GDP - methodology attachment

ANNEX

General information

On 30 September 2014 Central Statistical Bureau (CSB), taking into account requirements of the European Parliament and Council Regulation (EU) No.549/2013 on the European system of national and regional accounts in the European Union (ESA 2010), publishes revised data of the system on national accounts, according to the improved methodological principles.

The data recalculated characterizing time period from 1995 (1st quarter of 1995) contain the following changes:

  • for the first time supply-use tables (SUT) which is the most detailed GDP calculation at the branches' and products' level (64 branches x 64 products) were integrated into gross domestic product (GDP) time series. Compiling SUT the economics is balanced making sure that all goods produced in economics are also used in it. Until now, obtaining slightly different GDP estimate from the previously published one, according to the requirements of the European System of National and Regional Accounts ESA 95, SUT were prepared for 2008, 2009 and 2010, however, this result was not integrated into GDP time series. Even though SUT are prepared three years after the reference year, final data are used when compiling them, which are not always available when carrying out annual calculations. When balancing SUT, different interpretation of separate economic units at various data sources used in composition of national accounts was found, therefore calculations of all years were looked through. It was achieved that these units are correctly perceived in all time series, therefore, those years when SUT were not prepared were also affected;
  • compliance of GDP methodology to the principles of ESA 95 indicated in a specific reservations determined by the European Commission (EC) were improved and recalculations needed were carried out;
  • changes in GDP calculations were carried out in connection with changes in the estimates of population number and changes in indicators derived from this number, taking into account data of the Population and Housing Census 2011;
  • changes in the GDP calculation methodology according to the requirements of ESA 2010 were implemented;
  • current revisions for data of 2011 and 2012 were carried out by replacing results obtained in calculations based on short-term data sources with estimations which are based on more precise data sources of annual periodicity.

Under the influence of all conditions mentioned annual GDP value at current prices is adjusted in interval from +8.4% to -0.4% as compared to the previously published.

GDP value at current prices, mln EUR and changes in per cent

Year

GDP, mln EUR

Difference

 

before the revision

revised

mln EUR

% over the published

1995

3 733

4 046

+313

+8.4

1996

4 439

4 669

+230

+5.2

1997

5 190

5 373

+183

+3.5

1998

5 807

5 982

+175

+3.0

1999

6 106

6 207

+102

+1.7

2000

6 710

6 779

+68

+1.0

2001

7 345

7 432

+87

+1.2

2002

8 114

8 378

+263

+3.2

2003

9 064

9 551

+487

+5.4

2004

10 558

11 108

+550

+5.2

2005

12 806

13 604

+798

+6.2

2006

15 832

17 078

+1 246

+7.9

2007

20 946

22 537

1 591

+7.6

2008

22 886

24 400

+1 513

+6.6

2009

18 598

18 894

+296

+1.6

2010

18 190

18 166

-24

-0.1

2011

20 312

20 297

-14

-0.1

2012

22 083

22 043

-40

-0.2

2013

23 315

23 222

-93

-0.4

 

Impact of methodological improvements carried out on the estimation of GDP volume at constant prices of 2010 can be found in the picture below.

Changes of GDP at constant prices of 2010 as per cent over the previous year1

Reasons for the revision and their impact

1. Implementation of requirements of ESA 2010 methodology

1.1. Capitalization of research and development costs

ESA 2010 determines that research and development costs do not have to be recorded as intermediate consumption any more, but must be recorded as an element of gross fixed capital formation. Expenditure on the R&D service purchased is excluded from the intermediate consumption, value of own production R&D is included in the output, and in the result of this adjustment, gross fixed capital formation is increasing correspondingly. Methodology changes positively affect GDP value.

Influence of capitalization of costs on research & development, at current prices, mln EUR and in per cent over the previously published GDP

1.2. Capitalization of expenditure for the purchase of weapons system

According to ESA 95 such weapons systems as armoured vehicles, weapons delivery vehicles, weapons themselves, tanks, etc., which cannot be used for civil aims were included in intermediate consumption. ESA 2010 stipulates capitalization of this expenditure and to include it into gross fixed capital formation. Simultaneously consumption of fixed capital of these weapons system is calculated. Output of general government sector is calculated as sum of costs: output increases for the amount of consumption of fixed capital and decreases for the amount of intermediate consumption excluded. GDP rises according to estimation of the value of consumption of fixed capital.

