An Introduction to the National Income and Product Accounts Methodology Papers: U.S. National Income and Product Accounts U.S. DEPARTMENT OF COMMERCE Carlos M. Gutierrez Secretary ECONOMICS AND STATISTICS ADMINISTRATION Cynthia A. Glassman Under Secretary for Economic Affairs BUREAU OF ECONOMIC ANALYSIS J. Steven Landefeld Director Rosemary D. Marcuss Deputy Director September 2007 www.bea.gov Acknowledgments Part I, “Overview of the NIPAs,” was prepared by Stephanie H. McCulla, an Economist in the National Income and Wealth Division at the Bureau of Economic Analysis (BEA). Part II, “Underlying Economic Accounts”; Part III, “Economic Accounts for Sectors”; and Part IV, “NIPA Summary Accounts”; were prepared by Charles Ian Mead, an Economist in the Office of the Director at BEA. Brent R. Moulton, Associate Director for National Economic Accounts at BEA, provided overall supervision for the preparation of this project. Preface This paper provides a comprehensive explanation of the conceptual basis and framework of the U.S. national income and product accounts (NIPAs). It describes the structure and purpose of the U.S. economic accounts, discusses the relationship between business and financial accounting and national economic accounting, and presents a derivation of the seven NIPA summary accounts from generalized production, income and outlay, and capital accounts for each sector of the economy. This paper updates and replaces “An Introduction to National Economic Accounting” (MP1), which was published in March 1985. Comments about this paper are invited. Please contact the BEA National Economic Accounts Directorate, 1441 L St. NW, BE–6, Washington, DC 20230 or by e-mail at <[email protected]>. i An Introduction to the National Income and Product Accounts HE national income and product accounts (NIPAs) produced by the Bureau of Economic Analysis (BEA) Thave become a mainstay of modern macroeconomic analysis for the U.S. economy. In fact, the Commerce Department in 2000 named the NIPAs, and their marquee measure, gross domestic product (GDP), “its achieve­ ment of the century.”1 Because these accounts provide a detailed picture of economic activity at a given time, as well as a consistently defined series of measures over time, they are indispensable to researchers, forecasters, gov­ ernment officials, academics, and investors who use them for a wide array of academic, public policy, and other purposes. Given the importance of the NIPAs, users often seek a detailed explanation of the concepts that underlie them. The goal of this methodology paper is to present the conceptual basis and framework of the U.S. NIPAs.2 Specifi­ cally, the paper demonstrates how the seven accounts that summarize the NIPAs are derived from conventional accounting statements—in particular, the balance sheet, income statements, and the statement of cash flow fa­ miliar to business accounting. In deriving the summary accounts, the paper also illustrates how they reflect the activity occurring within the entire economy.3 The rest of this paper is organized as follows: I. Overview of the NIPAs: A look at what these accounts measure, a discussion of the larger system of national economic accounts into which the NIPAs fit, and a look at the key concepts underlying the NIPA estimates .............................................................................................................................................Page 2 II. Underlying economic accounts: A look at the theoretical derivation of economic accounts for a representative business firm from familiar financial accounting statements ...........................................Page 6 III. Economic accounts for sectors: A discussion of how economic accounts are derived for each sec­ tor of the economy—household, business, and government—from the theoretical economic accounts derived in section II ..................................................................................................................................Page 14 IV. NIPA summary accounts: A discussion of the derivation of the NIPA summary accounts from the theoretical economic accounts for each sector .........................................................................................Page 22 1. See “GDP: One of the Great Inventions of the 20th Century,” SURVEY OF CURRENT BUSINESS 80 (January 2000): 6–14. 2. New users of the NIPAs may find it beneficial to first review “Measuring the Economy: A Primer on GDP and the National Income and Product Accounts” on <www.bea.gov>. 3. Information on the data and estimating methods underlying the NIPAs is available in component methodologies available on BEA’s Web site at <www.bea.gov>. 