National Income And Product Accounts

Historical development

The economic accounting structure

The production account

Production by sector and industry

The appropriation accounts

The capital account

Uses of the economic accounts

BIBLIOGRAPHY

National income and product accounts form a systematic interlocking framework containing consistent estimates of significant aggregates and components for the economy and for major economic “sectors,” or groupings of like decisionmaking units. The sector tables are built on accounting principles, showing the transactions among sectors and distinguishing the main types of economic activity: production, consumption, and capital formation and its financing. The capital account may be elaborated in the direction of showing detailed flows-of-funds among sectors, and related to balance sheets and wealth statements for successive points in time.

Economic accounting systems may thus provide comprehensive numerical estimates of economic stocks and flows within national or regional economies. The accounts may be described as “general purpose,” for they are intended to serve various analytical uses: to increase economic understanding, to serve as a background for economic appraisals and projections, and to make possible more effective public and private decision making.

This article summarizes the historical development of national income concepts and estimates, and discusses the basic structure of economic accounts: the production account, in aggregate and by industry, with some reference to conceptual problems; appropriation accounts and their relation to the production account; and the capital account, and its relationship to flow-of-funds accounts and national balance sheets and wealth statements [seeNational wealth]. Finally, some mention will be made of the chief types of uses made of economic accounts.

Historical development

Until World War I, national income estimates were developed largely by individual investigators in a dozen or so countries. The basic income and product concepts were clarified, and estimating methodology was developed. Between World War I and World War n, estimating work was increasingly taken over by government statistical organizations and put on a regular, recurring basis. National income accounting systems, developed during World War n, spread rapidly to most countries of the world after the war. The focus is now on refinement and elaboration of the accounts. The following historical review relies heavily on Studenski (1958, part 1).

Developments up to World War I

The first estimates of national income were made in England by Sir William Petty in the essay “Verbum sapienti” in 1665, and in “Political Arithmetick” 11 years later, although the essays were not published for some years. Petty adopted a comprehensive income concept, defining the “Income of the People” as the sum of the “Annual Value of the Labour of the People” and the “Annual Proceed of the Stock or Wealth of the Nation” (rent, interest, and profit). On the other side of what was, in effect, a double-entry account, he included the “Annual Expense of the People,” comprising consumption outlays and, in principle, the surplus remaining after current consumption.

In 1696, more systematic estimates were included by Gregory King in a manuscript entitled “Natural and Political Observations and Conclusions Upon the State and Condition of England,” excerpts from which were published in 1698. Adopting Petty’s conceptual framework, King estimated “the Annual Income and Expense of the Nation as it stood in 1688” and the excess of income over expense, or the “yearly increase of wealth.” The method used was to estimate for more than two dozen socioeconomic groups the number of families and the average income, expense, and saving per family. He constructed a ten-year time series and provided comparisons with France and Holland.

In France, Pierre le Pesant de Boisguillebert was the first economist to develop the notion of national income and to make some crude estimates of its magnitude, which appeared in Detail de la France, written in the early 1690s and published in 1697, and in Factum de la France, published in 1707. Boisguillebert identified income with consumption, and on the income side he included income from property and from labor. More careful estimates were made by Marshall Vauban in his book Dime royale in 1707. Like Boisguillebert, Vauban was interested in tax reform and in income estimates as a basis for estimating yields from a gross income tax. He defined income broadly to consist of income generated in all branches of production, although available data allowed him to estimate only portions of the total.

The early estimators, and their followers during the first century of income work, followed a comprehensive production concept. This eventually became the accepted approach in Western countries, but only after some detours. In the later eighteenth century, the French physiocrats, led by Francois Quesnay, identified national income with agricultural product, believing that only agriculture produced a rent, or produit net over and above costs. While not accepted generally even in France, this approach influenced Lavoisier, who made the most detailed estimates of French income prior to 1800. Although excessively restricted, the physiocratic concept had the useful by-product of leading its authors to show the connections between agriculture and the so-called nonproductive sectors of the economy in a tableau économique. This was a forerunner of later sector accounts and input-output tables. [SeeEconomic thought, article onphysiocratic thought.]

