Chapter 10: National Accounts and the Health Sector

1. Purpose and History

National accounts provide statistical estimates of the value of national income, product and expenditure, and of their main components such as consumption, investment and government expenditure, on a standard basis which is consistent over time and between countries. They have a central place in economic planning; for example, in the UK various economic models based on the national accounts are used to forecast the effects of changes in government policy. Early forms of national accounts are found from the 18th century onward in Europe. Modern Western national accounting started from about 1900. There has been a rapid growth since then, with technical advances in national accounting methods more or less keeping pace with increasing government responsibility for economic affairs, and the increasing capacity and availability of computers. National income estimation in developing countries began in about 1950 (e.g. Jamaica) and estimates are now available for almost all countries.

National income/product per capita is the most widely used general-purpose indicator of the level of development. Hence it is important to understand how it is calculated and what are its limitations. National income must not be confused with government or public income, which is the share of national income which comes under government control.

2. Methods of Estimation

Modern national accounting started from an interest in welfare problems and concentrated on the income side. Such problems include: How numerous are the poor? How are incomes distributed? What is the effect of taxes?

At the simplest level, given a record of the income for a period - say, a year - of every individual in a country, it might be possible to add these together to give total national income. This approach is basically right if certain complications are considered:

- there are corporate incomes which do not accrue to individuals (the undistributed surpluses of businesses)

- there are similar surpluses (or deficits) related to government income

- part of the income of individuals and governments is passed on as a gift to others through transfer payments.

Provided double counting of transfer payments is eliminated, the national income can be calculated, in theory, as the total of individual, corporate and government incomes. Unfortunately, complete records of individual incomes are not available even in developed countries - much less in developing ones with less complete bureaucracies and tax systems, and many non-cash transactions.

How can the gaps by filled? Part of the answer is to take advantage of an important principle:

- all incomes result ultimately from production
- all incomes are spent, resulting in expenditure on consumption or investment.

Therefore the production and expenditure approaches can be used to supplement the income approach: if, for a part of the economy, there is no information on incomes, it might be possible to replace it by information on production or expenditure. For example, if the incomes of doctors are not known, they might be estimated from the public's expenditure on doctors' services. Information from more than one approach can also be used as a check on accuracy.

In practice, estimation in developed countries is more likely to start with production than incomes. Much of the basic information is in the accounts of businesses (including government enterprises). The basic items in their current accounts are:

Receipts	Expenditure
Sale of products	Purchase of goods and services from other enterprises
	Wages and salaries	)
	Rent (land, buildings)	) 'factor
	Interest	) incomes'
	Profits	)
	Depreciation (value of capital used in production)
	Taxes

If the expenditure side for all businesses were added together, all the incomes generated in industry would have been included; and correspondingly for government enterprises. Certain adjustments have, however, to be made to this crude total. The value of goods and services bought from other businesses (intermediate goods) must be left out, because these would involve double counting i.e. because the corresponding incomes will show up somewhere else in the economy, to count both would be to count the same item twice. Factor incomes must be included but depreciation and taxes can be included and/or excluded (see next section).

In some industries, even in developed countries, the basic accounts are poor (for example, self-employed lawyers and doctors, or small-scale farmers). The gaps have to be filled by estimates of what the public spends on the output of these industries (for example, through surveys of household budgets or retail sales).

In developing countries the expenditure approach plays a bigger role in national accounting than the income approach, mainly because of poor information. Another reason is that in some developing countries a large part of the national income is spent on imports, which are relatively accurately recorded for tax purposes. Tracing the money spent on importing and distributing foreign goods provides a framework for the rest of the national accounts.

When national accounts estimates are published, the totals can be broken down in any degree of detail, according to their purpose. But it is universal to distinguish between sectors that have different economic roles - the basic ones are industry, government, households (representing individual consumers and workers) and rest of the world (to take care of imports and exports). All these represent current payments. A capital sector is added to cover payments from the current to the capital account (savings, depreciation, investment). The basic national accounts record the flows between these five sectors.

