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1995 Feature Article - A Framework for Household Income Consumption Saving and Wealth
Figure 1. provides an overview of the conceptual model underlying the ICW framework and shows the major flows which affect a household's economic well-being.
Command over economic resources
In developing the framework, the ABS has extended the scope of household economic resources beyond those usually treated in national accounting statistics and in international guidelines.
In particular, the common emphasis on the household as a consumption unit has been counter balanced, giving equal weight to the household's role as a unit of production. In the ICW framework the household is seen as not only receiving income (in cash and in-kind) from outside, but also as a unit that produces goods and services for its own consumption without any intervention from the market place. The household provides these goods and services for itself through the use of its assets (including the family home) and through the services provided by unpaid household work.
In the model adopted for the ICW framework, a clear distinction is drawn between regular and recurring receipts that are classed as income and larger lump-sum receipts that are classed as capital transfers. Limiting the definition of income to regular and recurring receipts is designed to restrict income to reflect the resources that most households depend on for their day-to-day living. For most households it is these ongoing receipts (and the expectation of their continuance) that is the main predictor of the household consumption.
Figure 1 HOUSEHOLD ECONOMIC RESOURCES - MAJOR FLOWS
Income may be received as cash or in-kind, as a result of interaction with the market economy or from non-market sources. The ICW framework classifies income into four major groups according to source:
Other household resources
Households may have resources other than income that affect their economic well-being. These include capital transfers received from time to time from other households (e.g. a large gift or inheritance) or from other private organisations (e.g. lump sum termination payments for employees). In addition, there is potential for running down some of this stock of wealth to increase, or maintain current levels of, household consumption.
The concept of consumption is based on the 'using up' of goods and services. Consumption includes:
This concept of consumption is therefore much broader than one which is based solely on the current consumption expenditure of the household in the market place.
Saving is that part of current income (after direct taxes) that is not directly used up or transferred as part of household current consumption; it may be either positive or negative in any reference period. Saving is therefore, a derived item, the derivation of which depends on a knowledge of income, consumption and taxes.
The ICW framework provides a model from which measures of saving for individual households can be derived (See Table 1). Currently, such a measure of saving is not derivable from the ABS's household income and expenditure surveys.
TABLE 1. ICW CURRENT AND CAPITAL ACCOUNTS
The wealth or net worth of a household is defined as the difference between the household's stock of assets and its stock of liabilities at a particular point in time. The concept of assets covers both financial and non-financial assets, including all consumer durables owned by the household. The concept of liabilities covers all debts owed by the household whether they be to other households, private institutions, government or non-residents.
Household wealth plays an important role in the measurement of household economic well-being. Apart from providing regular receipts to the household in the form of interest, dividends, etc. the wealth also generates flows of capital gains (or losses) (See Table 2). In addition, wealth provides households with some additional economic power because it allows for running down of the stock of assets to increase, or maintain, levels of household consumption.
TABLE 2. ICW OTHER CHANGES IN STOCKS ACCOUNT
The additional economic power provided by household wealth is addressed by including a measure which transforms the value of assets into a national income stream. It is calculated as a wealth annuity which describes the potential to run down the household's assets over the expected lifetime of its members. All wealth, whether held as financial or non-financial assets, is converted to an annuity.
The change in a household's net worth over time is also considered in the ICW framework to be an important indicator of economic well-being. If net worth is increasing then the household must either have been able to save from its income or to access other economic resources (such as an inheritance, or capital gain). Such a household may be better off than a household with a similar level of consumption that has financed its consumption by running down assets or incurring a liability.
Summary measures of economic well-being
The ICW framework presents a summary measure of economic well-being of households by combining the flows (and notional flows) of economic resources discussed above.
This summary measure may be viewed either from the perspective of the household's disbursements, or from the perspective of its receipts.
Briefly, economic well-being is described from the disbursements point of view as:
economic well-being = consumption + change in net worth + notional wealth annuity.
From the receipts point of view, economic well-being is described as:
economic well-being = net disposable income - saving + change in net worth + notional wealth annuity
In developing the ICW, the ABS has drawn on related ABS standards and on frameworks published by several international organisations. The international standards used include the Provisional Guidelines on Statistics of the Distribution of Income, Consumption and Accumulation of Households (UN 1977), the System of National Accounts 1993 and various recommendations published by the International Labour Organisation since the early 1970s.
Where appropriate, the concepts and terminology used in the ICW framework are consistent with those used in the national accounts. A detailed comparison of components of the ICW framework and components of the Australian National Accounts and the System of National Accounts (SNA93) is contained in the publication.
The ICW framework will be periodically revised to reflect continuing changes in international guidelines relating to such areas as household income and expenditure statistics, national accounts and statistics of labour income. They will also reflect ongoing discussion within the ABS and with the user community.
This feature article was contributed by Maureen McDonald & Natalie Bobbin, Household Income and Expenditure Research Unit, ABS
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