THE TREATMENT OF EDUCATION IN NATIONAL ACCOUNTING1

It is argued that the conventions of an accounting system, such as the S.N.A., are a matter of convenience. The treatment of education as a current expenditure, instead of as a form of capital formation, derives from the Keynesian system, and is not appropriate for dynamic problems of developing countries, where weaknesses in education are often the main “bottleneck” in the process of development. In such countries, expenditure on education clearly yields its benefits mainly in the longer run. To treat this as a consumption item biases policy in the direction of using financial resources for fixed capital rather than human investment, and may cause aid agencies to penalize countries which expand their educational systems. A similar problem arises on other expenditures such as health, but the case for treating them as investment is not so strong. To treat educational expenditure as part of capital formation logically requires two major changes. First education needs to be removed from private and public consumption, and for this purpose a fairly broad definition of what is education should be used. Secondly, the stock of educational capital should be valued. The valuation problems are, however, severe. Variations in cost components make historic cost of little value as a yardstick, and calculations of future returns are fraught with difficulties. Using replacement costs, which seems the best method, involves the construction of education profiles in physical terms which can then be valued by present or by standardised costs. The depreciation of human capital through mortality and retirement can be allowed for by applying national average rates to these physical profiles. Switching educational expenditure from current to capital accounts involves no serious practical problem. However, although there should logically be an allowance for depreciation on human capital, this is not recommended; single monetary measures of educational stock are not very meaningful, and this would involve changing the definition of “net” aggregates. Development of statistics of educational stocks and flows in physical terms—the beginnings of “demographic accounting” fully integrated with the rest of national accounting—is strongly advocated.     

PROPOSALS FOR A HOMOGENEOUS TREATMENT OF HEALTH EXPENDITURES IN THE NATIONAL ACCOUNTS*

International comparisons always raise difficult problems, more especially when they deal with services which are jointly financed by households and government in varying shares with varying procedures in each country. This is obvious in the case of health where the area itself, the principles of economic analysis and the UN method of National Accounting appear to be either vague or unwieldy. Before any proposal it is necessary to review what is involved in the concept of service and the possibility of delimiting the health field inside which economic measures are feasible. Then using the SNA concept and with the help of six interdependent tables we propose two aggregates: the National Medical Consumption and the Current National Expenditure on health. The detailed and harmonized breakdowns of these global results make it possible to compare the structures of values, prices and quantities on an international base.     

ON THE TREATMENT OF TAXES AND GOVERNMENT IN THE NATIONAL ACCOUNTS

Framed in the context of the ongoing revision of the 1993 System of National Accounts (SNA), this note proposes a new presentation of the National Accounts. While it does not require new information, nor difficult calculations, it is suggested to be conceptually clearer and practically simpler. The changes concern the treatment of taxes and government in the national accounts which imply that: (i) GDP, measured at basic price, is now exactly the sum of all value added, which is split in the compensation of employees and an enlarged operating surplus; (ii) the two functions of government are clearly distinguished in a modified sequence of accounts, that is, as producing non-market services up to the allocation of primary income account, and then as redistributing the national income; and (iii) with a conventional allocation of government services and GDP broken down between market GDP and non-market GDP, households remain the only final consumer and the so called question of consumption subsidies is resolved.     

THE TREATMENT OF STOCK APPRECIATION IN THE MEASUREMENT OF NATIONAL INCOME*

In the latest official national income publication the Australian Commonwealth Statistician has altered the treatment of stock appreciation in the measurement of national income at current prices. Previously, stock appreciation had been included in both national expenditure and national product. Now the amount of stock appreciation (the difference between the change in the value of stocks and the value of the change in stocks) has been deducted from investment in stocks, and consequently national expenditure, and from trading incomes, and consequently national income. The former procedure (including stock appreciation in national expenditure and national product) had been advocated by the present author, when editor of the first official national income publications issued by the Commonwealth Statistician. In this note an attempt is made to set out the reasons for this view. A new approach is also suggested for handling the item of stock appreciation in national income accounts, which does not rest on the assumption that stock appreciation is a capital gain which should be excluded from trading incomes and national product.     

