THE ERRORS AND OMISSIONS ITEM
While the statistical discrepancies between the three measures of GDP provide one indicator of the accuracy of the national accounts, the net errors and omissions item in the financial account provides another. It represents the difference between the net lending derived in the capital account and the conceptually equivalent net lending item derived in the financial account - the net errors and omissions item is required to balance them.
Net lending in the capital account is derived as a residual and reflects the expenditure, production and income components of GDP as well as other items such as net property income and net secondary income. The financial account also derives net lending as a residual but using totally independent data - it is the difference between the acquisition of financial assets and the incurrence of liabilities.
The graphs below plot the net errors and omissions item in annual terms as a percentage of net lending for the nation. Some year to year differences are evident, reflecting the difficulties inherent in measuring residuals. It reflects timing and other errors in the estimation of income, expenditure and capital flows on the one hand and financial assets, liabilities and financial flows on the other.
The magnitude and volatility of the net errors and omissions item and the statistical discrepancy can also be used to indicate the quality of the saving estimates in the national accounts. National net saving is derived in the income and use of income accounts by deducting final consumption expenditure and consumption of fixed capital from gross disposable income. As it is a relatively small residual measure derived from very large aggregates its quality is particularly sensitive to inaccuracies in the series from which it is derived, and this needs to be borne in mind when using the data for analysis.
An alternative and largely independent measure of saving can be derived using acquisition of financial assets from the financial account as the starting point. Saving is a source of funds for both acquisition of financial assets and investment. The accounting relationships within the national accounts system mean that the alternative measure of saving can be calculated by deducting the net errors and omissions items and the statistical discrepancy between GDP(I) and GDP(E) from the official measure of saving. The graph below plots the official measure of annual saving and the alternative measure as a percentage of GDP. Although there are some year to year differences, the series track quite closely.