts, use a set of indicators to project the GDP by industry benchmarks from the I-O accounts.

Because the I-O accounts are highly detailed production accounts, they are used as a starting point for the income and expenditure accounts to construct the country’s current figures of quarterly GDP.

See about the input-output accounts.

The income and expenditure accounts

As the name suggests, the quarterly income and expenditure accounts (IEA) measure income generated by productive activity (such as individuals’ wages and salaries, corporation profits, and interest and dividends) and final expenditures on that production (such as consumer spending, government expenditures, business investments, and exports less imports). Estimates of GDP are central to this account and are, in fact, identical¹ to those found in the I-O accounts.

A key feature seen throughout the CSNEA, and in particular in the income and expenditure accounts, is the grouping of participants (transactors) in the economy into four sectors, each of which cover entities with similar economic behaviour. These are known as the institutional sectors, representing persons ², corporations, governments, and non-residents. The last two sectors are discussed later in this document.

For each sector, the income and expenditure accounts first present income, not only from production but also from transfers (mainly from government - such as old-age pensions). Then the income and expenditure accounts show current expenditures, either to buy goods and services or to transfer money to other agents (for example, to pay taxes). The difference between income and expenditure is saving. Saving is used to invest in physical capital such as machinery, houses or highways. The difference between saving and investment is any sector’s surplus or deficit position. Saving can also be used to invest in financial assets, such as bonds or shares. Investment is described below in the capital and financial accounts of each group of transactors.

The income and expenditure accounts are timely statements of the status of the economy, and are available within sixty days of the end of the reference quarter.

The financial and wealth accounts

Investments in financial assets (and the corresponding liabilities) are described in the Financial and Wealth Accounts, which are made up of the financial flow accounts (FFA) and the national balance sheet account. The financial flow accounts present the summation of capital and financial transactions during a given quarter, and the national balance accounts show the resulting stock of wealth at the end of each quarter. Flows are measured over an interval of time (e.g. quarter) while stocks are measured at a point in time.

The financial flow accounts include both the capital and the financial account. The capital account describes the non-financial (i.e. physical) investment by each institutional sector, while the financial account measures financial transactions. For each sector, the financial flow accounts measure net lending or borrowing (expressed as a surplus or deficit) in two ways by articulating the sources and uses of funds. The financial flow accounts show a measure of net financial investment, which is the difference between transactions in financial assets and liabilities. (e.g., net purchases of securities minus net sales of securities). The net financial investment is the financial counterpart of the income and expenditure accounts’ surpluses or deficits.

Like a business, the country’s wealth is measured with a balance sheet: the national balance sheet accounts (NBSA) present, for each sector, the value of physical and financial assets and the value of financial liabilities at the end of each quarter. Each sector’s net worth equals its assets minus its liabilities. This net worth evolves over time as the result of capital and financial transactions in the financial flow accounts on one hand, and capital gains and losses on the other. Canada’s net worth is the difference between what we as a country own and what we owe to the rest of the world³.

The financial flow accounts and national balance sheet accounts are presented in considerable sub-sector and asset detail (thirty sectors and twenty-five distinct types of financial instruments), showing the role of the financial system in financing economic activity. The financial flow accounts are available within sixty days of the end of the reference quarter whereas the national balance sheet accounts are available about seventy-five days after.

The balance of payments

Canada’s economy can be considered as one of the most open in the world, given the size of our exports and imports compared with our production, and given the level of direct and portfolio investments involving non-residents. To understand how it works, we need to track these commercial and financial transactions with non-residents.

The balance of payments serves this purpose, along with the associated international investment position. The balance of payments is really a one sector account as it focuses entirely on our country’s economic relations with the rest of the world. It provides all other accounts with the international dimension of our transactions.

In the balance of payments, economic transactions are presented in two main groups: (1) the current account for transactions in goods and services, investment income and current transfers; (2) the capital and financial account for capital transactions as well as for financial transactions in direct investment and portfolio investment. The international investment position is analogous to a balance sheet.

The following two sets of statistical data play an important role in the National Economic Accounts:

Productivity accounts

Productivity is the efficiency with which the economy transforms inputs (such as labour and capital) into outputs (such as a car). Productivity is an important indicator, since it is one of the factors that determine the increase in the standard of living over the long run. Canada – United States economic comparisons often use productivity as a measurement tool.

The objective of the Canadian productivity accounts is to provide, in an economy as large and diverse as that of Canada, a number that sums up the efforts of millions of workers using a variety of equipments and facilities, employed in hundred of thousands of establishments that produce more than one trillion dollars worth of output.

