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Blue Book 2011: Improvements to Gross Capital Formation Estimates This product is designated as National Statistics

Released: 19 August 2011 Download PDF

Abstract

The article describes the impact of the changes being introduced at Blue Book 2011 (new classification, systems and methodology) on GDP(O), IoS and IoP. The main sections describe the new classification, the level of publication, the new series identifiers and the main methodological changes.

Acknowledgements

The author would like to thank: Musaddek Ali, Elizabeth Birt, Claire Chetnik, Anna Davies, Steve Drew, Alison McCrae, Andy Phillips, Isabella Saunders, Graeme Walker and Terry-Ann Ware who provided input into this paper.

Summary

The Quarterly National Accounts consistent with Blue Book 2011, will be published on 5 October 2011. A separate article by Everett (2011) set out the scope and content of Blue Book 2011. This article explains the changes impacting on: gross fixed capital formation, inventories, valuables and capital stock estimates.

1. Introduction

The United Kingdom (UK) Quarterly National Accounts, consistent with Blue Book 2011, will be published on 5 October 2011. Important changes for Blue Book 2011, as outlined by Everett (2011), are:

1. The UK National Accounts will be published using the revised Standard Industrial Classification 2007 (SIC 2007). The SIC 2007 classifies businesses to a standard set of industries. Currently, the industry classification used within the UK National Accounts is based on the Standard Industrial Classification 2003 (SIC 2003), see ONS (2002). An update to the international classifications has occurred with changes reflected in SIC 2007, see ONS (2007) for links to the complete list of classifications. The use of this new classification is a requirement across Europe and impacts on a wide range of statistics produced from the ONS.

2. The UK National Accounts will be published using an integrated production system on a new IT platform, which will incorporate some changes to methodology. For example, improved deflation methodology will be incorporated.

3. The reference year and base year will both be 2008.

This article summarises these changes and outlines their potential impacts for the gross capital formation estimates that will be introduced in the Quarterly National Accounts consistent with Blue Book 2011 on 5 October 2011, and also the Business Investment Statistical Bulletin. The changes will also impact the calculation of the capital stocks estimates which will be published on 2 November 2011 (ONS, 2011a).

2. What is gross capital formation?

Gross capital formation is measured by the total value of gross fixed capital formation, change in the level of inventories, and acquisitions less disposals of valuables.
At Blue Book 2010, the percentage contribution to total gross capital formation for the 2006 reference year was: gross fixed capital formation 97.6 per cent , the change in the level of inventories 2.2 per cent, and acquisitions less disposals of valuables 0.1 per cent.

The following sections summarise the impact of changes to specific components of gross capital formation.

2.1 Gross fixed capital formation estimates

Gross fixed capital formation is measured by the total value of a producer’s acquisitions, less disposals of fixed assets during the reference period, plus additions to the value of non-produced assets (such as major improvements in the quantity, quality or productivity of land) realised by the productive activity of business units. (UN, 2011).
Published gross fixed capital formation information comprises the sectors of general government; public corporations; private sector; and business investment. Business investment includes investment by public non-financial corporations but excludes expenditure on dwellings land and existing buildings and costs associated with the transfer of ownership of non-produced assets. For gross fixed capital formation estimates, see Tables C1 and C2 of the Second Estimate of GDP (ONS, 2011b) and Table F in UK Quarterly National Accounts (ONS, 2011c).

2.1.1 New classification for the quarterly survey for capital expenditure (SIC 2007)

The quarterly survey for capital expenditure is the main source of survey information for gross fixed capital formation, and in particular, for business investment. The summary quality report for this survey is available at ONS (2010).

A list of National Accounts classification of industries under SIC 2007 is given in Annex D in Drew (2011).

Major changes to the capital expenditure classifications are as follows:

1. Other production

Under SIC 2003 other production includes industry codes 1.41 Agricultural service activities; landscape gardening and industry codes 10 Mining of coal and lignite; extraction of peat, through to industry code 14 Other mining and quarrying. This excludes industry codes 12 Mining of uranium and thorium ores and 13 Mining of metal ores. This category also includes industry codes 40 Electricity, gas and water supply through to industry code 41 Collection, purification and distribution of water.

Under SIC 2007 other production includes industry codes 01 Crop and animal production, hunting and related service activities and industry codes 02 Forestry and logging through to industry code 09 Mining support service activities and industries 35 Electricity, gas, steam and air conditioning supply through to industry code 37 Sewerage. Under SIC 2007 there are several new industries that will be collected for the first time in the Capital Expenditure Inquiry. These include industry codes 01 Crop and animal production, hunting and related service activities, 02 Forestry and logging and industry code and 03 Fishing and aquaculture.

