NIPA Methodology National Income Accounting and the Flow

NIPA Methodology

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

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

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

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

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

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 Liabilities Current Liabilities: $1, 573 Loans Accounts Payable: $1, 573 Bonds: Other: $16, 978 Stockholders Equity $61, 020 Other: $65, 074 Total Assets: $79, 571 Total Liabilities: $79, 571

The Balance Sheet l The Basic underlying identity of a firm’s balance sheet is Assets = Liabilities + Stockholder Equity l The Balance sheet gives a nice overview, but doesn’t really indicate how income was generated or who received payments

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

Statement of Income/Retained Earnings Sales Operating Income 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 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:

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 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

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

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

Example: Microsoft (in Millions) Change in Working Capital: $2, 788 Equals Additions to Working: $101, 706 Capital Change in Current Assets: Provided by Operations: $15, 224 Cash & Equivalent: $3, 422 Accounts Receivable: - $187 Inventories: Other: - $412 Less Change in Current: Liabilities Loans: Accounts Payable: Other: $35 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 Capital Dividends Paid: $857 Purchases of Fixed Assets: $1, 954 Purchase of Securities: $89, 621 Retirement of Stock: $6, 486

Deriving the Production Account Sales Equals Operating Income 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

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

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

Deriving the Production Account 1) 2) 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)

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

Deriving the Production Account 1) 2) 3) 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

Deriving the Production Account Source 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 Sales

Deriving the Production Account 1) 2) 3) 4) 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

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

Deriving the Production Account 1) 2) 3) 4) 5) 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

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

Deriving the Production Account 1) 2) 3) 4) 5) 6) 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

Microsoft’s Production Account Use Wages & Salaries: $13, 284 Depreciation: $1, 439 Indirect Business Taxes Interest Paid - Interest Received Profits: $14, 726 - Source Sales: $32, 187 Other: $1, 509 less Materials/Services: $4, 247 Change in Inventories Net Income: Dividends Received: Gain on Sale of Assets Income: $29, 449 Gross Output: $29, 449

Deriving the Appropriations Account Sales Equals Operating Income 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

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)

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

Deriving the Appropriations Account 1) 2) 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”

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

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

Deriving the Appropriations Account 1) 2) 3) 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

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

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

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

Deriving Savings/Investment Account l Rearrange Cash Flow Statement so that Change in assets (use) is on the left and change in liabilities (source) is on the right

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

Deriving Savings/Investment Account 1) 2) 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

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

Deriving Savings/Investment Account 1) 2) 3) 4) 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

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

Deriving Savings/Investment Account 1) 2) 3) 4) 5) 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

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

Microsoft’s Savings/Investment Account Change in Fixed Assets: $1, 954 Undistributed Profits: $9, 136 Purchases of Fixed Assets - Sales of Fixed Assets Plus Depreciation: $1, 439 Change in Inventories: Net Acquisition of Financial Assets: Purchases – Sales of Stock: $5, 259 Cash & Equivalent: $3, 422 Accounts Receivable: -$187 Other: -$412 Effect of Exchange Rate Change: $61 Other: $3731 Less Change in Liabilities: Loans Accounts Payable: Bond Issues – Retirements: Stock Issues - Retirements: -$4, 366 Other: $35 Gross Investment: $14, 367 Gross Savings: $14, 367

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

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

Microsoft Summary Microsoft Savings/Investment Uses Change in Fixed Assets: $1, 954 Net Acquisition of Financial Assets: $8, 082 Less Change in Liabilities: -$4331 Source Undistributed Profits: $9, 136 Plus Depreciation: $1, 439 Exchange Rate Change: $61 Other: $3731 Gross Investment: $14, 367 Gross Savings: $14, 367

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

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

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

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

GDP 2004 Q 2 (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%

Output Equals Income GDP ($11, 649. 3) + Net Factor Payments ($73. 5) GNP ($11, 722. 8)

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)

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)

National Income 2004 Q 2 Category Amount(B) % of Total Growth Wages $6, 600. 6 69% 5% Proprietor’s Income $902. 8 9% 14% Rental Income $173. 8 2% 2% Corporate Profits $1294. 2 14% 36% Interest $546. 9 6% -4% National Income $9518. 3 100% 6%

Personal Income/Outlays 2004 Q 2 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%

Savings/Investment 2004 Q 2 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%

Borrowing by Sector 2004 Q 1 Category Amount(B) % of 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%