Study sheet: National Accounting and Economic Aggregates

📋 Course Outline

1. National Accounting and Economic Flows
2. Institutional Sectors and Households
3. Non-Financial Enterprises and Their Forms
4. Financial Companies and Services
5. Public Authorities and Their Functions
6. Reasons for State Intervention
7. Welfare State and Social Solidarity
8. Historical Examples of Public Action
9. Welfare State and Social Redistribution
10. Institutional Sectors and Global Economy
11. Goods and Services Operations
12. Production Factors and Value Added
13. Distribution and Financial Operations
14. Resource-Employment Equilibrium
15. GDP Measurement and Limitations
16. National Income and Social Progress

📖 1. National Accounting and Economic Flows

🔑 Key Concepts & Definitions

• National accounting : a statistical technique that uses available macroeconomic data to construct a coherent overall representation of an economy within a territory and during a given period
• Economic flow : the annual variation of a recorded quantity expressed in monetary form
• Economic circuit : the set of economic flows created by operations between institutional units

📝 Essential Points

• French national accounting was harmonized with other countries from 1976, and France adopted the United Nations standards that led to the European System of Accounts, SEC95, in 1995.

💡 Memory Hook

Measuring flows → representing the national economy

📖 2. Institutional Sectors and Households

🔑 Key Concepts & Definitions

• Institutional unit : INSEE — a resident economic actor that owns assets, can incur debt, undertakes economic activities, and carries out operations with other institutional units
• Household : INSEE — all the occupants of the same dwelling, whether or not they are related, and it may consist of a single person

★ Must-know

• The six institutional sectors are:
  • households
  • non-financial corporations
  • financial corporations
  • public administrations
  • non-profit institutions serving households
  • the rest of the world

Further detail

• In 2015, France had 29 million households with an average size of 2.2 people, partly because of population ageing and the growth of single-parent and blended families.

💡 Memory Hook

MEFIR: households, enterprises, finance, public authorities, non-profits, rest of world

📖 3. Non-Financial Enterprises and Their Forms

🔑 Key Concepts & Definitions

• Non-financial corporation : the smallest combination of legal units forming an autonomous organizational production unit for goods and services, especially in the allocation of its current resources

★ Must-know

📌 A Société Anonyme limits each shareholder’s liability to the amount of the shareholder’s contribution, whereas a Société à responsabilité limitée is generally managed by a manager appointed by its associates and usually has between 2 and 100 associates.

• A public enterprise is one in which the State or a public authority exercises dominant influence through ownership, financial participation, a majority of capital, or a majority of voting rights.

• The main enterprise-size categories are: micro-enterprises with fewer than 10 employees and turnover not exceeding €2 million, SMEs with 10 to 250 employees and turnover below €50 million, ETIs with 250 to 5,000 employees, large enterprises with more than 5,000 employees

Further detail

• A Société coopérative et participative distributes its profit into a labour share of at least 25%, a capital share capped at 33%, and a reserve share of at least 16%.

💡 Memory Hook

Private ownership seeks profit; public ownership gives the State dominant influence

📖 4. Financial Companies and Services

🔑 Key Concepts & Definitions

• Financial corporation : SEC 2010 — a legally incorporated market producer whose main activity is producing financial services, including financial intermediation and auxiliary financial activities

📝 Essential Points

• The nine financial subsectors are:
  • the central bank
  • deposit-taking institutions excluding the central bank
  • money market funds
  • non-money market investment funds
  • other financial intermediaries
  • financial auxiliaries
  • captive financial institutions and non-institutional lenders
  • insurance corporations
  • pension funds

📖 5. Public Authorities and Their Functions

🔑 Key Concepts & Definitions

• Allocation function : Richard Musgrave, The Theory of Public Finance, 1959 — corrects market failures by directing resources toward socially necessary goods and services, including through public production, subsidies, or taxes

★ Must-know

• Public administrations are divided into:

  • central administrations
  • local administrations
  • social security administrations

• Public administrations perform three functions (Richard Musgrave, 1959):

  • producing non-market services
  • redistributing income and wealth
  • stabilizing economic activity

Further detail

• The functions of the State expanded beyond sovereign functions after the 1929 crisis, with the development of the welfare state and the influence of Keynesian ideas.

💡 Memory Hook

RAS: redistribution, allocation, stabilization

📖 6. Reasons for State Intervention

🔑 Key Concepts & Definitions

• Externality : occurs when an economic agent’s action changes the well-being of other agents without compensation, causing private costs or benefits to differ from social costs or benefits
• Asymmetric information : a situation in which economic agents do not possess the same information, potentially producing adverse selection or moral hazard and impairing market efficiency

★ Must-know

📌 The State and the market are complementary because markets require a legal and institutional framework established by the State, while excessive State coercion can produce a predatory State and reduce wealth creation. — Antoine Bozio et Julien Grenet, Economie des politiques publiques, 2017

Further detail

• Public authorities can correct market failures through:

  • corrective taxation
  • subsidies
  • public production
  • quantity regulation
  • quality standards
  • certification

• The Sherman Act was adopted in the United States in 1890 to combat anti-competitive practices and abuses of dominant positions.

