HANDBOOK OF THE INTERNATIONAL COMPARISON PROGRAMME

EXPENDITURE DATA NEEDED
    1. Gross domestic product as defined for ICP purposes
      1. Sectoring of the expenditure accounts
      2. Household consumption
        1. Some consumption boundaries
        2. Consumption financed by other sectors
      3. Government consumption
      4. Capital formation
      5. Net exports
      6. Dating of expenditure totals and details
    2. Breakdown of GDP by aggregations of basic headings
    3. Breakdown of GDP by basic headings
  1. EXPENDITURE DATA NEEDED

A. Gross domestic product as defined for ICP-purposes
  1. The ICP, from the beginning, has focused on comparisons of gross domestic product from the expenditure side. GDP is a basic concept in the United Nations System of National Accounts (SNA). Most participating countries base their national accounting system on the recommendations of the SNA, and the SNA gives a detailed description of the content of the gross domestic product. Therefore, the basic conditions in respect of the comparability of this concept are relatively easy to meet by participating countries. Nevertheless, country practices may differ to some extent from international recommendations and, if these differences are not recognized and corrected, they could lead to incompatibilities in the ICP results. Therefore, a thorough scrutiny of the content of GDP is required.
  2. As the present Handbook is prepared, the 1968 SNA, the so-called Blue Book, is being revised. At this stage, most of the recommendations for the revised SNA are known, though they will not be formally considered by the Statistical Commission until 1993. Where no special mention is made, it may be assumed that references in this chapter refer to both the old and the new SNA. Where changes recommended for the new SNA are likely to be accepted, as in the case of health and education expenditures, references will be to the new system. Where the final outcome is uncertain, this will be indicated in the text.
  3. For the ICP, GDP is compared across countries by expenditure category breakdowns, that is, household consumption, government, capital formation and net exports. The principles on which the accounts are sectored are discussed in part I of this section, while the four sectors are discussed in parts 2 to 5. This section concludes with a discussion of the timing of the collection of expenditures, while sections B and C treat other expenditure aggregates and the basic expenditure headings.

    4. 1. Sectoring of the expenditure accounts

  4. Four basic sets of expenditure data are necessary for the ICP: household consumption, government, capital formation and net exports. Under the 1968 SNA, the coverage in household consumption could vary from country to country because of differing institutional relationships, especially as they applied to health and education. Largely as a result of the ICP work, an alternative presentation of consumption will be introduced in the new SNA.
  5. The basic distinction that the new SNA introduces is between consumption expenditures and actual consumption. This is illustrated in the diagram below:


    6.
     

    Consumption expenditures

    Actual consumption

    of households

    of government

    Individual consumption

    IC

    TC

    Households = IC + TC

    Collective consumption

    		 

    CC

    Government = CC

    Consumption expenditures

    IC

    CC + TC

    IC + CC + TC

    In this tableau, IC represents individual consumption purchased by households, TC represents individual consumption of households that is purchased or financed by government and CC is collective consumption of government purchased by government. In the ICP, then, household consumption is actual consumption of households.

  6. Non-profit institutions will continue to be a separate sector in the new SNA. In principle, actual consumption of households for the ICP should include expenditures by non-profit institutions, such as for education, under the headings where they are actually consumed.

