*ESCWA/UNSD Expert Group Meeting on National Accounts12-14 May 2009, Cairo, Egypt

Gulab SinghUN Statistics DivisionExhaustive Measurement of Economy

Exhaustive Measurement of EconomyIntroduction

Good quality national accounts are vital for economic policy making and research. An important aspect of their quality is the extent to which they cover all economic activities. Exhaustive coverage is difficult to achieve because of the wide range of economic activities, some of which are deliberately concealed from observation by those responsible for them

Exhaustive Measurement of EconomyLack of coverage causes problems for users both in terms of levels and trendsLevelsGDP and other data downward biased inaccurate impression of economyGreat significance in situations - monetary contributions made/received by a country depend on its GDP or when poverty is measured by GDP per head etc.TrendsBiases in trend estimates can be expected if the economic activities missing from GDP grow at different rates from those includedFor National Accountants, lack of coverage causes imbalances in the internal consistency of the accounts

Notions of non-observed economyIn measuring the activities within 2008 SNA production boundary exhaustively, the 5 problem areas that are most likely to be non-observed are:UndergroundIllegalInformal sectorHousehold production for self consumptionDeficiencies of basic data collection programme. [OECD manual (2002) on Non-Observed Economy (NOE)]

Notions of non-observed economyClearly, the NOE problem areas are not mutually exclusive. Activities not included in the basic data because they are in one or more of these problem areas are collectively said to comprise the NOE.

Measurement of NOE involves action on two fronts:Improvements in direct measurement by the data collection programme, resulting in fewer non-observed activities and hence fewer non-measured activities; andImprovements in indirect measurement during compilation of the national accounts, resulting in fewer non-measured activities.

NOE problem areas1. Underground Production Certain economic activities which are legal are deliberately concealed from public authorities for the following reasonsAvoid payment of taxesAvoid payment of social security contributionsAvoid meeting legal standards min wages

Borderline between underground and illegal production is not entirely clear

SNA rule of thumbUnderground activities are those not complying with administrative rules,Illegal activities are associated with criminal behaviourFor NA purposes precise demarcation is not required

NOE problem areas2. Illegal Production All illegal activities that fit the characteristics of transactions are treated the same way as legal activitiesTwo categories of illegal production included in SNA production boundaryProduction of goods and services whose production, sale or mere possession is forbidden by law; andLegal activities undertaken by unauthorized producersDifferences in the boundary between countries, or changes in the boundary within a country over time, can cause inconsistencies

NOE problem areas3. Informal Sector Production discussed in separate session

4. Household Production for own final useProduction undertaken by household unincorporated enterprises exclusively for own final use is not part of the informal sectorSome household production activities are on a very small scale. Thus, SNA suggests a criterion of significance for deciding whether or not to record the production of a particular good. Only if the amount produced is believed to be quantitatively important in relation to the total supply of that good in the country should it be estimated

NOE problem areas5. Production Missed Due to Deficiencies in Data Collection ProgrammeSometimes referred to as the statistical undergroundUnder coverage of enterprises. Enterprises, or parts of them, are excluded from the data collection programme though in principle they should have been included - new unit, below size cut off, misclassificationNon-response by enterprises. Enterprises are included in the sample but no data are collected from them and no imputation is made for the missing observations.Underreporting by enterprises. Data are obtained from enterprises, but are misreported in such a way as to underreport value added, or correct data are received but are inappropriately edited or weighted.

Exhaustiveness - NA methodsIndirect methods of covering NOE in the GDP estimate:Supply based approaches, including labour input method;Demand based approaches;Income based approaches;Commodity flow approaches. Labour Input Method (LIM) is the most important procedure that has been use since 1950s to measure contribution of unorganised sector to GDP.

