Managerial Accounting for Nations (updated September 2009)

A course offered by the University of Alberta School of Business as MGTSC 488/686 X5

Developed and taught by Professor Alice O. Nakamura

The supplementary readings shown in the course outline are freely available online.

In addition there is an online textbook. (The 2010 revision of the textbook will be posted on this website as well by December 15, 2009.)


1.         Introduction


1.1       Why have leading business schools added courses in managerial accounting for nations?

            Where do people work who have expertise in managerial accounting for nations?


If you Google “national income accounting” you’ll find items like the following:


“National Income Accounting: This type of accounting is predominantly for the government and is responsible for providing the general public the data with reference to the gross national product about all market-related information, such as the value of the country’s goods and services provided and its purchasing power.”

Posted by tag44jobs on May 20, 2009


“As a national income accountant, it is your task to provide a public estimate of the yearly purchasing power of a nation.”




People with training in national income accounting do work for government agencies such as Statistics Canada which produces the national accounts for this nation. They work for the Bank of Canada and Finance Canada in Canada: agencies that make a great deal of use of the national accounts data produced by Statistics Canada. They work for the Bureau of Economic Analysis (BEA) which is the agency that produces the national accounts for the United States using a variety of statistical inputs produced by the Bureau of Labor Statistics (BLS). They work for U.S. Department of the Treasury and the Federal Reserve System in the United States, which are agencies that make ongoing use of the national accounts data for that nation.


The Statistics Canada’a homepage for the national accounts of Canada:


Employment opportunities at Finance Canada:


People with training in national income accounting also work for international organizations like the International Monetary Fund (IMF), the World Bank, and the Organization of Economic Cooperation and Development (OECD).


Wikipedia article on the World Bank Group:


The OECD homepage for national accounts,3355,en_2649_34245_1_1_1_1_1,00.html


However, people with training in national income accounting are also needed by private sector banks, consulting firms, and large companies. These are the people who are equipped to use the available statistics for nations to produce the analyses and forecasts their businesses need for planning purposes.


1.2       How are managerial accounting statistics for nations used?


The Calgary Herald

“Global finance crisis hits hard in Canada: Stephen Harper is a student of letting the invisible hand of the economy run its course, even during turbulent times.”


Economic survey of Canada 2008: Executive summary:,3343,en_2649_33733_40733536_1_1_1_1,00.html


U.S. Central Intelligence Agency Report on the Canadian Economy:


“The McKinsey Global Institute Productivity Studies: Lessons for Canada” by Matt Kellison of the Canadian Centre for the Study of Living Standards:


2.         Productivity as Performance Measure for Nations



            A ratio of output to input.”

(Atkinson, Kaplan and Young 1995, p. 514)


“While, for example, we look at the cost of power as a number of ‘analysed’ items such as coal, water-rate, ash removal, drivers’ and stokers’ wages, etc., it will probably be a long time before it dawns upon us that all this expenditure can be reduced to a horse-power-hour rate, and that such a factor, once known, may turn out to be a standing reproach. The burning of 200 tons of coal per week may mean anything or nothing, but the cost of a horse-power hour can be compared at once with standard data... the publication of figures based on them would reveal amazing inefficiencies that under present conditions are unsuspected and unknown because no means of comparison exists.”

(A. Hamilton Church 1909, p.190)


“The two main sources of economic growth in output are increases in the factors of production (the labor and capital devoted to production) and efficiency or productivity gains that enable an economy to produce more for the same amount of inputs.”

(Baldwin, Harchaoui, Hosein and Maynard, 2001

“Productivity: Concepts and Trends”

Statistics Canada)


Productivity measures are measures of output standardized for the inputs used. When output rises more than the inputs utilized to produce the output, productivity has increased. Productivity measures are created using measures of output and measures of input. These can be thought of as summary performance measures that pull together information about both the outputs and the inputs of production.


Productivity measures in common use include total factor productivity (TFP), multi factor productivity (MFP), labor productivity with wage weighted hours of work used as the measure of labor input, labor productivity with hours of work used as the measure of labor input, and labor productivity with the number of workers used as the measure of labor input. To be meaningfully interpreted, productivity measures must usually be placed in a comparative context. The two most common contexts are comparisons of productivity for two different time periods for the same productive unit -- e.g., for the same nation -- or a contemporaneous comparison for two different productive units such as for Canada and the United States.