2. Household consumption

  1. Household consumption, as defined in the ICP and in the proposed new SNA concept of "actual total consumption of households" consists of:
    1. Goods and services purchased by households;
    2. Goods produced by households for their own consumption or received as remuneration in kind;
    3. Goods and services accruing to households free of charge or at a substantially reduced rate, financed by
    government or non-profit institutions serving households.
  2. Items (a) and (b) above were also covered by the household consumption expenditure concept of the 1968 SNA. However, the third item, goods and services accruing to households free of charge or at a very reduced rate, was either included in the final consumption of the financing sector (government or non-profit institutions serving households) or was missing entirely from the gross domestic product. As mentioned above, the 1968 SNA does not have a concept of actual consumption of households (or, in earlier terminology, total consumption of the population).
  1. Some consumption boundaries
  1. Goods and services purchased by households should cover everything that households buy, if these items are designed for consumption. Goods purchased by households primarily for use in production (e.g., tools purchased by members of households to be used in an unincorporated enterprise owned by them) should be excluded from household consumption and should be treated as intermediate consumption. In principle, also, goods that are used both for consumption and production purposes, for example, a physician's car, which is used for both private and business purposes, should be apportioned between household consumption and intermediate consumption according to estimated use.
  2. Purchases of household durable goods (such as television sets, cars) should be included in household consumption of the accounting year in which they are purchased, in spite of the fact that these goods serve consumption purposes over several years and may also be paid for in installments over several years. Dwellings and similar structures (such as holiday homes) are the only exceptions; they have to be treated as capital formation of the period when they are purchased. For these items, consumption of the reference period consists of the imputed rent, that is, the rent the household would pay for the same dwelling if it was rented rather than owned.
  3. Household consumption is the consumption of resident households (as opposed to the consumption of resident and non-resident households on the domestic market). Thus, purchases of goods and services abroad by resident households are included, and purchases by non-resident households (e.g., by foreign tourists) on the resident market are excluded. In general, as a first step in the calculation of the consumption of resident households, the consumption on the domestic market is determined (since no distinction can be made at the point of purchase as to whether the customer is resident or not), and as a second step the estimated amount of the purchases of resident 'households abroad is added and the estimated amount of the purchases of non-residents on the domestic market is deducted. (However, this is generally done only at the level of total household consumption.)
  4. Consumption of goods and services connected with business travel expenses is treated as intermediate consumption and excluded from household consumption.
  5. Interest payments by households on borrowed funds or for consumer credit (installment) payments are treated as transfers and excluded from household consumption. However, household consumption includes payments for financial services of banks to households for credit cards, checking accounts and so on. The new SNA will recommend that a charge be included in household consumption for the imputed service charge of financial intermediaries.
  6. The net difference between consumer spending and winnings on lotteries or other legalized gambling are also included in household consumption. For non-life insurance, the difference between insurance premiums paid and claims received by households is included in household consumption as representing a purchase of insurance services.
  7. Purchased consumption is to be valued at the prices actually paid by the households. Thus, taxes (sales, excise, value added) and delivery costs are included in household consumption. Similarly, if the purchase price represents a reduction from the regular price, because of a sale or discount, it is the purchase price that should be used. Any interest charges resulting from late payment, as for example with credit card purchases, are not included in the price.
  8. Consumption from own production by households (e.g., potatoes, fruits, meat produced by farmers and consumed by the same households) are valued at producer prices, that is, at prices the households would receive if these products were sold at the nearest market point. Processed own-produced products should be valued at the prices of the processed products (e.g., as butter and cheese and not as milk); however, this value should exclude the results of the service-type activities carried out within the households (e.g., value created by cooking). As already mentioned, the consumption of own dwellings should be valued at imputed rents.
  9. When employers buy goods to supply to their employees, these goods are to be valued at the cost to the employer, as in the case, for example, of food consumed by members of the armed forces. If the employer provides workers products of the firm itself, they are to be valued at those prices at which such products could be sold by the firm. Uniforms supplied by employers should be included in household consumption only if it is usual to also wear them off duty.
  1. Consumption financed by other sectors
  1. In earlier phases of the ICP, allocating all medical and education expenditures to household consumption was presented as a departure from the rules of the SNA. As discussed above, with the introduction in the new SNA of the concept of actual consumption in addition to the concept of consumption expenditures, this difference in presentation between the ICP and the SNA will disappear.
  2. The concept "goods and services accruing to households financed by other sectors" needs some elaboration. In particular, the following should be made clear:
    1. What kind of goods and services are involved;
    2. How the consumption of these goods and services should be determined;
    3. What the term "other sectors" means;
    4. How those cases are to be treated where the financing of the expenses is shared by households and other sectors.
  1. As to the kind of goods and services involved, not all goods and services financed by other sectors should be allocated to actual household consumption. Only those goods and services that are consumed by individuals (explicitly) rather than collectively (implicitly) contribute to the consumption of households and that, in a sense, are closely linked to the welfare of the population, should be so allocated. As noted, these goods and services are referred to in the terminology of the new SNA as "individual consumption", while that part of government expenditures that should remain in government final consumption is termed "collective consumption". Expenditure on health, education, welfare and housing belong to individual consumption, while expenditures on public administration, including administration of education and health programmes, defence, research and community services belong to collective consumption.
  2. Consumption financed by sectors other than households should be valued at the cost of these expenses. Cost in this context means compensation of employees, intermediate consumption, consumption of fixed capital and taxes on production, if any.
  3. The definition of "other sectors" in this context means mostly government and private non-profit institutions serving households (such as charity organizations, the Red Cross etc). Expenses by enterprises, if they serve household consumption purposes directly, are included in remuneration in kind and not in expenditure financed by other sectors. Transfers in kind from abroad (gifts) also are covered by the consumption of households financed by other sectors.
  4. In the new SNA, there will be no consumer subsidies and in no case will any of these subsidies be treated as government final expenditure. When goods and services are provided free or at such nominal prices that they do not influence demand, then the items are to be valued at cost. When goods and services are sold at a price that is sufficient to influence the level of demand; then they will be valued at that price regardless of the level of subsidy that may be involved.
  5. A comment should also be made about the provision of radio and televis3on services to consumers. In those countries in which these services are commercially provided, they show up in higher prices of the items creating the advertising revenues, and as intermediate costs to the firms. Where radio and television are provided to households by government, they are usually treated in government. Where they are part non-profit and part government, these services are in both consumption and government. A consistent treatment would be to transfer these expenditures where commercially financed from the products that finance them, or from government and non-profit organizations, to household recreation expenditures. Thus far, neither the SNA nor the ICP has attempted these difficult transfers.