2. Manufacturing

Under SIC 2003 manufacturing includes industry codes 15 Manufacturing of food products and beverages through to industry code 37 Recycling.

Under SIC 2007 this will include industry codes 10 Manufacturing of food products through to industry code 33 Repair and installation of machinery and equipment.

One of the major changes for manufacturing is the movement of industry code 22.1 Publishing (SIC 2003) into other services (information and communication) industry code 58 Publishing activities (SIC 2007). Under SIC 2003 industry code 23.30 (now SIC 2007 code 24.46) Processing of nuclear fuel, is no longer required to be collected.

3. Distribution services (Motor Trades, Wholesale and Repair)

Under SIC 2003 distribution services includes industry codes 50 Sale, Maintenance and repair of motor vehicles and motor cycles; Retail sale of automotive fuel, 51 Wholesale and commission trade: except or motor vehicles and  52 Retail trade, except of Motor vehicles and motorcycles; Repair of personal and household goods.

Under SIC 2007 this includes industry codes 45 Wholesale and retail trade and repair of motor vehicles and motorcycles, 46 Wholesale trade, except of motor vehicles and motorcycles and 47 Retail trade except of motor vehicles and motorcycles. Within this sector under SIC 2003, industry code 50.5 Retail sale of automotive fuel has moved from Motor trades to industry code 47.3 Retail sale of automotive fuel in specialised stores (SIC 2007).

4. Other services

Under SIC 2003 other services include industry codes 55 Hotels and restaurants through to 64 Post and telecommunications, 65.12 Other monetary intermediation and 67 Activities auxiliary to financial intermediation through to industry code 93 Other service activities but excludes industry code 75 Public administration and defence; compulsory social security.

Under SIC 2007 other services include industry codes 49 Land transport and transport via pipelines through to industry code 96 Other personal service activities but excludes industry codes 64 Financial service activities, except insurance and pension funding, 65 Insurance, reinsurance and pension funding, except compulsory social security and 84 Public administration and defence; compulsory social security. This includes the movement of 22.1 Publishing under SIC 2003 into Other Services 58 Publishing activities for SIC 2007.

2.1.2 Sample changes to the quarterly survey for capital expenditure

The sample allocation for the quarterly survey for capital expenditure has been redesigned to account for the changes in classifications. The total sample size is approximately 27000 businesses each quarter. Collectively, these selected businesses cover approximately 50 per cent of all businesses in terms of employment within the United Kingdom. The sample size is optimally allocated to ensure appropriate coverage based on the constraints and principles of managing respondent burden and obtaining reliable estimates. To help achieve this objective, each quarter approximately 20 per cent of small and medium businesses are rotated out of the sample and replaced with similar businesses. Large businesses are always within the survey.

Table 2: Approximate sample size per quarter for capital expenditure survey under SIC 2007

Sector Small and medium businesses (10-299 employment) Large businesses (300+ employment) Total number of businesses
Other production 700 150 850
Manufacturing 3,700 1,100 4,800
Construction 1,400 300 1,700
Distribution services 4,100 950 5,050
Other services 11,600 3,000 14,600
Total 21,500 5,500 27,000

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2.2 Inventories estimates

In practice, the change in the level of inventories is difficult to measure. Changes in the level of inventories consist of (UN, 2011):

  • stocks of outputs that are held by the business units that produced them prior to being further processed, sold, or delivered to other units

  • stocks of products acquired from other business units that are intended to be used for intermediate consumption or for resale without further processing. This is measured by the value of the entries into inventories less the value of withdrawals and less the value of any recurrent losses of goods held in inventories.

For practical purposes businesses consider inventories to consist of a combination of raw materials (materials, stores and fuels), work in progress, and finished goods.

Change in inventories estimates are published in Table E of the Second Estimate of GDP (ONS, 2011b) and Table G of the UK Quarterly National Accounts (ONS, 2011c).

2.2.1 New classification for the quarterly stocks inquiry (SIC 2007)

The quarterly stocks inquiry is the main source of survey information relating to the level of inventories in the UK economy. Issues relating to this survey are covered in the summary quality report (ONS, 2010).

A list of National Accounts classification of industries under SIC 2007 is given in Annex D in Drew (2011).