💡 Memory Hook

Market failures → public intervention

📖 7. Welfare State and Social Solidarity

🔑 Key Concepts & Definitions

• Welfare-state crisis : Pierre Rosanvallon, La crise de l’Etat-providence, 1981 — problems of financing, legitimacy, and efficiency affecting social protection, including deficits, possible inactivity traps, bureaucracy, and persistent inequalities

★ Must-know

• According to John Rawls in A Theory of Justice (1971), social justice exists when the economic situation of two agents improves together rather than one progressing at the expense of the other.

• The Beveridge system follows the three-U rule (William Beveridge, 1942):

  • universal participation in financing
  • uniform benefits
  • a single fiscal contribution

Further detail

• During the Thirty Glorious Years from 1947 to 1970, disposable-income inequalities declined through progressive taxation and transfers benefiting disadvantaged households.

• In 2018, public expenditure in France represented 56% of GDP and compulsory levies represented 53.3% of GDP.

💡 Memory Hook

Redistribute → protect against risks → debate legitimacy and efficiency

📖 8. Historical Examples of Public Action

★ Must-know

• In 1868, the Meiji Restoration began in Japan and initiated political opening, Westernization, and industrialization that ended in 1912.

• The Beveridge reports of 1942 and 1945 defined two major postwar objectives: protection against social risks and full employment. — William Beveridge

• The COVID-19 crisis renewed Keynesian ideas and led to massive public intervention to address the health emergency, support financial activity, and protect the global economy.

Further detail

• The Japanese State provided infrastructure such as:
  • telegraph networks
  • roads
  • bridges
  • ports
  • railways
  • public schools

💡 Memory Hook

Meiji industrialization → postwar welfare state → renewed intervention after COVID-19

📖 9. Welfare State and Social Redistribution

🔑 Key Concepts & Definitions

• Social protection : the system through which the community takes responsibility for the economic consequences of social risks that reduce individuals’ living standards, such as old age or unemployment

★ Must-know

📌 Horizontal redistribution, also called the Bismarckian system, follows an insurance logic financed by compulsory salary-based social contributions, whereas vertical redistribution, also called the Beveridge system, follows an assistance logic financed mainly by taxes and aims at universal coverage of the poorest. — Bozio et Grenet, 2017

Further detail

• France introduced family allowances in 1932, the Matignon agreements in 1936, social security and the SMIG in the 1950s, and unemployment insurance in 1958.

• During the COVID-19 crisis, France expressed its interventionist solidarity through the slogan “Whatever it takes,” associated with Macron.

📌 Robert Nozick’s libertarian conception of justice holds that individual outcomes should depend on merit and effort and opposes redistribution to the poorest, whereas Obama’s approach considered inequalities of income and access to healthcare.

💡 Memory Hook

Insurance protects contributors against risks, whereas assistance supports the poorest universally.

📖 10. Institutional Sectors and Global Economy

🔑 Key Concepts & Definitions

• ISBLSM : private organizations that provide non-market services to households without seeking profit, including associations, political parties, trade unions, churches, and charities
• Rest of the world : all nations outside a state’s borders with which that state maintains economic relations

★ Must-know

• France’s economic openness rate, calculated as the average of exports and imports as a percentage of GDP, rose from 13% in 1965 to 32% in 2019.

Further detail

• In 2019, foreign direct investment amounted to more than 31 billion dollars invested in France, while French foreign direct investment amounted to 34.5 billion dollars.

• Foreign-owned transnational firms contributed to more than 10% of employment in France, two-thirds of French exports went to European Union countries, and most French capital was invested in EU countries.

💡 Memory Hook

Globalization increases openness → greater exposure to international shocks and competition.

📖 11. Goods and Services Operations

🔑 Key Concepts & Definitions

• Production : INSEE — the socially organized activity of resident units that creates goods and services usually exchanged on the national market or obtained from market-traded factors of production
• Final consumption : directly satisfies the individual needs of households or the collective needs of enterprises and administrations

★ Must-know

📌 Market production is sold at a significant price covering at least 50% of its production cost, whereas non-market production is provided free of charge or at a price that is not economically significant.

📌 The market price is paid by the consumer, whereas the basic price is the amount actually received by the producer after product taxes and production subsidies are taken into account.

Further detail

📌 Fixed capital formation consists of durable goods acquired for more than one year, whereas inventory formation concerns goods retained or released from stocks over time.

💡 Memory Hook

Market production is sold at a significant price, whereas non-market production is free or economically insignificant.

