IV. INSTITUTIONAL UNITS AND SECTORS
A. Introduction
| 4.1. | This chapter is concerned with the definition and description of institutional units and the way in which they are grouped to make up the sectors and sub-sectors of the System. Economic entities that are capable of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities are described in the System as institutional units. The various sectors and sub-sectors of an economy are composed of institutional units that are resident in the economy, the total economy consisting of the entire set of resident institutional units. The definition of residence is explained later. |
1. Institutional units
| 4.2. | An institutional unit may be defined as:
An economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.
The main attributes of institutional units may be described as follows:
(a) An institutional unit is entitled to own goods or assets in its own right; it is therefore able to exchange the ownership of goods or assets in transactions with other institutional units;
(b) It is able to take economic decisions and engage in economic activities for which it is itself held to be directly responsible and accountable at law;
(c) It is able to incur liabilities on its own behalf, to take on other obligations or future commitments and to enter into contracts;
(d) Either a complete set of accounts, including a balance sheet of assets and liabilities, exists for the unit, or it would be possible and meaningful, from both an economic and legal viewpoint, to compile a complete set of accounts if they were to be required. |
| 4.3. | There are two main types of units in the real world that may qualify as institutional units, namely persons or groups of persons in the form of households, and legal or social entities whose existence is recognized by law or society independently of the persons, or other entities, that may own or control them. |
| 4.4. | The individual members of multi-person households are not treated as separate institutional units. Many assets are owned, or liabilities incurred, jointly by two or more members of the same household while some or all of the income received by individual members of the same household may be pooled for the benefit of all members. Moreover, many expenditure decisions, especially those relating to the consumption of food, or housing, may be made collectively for the household as a whole. It may be impossible, therefore, to draw up meaningful balance sheets or other accounts for members of the household on an individual basis. For these reasons, the household must be treated as the institutional unit. An unincorporated enterprise that is entirely owned by one or more members of the same household is treated as an integral part of that household and not as a separate institutional unit, except when the enterprise is treated as a quasi-corporation (see below). |
| 4.5. | The second type of institutional unit is a legal or social entity that engages in economic activities and transactions in its own right, such as a corporation, non-profit institution (NPI) or government unit. Such units are responsible and accountable for the economic decisions or actions they take, although their autonomy may be constrained to some extent by other institutional units; for example, corporations are ultimately controlled by their shareholders. Some unincorporated enterprises belonging to households or government units may behave in much the same way as corporations, and such enterprises are treated as quasi-corporations when they have complete sets of accounts. |
2. Institutional sectors and sub-sectors: summary
| 4.6. | The resident institutional units that make up the total economy are grouped into the following five mutually exclusive institutional sectors:
The non-financial corporations sector
The financial corporations sector
The general government sector
The non-profit institutions serving households sector
The households sector. |
| 4.7. | All resident non-financial corporations and quasi-corporations are included in the non-financial corporations sector and make up most of the sector in practice. In addition, it includes non-profit institutions (NPIs) engaged in the market production of goods and non-financial services: for example, hospitals, schools or colleges that charge fees that enable them to recover their current production costs, or trade associations financed by subscriptions from non-financial corporate or unincorporated enterprises whose role is to promote and serve the interests of those enterprises. |
| 4.8. | The financial corporations sector includes all resident corporations and quasi-corporations whose principal activity is financial intermediation or facilitating financial intermediation. In addition, it includes NPIs engaged in market production of a financial nature (e.g., insurance), including those financed by subscriptions from financial enterprises whose role is to promote and serve the interests of those enterprises. |
| 4.9. | The general government sector consists mainly of central, state and local government units together with social security funds imposed and controlled by those units. In addition, it includes NPIs engaged in non-market production that are controlled and mainly financed by government units or social security funds. |
| 4.10. | The non-profit institutions serving households sector consists of all resident NPIs, except those controlled and mainly financed by government, that provide non-market goods or services to households. |
| 4.11. | The households sector consists of all resident households. These include institutional households made up of persons staying in hospitals, retirement homes, convents, prisons, etc. for long periods of time. As already noted, an unincorporated enterprise owned by a household is treated as an integral part of the latter and not as a separate institutional unit, except when the enterprise qualifies as a quasi-corporation. |
| 4.12. | Each of the five institutional sectors listed above may be divided into sub-sectors as described in the later sections of this chapter. The division of sectors into sub-sectors depends upon the type of analysis to be undertaken, the needs of policy makers, the availability of data and the economic circumstances and institutional arrangements within a country. No single method of sub-sectoring may be optimal for all purposes or all countries, so that alternative methods of sub-sectoring are recommended below for certain sectors. |
3. Relationship between sectors and types of institutional units
| 4.13. | A cross-classification of institutional units by sector and type of unit is illustrated schematically in table 4.1. As financial corporations and quasi-corporations are essentially different kinds of institutional units from non-financial corporations and quasi-corporations, it can be seen that, with the exception of NPIs, all institutional units of a particular type are grouped together within the same sector. Thus:
(a) All non-financial corporations and quasi-corporations are allocated to the non-financial corporations sector;