Understanding Productivity: A Primer, Mustapha Kaci, Statistics Canada:


“One for Good Measure: Evaluating EMS”:$8696


3.         The Building Blocks for Measures of Inflation, Output and Productivity for Nations


“But even if we confine our attention to what is ordinarily called a commodity, such as ‘wheat,’ we find ourselves dealing with a composite commodity made up of winter wheat, spring wheat, of varying grades.”

(Paul A. Samuelson, 1983 edition, Foundations of Economic Analysis, p. 130)


To construct measures of price level, output, input or productivity change for nations, we need ways of summing quantities for different sorts of products. It turns out that the basic building blocks for price, quantity and productivity indexes are revenue and cost types of sums.


3.1       Revenues and Costs as Price Weighted Quantity Aggregates



(Also published as “The Measurement of Aggregate Total Factor Productivity Growth” (with W. Erwin Diewert), in James J. Heckman and Edward Leamer (eds.), Handbook of Econometric Methods Vol. 6, 2007.)


3.2       The Relationship to Managerial Accounting Cost and Sales Variances for Firms


Managerial accounts are accustomed to standardizing for price level changes in assessing the performance of business units. Their methods (sales variances and cost variances) are closely related to the methods used by statistical agencies for measuring inflation.


4.         Price Changes for Products


When prices rise, the purchasing power of money shrinks. This is inflation. Price indexes are measures of inflation. For example, the Consumer Price Index (the CPI) is a measure of the inflation experienced by households. In addition, price indexes are used to transform current value figures for different years (often referred to as nominal values) into constant dollar figures (that is, into value figures expressed in terms of the value of the dollar in some given year).


The CPI for a nation is one of many price change measures. A CPI reflects the experience of consumers buying consumer goods and services. Official statistics agencies including Statistics Canada publish different sorts of price indexes as measures of price change for different target groups and for different groups of products.


4.1       The Price of widgets


We begin with basic measures of price level change for households and for producers.


Your Guide to the Consumer Price Index, Statistics Canada:


“Real Interest Rates vs. Collectibles Prices”:




4.2       The Price of Housing


The recent financial crisis resulted partly because of problems judging the inflation for housing services for people living in their own homes. We will examine the root sources of these measurement problems.


ACCOUNTING FOR HOUSING IN A CPI, WORKING PAPER NO. 09-4, Federal Reserve Bank of Philadelphia by W. Erwin Diewert and Alice O. Nakamura


4.3       Price Pass Through Along a Supply Chain


Consumers and businesses alike are interested in how price increases get passed along in supply chains. Cost pass through is also an issue that statistical agencies like Statistics Canada need to consider in designing and compiling measures of inflation. And cost pass through is an especially important issue for central banks like the Bank of Canada to consider in using statistics about inflation in making decisions regarding the money supply of a nation. We will use the supply chain for your morning cup of coffee to learn about cost pass through issues.


Issues of “Fair Trade,” competition, and pricing: “Standards and Sustainability in the Coffee Sector: 


Price Pass Through for Coffee:


4.5       The Cost of Living


Sometimes the Consumer Price Index is referred to as a measure of the cost of living. We’ll consider why this is.


Transport Canada document:


5.         Accounting for the Human Inputs to Production


Labor remains the single most important input for many production processes. From the perspective of production analysis, simple headcounts of employed persons will hide changes in average hours worked. Hence hours of work is a better measure of labor input. There are three alternative definitions of the hours of work to choose from:

(H1) Active production time.

(H2) Paid hours, including agreed on allocations of employer financed personal time, some of which may be taken away from the work site like paid vacation or sick days.

(H3) Hours at work whether or not they are paid hours or used for production.

Each of these measurement concepts implies a different factorization of the dollar amount spent on labor into price and quantity components. Understanding about the different measures of the quantity of labor is important for understanding the labor productivity measures often reported on in the press.


5.1       Measures of the Quantity of Labor


“Definitions,” Swiss Federal Statistical Office (FSO): 


The Conference Board of Canada: Mission Possible


5.2       Unemployment


When people who wanted to work cannot find work, they suffer because they do not have a way of earning their living and the nation suffers because the labor they would have provided is simply lost rather than being used to produce goods and services. Thus there are special measures to monitor unemployment.