Changes to the classification of businesses for the quarterly stocks inquiry under SIC 2007 are as follows:

1. Mining and quarrying

Under SIC 2003 this includes industry codes 10 Mining of coal and lignite; Extraction of peat through to industry code 14 Other mining and quarrying. It excludes 11 Extraction of crude petroleum and natural gas; Service Activities incidental to oil and gas extraction, 12 Mining or Uranium & Thorium Ores and 13 Mining of metal ores.

Under SIC 2007 this includes industry codes 05 Mining of coal and lignite through to 08 Other mining and quarrying. This excludes 06 Extraction of crude petroleum and natural gas, 07 Mining of metal ores and 09 Mining support service activities. There are no major changes.

2. Manufacturing

Under SIC 2003 this includes industry codes 15 Manufacture of food products & beverages through to 37 Recycling. Under SIC 2007 this includes industry codes 10 Manufacture of food products through to 33 Repair and installation of machinery and equipment.

One of the major changes for manufacturing is the movement of industry code 22.1 Publishing (SIC 2003) into industry code 58 Publishing activities (SIC 2007) and a new industry for SIC 2007 of industry code 33 which is Repair and installation of machinery and equipment. Previously, under SIC 2003, Repair and installation data was included within each individual industry, for example, if a business repaired electrical equipment, they were classified to Manufacture of Electrical equipment. This will not impact on the total aggregate.

Under SIC 2003, Recycling was a separate industry code of 37. The separation and sorting of recyclable materials will now be included in 38 Waste collection, treatment and disposal activities; materials recovery (SIC 2007).

Several new divisions have been created within manufacturing for SIC 2007. Manufacture of beverages is included in industry 15 Manufacture of food products and beverages under SIC 2003, but under SIC 2007 is now a new division of 11.

Under SIC 2007, industry 26 Computer, electronic and optical products includes SIC 2003 industries 30 Manufacture of office equipment and computers, 32 Manufacture of radio, television and communication equipment and 33 Manufacture of medical, precision and optical equipment.  In SIC 2003, 24.4 Manufacture of pharmaceuticals, medicinal chemicals and botanical products (SIC 2003) now has a separate division under SIC 2007 of 21 Basic pharmaceutical products and pharmaceutical preparations. 

Publishing activities were previously included in the manufacturing industry 22 Publishing, printing and reproduction of recorded media for SIC 2003, but under SIC 2007 will be in the service industries 58 Publishing activities.

3. Electricity, gas and water supply

Under SIC 2003 this includes industry codes 40 Electricity, gas, steam and hot water supply and 41 Collection, purification and distribution of water. Under SIC 2007 this includes industry codes 35 Electricity, gas, steam and air conditioning supply and 36 Water treatment, collection and supply. There are no major changes. 

4. Construction

Under SIC 2003 this was industry code 45 Construction. Under SIC 2007 this includes industry codes 41 Construction of buildings, 42 Civil engineering and 43 Specialised construction activities. New for SIC 2007 is industry code 41.1 Development of building projects.

5. Distribution Services (Motor Trades, Wholesale, Retail)

Under SIC 2003 this includes industry codes 50 Sale, Maintenance and repair of motor vehicles and motor cycles; Retail sale of automotive fuel, 51 Wholesale and commission trade: except or motor vehicles and 52 Retail trade, except of Motor vehicles and motorcycles; Repair of personal and household goods. Classification, 50.1 Wholesale on a fee or contract basis is not included.

Under SIC 2007 this includes industry codes 45 Wholesale and retail trade and repair of motor vehicles and motorcycles, 46 Wholesale trade, except of motor vehicles and motorcycles and 47 Retail trade except of motor vehicles and motorcycles. Classification, 46.1 Wholesale on a fee or contract basis is not included.

Within this sector industry code 50.5 Retail sale of automotive fuel (SIC 2003) has moved from Motor trades to industry code 47.3 Retail sale of automotive fuel in specialised stores (SIC 2007) within Retail and the respondent will now be asked for total stocks only.

The classification 52.7, Repair of personal and household goods, has moved from 52 Retail trade, except of motor vehicles and motorcycles; Repair of personal and household goods (SIC 2003) to industry 95 Repair of computers and personal and household goods (SIC 2007). 

2.2.2 Sample changes to quarterly stocks inquiry

The sample allocation for the quarterly stocks inquiry has been redesigned to account for the changes in classifications. The total sample size is approximately 5500 businesses each quarter. Collectively, these businesses cover approximately 50 per cent of the universe in terms of employment within the United Kingdom.

