Basic national accounts identities, Public Economics

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Basic National Accounts Identities

The supply and use accounts reflect three basic national accounts identities. These are as follows:

1)  The supply-use identity

Production + imports = lntermediate Consumption + Exports + Final Consumption + Gross Capital Formation....(1)

2)  The value-added identity

Net Value Added = Output - Intermediate Consumption - Consumption of Fixed Capital .... (2)

3) The domestic product identity

Gross domestic Product = Final Consumption + Gross Capital Formation + (Export - Imports)...   (3)

 In addition to the supply and use accounts, there is also the asset account which "covers changes in assets and liabilities. The products of economic assets are generally valued in the market, either directly or indirectly. These assets are referred to in the SNA as economic assets. In the year 1993 the SNA was modified to include only those natural assets in the asset accounts whose ownership rights existed and those that can bestow economic benefits to their owners. Some examples of produced natural assets include the value of livestock for breeding, orchards, private plantations and timber tracts. The asset balances for produced assets and non- produced natural assets include the opening and closing stocks of produced assets and the elements explaining the change between these two, viz., net capital formation. Holding gains or losses of assets, other changes in the volume of produced assets and the closing stocks (i.e. opening stocks plus the sum of the preceding adjustments). Due to the inclusion of asset accounts into the national accounts we have one more set of identity. Which explains the difference between the opening and closing stock of assets by flows during the accounting period?

For produced and non-produced assets, the balances are identified as:

Closing Stocks = Opening Stock + Gross Capital Formation - Consumption of Fixed Capital + Other changes in Volume of Assets + Holding Gains/Losses on Assets   .....  (4)

The gross capital formation consists of

a) Gross fixed capital formation, and

b) Changes in inventories in produced assets such as buildings, roads, machinery and stocks of commodities.

The gross fixed capital formation may also include additions to the produced assets such as improvement of land, cost of transferring land and other non-produced assets between owners. The value of capital formation is added to the value of non-produced assets but separately 'depreciated' as other changes in volume. Thus, the elements of the column related to non-produced economic assets, do not figure in the calculation of NDP, as all the changes in non-produced natural assets between opening and closing stocks are explained in the SNA as holding gains or losses and other changes in the volume of assets. Hence, the elements under other changes in volume are the most relevant items to be reclassified for analysis in the natural resources accounting.

The present system of national accounts reflects the Keynesian macroeconomic model and like the Keynesian system it largely ignores the productive role of natural resources. The major aggregates of Keynesian analysis. viz., consumption, savings, investment and government expenditures are carefully defined and measured. As Keynes and his contemporaries were preoccupied with the Great Depression and the business cycles, scarcity of natural resources was never given any importance.

In fact, natural resource scarcity played little role in the 19th century neo-classical economics, from which the traditional Keynesian and most contemporary economic theories are derived. The classical economists had regarded income as return on three kinds of assets: natural resources, human resources, and invested capital (land, labour, and capital).

The neo-classical economists dropped natural resources from their model and concentrated on labour and invested capital only. When these theories were applied after World War 2 to problems of economic development in the developing economies, human resources were also left out on the grounds that labour was always surplus, and development was seen almost entirely as a matter of savings and investment in physical capital. As a result, there is a dangerous asymmetry today in the way we measure, and hence, the way we think about the value of natural resources.


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