    6. 3. Government consumption

  6. As defined above, government consumption is collective consumption. The difference between household consumption and actual consumption is matched by an adjustment between government consumption expenditure and actual consumption. Put another way, the transfer of individual consumption removed from government consumption expenditures is added to household consumption expenditure to give actual consumption.
  7. Government consumption is to be valued at cost, that is, compensation of employees, intermediate consumption, consumption of fixed capital and taxes on production, if any. This value should be netted by fees and sales of government to other sectors, for example, the value of the postcards sold by museums, and any other small-scale cost-offsetting recoveries from these sectors.
  8. There are only a few rules to which special attention should be drawn. Government consumption on defence includes not only current expenditures but also expenditure on military durables that are offensive weapons and their means of delivery. Capital items that are purchased by the military but that could have a civilian use will in the new SNA be treated as capital equipment. If a military durable that had originally been treated as government consumption is converted to civilian use, for example, a military hospital is handed over to the government for public use, or motor vehicles such as trucks are sold to commercial operators, this should be treated as negative government consumption in the given period and a corresponding increase in capital formation of government for the hospital and of the household sector for trucks.

    9. 4. Capital formation

  9. While there was no difference in the concept of capital formation between the 1968 SNA and the ICP, there will be some important changes in the new SNA that will also affect the ICP. Capital formation, according to the new SNA, will no longer be restricted to material capital formation only, that is, the change in stocks and fixed capital formation. Research and development (R and D) expenditures will still not be part of capital formation but the payment of a licence for R and D use will be treated as a fee for a service. Human capital will still be excluded from capital formation. However, with respect to capital formation, several important extensions will be recommended in the new SNA.
  10. One change already noted is the treatment of military durables. In the new SNA, all mineral exploration and development will be treated as capital formation. Further, all improvements and developments of land such as land reclamation or planting of forests will be capital formation in the new SNA.
  11. Development of computer software and databases, whether for internal use or commercial sale, will be treated as part of capital formation. Under certain circumstances, this will also be true for the development of literary and artistic works.
  12. These changes will not immediately affect the ICP but in the future the ICP will want to follow the new SNA. This is likely to have implications for the basic headings of expenditures and the core commodity list in subsequent rounds of the ICP.

    13. 5. Net exports

  13. Net exports, that is, exports minus imports, is the last expenditure category on the use side of the gross domestic product. Exports and imports cover all transactions in goods and services between resident and non-resident economic units. There is no difference in this respect between the SNA and the ICP. From what has been said earlier, it follows that exports and imports also cover direct exports/imports by households (purchases by non-resident households on the domestic market and purchases by resident households abroad), as well as direct exports and imports by government.
  14. The ICP has chosen to work with net exports rather than deal separately with exports and imports. The reason for this is mainly that it would require major price collection to make price comparisons separately for exports and imports since they include both intermediate and final products. In the future, the current ICP treatment of the net foreign trade balance is likely to be further reviewed.