The sample size is optimally allocated to ensure appropriate coverage based on the constraints and principles of managing respondent burden and obtaining reliable estimates. To help achieve this objective, each quarter approximately 20 per cent of small and medium businesses are rotated out of the sample and replaced with similar businesses. Large businesses are always within the survey.

Property developers are now included in the sample for the first time within the construction sector. Previously, this sector was covered in the service sector, e.g. Industry 70 Real Estate Activities (SIC 2007). 

Table 1: Approximate sample size per quarter for quarterly stocks inquiry under SIC 2007

Sector Small and medium businesses (10-299 employment) Large businesses (300+ employment) Total number of businesses
Mining and quarrying 40 15 55
Manufacturing 850 1,070 1,920
Energy 400 70 470
Construction 800 270 1,070
Motor trades 140 150 290
Wholesale 670 330 1,000
Retail 185 450 635
Publishing 30 70 100
Total 3,115 2,425 5,540
 

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2.3 Valuables estimates

Valuables estimates are commonly categorised into: precious metals and stones; antiques and other art objects; and other valuables (SNA, 2009). Valuables form a small component part of the total gross capital formation. Sources include data from trade in goods, and household investment.

Valuables estimates are unchanged with the introduction of the new classification. However, previously published estimates may be revised due to method changes such as the change in deflation (see Section 3). 

3. Changes to statistical methods

Drew (2011) describes in detail how the changes to deflation will impact on estimates within the UK National Accounts. The use of consumer price indices (CPI) rather than retail price indices (RPI) does not significantly impact the gross fixed capital formation estimates. Within gross fixed capital formation estimates, RPI’s are only used to deflate artistic originals which is approximately 2% of total gross fixed capital formation. This change impacts on the inventories estimates as currently deflation is performed primarily using the producer price indices although RPI’s are used in motor trades and retail which account for approximately 55% of inventories. Valuables estimates are only a very small proportion of total gross capital formation, and will also now use CPI’s for all deflation.

The level of deflation has been changed with the introduction of the new deflation methods. Product specific deflators are now used. For example, within the calculation of the inventories estimates, stockholding periods will now be calculated on a product specific basis, where previously industry specific holding periods were used. See Drew (2011) for more detail on use of deflators.

Continuous time series on a consistent basis are required to ensure comparability of estimates over time. For data inputs related to the quarterly survey for capital expenditure and the quarterly stocks inquiry, the following process was used. From March 2011 onwards, survey estimates are calculated using data obtained from the redesigned surveys. For data from March 2009 to December 2010, a micro-method has been used. Individual survey responses are weighted and aggregated to form the estimates for SIC 2007 based domains. This is a standard statistical method and is referred to as domain estimation. For data from March 1997 to December 2008 a conversion matrix was used. This method apportions industry-based estimates for lower aggregates and then re-aggregates the estimates to form SIC 2007 estimates. The proportions used are obtained from dual coded data on the ONS business register. This method was used by the ONS at the last major change in classification and is widely used by other National Statistics Institutes. To ensure consistent estimates over time, any statistically significant differences are taken into account through a linking process where statistically significant differences are blended into the historical estimates over time. The size of revisions will depend on the size of the difference between the conversion matrix and domain estimation methods.

Seasonally adjusted estimates are an important published output. The seasonal adjustment methodology used within the UK National Accounts has been updated to use X-12-ARIMA. This replaces the use of X-11-ARIMA. This method is one of the seasonal adjustment approaches recommended by Eurostat and its use may result in revisions. Note that the seasonal adjustment parameters have been reassessed based on the new data that has been derived. This process is done on a regular annual basis but will also contribute to revisions in the seasonally adjusted estimates.

4. Changes to published information in the Business Investment Statistical Bulletin

Business investment for private non-financial corporations is one published sector of gross fixed capital formation, and detailed business investment information is published separately to the UK Quarterly National Accounts in the Business Investment Statistical Bulletin. Estimates for business investment are primarily based on the quarterly survey of capital expenditure.

The planned introduction of the new ONS website will mean that the presentation of the Business Investment Statistical Bulletin will change. This will occur with the release of the Quarterly National Accounts consistent with Blue Book 2011 on 5 October 2011.

The change to classifications also means that there are some changes to the published tables in the Business Investment Statistical Bulletin.

Under SIC 2003 within Other production, Fishing is published separately from Agriculture and forestry. Under SIC 2007 these are now combined. This does not affect the total of Other production.

