Concepts, methodology, data quality

The following information should be used to ensure a clear understanding of the basic concepts that define the data provided in this product, of the underlying methodology, and of key aspects of data quality. This information will provide users with a better understanding of the strengths and limitations of the data, and how they can be effectively used and analysed.

Concepts and variables measured

At the core of the Income and Expenditure Accounts (IEA) is the concept of Gross domestic product (GDP) and its components. It is a measure of aggregate economic activity that represents the unduplicated value of production in two ways: Incomes arising from production; and final expenditures on production. The first is simply to sum the factor incomes generated by productive activity – that is, incomes representing the returns to the labour and capital employed. The second is to sum all sales to final users (consumers, governments, business on capital account, exports less imports). The two measures of GDP may not be equal to each other, giving rise to a statistical discrepancy.

Gross domestic product income-based

The income-based estimates show factor incomes accruing to labour and capital generated as part of the production process. The largest source of factor income is wages, salaries and supplementary labour income, accounting for over half of GDP. The other income components are corporation profits before taxes, interest and miscellaneous investment income, the accrued net income of farm operators, net income of non-farm unincorporated business (including rent), and the inventory valuation adjustment. Together these six aggregates, plus taxes less subsidies on factors of production, yield Net Domestic Product at basic prices. GDP at market prices is calculated by adding taxes less subsidies on products as well as capital consumption allowances and one half of the statistical discrepancy.

Gross domestic product expenditure-based

In the expenditure-based estimates, GDP is broken down into the categories of final purchases of goods and services. The major aggregate is personal expenditure on consumer goods and services, accounting for close to 60% of GDP. Government current expenditure on goods and services is a second component and government and business investment spending is a third. The sum of these components of the summary expenditure account is referred to as final domestic demand. To move from final domestic demand to GDP, the value of physical change in inventories, net exports of goods and services (that is, exports minus imports) and one-half of the statistical discrepancy are added.

Real gross domestic product

Real GDP is related directly to other key macroeconomic variables such as employment, business cycles, productivity and long-term economic growth.

Real GDP is a measure of the volume of production. To measure this concept, GDP expenditure-based components are adjusted to eliminate the effect of price change. This process is known as deflation, and makes use of expenditure-side associated price indexes. Up to 2001, real GDP was calculated by using a Laspeyres’ formula. As of May 31st, 2001, the quarterly IEA adopted the Fisher index formula, chained quarterly, as the official measure of real expenditure-based GDP. The reason for the adoption of this particular formula is that it produces the most accurate measure of quarter to quarter growth in GDP.

Coverage

GDP includes all activities within the SNA production boundary. Illegal transactions are, for the most part, excluded.

Sector accounts

The IEA also provide considerable information on the four major sectors of the economy: persons and unincorporated business, corporations, governments and non-residents. The sector accounts record (i) incomes and outlays, (ii) saving and investment and (ii) transactions in financial assets and liabilities for each of the four broad sectors of the economy. Additional information is also provided for sub-sectors of the government and corporate sectors. The sum of the final (non-transfer) income, or the final (non- intermediate) expenditure, of the sectors equals gross national product.

A sector has current incomes and current outlays. The difference between the two is saving. Saving, combined with capital consumption allowances and net capital transfers, is a source of funds for investment, or non- financial capital acquisition. To the extent that saving exceeds (falls short of) investment, the sector is said to be in a net lending (net borrowing) position. A second measure of net lending/borrowing is provided by the difference between the transactions in financial assets less the transactions in liabilities and equity. The two measures differ somewhat due to statistical errors.

The IEA make up part of an integrated sequence of accounts. The source of information for the financial transactions of the sector accounts is the associated quarterly Financial Flow Accounts release. The end result of economic and financial activity is presented in the National Balance Sheet Accounts.

Data sources and methodology

The IEA measure of macroeconomic activity on a quarterly basis as represented by income and expenditure-based GDP, relies heavily on a wealth of information from various areas of Statistics Canada.

Sources

A very large amount of information from various survey divisions within the bureau, along with other data, are compiled, integrated and analysed as part of the complex process of arriving at GDP and its component categories and underlying sector accounts.

Major suppliers of data within Statistics Canada include Agriculture Division, Investment and Capital Stock Division, Income Statistics Division, International Trade Division, Distributive Trades Division, Manufacturing, Construction and Energy Division, Industrial Organization and Finance Division, Labour Division, Prices Division, Public Institutions Division and Tax Data Division. There are also a host of external and administrative sources of data used.

General methodology

Final expenditure measures by detailed component are compiled for the major sectors of the economy. Data are analysed for time series consistency, links to current economic events, issues arising from the source data, and finally with respect to coherence. The same process is followed for the income measures. Initial estimates of income and expenditure-side GDP are then produced, and the discrepancy is assessed. Real estimates are then compared with the results of the monthly GDP by Industry program.

Annually, the income and expenditure benchmarked to the Input-Output Accounts

data are

For further details on definitions, concepts, sources and methods, please refer to the “Guide to the Income and Expenditure Accounts”, catalogue no. 13-017-X.

Seasonal adjustment

Almost all series of the quarterly IEA are seasonally- adjusted. Seasonal adjustment is generally made at the

lowest level of aggregation, and seasonally-adjusted aggregates are obtained by summation. Statistics Canada’s X-11 ARIMA is used to seasonally adjust series.

Revisions

Estimates for each quarter are revised when those for subsequent quarters of the same year are published and when those for the first quarter of each of the next four years are published. They are not normally revised again except when historical revisions are carried out, usually once per decade. Statistical revisions are carried out in order to incorporate the most recent information from quarterly and annual surveys, taxation statistics, public accounts, censuses, etc., as well as from the annual benchmarking process with the Input-Output Accounts.

Reference period

Data are released within 60 days after the reference period.

Data quality (accuracy)

The accounts are designed as a double-entry system in which the income- and expenditure-based GDP totals should, in principle, be identical. In fact, a difference virtually always arises between them due to errors in the source data, imperfect estimation techniques, differing seasonal adjustment methods and discrepancies in the time at which the incomes and expenditures are recorded.

The size of the discrepancy, which stems from the estimation procedure, is one gauge of the system's overall reliability. However, it is a partial and quite insufficient gauge. Another quality measure is how well real expenditure-side GDP compares to the real GDP by Industry measure.

No direct measures of the margin of error in the estimates can be calculated. The quality of the estimates can be inferred from analysis of revisions and from a subjective assessment of the data sources and methodology used in the preparation of the estimates.

Comparability of data and related sources

It is not possible to produce an equivalent to the income or expenditure accounts except at the aggregate level. At the level of GDP, the unduplicated value of production can also be measured by taking the gross value of production of each firm and subtracting from this each firm's intermediate inputs in the form of its purchases from other

firms (including imports), to yield the 'net value added' to production by the firm. Estimates of this type are produced in the annual Input-Output tables, as well as in the monthly industry-based estimates of GDP.

Certain components of income and expenditure-based GDP can be obtained in survey divisions, but typically the data are not directly comparable. For example, the variable “corporate profits” is published in the Quarterly Financial Statistics release, but it differs from the income-based GDP measure by certain national accounts concept adjustments.