The Canadian productivity accounts comprise three components:

The annual component is made of indexes of labour productivity (output per hour worked), multifactor productivity (output per unit of combined inputs), and related measures (employment, hours worked, cost of inputs, measures of inputs) by industry at the national level. Each set of measures involves a comparison of the growth in output and in inputs, but each relies on a different methodology. Annual productivity series are highly watched by analysts, policymakers and researchers as indicators of productivity contributing to long run economic growth and living standards.
The quarterly component provides, on a more timely basis, data on labour productivity and related variables such as employment, hours worked, output, labour compensation and unit labour cost by industry. These data are useful for analyzing the business cycle and to provide an overview of Canada – United States performance.
The provincial component provides annual data on jobs, hours worked, labour compensation and a variety of related variables, such as labour productivity and unit labour cost, for the economy and its industries of every province and territory. These data shed light on the labour market performance of provinces and territories.

Government financial statistics

Government is one of the four institutional sectors of the economy (along with persons, corporations and non-residents). The CSNEA measure the activity of governments and government business enterprises⁴, in terms of revenues, expenditures, balance sheets and level of employment. Statistics Canada’s financial management system (FMS) is the classification framework used to produce the government financial statistics. These, in turn, serve as the primary inputs into the calculation of the government sector statistics and for other components of the CSNEA.

FMS standardizes individual governments’ accounts to provide consistent and comparable statistics. As a result, FMS statistics generally differ from the figures published in individual government financial statements. The need for a standardized classification arises from the fact that public accounts and financial reports produced by individual governments are based on the organizational structures, and on the accounting and reporting practices, of those individual governments⁵.

1.2 The satellite accounts

The four main accounts – the input-output accounts, the income and expenditure accounts, the financial and wealth accounts, and the balance of payments - provide a different but comprehensive perspective of economic activity. However, some parts of the economy are difficult to measure within the traditional national accounting framework.

For example, tourism is not an explicitly recognized industry in the traditional list of CSNEA industries. Rather, it cuts across several industries, i.e. the transportation, restaurants, hotels, and recreation industries. More importantly, only a portion of the output of these industries serves tourism. Similar classification boundary issues for nonprofit institutions, whose activities are mixed in with the activities of economic sectors.

National accountants have developed extensions (the satellite accounts) to measure the importance these activities. Satellite accounts can be seen as a reorganization of, and sometimes an extension to, the existing statistics in the CSNEA. They focus on industries or sectors that are not identified in commonly used classifications or definitions. These new views of activities that formerly were less examined expand our analytical capabilities. In Canada, there are satellite accounts for the tourism industries and for the nonprofit institutions sector. Preliminary research work has also been done to produce a transportation satellite account. Another project is under way to create a pension satellite account. Finally, environment and resource accounts – which are viewed as satellite accounts - have been developed to meet the demand for data in this field.

The environmental and resource accounts

Comprising three major components, the environment and resource accounts provide a set of physical and monetary statistics to enable the study of the relationship between the environment and human and economic activity.

The first component, the natural resource stock accounts, provides a broader dimension to our nation’s net worth by helping to measure the stocks of natural resources such as energy resources (for example, oil and gas), mineral resources (for example, zinc, potash), timber and land. This account forms the basis of the estimates of Canada's natural resource wealth that are included in the national balance sheet accounts.

The material and energy flow accounts record, in physical terms only, the flows of materials and energy - in the form of natural resources and wastes - between the economy and the environment. The material and energy flow accounts are linked directly to the input-output accounts. This linkage enables the calculation of key indicators of the resource and waste intensity of economic activity.

The environmental protection expenditure accounts identify current and capital expenditures by business and government for the purpose of protecting the environment. These accounts measure both the financial burden associated with environmental protection and the contribution of environmental protection to economic activity from a demand-side perspective.

All these satellite accounts (except the pension account) use the input-output accounts as their conceptual and statistical framework. This enables a high level of integration and quality in these data sets.

1.3 Related products

In addition to painting a portrait of the economy, the CSNEA provides a set of analytical tools or related products to help people understand how the economy works.

The Canadian composite leading indicator (CCLI) is made up of ten components that tend to lead cyclical activity in the economy and together represent all major categories of gross domestic product. It thus reflects the variety of mechanisms that can cause business cycles and can therefore be used by analysts to help predict economic cyclical behaviour. The Canadian composite leading indicator is available about 20 days after the end of the reference month.

Annual estimates of purchasing power parities (PPP) are produced on an occasional basis. Purchasing power parities, which generally represent an exchange rate, are used to equalize purchasing power between two countries so that the performances of different countries can be compared more effectively. An important use of the purchasing power parities is to convert different countries' gross domestic product to a common currency.

