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Classification

Classification criteria

Economic statistics are arranged by institutional sector to support analysis of the economy. To do this, the Statistical Classification for Institutional Sectors (SCIS) distinguishes the differing economic roles of the institutional units and their response to economic events and interventions. It first recognises four types of institutional units observed in the economy: business units, government units, non-profit institutions (NPIs), and households. These are then classified to categories by considering the following concepts: residency, market/non-market orientation, government/non-government control, financial/non-financial purpose. These four concepts determine the institutional sector groups at the top level.

A unit’s sector cannot be inferred from its name, its legal character, or its tax-paying status. It is necessary to look beyond these and examine the unit’s purpose, function, and behaviour in the economy as these are the principles underlying the classification.

The related control classification supports the SCIS by identifying units that are controlled by government or non-residents.

Business units

A business unit operates in the market with the clear intention of generating a profit or other financial gain for its owners. This is achieved by selling its goods and services at competitive market prices and making a profit, accumulating financial assets that generate income, or, more generally, managing its assets and liabilities in such a manner that financial benefits accrue directly to the owners. By virtue of its structure, a business unit is capable of earning a profit or other financial gain for its owners. Such units supply goods and services to other institutional units willing to pay for them.

Government units

Government units are a unique kind of legal entity (established by political processes) that have legislative, judicial, or executive authority over other institutional units. Government units implement the laws and regulations that affect the behaviour of other institutional units. They also produce goods and services that might otherwise not be produced by the market, or for which no individual institutional unit is willing to pay to meet social or political objectives on behalf of society in part or whole.

As the government units have the authority to collect compulsory payments (eg taxes) from institutional units they are also primary income distributors within the economy.

Non-profit institutions

Non-profit units produce goods and services. However, they have a legal structure that does not permit them to be a source of income, profit, or other financial gain for the units that established them. In practice, non-profit units generate either surpluses or deficits, but any surpluses made cannot be appropriated by the institutional units that control or manage them. Non-profit units may be created by any other institutional unit, and the reasons for doing so are many and varied. Some are created to provide services that benefit the people or businesses that control or finance them; others are established for charitable, philanthropic, or welfare reasons and may provide goods and services to meet collective social or community objectives; while others may provide services such as health and education, free or at significantly reduced prices. These units are characterised by having activities that are not intended to generate income, directly or indirectly, for the units that control them – despite being done in a cost-conscious way.

While units in the non-profit institutions serving households sector (sector 4) are non-profit by definition, other non-profit units can engage in market activities. They are called non-profit business enterprises, and are a separate subgroup in the non-financial business enterprises sector (sector 1).

Households

From an economic perspective, households are final consumers of goods and services. They supply labour to other institutional units, and own financial and real assets from which they may earn income. Some households may also produce and accumulate fixed assets informally. In these circumstances, it is not possible to meaningfully identify a separate institutional unit engaged in the productive activity – therefore, both types of activity are recorded in the single household institutional unit.

Residency

To support economic analysis, institutional units are categorised as either a ‘resident’ unit or ‘non-resident’ unit. A unit is ‘resident’ within the economic territory of a country when it has a centre of predominant economic interest in that territory. A resident unit is subject to New Zealand law and economic policy and responds to economic conditions in New Zealand.

Institutional units resident outside New Zealand’s domestic territory are classified to the rest of the world sector (sector 6). The definition and concept of rest of the world used in SCIS is consistent with the System of National Accounts (2008 SNA) and harmonised with that used in the Balance of Payments and International Investment Position Manual (6th edition). Resident institutional units are further classified according to their role in the economy, using the categories described above.

Residency is not the same concept as foreign control, as resident enterprises can be controlled by foreign owners. Overseas control is represented in the separate, but related, control classification.

Market / non-market orientation

The distinction between market and non-market units is the most important concept underlying SCIS.

A ‘market’ unit‘s main objective is to operate in the market by selling its goods and services at competitive prices that are sufficient to generate a profit or surplus in the long term. Market units operate in markets where purchasers are free to buy, or not, depending on the price offered, so sales will only take place when there is a mutually beneficial exchange. The sales and profitability of market units are directly affected by changes in the prices of their inputs and outputs.

Market units react to changes in the economic environment by changing the level of output and/or changing the scope of the productive activity undertaken. They monitor prices to identify opportunities to expand their activities by developing new markets and products, so changes in economic conditions have a strong influence on the market unit’s behaviour. The 2008 SNA employs the concept of an “economically significant price” to distinguish market units. Market units operating in New Zealand are generally classified to sectors one and two.