Under SIC 2003 within Other services, Transport and communication is published combined. Under SIC 2007 this will now be split into two separate time series of Transportation and storage and then Information and communication. This does not affect the total of Other services.

Under SIC 2003 only total distribution services is published in Table 1 within the Business Investment Statistical Bulletin. Under SIC 2007, there will be a breakdown available for distribution services by asset, split by industries; wholesale, retail trade and sale and repair of motor vehicles. This breakdown will be found on Table 6 for chained volume measures and Table 7 for current prices.

The availability and quality of lower level data may be impacted with the move to the new classification. Data quality will be monitored closely and advice will be issued where the new data is not fit for purpose.

5. Changes to estimates for capital stocks, capital consumption and non-financial balance sheet

The capital stocks, capital consumption and non-financial balance sheet is published on an annual basis (ONS, 2011a). This is next planned to be published on 2 November 2011.

Capital stock and capital consumption are calculated using a perpetual inventory method (PIM) (ONS, 2008). The use of a PIM enables balance sheets (or stocks) to be calculated from the associated flow data. In practice, the PIM takes capital investment data, from GFCF estimates, and uses this to form estimates of the value of capital stocks in use in the UK. The main measures produced by the PIM are by asset, industry and sector for  gross capital stocks, net capital stocks and capital consumption. The PIM uses series input at constant prices and then reflates the series using appropriate price indices to give current price estimates.

The changes impacting on the input GFCF data will therefore have a direct impact on the estimates produced for capital stocks. Additionally, the capital stocks system under SIC 2003 takes input data at the sector by asset by industry, uses the PIM and then aggregates to a top level aggregate. Under SIC 2007, this system takes input data at asset by industry at an aggregate level, uses the PIM and then lower level estimates are created by proportions. This method change will be assessed as more data becomes available.

The non-financial balance sheet measures the net worth of the United Kingdom. There are no changes in methods for the compilation of the non-financial balance sheet.

6. Changes to obtaining data on the ONS website

The change in classification has meant that, for some time series, the time series identifiers used to identify individual time series have changed. A summary of the changes to time series published in the Business Investment Statistical Bulletin, inventories, valuables, capital stocks and non-financial balance sheet is available here:

A note on 'New series identifiers for GDP(O), IoS and IoP and GCF' (35.4 Kb Pdf) is available under the Business Investment release published on 19th August 2011.

More information on CDID changes is available under 'Download data in this release'.

This will help users map between the previously published and newly published estimates. More detail is available on request.

7. Conclusion

The introduction of the SIC 2007 classification change ensures that ONS estimates continue to conform to international definitions. Method changes have occurred as part of the regular review of methods and recently introduced modernised compilation systems used within the UK National Accounts. 

The availability of lower level data may be impacted with the move to the new classification. Once data is available, further analysis will be performed to highlight differences in estimates. As part of the publication process, ONS will monitor the quality of data closely and advise where the new data is not fit for purpose.

Background notes

  1. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

Supporting information

Glossary

For further information please contact
Dr. Craig H. McLaren, Tel: 01633 455250, Email: gcf@ons.gov.uk

References

Drew S (2011). Deflation improvements in the UK National Accounts, Non-journal article, ONS. 

Everett G (2011). ‘ Content of Blue Book 2011 (39.8 Kb Pdf) ’, Economic and Labour Market Review, April 2011,
Volume 5, No 4, pp 87-85.

Office for National Statistics (2002), UK Standard Industrial Classification of Economic Activities 2003.

Office for National Statistics (2007), UK Standard Industrial Classification of Economic Activities 2007.

Office for National Statistics (2008), “Methods explained: Perpetual Inventory Method (PIM)” (189.1 Kb Pdf) , Published September 2008 in Economic & Labour Market Review, vol 2, no 9, pp 48-52.

Office for National Statistics (2010), Summary quality reports for Business Statistics.

Office for National Statistics (2011a) Capital Stocks, Capital Consumption and Non-Financial Balance Sheets, which will be published on 2 November 2011.

Office for National Statistics (2011b) Second estimate of GDP release page.

Office for National Statistics (2011c) Quarterly National Accounts. (292.4 Kb Pdf)

System of National Accounts 2008 (2009) International manual for National Accounts.

United Kingdom Statistics Authority (2009) Code of Practice for Official Statistics.

United Nations Statistics Division (2011) National Accounts definitions.

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