Labour Input MethodThe labour input method (LIM) of estimating value added/output for an economic activity or a group of economic activities consists of:Obtaining an estimate of labour input from Population Census and/or Labour Force Survey (LFS);Obtaining estimates of output or value added per unit of labour input from Establishment Survey; and Multiplying the estimate of labour input by the estimate of per unit value added/output to arrive at an aggregate estimate of value added/output.

Issues for discussionCountry experiences for measuring the NOEIllegal, underground activities;Own-account non-agricultural goods production solely for own final use Statistical undergroundInformal sector enterprises (next session)In the absence of up-to-date business register, additional NOE problem area would includenew establishments that are born after the last Economic Census and not registered with the concerned authority.

Thank You

1.3. For the national accountants, lack of coverage causes imbalances in the internal consistency ofthe accounts because parts of economic transactions may be measured whilst other parts are not. Forexample, household expenditures on goods and services produced underground may be measuredbecause the purchasers have no reason to hide their purchases, whereas the corresponding productionactivities are not reported by the producers.5.16. Supply based methods rely on data about the supply of inputs that are used in producing goodsand services. Inputs may include a number of primary raw materials, just one major raw material, labour,land, fixed capital stock, etc. If data on the supply of one or several inputs used in a given productionactivity are available, the total production of the activity that uses these inputs can be estimated.5.17 Input/output and input/value added ratios are needed to calculate output and value addedestimates from the input data. Preferably, these ratios should be obtained through ad-hoc surveys forthe current period5.33. Demand based methods aim at determining production by using indicator data on specific usesof goods and services. These indicators can be any use of goods and services that sufficiently describetheir production. They could be household final consumption expenditures of a certain commodity(e.g. health and personal services), uses of major products as raw materials (e.g. processing of agricultural products), exports (e.g. major export commodities), or administrative data indicatingdemand for a product (e.g. motor vehicle registrations and building permits). After a measure of outputhas been obtained, value added estimates can be derived using output/value added ratios, as forsupply-based methods.5.34. Demand indicators are usually incomplete. In most cases, only data on one or a limited numberof major uses are available.Income Based Methods5.36. Data on some categories of income are available from administrative sources and can be used toobtain an indication of production covered by the administrative system. Information on income taxesor social security contributions paid by self-employed persons (or private entrepreneurs) are oftenreadily available. However, adjustments are usually necessary to account for activities not covered bytax laws and for underreporting of incomes for tax purposes.Commodity Flow Method5.39. The commodity flow method involves balancing total supplies and uses of individual products.It is used to estimate the output of a commodity by balancing the supply and use of that commodity,using the following equation:output = the sum of all intermediate consumption, final consumption, changes (positive ornegative) in inventories, gross fixed capital formation, acquisition less disposals of valuables,and exports minus imports.

Labour Input MethodAt the core of the method are three basic steps: obtain estimates of the supply of labour input to GDP, for selected economic activity and sizeof enterprise, from a household labour force survey and/or other demographic sources; obtain estimates of output per unit of labour input and value added per unit of labour input for thesame activity and size breakdown from regular or special purpose enterprise survey; and multiply the labour input estimates by the per unit ratios to get output and value added forthe activity and size categories.GDP compilation for the non-governmental non-agricultural sectors are mainly based on Annual Economic (Business) Surveys.Annual Economic surveys, if conducted, are invariably list-frame based surveys.The list frame is drawn from the results of the preceding Economic Census and consists of establishments.It is often updated using the information on new establishments that are available from the administrative sources. .Thus the segment of the economy that remains Non-Observed includes:Informal sector (in some of the member countries, it has a significant presence), particularly non-establishment production units, i.e. those run within households or without a fixed (visible) premises;Illegal, underground activities;Own-account non-agricultural goods production solely for own use;new establishments that are born after the last Economic Census and not registered with the concerned authority.Further, the list frame is likely to contain a large proportion of dead units, which progressively increases with each passing year after the Economic Census. Small establishments, which are usually more numerous, tend to have high birth and death rates. Results of the surveys based on samples drawn from such a list frame are likely to suffer from high sampling error. *