Market units do not produce all the goods and services that people in the economy want or need. ‘Non-market’ units deliver goods or services that fulfil a social need, community interest, or government policy. People join together to form non-market units because they have a common objective they wish to accomplish. Some provide goods or services specifically for their members, while others have a philanthropic objective that members are willing to support. The government may produce non-market goods and services to fulfil policy objectives, or where it is technically impossible to make individuals pay the full cost of the goods and services consumed. For example, services provided to the whole community or part of the community, such as street lighting and police services. These ‘collective services’ are unlikely to be produced by market units or bought and sold by individuals at economically significant prices.

Non-market units are often partially or wholly funded from subscriptions, donations, grants, or taxes. This means the production decisions of non-market units are less responsive to market signals. Some non-market units can produce market goods and services to raise funds, but this is not their primary role. Non-market units are classified to sectors three and four.

Government / non-government control

Non-market units are further categorised into government and non-government units. This distinction is based on government units being entities established by political processes that give them legislative, judicial, or executive authority over other institutional units. Government units implement the laws and regulations that affect the behaviour of other institutional units. Sometimes government units will produce goods and services that might otherwise not be produced by the market, or for which no individual institutional unit is willing to pay. Such goods and services are produced to meet social or political objectives on behalf of society in part or whole. Some are collective goods or services ‘consumed’ by society as a whole (eg public administration, defence, and law enforcement services) while others are provided free to individuals (eg education and health services). Government units are also primary income distributors within the economy. They have the authority to collect compulsory payments, such as taxes, from other institutional units and redistribute the income and wealth collected to other institutional units.

Government non-market units are classified to sector three, general government institutions. Non-government non-market units are classified to sector four, non-profit institutions serving households. Government control is a different, broader concept, reflecting the fact that some outside the government sector are controlled by the government (eg state-owned enterprises). Government control is represented in the separate, but related, control classification.

Financial / non-financial purpose

For market units, a distinction is made between those providing financial services and those providing market goods and non-financial services. This is to reflect the different role financial services play in the economy. Financial services embrace financial intermediation, financial risk management, liquidity transformation, and various supporting activities.

Financial institutional units help accumulate capital within the economy, by organising the financial transactions that allow institutional units to incur financial liabilities and acquire financial assets. They collect funds from lenders and match them to borrowers’ requirements by transforming or repackaging the funds. These units help other institutional units manage their financial risks by rebalancing their portfolios of assets and liabilities, and by allowing lenders to choose asset instruments with appropriate risk and term, and borrowers to choose appropriate forms of debt.

This financial role underpins much of the economy’s ‘real’ activity. The operations of financial institutions, through their financial instruments, are the main way central monetary policy is accomplished. Some of their activities will be regulated or supervised by the Reserve Bank or the Financial Markets Authority. For these reasons, financial services units are distinguished as a separate sector in SCIS (sector two).

Classification

The Statistical Classification for Institutional Sectors

The SCIS is a hierarchical classification with three levels. The sector level has six categories. The subsector level has 18 categories. The group level of the classification has 21 categories.

Following the principle of identifying sectors according to economic role, the classification recognises six mutually exclusive sectors at the top level:
1. Non-financial business enterprises sector
2. Financial business enterprises sector
3. General government institutions sector
4. Non-profit institutions serving households sector
5. Household sector
6. Rest of the world sector.

These sectors align with the previous institutional sector classification. Changes occur at the subsector and group levels.

SCIS V1.0

1 Non-financial business enterprises 
        11 Corporate business enterprises 
                111 Corporate business enterprises 
        12 Non-corporate business enterprises 
                121 Non-corporate business enterprises 
        13 Non-profit business enterprises 
                131 Non-profit business enterprises

2 Financial business enterprises 
        21 Central bank 
                211 Central bank 
        22 Deposit-taking corporations except the central bank 
                221 Registered banks 
                222 Other depository institutions 
        23 Investment funds 
                231 Investment funds 
        24 Other financial intermediaries excluding insurance and pension funds 
                241 Other financial intermediaries excluding insurance and pension funds 
        25 Insurance corporations 
                251 Insurance corporations 
        26 Pension funds 
                261 Pension funds 
        27 Financial auxiliaries 
                271 Corporate financial auxiliaries 
                272 Non-corporate financial auxiliaries 
        28 Captive financial institutions 
                281 Captive financial institutions

3 General government institutions 
        31 Central government institutions 
                311 Central government institutions excluding funded social insurance schemes 
                312 Funded social insurance schemes 
        32 Local government institutions 
                321 Local government institutions

4 Non-profit institutions serving households 
        41 Non-profit institutions serving households excluding tangata whenua governance organisations 
                411 Non-profit institutions serving households excluding tangata whenua governance organisations 
        42 Tangata whenua governance organisations 
                421 Tangata whenua governance organisations

5 Households 
        51 Households 
                511 Households

6 Rest of the world 
        61 Rest of the world 
                611 Rest of the world

Control classification

 The control classification is a flat classification and has four categories.
1 National private control
2 Foreign control
3 Central government control
4 Local government control

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