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Chapter 3. Structure of the ICW - a stock flow model
Receipts and disbursements
3.1. Within a given reference period a household experiences continuous flows of receipts and disbursements relating to economic resources. Receipts include regular receipts (e.g. wages and salaries, interest earned by assets), irregular receipts (e.g. an inheritance), flows generated by selling an asset (such as a car) and income in-kind (e.g. use of a car provided by an employer).
3.2. Disbursements may be equally diverse. They include expenditure on consumer goods (e.g. food), purchase of consumer durables (e.g. a car), saving (e.g. cash deposited in the bank), gifts to relatives, and tax to the government.
3.3. Together, these receipts and disbursements determine not only a household's standard of living but also its level of wealth. 'Living well' and 'getting rich' are the indicators used in everyday life to define economic well-being. These indicators also form the basis of the measure of economic well-being in the ICW framework.
Stock/flow model
3.4. To formally describe the components of economic well-being identified above, and to map their relationships, a stock/flow model has been developed.
3.5. The model relates flows of income over a given reference period to flows of consumption and saving. This is done within a current account, which notionally can be constructed for each household.
3.6. Saving and dissaving flows and capital transfers are reconciled to a measure of change in net worth, resulting from transactions, in a capital account.
3.7. The current and capital accounts are linked by the flows of saving and dissaving, the former building up and the latter running down the stock of household net worth.
3.8. The transactional change in net worth, as measured in the capital account, is added to changes in stocks resulting from other changes in volume of assets and nominal holding gains or losses in the third account called other changes to stocks account. This final measure gives total change in net worth for the individual household during the reference period.
3.9. The current account therefore measures the 'living well' aspect of the economic well-being of households. The capital account and other changes in stocks account measure the 'getting rich' aspect of economic well-being.
Flows
3.10. Most flows are transactions - i.e. they are interactions between two units by mutual agreement or they are interactions within the same unit that is operating in two capacities.
3.11. For example, an interaction takes place between two units when wages or salaries are paid to an employee as a return for his/her labour. Similarly, an interaction takes place by mutual agreement between two parties when a household purchases goods and services for consumption.
3.12. An interaction within the same unit takes place when, for example, a household produces goods or services for its own consumption. In this instance, the household operates as both the producer and the consumer.
3.13. Transactional flows reflect the receipt and disbursement of all economic resources in households. They reflect the receipt of income in cash or in-kind, disbursements by way of consumption or transfers out of the household, and capital transactions.
3.14. There are other flows that are not transactions. These flows are dealt with in the account dealing with other changes in stocks and relate to changes in the volume of stocks brought about by, e.g. catastrophic events, and changes brought about due to nominal holding gains and losses.
Stocks
3.15. The term stocks describes a household's holdings of assets and/or liabilities at a given point in time. The value of these stocks is affected by all of the flows described above.
Reference period
3.16. A reference period is required for measuring flows of income and consumption and the changes in the stocks of assets and liabilities that take place over time.
3.17. A number of factors can influence the choice of a reference period. These include:
- the influence of seasonal factors on income and consumption; and
- requirements of policy makers and analysts (e.g. 'current weekly' income, annual income, lifetime income).
3.18. At an operational level, other factors also take on importance:
- payment conventions (e.g. daily piece work, fortnightly salary, monthly pension, annual profit);
- the need to have enough events in the sample;
- the problem of respondent recall.
3.19. To achieve a full reconciliation of the elements of the ICW framework, all contributing data need to relate to the same reference period. For purposes of exposition, this paper adopts a reference period of one year.
Current and capital accounts
3.20. For the ICW framework, a book-keeping approach is adopted which uses a Current account, a Capital account and an Other changes to stocks account to describe the diverse flows of household budgeting and to ensure a balancing of the household books.
3.21. The current account deals with the relationship between income, consumption, direct taxes and saving. The capital account deals with the capital transactions that result in a building up or running down of assets and liabilities via transactions. The other changes in stocks account deals with changes in the volume of stocks that are not related to transactions, and changes to the value of stocks from capital gains or losses.
3.22. Chapter 4 and Chapter 5 describe the relationships between the transactions and other flows and the main components of the accounts.
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