(b) All financial corporations and quasi-corporations are allocated to the financial corporations sector;
(c) All government units, including social security funds, are allocated to the general government sector;
(d) All households are allocated to the households sector. | | | Text refers to: table 4.1.  |
| 4.14. | However, NPIs may be classified as belonging to any of the five major sectors, except the households sector, depending upon the purposes they serve and the kinds of units that control and finance them. As explained below, NPIs are not necessarily non-market producers, the essential characteristic of an NPI is that it cannot be a source of income or profit to the units that control it. The way in which institutional units are grouped into sectors is, therefore, mostly self-evident except for NPIs. It is still necessary, however, to explain in more detail what are the characteristic features by which legal or social entities in the form of corporations, quasi-corporations or NPIs can be identified. |
4. Residence
| 4.15. | The total economy is defined as the entire set of resident institutional units. It is divided into sectors that consist of groups of resident institutional units. An institutional unit is resident in a country when it has a centre of economic interest in the economic territory of that country. It is said to have a centre of economic interest when there exists some location - dwelling, place of production or other premises - within the economic territory on, or from, which it engages, and intends to continue to engage, in economic activities and transactions on a significant scale either indefinitely or over a finite but long period of time. In most cases, a long period of time may be interpreted as one year or more, although this is suggested only as a guideline and not as an inflexible rule (see paragraph 14.13 of chapter XIV). |
| 4.16. | Thus, residence is not based on nationality or legal criteria (although it may be similar to the concepts of residence used for exchange control, tax or other purposes in many countries). The concept of residence is explained in detail in chapter XIV; it is identical with that used in the fifth edition of the Balance of Payments Manual of the International Monetary Fund (IMF). It may nevertheless be useful to elaborate here on some aspects of residence:
(a) The residence of individual persons is determined by that of the household of which they form part and not by their place of work. All members of the same household have the same residence as the household itself, even though they may cross borders to work or otherwise spend periods of time abroad. If they work and reside abroad so long that they acquire a centre of economic interest abroad, they cease to be members of their original households;
(b) Unincorporated enterprises that are not quasi-corporations are not separate institutional units from their owners and, therefore, have the same residence as their owners;
(c) Corporations and NPIs may normally be expected to have a centre of economic interest in the country in which they are legally constituted and registered. Corporations may be resident in countries different from their shareholders and subsidiary corporations may be resident in different countries from their parent corporations. When a corporation, or unincorporated enterprise, maintains a branch, office or production site in another country in order to engage in a significant amount of production over a long period of time but without creating a subsidiary corporation for the purpose, the branch, office or site is considered to be a quasi-corporation (i.e., separate institutional unit) resident in the country in which it is located (see paragraphs 14.22 to 14.28 of chapter XIV);
(d) Owners of land and buildings in the economic territory of a country are deemed always to have a centre of economic interest in that country, even if they do not engage in other economic activities or transactions in the country. All land and buildings are therefore owned by residents (see paragraph 14.14 of chapter XIV). |
5. Sectoring and economic behaviour
| 4.17. | The sectors of the System group together similar kinds of institutional units. Corporations, NPIs, government units and households are intrinsically different from each other. Their economic objectives, functions and behaviour are also different. |
| 4.18. | Corporations are institutional units created for the purpose of producing goods or services for the market. They may be a source of profit to the units that own them. They are essentially producer units and do not themselves incur expenditures on final consumption. The functions of NPIs are similar in some respects to those of corporations but they can be broader in scope. NPIs are institutional units created for the purpose of producing or distributing goods or services but not for the purpose of generating any income or profit for the units that control or finance them. In contrast to corporations, NPIs may incur final consumption expenditures in respect of final goods or services that they provide to households. |
| 4.19. | The economic objectives, functions and behaviour of government units are quite distinct. They organize and finance the provision of non-market goods and services, including both individual and collective services, to households and the community and, therefore, incur expenditures on final consumption. They may also engage in non-market production themselves. They are also concerned with distribution and redistribution of income and wealth through taxation and other transfers. Government units include social security funds. |
| 4.20. | Finally, the economic objectives, functions and behaviour of households are different again. Although primarily consumer units, they can engage in any kind of economic activity. They not only supply labour to enterprises but may operate their own producer units in the form of unincorporated enterprises. |
| 4.21. | Thus, dividing the total economy into sectors enhances the usefulness of the accounts for purposes of economic analysis by grouping together institutional units with similar objectives and types of behaviour. However, sectors and sub-sectors are also needed in order to be able to target or monitor particular groups of institutional units for policy purposes. For example, the household sector has to be divided into sub-sectors in order to be able to observe how different sections of the community are affected by, or benefit from, the process of economic development or government economic and social policy measures. Similarly, it may be important to treat corporations subject to control by non-residents as sub-sectors of the financial and non-financial corporate sectors not only because they are liable to behave differently from domestically controlled corporations but because governments may wish to be able to identify and observe those parts of the economy that are subject to influence from abroad. |
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