    15. 6. Dating of expenditure totals and details

  15. The ICP comparisons are on a calendar-year basis. Many countries construct their national accounts on a year beginning on some date other than 1 January. For these countries, it is necessary to move their estimates to a calendar basis. Unless there is reason to believe this change in dating would greatly affect the expenditure detail, it is normally done at the level of consumption, government, capital formation and net exports.
  16. Many countries derive their basic GDP estimates from measures of output. In subsequent calculations estimates of expenditure categories are made where consumption is often derived as a residual. More detailed expenditure estimates may not be available for the most recent year for GDP because the expenditure survey or a commodity flow survey used to generate expenditure detail is either not done annually or lags in time behind estimates of the GDP total. What is usually done in such cases is to apply expenditure detail for the most recent year available to obtain estimates for the ICP benchmark year.
  17. One advantage of the commodity flow approach is that it allows for improvements in the estimates of the commodity composition of household and government consumption. It has also proved useful for countries to examine their resulting detailed expenditure distribution in relation to countries at a similar level of income as a check on anomalies. Where the expenditure weights for the consumer price index are only changed on the basis of periodic surveys, the detailed expenditures generated for the ICP from the commodity flow approach may also prove useful for price index purposes.
  18. It often happens that countries have GDP expenditures for an ICP benchmark year, and more detailed expenditures may be available from one or more earlier years. In the absence of benchmark year detailed expenditure or commodity flow surveys, the most recent data should serve as control totals. For example, if the consumption total is known for the benchmark year, but the food percentage distribution is available for the previous year, then the food percentage of consumption for the previous year would be applied to the benchmark year GDP to obtain an estimate of food expenditures in the benchmark year. And if the best detailed breakdown within food expenditures was for a still earlier year, then that distribution would be applied to the estimated benchmark year food total.

    19. B. Breakdown of GDP by aggregating of basic headings

  19. The task of the ICP is to compare not only the levels of gross domestic product but also its structure. This structure can be expressed in terms of more detailed aggregates, such as bread and cereals, non-alcoholic beverages, or operating costs of transport, as well as in larger aggregates, such as food or consumption of households. These aggregate categories can be used for volume comparisons, or are equally interesting in comparing purchasing-power parities, as was discussed above for capital formation.
  20. There are several criteria that have been used to break down GDP into the 55 aggregates given in table 2. The breakdown starts with the main functions of the expenditure categories, distinguishing household consumption, government consumption, capital formation and net exports. The next criterion applied is the purpose/use of the goods and services consumed; for example, food, clothing, transport and communication are distinguished. Additional criteria are applied whenever feasible; these distinguish goods from services, and, within goods, durable goods from non-durable goods.


    21.

    Table 2. Breakdown of GDP into expenditure aggregates

    1.

    Household consumption

    2.

    		 

    Food, beverages and tobacco

    3.

    		   

    Food

    4.

    		     

    Bread and cereals

    5.

    		     

    Meat

    6.

    		     

    Fish

    7.

    		     

    Milk, cheese and eggs

    8.

    		     

    Oils and fats

    9.

    		     

    Fruits, vegetables and potatoes

    10.

    		     

    Other food

    11.

    		   

    Beverages

    12.

    		     

    Non-alcoholic beverages

    13.

    		     

    Alcoholic beverages

    14.

    		   

    Tobacco

    15.

    Clothing and footwear

    16.

    		 

    Clothing

    17.

    		 

    Footwear

    18.

    Gross rent, fuel and power

    19.

    		 

    Gross rent

    20.

    		 

    Fuel and power

    21.

    Household equipment and operation

    22.

    		 

    Furniture

    23.

    		 

    Household textiles

    24.

    		 

    Appliances

    25.

    		 

    Other household goods

    26.

    Medical care

    27.

    		 

    Pharmaceutical-therapeutical products

    28.

    		 

    Medical and health services

    29.

    Transport and communication

    30.

    		 

    Equipment

    31.

    		 

    Operation

    32.

    		 

    Purchased transport

    33.

    		 

    Communication

    34.

    Recreation and education

    35.

    		 

    Equipment for recreation

    36.

    		 

    Recreational and cultural services

    37.

    		 

    Books, periodicals etc.

    38.

    		 

    Education

    39.

    Miscellaneous goods and services

    40.

    		 

    Restaurants, cafes etc.

