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NIPA Methodology
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National Income Accounting and the Flow of Funds
National income accounting aims to answer two fundamental questions: What is the size and composition of the US economy? How was this output produced and distributed?
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National Income Accounting and the Flow of Funds
National income accounting aims to answer two fundamental questions: What is the size and composition of the US economy? How was this output produced and distributed? These questions are answered in three quarterly reports. NIPA (National Income and Product Accounts) - BEA Capital Finance Account (Flow of Funds) – Federal Reserve Input/Output Accounts - BEA
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The Business Sector Businesses have three common accounting statements for financial reporting Balance Sheet Statement of Income and Retained Earnings Statement of Change in Financial Position With a little manipulation, we can transform these into economic accounting reports
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The Balance Sheet The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity
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The Balance Sheet Assets Current Assets Financial Assets
Cash & Equivalent Accounts Receivable Inventories Securities Fixed Assets Plant & Equipment less accumulated depreciation Liabilities Current Liabilities Loans Accounts Payable Bonds Stockholders Equity
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Example: Microsoft (in Millions)
Assets Current Assets: $12,274 Financial Assets: $11,634 Cash & Equivalent: $6,438 Accounts Receivable: $5,196 Inventories: $640 Securities: Fixed Assets: $2,223 Plant & Equipment: $6,078 less accumulated depreciation: $3,855 Other: $65,074 Total Assets: $79,571 Liabilities Current Liabilities: $1,573 Loans Accounts Payable: $1,573 Bonds: Other: $16,978 Stockholders Equity $61,020 Total Liabilities: $79,571
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The Balance Sheet The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity The Balance sheet gives a nice overview, but doesn’t really indicate how income was generated or who received payments
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Statement of Income/Retained Earnings
The Basic underlying identity in this statement is Net Income = Revenues - Costs
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Statement of Income/Retained Earnings
Sales less Costs of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Net Gains on Sale of Assets/Securities Equals Net Income Before Tax: Less Corporate Tax Equals Net Income After Tax: Less Dividends Paid Equals Retained Earnings:
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Example: Microsoft (In Millions)
Sales: $32,187 less Costs of Goods & Services Sold: $18,970 Materials/Services $4,247 Wages & Salaries $13,284 Depreciation: $1,439 Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income: $13,217 Operating Income: $13,217 Other Income: $1,509 Plus Interest/Dividends Received: Less Interest Paid Plus Net Gains on Sale of Assets/Securities: Equals Net Income Before Tax: $14,726 Less Corporate Tax: $4,733 Equals Net Income After Tax: $9,993 Less Dividends Paid: $857 Addition to Retained Earnings: $9,136
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Statement of Cash Flows
The basic underlying identity in this statement is Change in Working Capital = Change in Current Assets – Change in Current Liabilities
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Statement of Cash Flows
Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Less Change in Current Liabilities Loans Accounts Payable Additions to Working Capital Provided by Operations Net Income (After Tax) Depreciation Less Gains on Sales of Assets Other Sources Sale of Fixed Assets: Sale of Securities: Stock/Bond Issues: Less Reductions in Working Capital Dividends Paid Purchases of Fixed Assets Purchase of Securities Retirement of Stocks/Bonds
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Example: Microsoft (in Millions)
Change in Working Capital: $2,788 Change in Current Assets: Cash & Equivalent: $3,422 Accounts Receivable: - $187 Inventories: Other: - $412 Less Change in Current: Liabilities Loans: Accounts Payable: Other: $35 Equals Additions to Working: $101,706 Capital Provided by Operations: $15,224 Net Income (After Tax): $9,993 Depreciation: $1,439 Other: $3,731 Effect of Exchange Rate: $61 Less Gains on Sales of Assets/Securities: Other Sources: $86, 482 Sale of Fixed Assets: Sale of Securities: $84,362 Stock/Bond Issues: $2,120 Less Reductions in Working: $98,918 Dividends Paid: $857 Purchases of Fixed Assets: $1,954 Purchase of Securities: $89,621 Retirement of Stock: $6,486
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Deriving the Production Account
Sales less Costs of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax: Less Corporate Tax Equals Net Income After Tax: Less Dividends Paid Equals Retained Earnings
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account
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Deriving the Production Account
Sales less Costs of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account Arrange items by “source” (on the right) and “use” (on the left)
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Deriving the Production Account
Source Sales Interest Received Dividends Received Gains on Sale of Assets/Securities Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid Net Income Before Tax
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account Arrange items by “source” (on the right) and “use” (on the left) Subtract “Interest/Dividends received” and gain on sale of assets from both sides
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Deriving the Production Account