A Canadian House of Commons Committee Report:


6.         Dealing with Intermediate Material Inputs


In the national accounts, the uses of resources are described either as intermediate or final. Intermediate uses consist of goods and services that are used-up in a production process during the accounting period; final uses comprise all other goods and services. It is not the nature of the good or service that determines whether it is intermediate or final. A steak bought by a household is “final”, but if a restaurant buys the same steak, it is “intermediate”.


6.1       The Concepts of Value Added and Economic Value Added (EVA)


“Economic Value Added (EVA),” The Executive Fast Track:


“Definition, Calculation and Uses of Value Added,” U.K. Department for Business Innovation & Skills:


“Measuring the economic value-added effects in the Finnish food sector,” by M. Knuuttila, E. Vatanen, and J. Niemi:  


6.2       Value Added Measures of National Output Like GDP


Deducting the value of intermediate consumption from that of output eliminates double counting. The result is an indicator that is independent of the way firms are organized. This is why the Gross Domestic Product (GDP) of a nation is defined as being equal to the sum of the value added of each producing unit in a country.


“The main aggregates associated with value added,” United Nations Statistics Division:


“An Overview of the Components of the System of National Accounts,” Statistics Canada:


“Economy: what is GDP?” Statistics Finland:


“Principles of National Accounting For Non-Market Accounts,” William D. Nordhaus:


7.         Capital Inputs Including Machinery and Equipment (M&E)


For any given stock of some type of productive asset, there is a flow of productive services called capital services. This is the appropriate measure of capital input for national productivity analysis. If capital services were directly observable, there would be no need to measure capital stocks. The price of capital services is measured as their rental price. However, a large proportion of business capital is owned rather than rented, so the rental prices cannot be directly observed and hence must be imputed. Many of the problems that national income accountants have had to face in measuring the capital services for a nation have been faced by accountants as well in their efforts to measure the capital assets of businesses.




8.         Canada’s Productivity Numbers




9.         International Comparisons


In order to make productivity comparisons among nations, it is necessary to control for price level differences, much as it is necessary to control for changes over time in the prices to measure productivity growth over time for a single nation.


9.1       The Concept of Purchasing Power Parity


Purchasing power parties (PPPs) are essentially price indexes for making comparisons of the price levels of different nations.


“Purchasing Power Parity,” Werner Antweiler, Sauder School of Business, University of British Columbia:


“Big Mac Index,” Wikipedia:


“An Alternative Big Mac Index: How many minutes to earn the price of a Big Mac?” The Economist:


“The Use of Purchasing-Power-Parity Exchange Rates in Economic Modeling: An Expository Note,” Lawrence J. Lau, Stanford University:


“Diewert on Quiggin, Castles and Henderson,” John Quiggin, University of Queensland, Australia: 


“Comment on ‘The Choice of Exchange Rate on Modelling the Impact of Climate

Change: A Response to the Castles-Henderson Critique of the IPCC’ by John

Quiggin,” W. Erwin Diewert:


9.2       GDP (at PPPs) versus GNI (based on the Atlas Method) for Canada and Other Nations


“World Bank Atlas method, Purchasing power parities, and Market exchange rates,” World Bank:,,contentMDK:20399244~menuPK:1390200~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html


“The Three Faces of GDP,” OECD:


9.3       Silly and Good International Productivity Comparisons from the OECD


Statistical narratives, Statistics Directorate, Organization of Economic Cooperation and Development (OECD):,3343,en_2649_33715_43341080_1_1_1_1,00.html




“Productivity is no way to evaluate education, says economist,” Caitlin Crawshaw (


9.4       A “Genuine Progress” Indicator Would Not Be a Better Way of Assessing Living Standards!


“Genuine Progress Indicator,” About Redefining Progress:


“Alberta Genuine Progress Indicator,” Green Economics:


“Economic Growth and Happiness: Reassessing the Easterlin Paradox,” Betsey Stevenson and Justin Wolfers, Wharton School, University of Pennsylvania, presented at the 2008 World Congress on NAEP Measures for Nations:,14,135/Economic%20Growth%20and%20Happiness%20-NAEP.ppt


Betsey Stevenson being interviewed and also filmed during her 2008 World Congress presentation: