1. NIPA Methodology

2. National Income Accounting and the Flow of Funds National income accounting aims to answer two fundamental questions: National income accounting aims to answer two fundamental questions: What is the size and composition of the US economy? What is the size and composition of the US economy? How was this output produced and distributed? How was this output produced and distributed?

3. National Income Accounting and the Flow of Funds National income accounting aims to answer two fundamental questions: National income accounting aims to answer two fundamental questions: What is the size and composition of the US economy? What is the size and composition of the US economy? How was this output produced and distributed? How was this output produced and distributed? These questions are answered in three quarterly reports. These questions are answered in three quarterly reports. NIPA (National Income and Product Accounts) - BEA NIPA (National Income and Product Accounts) - BEA Capital Finance Account (Flow of Funds) – Federal Reserve Capital Finance Account (Flow of Funds) – Federal Reserve Input/Output Accounts - BEA Input/Output Accounts - BEA

4. The Business Sector Businesses have three common accounting statements for financial reporting Businesses have three common accounting statements for financial reporting Balance Sheet Balance Sheet Statement of Income and Retained Earnings Statement of Income and Retained Earnings Statement of Change in Financial Position Statement of Change in Financial Position With a little manipulation, we can transform these into economic accounting reports With a little manipulation, we can transform these into economic accounting reports

5. The Balance Sheet The Basic underlying identity of a firm’s balance sheet is The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity

6. The Balance Sheet Assets Current Assets Financial Assets Cash & Equivalent Accounts Receivable Inventories Securities Fixed Assets Plant & Equipment less accumulated depreciationLiabilities Current Liabilities Loans Accounts Payable Bonds Stockholders Equity

7. 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

8. The Balance Sheet The Basic underlying identity of a firm’s balance sheet is 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 The Balance sheet gives a nice overview, but doesn’t really indicate how income was generated or who received payments

9. Statement of Income/Retained Earnings The Basic underlying identity in this statement is The Basic underlying identity in this statement is Net Income = Revenues - Costs

10. 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:

11. Example: Microsoft (In Millions) Sales: Sales: $32,187 less Costs of Goods & Services Sold: less Costs of Goods & Services Sold: $18,970 Materials/Services Materials/Services $4,247 Wages & Salaries Wages & Salaries $13,284 Depreciation: Depreciation: $1,439 Indirect Business Taxes Beginning Inventory less Ending Inventory Equals Operating Income: Equals Operating Income: $13,217 Operating Income: Operating Income: $13,217 Other Income: Other Income: $1,509 Plus Interest/Dividends Received: Less Interest Paid Net Gains on Sale of Assets/Securities: Plus Net Gains on Sale of Assets/Securities: Equals Net Income Before Tax : Equals Net Income Before Tax : $14,726 Less Corporate Tax: Less Corporate Tax: $4,733 Equals Net Income After Tax: Equals Net Income After Tax: $9,993 Less Dividends Paid: Less Dividends Paid: $857 Addition to Retained Earnings: Addition to Retained Earnings: $9,136

12. Statement of Cash Flows The basic underlying identity in this statement is The basic underlying identity in this statement is Change in Working Capital = Change in Current Assets – Change in Current Liabilities

13. Statement of Cash Flows Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Current Liabilities Less Change in Current LiabilitiesLoans 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

14. Example: Microsoft (in Millions) Change in Working Capital: Change in Working Capital: $2,788 Change in Current Assets: Cash & Equivalent: Accounts Receivable: Cash & Equivalent: $3,422 Accounts Receivable: - $187Inventories: Other: Other: - $412 Change in Current: Less Change in Current:LiabilitiesLoans: Accounts Payable: Other: Other: $35 Equals Additions to Working: Equals Additions to Working: $101,706Capital Provided by Operations: Provided by Operations: $15,224 Net Income (After Tax): Net Income (After Tax): $9,993 Depreciation: Depreciation: $1,439 Other: Other: $3,731 Effect of Exchange Rate: Effect of Exchange Rate: $61 Less Gains on Sales of Assets/Securities: Other Sources: Other Sources: $86, 482 Sale of Fixed Assets: Sale of Securities: Sale of Securities: $84,362 Stock/Bond Issues: Stock/Bond Issues: $2,120 Less Reductions in Working: Less Reductions in Working: $98,918Capital Dividends Paid : Dividends Paid : $857 Purchases of Fixed Assets: Purchases of Fixed Assets: $1,954 Purchase of Securities: Purchase of Securities: $89,621 Retirement of Stock: Retirement of Stock: $6,486