    41.

    		 

    Other goods and services

    42.

    Net purchases abroad

    43.

    Government consumption

    44.

    Capital formation

    45.

    		 

    Machinery and equipment

    46.

    		   

    Non-electrical machinery

    47.

    		   

    Electrical machinery

    48.

    		   

    Transport equipment

    49.

    		 

    Construction

    50.

    		   

    Residential buildings

    51.

    		   

    Non-residential buildings

    52.

    		   

    Other construction and civil engineering work

    53.

    		 

    Changes in stocks

    54.

    Net exports

    55.

    Gross Domestic Product

  21. Regional comparisons may adopt a more detailed breakdown than the world comparison. However, this more detailed breakdown must be compatible with the breakdown presented above, that is, it should always be possible to arrive at the most detailed analytical categories of the world breakdown by combining the analytical categories of the regional breakdown.

    22. C. Breakdown of GDP by basic headings

  22. Each expenditure aggregate is divided into one or more basic headings; however, the function of the two breakdowns is quite different. The breakdown of GDP into aggregates serves data presentation purposes: the organizers of the ICP would like to derive (interspatial) quantity indexes and purchasing-power parities for each expenditure aggregate. The basic heading breakdown, on the other hand, is a technical stratification or classification, the main purpose of which is to permit better estimates of the larger expenditure aggregates. As mentioned in chapter I, it is not intended to publish the results at the level of the basic heading breakdown, though they are made available to users for research purposes.
  23. In terms of the general theory of statistics, the basic headings serve the purposes of stratification in order to improve accuracy. This stems from three factors:
    1. It is expected that the dispersion of the individual price ratios is smaller within the basic headings than between the basic headings within large expenditure aggregates;
    2. The coverage of all expenditure aggregates is ensured;
    3. The basic heading breakdown enables weighting to be applied (i.e., to compile weighted instead of unweighted averages of the parities) at a relatively detailed level.
    If no basic heading breakdown were applied and the purchasing-power parities of an aggregation such as clothing were compiled as an unweighted average of the purchasing power ratios within the category, this would provide less accurate results because weights would to a large extent be neglected.
  24. The point made in subparagraph (a) above requires some qualification. Between basic headings of food, such as vegetables and cereals, there may be less price variation than within a basic heading such as recreational equipment. The point being made is that within large aggregates such as food, price variation will be reduced by sampling items at more detailed headings. Similarly, though overall price variation for recreation may be quite large, by separating out basic headings such as recreation equipment from entertainment, the price dispersion for all of recreation will be reduced.
  25. In delineating basic headings from each other, two principles have to be followed:
    1. The basic headings should be as homogeneous as possible;
    2. Sufficiently reliable weights (i.e., detailed expenditure data) should be available for each basic heading.
  26. Homogeneity of basic headings should be interpreted in terms of the dispersion of the individual price ratios across countries. The smaller this dispersion, the more homogeneous a given basic heading is considered. Of course, when basic headings are initially delineated, no prior information is available on the dispersion of the individual price ratios. Most of the basic headings used in the ICP correspond to national accounting or survey divisions that have been devised for other purposes. However, this delineation, which has been based on the kind, type or function of the products in a basic heading, tends to produce relatively homogeneous groupings, even in respect of the dispersion of the individual price ratios. For instance, the dispersion of price ratios within the category "footwear" can be expected to be smaller than within the broader category "clothing and footwear", and within the category "men's footwear" it should be even smaller than within the category "footwear".
  27. The expenditure data for basic headings are used mainly as weights, but frequently very important weights. For example, some countries find it difficult to separate government consumption between wages and salaries and purchases of goods and services. However, parities for these basic headings are different across countries. It is therefore important to make the best possible estimate of the distribution of collective consumption between these two headings. Even expenditure weights for these headings of limited accuracy are likely to be more useful than using no weights at all. This is because no weights at all would implicitly assign equal weights in this example; only if it is not possible to improve on that default option, should countries not attempt expenditure estimates at the basic heading level.
  28. In all phases of the ICP, the number of basic headings distinguished at the world level has been about 150, although the number distinguished in some regional comparisons (especially in the developed regions) has been substantially higher. The world expenditure and basic heading list for phase VI of the ICP is provided in annex III of the Handbook, along with a description of the types of goods and services included under each heading.