Source Sales Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid - Interest Received Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account Arrange items by “source” (on the right) and “use” (on the left) Subtract “Interest/Dividends received” and gain on sale of assets from both sides Profits = Net Income – Dividends Received – Gains on Asset Sales
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Deriving the Production Account
Source Sales Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid - Interest Received Profits
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account Arrange items by “source” (on the right) and “use” (on the left) Subtract “Interest/Dividends received” and gain on sale of assets from both sides Profits = Net Income – Dividends Received – Gains on Asset Sales Subtract “Purchased Materials/Services” and inventories from both sides
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Deriving the Production Account
Source Sales less Materials/Services Ending Inventory less Beginning Inventory Use Wages & Salaries Depreciation Indirect Business Taxes Interest Paid - Interest Received Profits
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Deriving the Production Account
Eliminate Taxes and dividends paid. These will show up in the Appropriations Account Arrange items by “source” (on the right) and “use” (on the left) Subtract “Interest/Dividends received” and gain on sale of assets from both sides Profits = Net Income – Dividends Received – Gains on Asset Sales Subtract “Purchased Materials/Services” and inventories from both sides Gross output = Sales – consumed materials + change in inventories
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Microsoft’s Production Account
Source Sales: $32,187 Other: $1,509 less Materials/Services: $4,247 Change in Inventories Gross Output: $29,449 Use Wages & Salaries: $13,284 Depreciation: $1,439 Indirect Business Taxes Interest Paid - Interest Received Profits: $14,726 Net Income: Dividends Received: Gain on Sale of Assets Income: $29,449
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Deriving the Appropriations Account
Sales less Costs of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income Equals Operating Income Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax: Less Corporate Tax Equals Net Income After Tax: Less Dividends Paid Equals Retained Earnings
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Deriving the Appropriations Account
Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS)
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Deriving the Appropriations Account
Source Equals Net Income Before Tax Use Corporate Tax Dividends Paid Addition to Retained Earnings
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Deriving the Appropriations Account
Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) Now, so our terminology matches, we need to convert “Income” to “Profits”
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Deriving the Appropriations Account
Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities Use Corporate Tax Dividends Paid Addition to Retained Earnings - Dividends Received - Gains on Sale of Assets/Securities
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Deriving the Appropriations Account
Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities Use Corporate Tax Dividends Paid - Dividends Received Addition to Retained Earnings - Gains on Sale of Assets/Securities
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Deriving the Appropriations Account
Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) Now, so our terminology matches, we need to convert “Income” to “Profits” Undistributed Profits = Additions to Retained Earnings – Gains from asset sales
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Deriving the Appropriations Account
Source Profit Use Corporate Tax Dividends Paid - Dividends Received Undistributed Profits
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Microsoft’s Appropriations Account
Source Profit: $14,725 Use Corporate Tax: $4,733 Dividends Paid - Dividends Received: $857 Undistributed Profits: $9,136
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Deriving Savings/Investment Account
Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Less Change in Current Liabilities Loans Accounts Payable Additions to Working Capital Provided by Operations Net Income (After Tax) Depreciation Less Gains on Sales of Fixed Assets & Securities Other Sources Sale of Fixed Assets: Sale of Securities: Stock/Bond Issues: Less Reductions in Working Capital Dividends Paid Purchases of Fixed Assets Purchase of Securities Retirement of Stocks/Bonds
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Deriving Savings/Investment Account
Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right
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Deriving Savings/Investment Account
Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Less Sales of Securities: Plus Gains on Securities Change in Fixed Assets Purchases of Fixed Assets Less Sales of Fixed Assets: Plus Gains on Assets Less Depreciation Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues Less Stock Retirements Addition to Retained Earnings: Net Income (After Tax) Less Dividends Paid
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Deriving Savings/Investment Account
Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides
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Deriving Savings/Investment Account
Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Less Sales of Securities: Change in Fixed Assets Purchases of Fixed Assets Less Sales of Fixed Assets: Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues Less Stock Retirements Addition to Retained Earnings: Net Income (After Tax) Less Dividends Paid Less Gains on Securities/Assets Plus Depreciation
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Deriving Savings/Investment Account
Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales Finally, subtract change in Liabilities from both sides and regroup
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Deriving Savings/Investment Account