15. Deriving the Production Account Sales less Costs of Goods & Services Sold Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory Ending Inventory less Ending Inventory 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

16. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account

17. 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 Plus Interest/Dividends Received: Less Interest Paid Plus Gains on Sale of Assets/Securities Equals Net Income Before Tax

18. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account 2) Arrange items by “source” (on the right) and “use” (on the left)

19. Deriving the Production Account Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid Net Income Before Tax Source Sales Interest Received Dividends Received Gains on Sale of Assets/Securities

20. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account 2) Arrange items by “source” (on the right) and “use” (on the left) 3) Subtract “Interest/Dividends received” and gain on sale of assets from both sides

21. Deriving the Production Account 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 Source Sales

22. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account 2) Arrange items by “source” (on the right) and “use” (on the left) 3) Subtract “Interest/Dividends received” and gain on sale of assets from both sides 4) Profits = Net Income – Dividends Received – Gains on Asset Sales

23. Deriving the Production Account Use Materials/Services Wages & Salaries Depreciation Indirect Business Taxes Beginning Inventory less Ending Inventory Interest Paid - Interest Received Profits Source Sales

24. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account 2) Arrange items by “source” (on the right) and “use” (on the left) 3) Subtract “Interest/Dividends received” and gain on sale of assets from both sides 4) Profits = Net Income – Dividends Received – Gains on Asset Sales 5) Subtract “Purchased Materials/Services” and inventories from both sides

25. Deriving the Production Account Use Wages & Salaries Depreciation Indirect Business Taxes Interest Paid - Interest Received Profits Source Sales less Materials/Services Ending Inventory less Beginning Inventory

26. Deriving the Production Account 1) Eliminate Taxes and dividends paid. These will show up in the Appropriations Account 2) Arrange items by “source” (on the right) and “use” (on the left) 3) Subtract “Interest/Dividends received” and gain on sale of assets from both sides 4) Profits = Net Income – Dividends Received – Gains on Asset Sales 5) Subtract “Purchased Materials/Services” and inventories from both sides 6) Gross output = Sales – consumed materials + change in inventories

27. Microsoft’s Production Account 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 Source Sales: $32,187 Other: $1,509 less Materials/Services: $4,247 Change in Inventories Gross Output: $29,449

28. 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 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

29. Deriving the Appropriations Account 1) Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS)

30. Deriving the Appropriations Account Use Corporate Tax Dividends Paid Addition to Retained Earnings Source Equals Net Income Before Tax

31. Deriving the Appropriations Account 1) Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) 2) Now, so our terminology matches, we need to convert “Income” to “Profits”

32. Deriving the Appropriations Account Use Corporate Tax Dividends Paid Addition to Retained Earnings - Dividends Received - Gains on Sale of Assets/Securities Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities

33. Deriving the Appropriations Account Use Corporate Tax Dividends Paid - Dividends Received Addition to Retained Earnings - Gains on Sale of Assets/Securities Source Equals Net Income Before Tax - Dividends Received - Gains on Sale of Assets/Securities

34. Deriving the Appropriations Account 1) Now will use what was left over after the derivation of the production account. As before, arrange things by “source” (RHS) and “Use” (LHS) 2) Now, so our terminology matches, we need to convert “Income” to “Profits” 3) Undistributed Profits = Additions to Retained Earnings – Gains from asset sales

35. Deriving the Appropriations Account Use Corporate Tax Dividends Paid - Dividends Received Undistributed Profits Source Profit

36. Microsoft’s Appropriations Account Use Corporate Tax: $4,733 Dividends Paid - Dividends Received: $857 Undistributed Profits: $9,136 Source Profit: $14,725

37. Deriving Savings/Investment Account Change in Working Capital Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Current Liabilities Less Change in Current LiabilitiesLoans 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

38. 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 Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right

39. Deriving Savings/Investment Account Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Purchases of Securities Less Sales of Securities: Less Sales of Securities: Plus Gains on Securities Change in Fixed Assets Change in Fixed Assets Purchases of Fixed Assets Purchases of Fixed Assets Less Sales 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) Dividends Paid Less Dividends Paid

40. Deriving Savings/Investment Account 1) Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right 2) Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides

41. Deriving Savings/Investment Account Change in Current Assets Change in Current Assets Cash & Equivalent Accounts Receivable Inventories Change in Securities Purchases of Securities Purchases of Securities Less Sales of Securities: Less Sales of Securities: Change in Fixed Assets Change in Fixed Assets Purchases of Fixed Assets Purchases of Fixed Assets Less Sales of Fixed Assets: Less Sales of Fixed Assets: Change in Liabilities Loans Accounts Payable Bond Issues – Retirements 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

