Blog Post

Welcome to the dark side: GDP revision and the non-observed economy

Back in 2009, the United Nations Statistical Commission endorsed a revision to the System of National Accounts (SNA), which sets the international standards for the compilation of national accounts. As a consequence, Eurostat amended the European equivalent of the SNA, i.e. the European System of Accounts (ESA) leading to a revision of GDP figures.

By: and Date: March 2, 2015 European Macroeconomics & Governance Tags & Topics

Back in 2009, the United Nations Statistical Commission endorsed a revision to the System of National Accounts (SNA), which sets the international standards for the compilation of national accounts. As a consequence, Eurostat has amended the European equivalent of the SNA, the European System of Accounts (ESA) leading to a revision of GDP figures.

The changes come from the accounting treatment of some items. Research & Development (R&D) purchases and military weapon systems have been reclassified from intermediate consumption to investments, which increases value added (the difference between output and intermediate consumption), and thus GDP. Additional changes have been introduced in the accounting of pension entitlements, directly affecting the computation of compensation of employees and households’ savings rate. Other measures, such as changes in measurement of financial services, and the classification of head offices, holding companies and Special Purpose Entities, have little or no impact on the GDP numbers.

Source: OECD

The reclassification has had a positive effect on GDP, increasing it on average by 3.5 percentage points for the EU and the Euro area as whole.

Figure 1 shows the average difference between GDP computed with the new and the old standard, retrospectively over the period 2000-2013. The reclassification has had a positive effect on GDP, increasing it on average by 3.5 percentage points for the EU and the Euro area as whole. Country variation is however significant; the impact of the reclassification ranges from 0.3 percentage points in Luxembourg to 9.3 percentage points in Cyprus. Although the revision may have had a visible impact on GDP levels, growth rates are generally less affected.

Unfortunately, Eurostat does not provide a breakdown of how the different accounting changes contribute to the final number. However, the OECD published this month a report disentangling the effect of the different factors for all OECD countries in year 2010 (Figure 2).

Source: OECD

Having a breakdown is important because most countries have used the opportunity of the changeover in standards to also introduce a new statistical benchmark estimate, introducing new sources and methods. The OECD report shows that in some countries this has an important impact, most notably in the Netherlands and the UK (see the light red bar in Figure 2).

Other than that, R&D reclassifications tend to be the item with the largest impact on GDP recalculation, whereas reclassification of military weapon systems has very limited impact, with the exception of Greece. In Europe, the impact of R&D reclassification on 2010 GDP ranges between 0.5 percentage points and 4 percentage points, compared to an OECD average of 2.2.  The effect of the change is highest in Finland and Sweden – which have among the highest gross spending levels on R&D in EU – and lowest in Poland, the Slovak Republic, Luxembourg and Greece (Figure 3).

Source: OECD

The impact of including illegal activities varies across countries. Both the new and the old standards for the compilation of national accounts stated that illegal activities should be included in GDP, but many countries did not explicitly include estimates for these activities, also because the definition of illegal activities was only streamlined by the decision in September 2014. In contrast with the previous system, EU States are now required to comply with common methodological guidelines how to account for prostitution, the production and trafficking of drugs and alcohol and tobacco

This decision was expected to have a differentiated impact across countries, and the OECD breakdown of GDP change between the old and new system make clear the extent of this divergence.

The inclusion of estimated illegal activities results in an increase in 2010 GDP by 1 percentage point in Italy and 0.9 percentage points in Spain.

In Figure 3, Italy and Spain stand out as two special cases. The inclusion of estimated illegal activities results in an increase in 2010 GDP by 1 percentage point in Italy and 0.9 percentage points in Spain. This is about five times the average for the OECD as a whole, which was 0.2 in 2010. Perhaps even more striking is the fact that in these two countries the impact of including illegal activities is only slightly smaller than the impact of reclassifying R&D (which increased 2010 GDP by 1.3 pp in Italy and 1.2 pp in Spain).

Apart from illegal activities, GDP numbers can also be influenced by the share of countries’ ‘legal’ shadow economies, defined as all market-based legal production of goods and services which are deliberately concealed from public authorities.

A report on the shadow economy in Europe shows that its size reached a 10-year low in 2013. Several reasons might explain this development: improving economic conditions, the dramatic contraction of the construction-sector in several crisis-hit countries (which is historically a sector with a large shadow economy), a crack-down on tax evasion in recent years and generally stricter law enforcement.

Source: Schneider Friedrich (2013), ‘The Shadow Economy in Europe, 2013’, ATKearney

Interesting to note is the comparatively small size of the shadow economy in Western Europe, with Southern and Eastern Europe exhibiting substantially higher shadow economy activities in % of GDP. The euro area is characterized by a great heterogeneity, with the size of the shadow economy in % of GDP in 2013 varying from just 7.5% in Austria to 27.6% in Estonia. In absolute numbers, the shadow economies in Italy and Germany were as large as Austrian GDP in 2013. Statistical offices make adjustments to account for shadow economy in order to arrive at exhaustive estimates of GDP and national accounts (see OECD)

A report on the shadow economy in Europe shows that its size reached a 10-year low in 2013.