Change in Fixed Assets Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories Change in Current Assets Cash & Equivalent Accounts Receivable Change in Securities Purchases of Securities - Sales of Securities: Less Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation
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Deriving Savings/Investment Account
Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales Finally, subtract change in Liabilities from both sides and regroup Net Acquisition of Financial Assets = Change in Current Assets + Change in Securities
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Deriving Savings/Investment Account
Change in Fixed Assets Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories Net Acquisition of Financial Assets Less Change in Liabilities Loans Accounts Payable Bond Issues – Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation
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Microsoft’s Savings/Investment Account
Change in Fixed Assets: $1,954 Purchases of Fixed Assets - Sales of Fixed Assets Change in Inventories: Net Acquisition of Financial Assets: Purchases – Sales of Stock: $5,259 Cash & Equivalent: $3,422 Accounts Receivable: -$187 Other: -$412 Less Change in Liabilities: Loans Accounts Payable: Bond Issues – Retirements: Stock Issues - Retirements: -$4,366 Other: $35 Gross Investment: $14,367 Undistributed Profits: $9,136 Plus Depreciation: $1,439 Effect of Exchange Rate Change: $61 Other: $3731 Gross Savings: $14,367
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Microsoft Summary Microsoft Production Account
Uses Source Wages & Salaries: $13,284 Capital Consumption Allowance: $1,439 Profits: $13,217 Sales: $32,187 Change in Inventories Less Materials/Services: $4,247 Charges Against Output: $27,940 Gross Business Output: $27,940
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Appropriation Account
Microsoft Summary Microsoft Appropriation Account Uses Source Corporate Tax: $4,733 Net Dividends Paid: -$652 Undistributed Profits: $9,136 Profits: $13,217 Distribution of Profits: $13,217
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Microsoft Summary Microsoft Savings/Investment
Uses Source Change in Fixed Assets: $1,954 Net Acquisition of Financial Assets: $8,082 Less Change in Liabilities: -$4331 Undistributed Profits: $9,136 Plus Depreciation: $1,439 Exchange Rate Change: $61 Other: $3731 Gross Investment: $14,367 Gross Savings: $14,367
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Other Sectors In addition to the business sector, there will be corresponding accounts for Household & Non Profits Government Foreign (BOP Accounts) These individual tables can then be consolidated into a national account by adding across sectors and making the appropriate cancellations Taxes Paid = Receipts By Government Transfers Paid = Transfers Received
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NIPA Accounts The NIPA account is a configuration that includes
NIP (National Income and Product): Consolidated Product account and the Business appropriations account Personal Income and Outlays: Household Appropriation Account Government Receipts and Expenditures: Government Appropriations Account Foreign Transactions: Foreign Appropriations and Savings/Investment Accounts Gross Saving/Investment: Domestic Portion of Consolidated Saving/Investment Accounts
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Capital Finance (Flow of Funds)
The Flow of Funds is a detailed look at the savings/investment accounts “Changes in Liabilities” are subtracted from both sides do that the Left hand side of the chart is “Sources of Funds” and the RHS is “Uses of Funds” The Data is disaggregated by asset type (Deposits, Loans, Securities, Trade Credit) and by Sector (Business, Financial, Household, Government, and Foreign)
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Input/Output Accounts
The Input/Output Tables illustrate the flows of goods and services across sectors of the economy The national production accounts are disaggregated across industries and commodity.
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GDP 2004Q2 (Billions) Category Amount (B) % of Total Growth
Consumption $8,146.2 70% 4.0% Investment $1,891.2 16% 12% Government $2,172.9 18% 6% Net Exports -561.0 -4% ---- GDP $11,649.3 100% 6.0%
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Output Equals Income GDP ($11,649.3) + Net Factor Payments ($73.5)
GNP ($11,722.8)
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Output Equals Income GDP ($11,649.3) + Net Factor Payments ($73.5)
GNP ($11,722.8) Depreciation ($1,370.1) Net National Product ($10,352.7)
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Output Equals Income GDP ($11,649.3) + Net Factor Payments ($73.5)
GNP ($11,722.8) Depreciation ($1,370.1) Net National Product ($10,352.7) Indirect Taxes ($834.4) National Income ($9518.3)
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National Income 2004Q2 Category Amount(B) % of Total Growth Wages
$6,600.6 69% 5% Proprietor’s Income $902.8 9% 14% Rental Income $173.8 2% Corporate Profits $1294.2 36% Interest $546.9 6% -4% National Income $9518.3 100%
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Personal Income/Outlays 2004Q2
Category Amount(B) % of Total Personal Income $9614.8 100% Taxes $1030.3 10% Consumption $8146.2 85% Interest $296.3 3% Personal Savings 142.0 2%
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Savings/Investment 2004Q2 Category Amount(B) % of Total
Gross Investment $1631.3 100% Depreciation $1355.0 85% Private Saving $142.0 9% Undistributed Profits $506.7 31% Government -$372.4 -25%
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Borrowing by Sector 2004Q1 Category Amount(B) % of Total Total $2801.3
100% Financial Sector $805.7 28% Federal Government $466.0 17% State & Local Government $149.7 5% Non-Financial Business $303.3 11% Household $1008.2 37% Foreign $68.4 2%
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