42. Deriving Savings/Investment Account 1) Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right 2) Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides 3) Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales 4) Finally, subtract change in Liabilities from both sides and regroup

43. 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 Bond Issues – Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation

44. Deriving Savings/Investment Account 1) Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right 2) Add Depreciation to both sides and subtract gains from sale of assets and securities from both sides 3) Recall, Undistributed Profits = Additions to Retained Earnings – Gains from asset sales 4) Finally, subtract change in Liabilities from both sides and regroup 5) Net Acquisition of Financial Assets = Change in Current Assets + Change in Securities

45. 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 Accounts Payable Bond Issues – Retirements Bond Issues – Retirements Stock Issues - Stock Retirements Stock Issues - Stock Retirements Undistributed Profits Plus Depreciation

46. 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: Gross Investment: $14,367 Undistributed Profits: $9,136 Plus Depreciation: $1,439 Effect of Exchange Rate Change: $61 Other: $3731 Gross Savings: $14,367

47. Microsoft Summary Microsoft Production Account UsesSource 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: $27,940Gross Business Output: $27,940

48. Microsoft Summary Microsoft Appropriation Account UsesSource Corporate Tax: $4,733 Net Dividends Paid: -$652 Undistributed Profits: $9,136 Profits: $13,217 Distribution of Profits: $13,217Profits: $13,217

49. Microsoft Summary Microsoft Savings/Investment UsesSource 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: $14,367Gross Savings: $14,367

50. Other Sectors In addition to the business sector, there will be corresponding accounts for In addition to the business sector, there will be corresponding accounts for Household & Non Profits Household & Non Profits Government Government Foreign (BOP Accounts) Foreign (BOP Accounts) These individual tables can then be consolidated into a national account by adding across sectors and making the appropriate cancellations 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 Taxes Paid = Receipts By Government Transfers Paid = Transfers Received Transfers Paid = Transfers Received

51. NIPA Accounts The NIPA account is a configuration that includes The NIPA account is a configuration that includes NIP (National Income and Product): Consolidated Product account and the Business appropriations account NIP (National Income and Product): Consolidated Product account and the Business appropriations account Personal Income and Outlays: Household Appropriation Account Personal Income and Outlays: Household Appropriation Account Government Receipts and Expenditures: Government Appropriations Account Government Receipts and Expenditures: Government Appropriations Account Foreign Transactions: Foreign Appropriations and Savings/Investment Accounts Foreign Transactions: Foreign Appropriations and Savings/Investment Accounts Gross Saving/Investment: Domestic Portion of Consolidated Saving/Investment Accounts Gross Saving/Investment: Domestic Portion of Consolidated Saving/Investment Accounts

52. Capital Finance (Flow of Funds) The Flow of Funds is a detailed look at the savings/investment accounts 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” “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) The Data is disaggregated by asset type (Deposits, Loans, Securities, Trade Credit) and by Sector (Business, Financial, Household, Government, and Foreign)

53. Input/Output Accounts The Input/Output Tables illustrate the flows of goods and services across sectors of the economy 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. The national production accounts are disaggregated across industries and commodity.

54. GDP 2004Q2 (Billions) CategoryAmount (B)% of TotalGrowth Consumption$8,146.270%4.0% Investment$1,891.216%12% Government$2,172.918%6% Net Exports-561.0-4%---- GDP$11,649.3100%6.0%

55. Output Equals Income GDP ($11,649.3) + Net Factor Payments ($73.5) GNP ($11,722.8)

56. 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)

57. 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)

58. National Income 2004Q2 CategoryAmount(B)% of TotalGrowth Wages$6,600.669%5% Proprietor’s Income $902.89%14% Rental Income$173.82% Corporate Profits $1294.214%36% Interest$546.96%-4% National Income $9518.3100%6%

59. Personal Income/Outlays 2004Q2 CategoryAmount(B)% of Total Personal Income $9614.8100% Taxes$1030.310% Consumption$8146.285% Interest$296.33% Personal Savings 142.02%

60. Savings/Investment 2004Q2 CategoryAmount(B)% of Total Gross Investment $1631.3100% Depreciation$1355.085% Private Saving$142.09% Undistributed Profits $506.731% Government-$372.4-25%

61. Borrowing by Sector 2004Q1 CategoryAmount(B)% of Total Total$2801.3100% Financial Sector$805.728% Federal Government$466.017% State & Local Government$149.75% Non-Financial Business$303.311% Household$1008.237% Foreign$68.42%