📖 12. Production Factors and Value Added

🔑 Key Concepts & Definitions

• Value added : the additional value created by an enterprise’s productive activity beyond the intermediate consumption purchased from other enterprises

★ Must-know

📌 Circulating capital consists of goods and services used during one production cycle, whereas fixed capital consists of durable production means such as machines, buildings, and transport equipment.

📐 Formula — Gross value added equals production minus intermediate consumption: $VAB = production - intermediate\ consumption$.

Further detail

• A hairdresser charging 30 euros for a service requiring 10 euros of purchases creates 20 euros of value added.

💡 Memory Hook

Inputs are transformed by production → value added and income distribution.

📖 13. Distribution and Financial Operations

🔑 Key Concepts & Definitions

• Financial operations : the creation and circulation of means of payment and the financing required for economic activity

★ Must-know

📌 Payment instruments include money and international means of payment, placement instruments include deposits, negotiable bills, shares, and bonds, and financing instruments include short-, medium-, and long-term credit.

📌 A flow variable has a time dimension and is measured over a period, whereas a stock variable is measured at a point in time without that period dimension.

Further detail

• Since the European System of Accounts was introduced in the 1990s, national accounting has included stock measurements alongside wealth-flow measurements.

📖 14. Resource-Employment Equilibrium

🔑 Key Concepts & Definitions

• Resource-employment equilibrium : the state in which the total resources available for a product equal the total uses made of that product

★ Must-know

📐 Formula — The simplified resource-employment equilibrium is $P + M = CI + CF + FBCF + VS + X$, where production and imports equal intermediate consumption, final consumption, fixed capital formation, inventory changes, and exports.

📐 Formula — The more exact equilibrium is $P + taxes - subsidies + MC + MT + M = CI + CF + FBCF + VS + X$, including taxes, subsidies, commercial margins, and transport margins.

Further detail

• The main employments are:
  • intermediate consumption
  • final consumption
  • gross fixed capital formation
  • inventory variation
  • exports

💡 Memory Hook

Resources: production and imports; uses: intermediate consumption, final consumption, investment, stocks, exports.

📖 15. GDP Measurement and Limitations

🔑 Key Concepts & Definitions

• Gross domestic product : the sum of goods and services obtained within a territory through the use of production factors
• Purchasing power parity : uses monetary conversion rates based on the prices of a consumption basket to compare GDP volumes across countries while eliminating price-level differences

★ Must-know

📐 Formula — GDP can be measured by adding final consumption, fixed capital formation, inventory variation, and exports, then subtracting imports: $GDP = CF + FBCF + VS + X - M$.

📌 Real GDP is measured at constant or deflated prices after removing inflation, whereas nominal GDP is measured at current prices without correcting for inflation.

Further detail

• Simon Kuznets created GDP in 1934 after the 1929 financial crisis to measure economic recovery.

📐 Formula — Using a base-year consumer price index, real GDP is calculated as $real\ GDP_n = \frac{nominal\ GDP_n \times CPI_{base\ year}}{CPI_n}$.

• In 2012, domestic work represented 60 million hours in France, and valuing it at the SMIC would have represented one-third of GDP.

💡 Memory Hook

Nominal GDP uses current prices, whereas real GDP removes inflation.

📖 16. National Income and Social Progress

🔑 Key Concepts & Definitions

• Gross national income : GDP plus primary incomes received from the rest of the world minus primary incomes paid to the rest of the world

★ Must-know

📌 GDP may be overestimated because it adds defensive expenditures and ignores negative externalities, while it may be underestimated because it excludes domestic production and parts of the underground economy.

• The commission’s recommendations included: measuring material well-being through income, consumption, wealth, and income distribution, including non-market activities, using multidimensional well-being indicators, measuring the sustainability of well-being for future generations

Further detail

• The Stiglitz-Sen-Fitoussi Commission submitted a report to President Sarkozy in September 2009 on measuring economic performance and social progress.

📐 Formula — The Human Development Index combines education, life expectancy, and GDP: $HDI = education + life\ expectancy + GDP$.

• The gross national income corresponds to the aggregate called gross national product in the European System of Accounts 1995 and includes production by national units at home and abroad.

📊 Synthesis Tables

Institutional Sectors

Sector	Main function	Typical examples
Households	Consumption	Individuals and dwelling occupants
Non-financial corporations	Production of market goods and services	Industrial and service enterprises
Financial corporations	Financial intermediation and auxiliary services	Banks, insurers, pension funds
Public administrations	Non-market services, redistribution, stabilization	Central, local, and social-security administrations

Public Functions and Justifications

Function or justification	Main objective	Typical instrument
Allocation	Correct market failures	Public production, subsidies, taxation
Redistribution	Reduce income and wealth inequalities	Taxes and transfers
Stabilization	Smooth macroeconomic fluctuations	Economic support and countercyclical policy
Market framework	Make exchanges legally viable	Property rights and regulation