- (a)Section 2 of the UK ONS's "Guide to the National Accounts" noted that the economy was broken into a number of "institutional sectors". What were some of these, and how do you think they might have been affected differently by the pandemic and lockdowns?
- (b)What is another way in which the ONS breaks down the economy? Comment on how you think the components of this breakdown have been affected by the pandemic and lockdowns.
The section 2 is here in the picture, please take the time to read it, thanks a lot!
2. The principles of the national accounts framework Institutional sectors In order to make the accounts more meaningful and to provide certain important analyses, the units making up the economy are grouped into a number of institutional sectors based on their activities as well as who owns and controls them. An institutional unit is defined as one that has autonomy of economic decision-making (for example, it can enter into contracts, own assets, and incur liabilities) and is able to keep a meaningful set of accounts. The characteristics of the various sectors are described in brief in this section. Most ofthe sectors have sub-sectors to enable more detailed analysis; the most important of these are also described. Financial transactions Financial transactions differ from distributive transactions in that they relate to transactions in financial claims, whereas distributive transactions are unrequited. The main categories in the classification of financial instruments are monetary gold and special drawing rights; currency and deposits; debt securities; loans; equity and investment fund shares/units; insurance, pension and standardised guarantee schemes; financial derivatives and employee stock options; and other accounts receivable/payable. Assets and liabilities The national accounts identify two types of asset within the economy. The first of these is non-financial assets and includes fixed assets (such as buildings and vehicles), valuables, inventories, and non- produced assets (such as land). The second type is financial assets; these include currency holdings, bank deposits, ownership of shares and loans (from the point of view of the lender). Every financial asset has an equal and opposite liability - in the examples above, the central bank is liable for currency, the bankNon-financial corporations (N FCs) NFCs produce goods and services for the market and do not, as a primary activity, deal in financial assets and liabilities. This sector includes, for example, retailers, manufacturers, utilities, business service providers (such as accountancy and law firms), caterers, haulage companies, airlines, construction companies, and farms. The NFCs sector is broken down into two sub-sectors: public sector NFCs and private sector NFCs, dependent upon criteria such as the control of general corporate policy. Financial corporations (FinCos) The FinCos sector consists of institutional units that are independent legal entities and market producers, and whose principal activity is the production of financial services. Some of the most important financial instruments include currency, loans, shares and bonds, although there are many others. Thus the main kinds of financial corporations are banks, building societies, securities dealers, insurance corporations and pension funds, although this list is not exhaustive. There are some public sector FinCos, most notably the nationalised banks. The FinCos sector is broken down into three sub-sectors: monetary financial institutions (MFI), insurance corporations and pension funds (ICPF), and financial corporations except MFI and ICPF. General government (GG) This sector is made up of those units providing services for collective or individual consumption that are not sold at market prices. These units are usually funded by compulsory payments from units in other sectors (that is, taxes) and may be involved in the redistribution of national income (for example, benefits and State Pension). The sector includes government departments and agencies, local authorities, the devolved administrations in Northern Ireland, Scotland and Wales, the state education system, the National Health Service, the armed forces, and the police. Non-departmental public bodies are also included in the general government sector. In the UK, it is broken down into two sub-sectors: central government and local government. Households (H H) The HH sector covers both consumers and producers. Households as consumers comprise groups of people sharing the same living accommodation who share some or all of their income and collectively consume certain types of goods and services, such as food, electricity or housing. This sector also includes the self-employed who are treated as producers. A smaller group of units within the household sector comprises those living permanently in institutions with little economic autonomy, such as prison populations and members of religious orders living in monasteries. Non-profit institutions serving households (N PISHs) NPISHs are institutions that provide goods and services, either free or below the market price, which mainly derive their income from grants and donations and which are not controlled by government. In the UK, this sector includes most charities, trade unions, religious organisations, political parties and the majority of universities. Rest of the world (RoW) The RoW sector in national accounts terms includes all those institutions or individuals not resident in the UK that have economic interactions with resident units. It can include overseas corporations, charities, governments or private individuals. It should be noted that residence does not imply nationality. This is particularly true for private individuals where (other than for a small number of exceptions, such as students, diplomats and service personnel) residing in another country for more than one year is sufficient to be classed as a non-resident and thus part of the RoW sector, irrespective of citizenship or nationality. Also within the RoW sector are international organisations, irrespective of their geographical location. For example, in the German National Accounts, the European Central Bank would be classified in the rest of the world, even though it is physically located in Frankfurt- am- Main. The sector also includes foreign embassies and consulates on UK soil. Classification decisions In the UK, the Office for National Statistics (ONS) is responsible for decisions on the sector classification of any unit. These decisions are taken by the Economic Statistics Classification Committee (ESCC). More information on the work of the ESCC and the latest version of the Sector Classification Guide can be found in economic statistics classifications. Industries Another way in which the units making up the economy can be grouped is by their industrial classification. Broadly, the main industrial groups are agriculture, production, construction, and services. The classification of units to industries in the UK is based on the Standard Industrial Classification (SIC). This is consistent with the European NACE (Nomenclature statistique des Activites economiques dans la Communaute Europeene) classification and is updated periodically to take account of changes in economic structures and the impact of new industries. In October 2011, the latest version of theclassification, SIC 2007, was implemented in the national accounts, ensuring that the accounts more accurately reflect the current structure of the UK economy. Agriculture This industry includes traditional agriculture, horticulture, hunting, forestry and fishing, as well as activities such as fish farming. Production The production industries are those involved in extraction (including oil, gas, coal, iron and other metal ores, and stone for construction), manufacturing (including food processing, publishing and basic metal products), the supply of electricity, gas and water, and the treatment of sewerage. Construction The construction industry includes civil engineering projects, house building, demolition, road building and the installation of electrical wiring, plumbing and so forth. It also includes the renting of construction equipment. Services By far the largest and most diverse grouping of industries, the services industries include retailers, wholesalers, motor traders, hotels, pubs and restaurants, the transport industry, postal services, telecommunications, banks, Stockbrokers, insurance companies, pension funds, real estate, professional services such as lawyers, architects and recruitment consultants, local and central government (including the armed forces and the police), healthcare, education, libraries, museums, broadcasters, funeral directors, charities, sporting activities, bookmakers and hairdressers. This is not by any means an exhaustive list, but it does give some idea of the broad spectrum of activities included. Table 1: Industry groups' respective contributions to the UK economy, 2016 Industry Percent of the economy, 2016 Agriculture, forestry and fishing 0.7 Production 13.6 Construction 6.1 Services 79.6 Source: Office for National Statistics GDP monthly estimate Transactions, assets and liabilities The national accounts describe the interactions between the various sectors by means ofa variety oftransactions. A transaction is defined as being an economic interaction between two willing participants. Please note that in some special cases, such as subsistence farming and government services, the producer and consumer are the same institution or individual. Also, consent can be implicit, such as in the case of penalty fares on the railways. It is important to recognise that legality is not a criterion for deciding whether an interaction is a transaction. If it were then it would be impossible to carry out international comparisons, as laws are different in different countries or comparisons over time, as laws change. There are three main types oftransactions: transactions in products, distributive transactions and financial transactions. These are described in more detail in this