1 2 I. Overview of the NIPAs HE NIPAs are a set of economic accounts that The Federal Reserve Board’s flow of funds accounts T provide detailed measures of the value and com­ record the value of tangible and financial assets ac­ position of national output and the incomes generated quired and the value of liabilities incurred throughout in the production of that output. Essentially, the NIPAs the U.S. economy, and the sources of the funds used to provide a detailed snapshot of the myriad transactions acquire the assets.5 that make up the economy—buying and selling goods In addition, BEA prepares two other sets of U.S. and services, hiring of labor, investing, renting prop­ economic accounts: The international accounts, which erty, paying taxes, and the like. More specifically, the consist of the international transactions (balance of seven summary accounts of the NIPAs simplify both payments) accounts and the international investment the transactors and transactions in the economy. The position accounts; and the regional accounts, which transactors of the domestic economy are grouped into consist of the estimates of GDP by state, of state per­ three distinct groups, or sectors—persons, businesses, sonal income, and of local area personal income. Fi­ and government; a fourth sector for the rest of the nally, the Bureau of Labor Statistics prepares estimates world is added to cover transactions between the Na­ of productivity for the U.S. economy (which are par­ tion and foreigners. The seven summary accounts of tially based on estimates of GDP). Altogether, the sys­ the NIPAs show the contribution of each sector to the tem of U.S. economic accounts presents a coherent, output of the economy, their income and outlays, and comprehensive, and consistent picture of U.S. eco­ their saving and investment. nomic activity. The best-known NIPA measure is GDP, which is de­ An internationally accepted conceptual framework fined as the market value of the goods and services for these accounts is found in the System of National produced by labor and property located in the United Accounts 1993 (SNA). The SNA provides a set of States. The NIPAs calculate GDP as the sum of familiar guidelines for national statistical offices compiling na­ final expenditure components: Personal consumption tional economic accounts. Along with national ac­ expenditures, private investment, government spend­ countants from many countries, BEA actively ing (consumption and investment) and net exports. participated in developing these guidelines. However, GDP is just one of many economic measures Many of the major improvements made to the presented in the NIPAs, which include seven summary NIPAs in recent years are consistent with the guidelines accounts and nearly 300 tables of supporting data. provided by the SNA. These include the adoption of chain-type quantity and price indexes, the capitaliza­ National Economic Accounts System tion of software, and the recognition of the implicit The NIPAs are part of an integrated system of national services provided by commercial banks. BEA is cur­ economic accounts that also includes the industry ac­ rently participating in the international effort to up­ counts and the flow of funds accounts. BEA’s industry date these guidelines to take account of changes in the accounts consist of the input-output (I-O) accounts, economic environment.6 which trace the flow of goods and services among in­ The remainder of this section discusses the concepts dustries in the production process and which show the underlying the NIPAs. value added by each industry and the detailed com­ modity composition of national output, and the GDP by industry accounts, which measure the contribution 4 5. See U.S. Board of Governors of the Federal Reserve System, Guide to the of each private industry and of government to GDP. Flow of Funds Accounts, Board of Governors, Washington, D.C., 2006; and see Albert M. Teplin, “The U.S. Flow of Funds Accounts and Their Uses,” Federal Reserve Bulletin (July 2001): 431–441. 4. See U.S. Bureau of Economic Analysis, “Concepts and Methods of the 6. See Commission of the European Communities, International Mone­ U.S. Input-Output Accounts,” September 2006, at <www.bea.gov/bea/ tary Fund, Organization for Economic Co-operation and Development, mp.htm>; and see Brian C. Moyer, Mark A. Planting, Mahnaz Fahim United Nations, and the World Bank, System of National Accounts 1993 Nader, and Sherlene K.S. Lum, “Preview of the Comprehensive Revision of (Brussels/Luxembourg, New York, Paris, and Washington, DC, 1993). For the Annual Industry Accounts: Integrating the Annual Input-Output more on the SNA and the relationship between it and the NIPAs, see Accounts and the Gross-Domestic-Product-by-Industry Accounts, SURVEY Charles Ian Mead, Karin E. Moses, and Brent R. Moulton, “The NIPAs and 84 (March