Many research papers are also available, covering a wide range of topics such as productivity, the environmental impact on productivity growth, size of the underground economy, innovation, offshore financial centers, price indexes, and cross-border shopping.

2. Uses

The CSNEA offers an accurate, comprehensive and multi-dimensional portrait of our economy in terms of structure, current performance and trend. It provides the accounting framework for macroeconomic analysis, and gives various institutions and levels of government the tools to assist them in assessing a wide range of economic and policy decisions.

For example, the Bank of Canada and the federal, provincial and territorial governments use CSNEA information to formulate fiscal, monetary or foreign exchange policies. CSNEA data are used in the formula to determine the payments to provinces under the equalization program and to allocate the harmonized sales tax to provincial economies.

CSNEA data are also used by researchers in government, academia and non-governmental organizations, both in Canada and abroad, to assess Canadian economic performance.

Business people use the CSNEA when developing strategies and in planning investments. They need to understand the economic cycles because it helps them determine, in conjunction with other information sources, when to start or stop investment projects, what production levels to maintain, how many people to hire, and so on.

Comparisons, analyses and forecasts on the world economy – often performed by international organizations such as the Organisation for Economic Co-operation and Development, the International Monetary Fund and the United Nations - are generally done using statistics produced within the SNA framework.

University scholars, particularly professors and students of economics and business, are important users. Textbooks on economics and other subjects often refer to the CSNEA and make extensive use of CSNEA data. The origin of the CSNEA itself lies in the economic theories developed by academic economists.

3. Data sources

The CSNEA draws from and benefits from the information collected by Statistics Canada, that is a combination of data obtained through various administrative sources (such as customs records, income tax returns, governments’ public accounts, businesses’ remittances of GST collections) and through more than one hundred economic and social surveys currently conducted by the national statistical agency.

Statistics Canada’s economic surveys cover areas such as retail and wholesale sales, shipments and inventories of the manufacturing industries, public and private investments on residential and non-residential construction, employment-related surveys, balance sheet and income statements from corporations in the financial and non-financial sectors, and price statistics collected at various stages of the economic production process (such as at the producer and consumer levels).

Selected statistics collected by other federal, provincial and local departments as well as publicly available information are also used in the making of CSNEA estimates.

Once all the individual records of information are collected, coded, tabulated and verified all of this information is assembled, analysed and compared through the framework of the CSNEA.

4. The conceptual and statistical framework

Two key concepts are predominant in the CSNEA. For the input-output accounts and the income and expenditure accounts, it is production, whereas in the financial and balance sheet accounts it is finance and wealth accumulation. The balance of payments and one of its by-products, the international investment position (IIP), straddle both concepts, with its exports-imports component falling into the production sphere and the capital account and international investment position into the financial sphere. It is important to note that these two concepts are not synonymous for a measure of a country’s welfare or “happiness”.

The CSNEA’s common set of concepts, definitions and classifications allows for coherent and comparable data. International guidelines for the national accounts were developed in conjunction with organizations such as the Organization for Economic Co-operation and Development, the International Monetary Fund and the United Nations. Canada adheres to these international guidelines (with a few minor exceptions). The guidelines are periodically reviewed and updated to help ensure their relevancy. They enable us to compare our statistics with those of other nations.

The CSNEA framework, with its various equations drawn from the economic theory, allows for data comparisons and the identification of gaps or inconsistencies in the data and addresses them, therefore allowing for an accurate rendering of overall economic activity. By comparing and analysing one time series with others, the process of constructing the set of accounts provides a valuable means of data quality assessment. The strength of the CSNEA framework is that it provides a series of cross-checks on the data.

When analysing and comparing the statistics from a myriad of sources, the team responsible for producing the CSNEA statistics is sometimes faced with conflicting signals and / or anomalies in the data. These can be the results of problems such as: differing accounting practices or concepts (on aspects such as timing and valuation) used by those who submit the data, missing or incomplete information, sampling and non-sampling errors in surveys, and deficiencies in the statistical methods to measure economic phenomena. In this event, consultations between national accountants and the data providers are necessary to identify, investigate and to resolve these issues. It is also important that such consultations be conducted on an on-going basis in order to avoid, or at least, to minimize, the occurrence of such conflicting signals. This is also true in the design of a new survey, or for the redesign of an existing one, where CSNEA data requirements regarding concepts, classifications, level of detail, timeliness and data quality need to be considered.

Within the CSNEA framework, many accounting identities are maintained: saving equals investments, output equals input, net lending equals net financial investment, sum of the incomes arising from production equals the final expenditures on production are a few examples that have been mentioned, but there are others. For a complete listing, please consult the sources and methods documents for each component of the CSNEA.