Influence of capitalization of expenditure on purchase of weapons system, at current prices, mln EUR and in per cent over the previously published GDP

1.3. Other changes related to the introduction of ESA 2010

ESA 2010 determines more strict principles for the classification of statistical units' institutional sectors, especially, this concerns application of qualitative criteria in determination of limits for general government sector. In difference from other EU countries, in Latvia these changes are not voluminous, because qualitative criteria were already applied. Other changes in ESA 2010 methodology, which may have both positive and negative impact on the GDP value, include changes in calculations of financial intermediation services indirectly measured (FISIM), changes in calculations of non-life insurance, etc. Their cumulative impact on the GDP varies between -16 mln EUR in 2006 to +91 mln EUR in 2010.

2. Improvement of sources and methods or impact of specific reservations of the European Commission

Gross National Income (GNI) is one of the sources of EU own resources, i.e., government instalments into the EU budget are calculated from GNI. Task of the Eurostat is to monitor that GNI is evaluated accordingly requirements of the methodology and that these data are comparable among the EU member states. If some discrepancies are found out, individual specific reservations for each country separately or transversal issues for all countries together are determined. Until September 2014, due to these specific reservations and transversal issues, all countries had to make changes in GDP (GNI) time series according to ESA 95 requirements.

2.1. Own-account production of fixed assets

ESA 95 allowed that own-account produced fixed assets for own final use may be evaluated in production costs if sufficient information on enterprise mark-up is not available. ESA 2010 stipulates, that such fixed assets must be evaluated only at basic prices, i.e., with mark-up of an enterprise. With the implementation of these requirements, mark-up was calculated for own-account produced fixed assets by enlarging the output respectively. The major impact arises from re-estimated investment in residential buildings in household sector (S.14).

Impact of changes made in evaluation of own-account produced fixed assets, at current prices, mln. EUR and in per cent over the previously published GDP

2.2. Consumption of fixed capital

Using the Perpetual Inventory Method (PIM), according to the current market values consumption of fixed capital was recalculated. The obtained results affected value of output in those sectors for which it is calculated as sum of costs (non-market producers) – in general government sector (S.13), in non-profit institutions serving households sector (S.15), as well as imputed rent calculation in household institutional sector (S.14).

Impact of changes made in calculation of consumption of fixed capital, at current prices, mln EUR and in per cent over the previously published GDP

2.3. Entertainment, literary and artistic originals

According to ESA 95 methodology, originals are considered as own-account produced gross fixed capital formation. Value of gross fixed capital formation was enlarged including own-account produced originals estimated in the future value (literary, artistic and music originals).

Impact of changes made in estimation of entertainment, literary and artistic originals, at current prices, mln EUR and in per cent over the previously published GDP

2.4. Wages and salary in kind

Output and intermediate consumption in the GDP production approach was adjusted following the methodology principle that goods and services received from the employer free of charge also must be included in wages and salaries. Such adjustment has positive impact on the GDP as goods and services produced by the enterprise itself increased the output, while goods and services purchased reduced the intermediate consumption.

Impact of the inclusion of wages and salaries in kind in the GDP calculation, at current prices, mln EUR and in per cent over the previously published GDP

2.5. Illegal economy

Requirement to include also illegal activities in the calculations of the national accounts was stipulated in ESA 95, however, harmonized recommendations for the key principles of estimation of illegal economy were developed rather recently. According to Eurostat's requirements, national accounts must include such activities as prostitution, drugs, smuggling of alcohol and tobacco. Additionally to these requirements, Latvia has also included smuggling of fuel. Estimates of illegal economy enlarge GDP value on average by 1%.

Impact of the inclusion of illegal economy in the GDP calculation, at current prices, mln EUR and in per cent over the previously published GDP

2.6. Pievienotās vērtības nodokļa plaisa

2.6. Value Added Tax fraud

GDP data includes and will also include in the future estimation of the Value Added Tax (VAT) gap. VAT gap (according to methodology requirements of the national accounts) is VAT unpaid to the tax authority by entrepreneurs, even though the buyer has paid full price for the purchase of good (including VAT). VAT gap is made up both by intentional fraudulent cases and by those cases when enterprise for some reason was not able to fulfil its obligations towards the tax authority (for instance, bankruptcy of an enterprise). VAT gap is not made up by those cases when the transaction was carried out with the participation of both parties agreeing on the price which excludes VAT, i.e., both parties initially know that the VAT will not be paid. Data source used for the calculations is detailed national accounts data and VAT rates of the respective year at product level. From 2008 - 2010 calculations of the VAT gap were carried out in several steps using balanced supply-use tables:

  1. Theoretical VAT receipts have been calculated to all transactions which are subject to non-deductible VAT except intermediate consumption of non-observed economy. There has been made an assumption that transactions for intermediate consumption of non-observed economy should be classified as VAT fraud with purchasers’ complicity.
  2. VAT fraud with purchasers’ complicity has been calculated just for final household consumption. Calculation of VAT fraud with purchasers’ complicity has been based on output of non-observed economy and VAT rates. There has been made assumption that the part what concerns to final household consumption and what concerns to intermediate consumption has the same ratio as their bases have.
  3. Total VAT fraud without purchases’ complicity has been calculated as theoretical VAT (except VAT fraud from intermediate consumption of non-observed economy) less VAT fraud with purchases’ complicity (only VAT fraud from final household consumption) less published VAT.

For years 1995-2007 and 2011-2012 calculations have been made combined with extrapolations depending how detailed data were available. 

Impact of the inclusion of VAT gap in the GDP calculation, at current prices, mln EUR and in per cent over the previously published GDP

2.7. Other changes related to work on specific reservations of GNI

Other changes according to ESA 95 which have an impact on GDP value:

  • integration of supply-use tables into GDP time series (this item also includes current revisions for 2011 and 2012, as well as integration of Population and Housing 2011 data (also see section 3 of this description));
  • using the latest information available, calculations on own-account produced software were adjusted (2007 - 2012);
  • recalculation of insurance service was carried out, making sure that insurance service is balanced from all GDP approaches;
  • changes in calculations of financial intermediation services indirectly measured (FISIM).

3. Impact of Population Census 2011

In GDP calculations published on September 30 this year Population Census 2011 data were fully used. Until now estimation of the number of population and derived indicators used in GDP calculation were based on the data from Population Census 2000; data from Population Census 2011 were used only partially – as a divider to obtain GDP estimate per person.

Changes in the number of population negatively affected final consumption of households (even though consumption structure remained practically the same, the number of consumers reduced). Non-observed economy also shrank because the calculation is based onthe estimates of non-registered employment.When the employment figures were recalculated, the number of non-registered employment reduced significantly. Taking into account that such significant changes in GDP time series can be carried out only once in five years, moreover, only in those years that end with "4" or "9", data of Population Census 2011 are fully integrated into GDP calculations only this year.

Impact of Population Census 2011 on GDP, at current prices, mln EUR

Year

Impact of Population Census on GDP

GDP per capita, mln EUR

Number of population, thsd persons

 

mln EUR

% of GDP before revisions

before revision

after revision

difference, %

before revision

after revision

difference, %

2000

-

-

2 828

2 863

+1.2

2 373

2 368

-0.2

2001

-87.2

-1.2

3 119

3 179

+1.9

2 355

2 338

-0.7

2002

-49.2

-0.6

3 469

3 627

+4.5

2 339

2 310

-1.2

2003

-67.7

-0.7

3 898

4 174

+7.1

2 325

2 288

-1.6

2004

-94.8

-0.9

4 565

4 908

+7.5

2 313

2 263

-2.2

2005

-73.6

-0.6

5 566

6 076

+9.2

2 301

2 239

-2.7

2006

-42.5

-0.3

6 919

7 696

+11.2

2 288

2 219

-3.0

2007

-57.9

-0.3

9 203

10 239

+11.3

2 276

2 201

-3.3

2008

-529.2

-2.3

10 100

11 203

+10.9

2 266

2 178

-3.9

2009

-614.3

-3.3

8 247

8 821

+7.0

2 255

2 142

-5.0

2010

-638.3

-3.5

8 124

8 663

+6.6

2 239

2 097

-6.3

If until now shadow economy was comprised by calculations on the value added of non-registered employment, in the future this indicator will be comprised by 3 components:

  • contribution of non-registered employment;
  • illegal economy;
  • calculation of VAT gap.

Each of these components is evaluated separately.

 

Share of the shadow economy in the GDP at current prices, in per cent of GDP

 

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

% of GDP

15.6

12.5

11.5

11.0

10.4

8.2

12.5

20.2

21.2

20.8

16.0

 

More information:
Intars Abražuns
Macroeconomic Statistics Department
Tel.: + 371 67366864

 



1 In this and other pictures numerical information can be obtained by clicking on the picture.