The rationale for streamlining guidelines for both the inclusion of legal and illegal activities in the national accounting – which has been extensively debated in the media – is that GDP is supposed to be comparable across countries, independently of differences in national law. As recently pointed out by the OECD, international comparability has become even more important, as contributions to international organisations (including e.g. the European Union) are based on levels of Gross National Income, which is linked to GDP.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More by this author

Working Paper

Cover WP 2017_06

Regional and global financial safety nets: the recent European experience and its implications for regional cooperation in Asia

Comparing and evaluating financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis. Asian countries can draw several lessons from European experiences.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance Date: April 20, 2017
Read article More on this topic More by this author

Podcast

Podcast

Labour mobility in Europe

With anti-immigration sentiment on the rise, we look into the issue of labour mobility in Europe. How does migration affect labour markets and how does perception of migration differ from reality? What are the economic challenges for migrants and how do these challenges reflect on social integration? We try to answer these questions with our guests in this episode of The Sound of Economics.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 20, 2017
Read about event More on this topic

Past Event

Past Event

Understanding the French elections

This is a restricted workshop on the forthcoming French elections to understand the challenges and possible scenarios.

Speakers: Grégory Claeys, Thomas Guénolé-Ryzhakov, Bruno Jeanbart and Guillaume Tusseau Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 19, 2017
Read about event

Upcoming Event

May
30
11:00

Geo-blocking in the digital single market

Geo-blocking is a discriminatory practice that is wide-spread in EU. It prevents online customers from accessing and purchasing products or services from a website based in another member state

Speakers: Felipe Florez Duncan, Marine Elgrichi, J. Scott Marcus, Fabian Paagman, Bertin Martens, Georgios Petropoulos, Agustin Reyna, Werner Stengg and Roza von Thun Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Upcoming Event

May
31
12:30

Inclusive growth: global and European lessons for Spain

Can manufacturing still be a driver for inclusive growth around the world? What European and national policies can foster inclusive growth in Europe? What is the situation in Spain and what can Spain learn from the global and European experiences?

Speakers: Cristina Cabrera, Zsolt Darvas, Maria Demertzis, Alejandra Kindelán, Robert Lawrence and Federico Steinberg Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Calle Los Madrazo 36-38 Madrid
Read about event More on this topic

Upcoming Event

Jun
1-2
08:30

Fiscal frameworks in europe: background and perspectives

On 1-2 June Bruegel together with Danmarks Nationalbank and the Copenhagen Business School will organise a conference about fiscal frameworks in Europe. The conference will re-evaluate fiscal frameworks in Europe in light of experience gathered since the formation of the Economic and Monetary Union (EMU). The implications for the design of fiscal policy stemming from […]

Topic: European Macroeconomics & Governance Location: Danmarks Nationalbank
Read about event More on this topic

Past Event

Past Event

Can EMU survive a multi speed Europe?

On 6 April Bruegel, as in previous years, hosted the presentation of the Euro Yearbook, a collection of experts’ insights on the construction of the European Monetary Union through 2016.

Speakers: Pablo Zalba Bidegain, Maria Demertzis, Fernando Fernandez, Javier Méndez Llera, Karl Pichelmann and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 6, 2017
Read about event

Past Event

Past Event

Micro- and macro-based methods in assessing the impact of investment

This workshop will discuss methods for accurately evaluating the performance of public and private investment initiatives.

Speakers: Francesco Di Comite, Grégory Claeys, Zsolt Darvas, Helmut Kraemer- Eis, Áron Gereben, Robert P. Lieli, Simon Mizrahi, Amine Ouazad, Debora Revoltella, John K. Swales, Simone Signore, Natacha Valla, Marcin Wolski and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 5, 2017
Read article More on this topic More by this author

Blog Post

B Coeuré - photo

Central bank communication in a low interest rate environment

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at an event organised by Bruegel, Brussels, 31 March 2017

By: Benoît Coeuré Topic: European Macroeconomics & Governance Date: March 31, 2017
Read about event More on this topic

Past Event

Past Event

Central bank communication in a low interest rate environment

At this event, we are pleased to welcome Mr. Benoît Coeuré, Member of the Executive Board of the European Central Bank at Bruegel.

Speakers: Benoît Coeuré and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: what are the possible liabilities?

The EU-UK financial settlement will be a complex part of the Brexit negotiations. Here the authors estimate that at end-2018 the EU will have outstanding commitments and liabilities totalling €724bn. Most of these relate to spending after the UK’s likely departure date, but are tied to commitments made during the UK’s EU membership.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

Brexit bill negotiators must answer these 12 questions

Is Brexit a divorce, or is the UK leaving a club? This is the first question to answer as negotatiors discuss the key aspects of the EU-UK financial settlement. The authors present various scenarios, and find that the UK could be expected to pay between €25.4 billion and €65.1 billion. But the final cost can only be calculated after extensive political negotiations.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Load more posts