3. Alternative Forms of the Totals

There are some descriptive words attached to totals like 'income' and 'product' to reflect alternative ways of treating marginal items:

- domestic v. national - all incomes generated within the country v. all incomes accruing to nationals of the country (e.g. if on balance there is an outflow of profits to foreign industrial areas, as is not uncommon in developing countries, the country's domestic product will be greater than its national product)

- gross v. net - including or excluding the value of capital assets used in production (depreciation)

- at market price v. at factor cost - including or excluding indirect taxes.

Ideally, like with like should be compared; but in comparing developing countries this is not always possible.

It is important to notice whether a total is given at current prices or constant prices. In the latter case it will have been adjusted using some index to reflect the prices of some base year.

4. National Income as an Indicator of Welfare

One of the main uses of national income figures is to serve as an indicator of changes in the welfare of the population over time (or welfare differences between countries). For this purpose the estimates have well-known limitations:

- the quality of data is uneven between industries and between countries; for example the economic importance of small farming in developing countries may be underestimated

- omitted items - no money value is attached to many non-market activities, such as domestic work in one's own household

- inclusion of activities which do not contribute to welfare - defence? advertising? alcohol? pornography?

- silence on income distribution - the same per capita average could represent different patterns of income distribution (and so of welfare).

Discussion of these problems has a long history in the developed world, but has recently been emphasized much more for developing countries. Suggestions for improvement are along two main lines:

- to elaborate existing systems of national accounting (for example incorporate the costs of pollution; show incomes of different groups separately in the accounts)

- to use direct welfare measures such as life expectancy, infant mortality, literacy, nutrition, employment, separately or incorporated into a single quality of life' index. (Note that between countries, all these measures are in fact highly correlated with per capita incomes.)

At present, the most common approach appears to be to use a statistic such as gross national product per capita as the best single general indicator of welfare and development, supplemented with special indicators for different purposes.

5. The Health Sector and National Accounts

Although the national accounts might appear to provide the information required to assess health sector expenditure, in practice health sector information is generated through special surveys (see Chapter 11). This is because the national accounts do not allow easy or adequate estimation of health expenditure. Among the problems are:

- the full range of health expenditure is broken up in various ways

* expenditure on health-related items such as domestic water supplies is excluded from health expenditure (it clearly is difficult to draw the line between such non health items which affect health and more direct health items)

* expenditure on the education of health personnel is classified under 'education'

* premiums paid for health insurance services are classified under 'financial services' (and are often excluded from national accounts calculations)

- national accounts data are too aggregated to allow easy identification of expenditure such as household payments for the care provided by non-government, non-profit hospitals (which may be large in countries with mission hospitals)

- treatment of money flows in national accounts does not adequately represent the health sector pattern e.g. user fees are seen as transfers to government in national accounts, but for the health sector they are direct payments and part of consumer expenditure.

More generally, there are two central national accounting questions that are especially difficult to answer for the health sector:

- are all relevant activities represented by monetary expenditure?

- are monetary measures appropriate measures of the relative importance of activities (their value)?

As 'health' is a broad-ranging concept it is difficult to identify all relevant activities. However, there are many individual actions (e.g. smoking or not smoking) and services rendered by one household member to another (e.g. discouraging smoking) that are important to health but that cannot be measured in monetary terms. These are missed both by national accounts data and by special health sector expenditure surveys.

Monetary measures have a variety of weaknesses in assessing the relative importance of activities within the health sector. For example, there are fundamental accounting differences between institutions in the government and private sectors. The value of the output of a private hospital is based on the price clients are willing to pay for its services but in government hospitals the value is based on the cost of inputs. In other words, the valuation of a private hospital's output includes an element of profit but the valuation of a government hospital's output does not, and so the public sector's output is underestimated relative to that of the private sector.

In general, the appropriate valuation of activities within the health sector is a difficult issue, as discussed in Chapter 9. National accounts data cannot fully assess the contribution of health or health-related expenditure to welfare - stressing the importance of using complementary indicators in welfare assessment (e.g. access to safe water supplies, percentage literate). Health sector expenditure surveys should also include such assessments.