FACT AND FALLACY IN LABOUR MARKET ANALYSIS: A REPLY TO MR. LANDO*

Mr. Mordechai E. Lando has devoted his entire ‘Comment’ to one paragraph in my article, ‘Full Employment and the New Economics’, which ran to 36 paragraphs. Despite this rather narrow concentration, Mr. Lando has seriously misstated my argument in that one paragraph, and he has supported his criticisms by misstatements of fact and errors in analysis. Since his criticisms go to the heart of a thesis that I have developed in some detail during the past decade, I think that I should answer them rather fully.     

THE TREATMENT OF INTEREST AND NET RENTS IN THE NATIONAL ACCOUNTS FRAMEWORK1

The contention in this paper is that the present method of treating interest and net rents as transfers rather than as payments for services provided creates problems in the measurement of production by industry and that the difficulties encountered in explaining the treatment of interest items in the different tables of the National Accounts are even more apparent when one views the National Accounts framework as an integrated reflection of economic reality. It is argued that the lending of money arises from the stretching out of the production and consumption process, and the interest charges constitute a charge for the administrative services and risk involved. This is somewhat analagous to the charges for hiring out real goods and services. A similar case is made for the treatment of rents with the exception of imputed net rent where it is contended that economic risk is incurred only when production is undertaken for sale and that there should be no entrepreneurial return where the production is for the use of the owner-producer. It is suggested that an alternative treatment of interest and rents as payments for services is more realistic. Its adoption in the National Accounts would eliminate the need for imputations now made to account for the production of financial intermediaries, as well as the unconvincing explanations put forward for the present treatment of interest on consumer and public debt. Finally, it would serve to integrate the production accounts with the financial flows and the related financial structure.     

THE TREATMENT OF INTEREST AND FINANCIAL INTERMEDIARIES IN THE NATIONAL ACCOUNTS OF AUSTRALIA

This paper is divided into two main sections. The first part summarises briefly the main points which have arisen in the lengthy debate over the treatment of banking intermediaries in the national accounts. The discussion emphasises the method adopted in the early Australian accounts when banks were treated in the same way as the general government. It is argued that this method is simpler and provides a more realistic account of the functions of banks than the current SNA proposal.
The second part of the paper examines the functions of banks in Australia. It uses data of interest and administration cost for separate banking institutions to examine the incidence of bank costs. It is concluded that the costs do not fall on borrowers or lenders but are a charge in providing a communal service in the establishment and maintenance of the financial system.     

THE TREATMENT OF PENSIONS AND INSURANCE IN NATIONAL ACCOUNTS*

In the course of the nearly two decades since the revised SNA was developed, the role of pensions and insurance in the developed western economies has been significantly altered. The United Nations System of National Accounts (SNA) is not fully consistent in its treatment of pension and insurance transactions. This paper examines whether, in view of the changed institutional context, a modification of the SNA treatment of this complex of flows would be desirable. It investigates the impact on household income and saving of adopting a somewhat more consistent transactor/transaction approach for all pension and insurance transactions. Four main topics are covered: (1) social security, (2) private pensions, (3) life insurance, and (4) casualty insurance. Each is considered in terms of the treatment of contributions, the treatment of benefits, and the handling of reserves and the income generated by them. The same sorts of problem arise in all four cases.     

SUSTAINING THE GOOSE THAT LAYS THE GOLDEN EGG: A CONTINUOUS TREATMENT OF TECHNOLOGICAL TRANSFER

This paper proposes a simple model of the trade-offs perceived by innovating firms when investing in countries with limited intellectual property rights (IPR). The model allows for a continuous treatment of technology transfer and production cost gains occurring through FDI. While it does not consider possible changes in rates of innovation caused by changes in IPR in developing countries, it allows one to uncover a potentially non-monotonic relationship between welfare and IPR in the recipient country.