In The Wealth of Nations (published in 1776) Adam Smith pointed out that all commodity production and distribution could be productive, returning a net income to producers in the form of profit. Since Smith was concerned with the creation of material wealth as a source of economic growth, he emphasized activity that “fixes itself” in commodities rather than services that are consumed directly, defining the latter as unproductive. Thus, while Smith’s production concept was broader than that of the physiocrats, it was also restricted.

Smith’s restricted concept was opposed by such economists as Lauderdale, Say, Senior, and Walras, but it stayed in the mainstream of economic thought for almost a century, perpetuated by the writings of David Ricardo and John Stuart Mill, in particular. It was the basis of the chief national income estimates made in England and France between Smith’s time and the mid-nineteenth century, which placed main reliance on commodity production data.

This restricted concept was also adopted by Karl Marx in Das Kapital, since by associating productive labor with the creation of material goods alone, he could more conveniently develop his theories of the transformation of surplus value into capital. The Marxian approach later became the basis of the “material product system” of income accounts in the Soviet Union and other communist countries.

In Western thought, Alfred Marshall gave the coup de grâce to Smith’s restricted concept. In Economics of Industry in 1879 and in the Principles in 1890, he firmly identified production with the creation of utility, thus clearly encompassing services as well as material commodities. He also clearly distinguished between gross and net product (or the “national dividend”), and pointed out that the net concept excludes the consumption of capital as well as of intermediate products.

In the latter part of the nineteenth century, both English and French estimators returned to the comprehensive production concept, using income tax data and other sources in addition to production censuses and surveys. Perhaps the most sophisticated estimates made prior to World War I were those of A. L. Bowley. Recognizing the need for continuing estimates, he called for a central statistical agency to coordinate the basic data and prepare estimates on a regular basis.

In the meantime, national income estimation was spreading to other countries. In Russia, three partial estimates of national income and consumer expenditures for commodities were made in the 1790s by B. F. G. Hermann, A. N. Radishchev, and the anonymous authors of New World Geography. The latter two sets of estimates, which were included in reformist tracts, were suppressed, and apparently no further estimates were made until 1897. S. N. Prokopovitch, a Marxian reformer, prepared new estimates in 1906, using the material production concept. These were updated in 1917 under the Kerensky government as a basis for wartime planning.

The United States was the fourth country in which national income estimates appeared. In 1843 George Tucker of the University of Virginia published his Progress of the United States in Population and Wealth in Fifty Years, based on the expanded 1840 decennial census and the five previous censuses. In 1855, he added new chapters based on data from the census of 1850. One was devoted to estimates of annual income and product, by commodity-producing industry and by state, and another to national wealth estimates. In the 1890s, Charles B. Spahr published An Essay on the Present Distribution of Wealth in the United States, with estimates of national income and wealth for 1880 and 1890. In 1915, Wilford I. King in effect extended the Spahr estimates to 1910 in his volume The Wealth and Income of the People of the United States.

National income estimates were prepared in nine additional countries before the end of World War i. These were Austria (in 1861), Australia (in 1890), Norway (in 1893), Germany (in 1899—although estimates had been prepared earlier for individual German states), Japan (in 1902), Switzerland (in 1902), the Netherlands (in 1910), Italy (in 1911), and Bulgaria (in 1915). It is noteworthy that the Australian estimates, by Timothy Coghlan, were prepared officially and continued annually until his resignation as Commonwealth statistician in 1904. Coghlan used all three approaches to estimation: industry value added, factor cost, and final expenditures. His work foreshadowed the era of official estimation that began in the 1920s.

Developments since World War I

Between the two world wars, national income estimation work spread rapidly, the number of countries with estimates increasing from 13 in 1919 to 33 by 1939. What is more important, an increasing number of central governments took over national income estimation and put it on a regular basis, beginning with Canada and the Soviet Union in 1925 and Germany in 1929. By 1939, official estimates were prepared in nine countries. In the 1939 World Economic Survey, the League of Nations published comparative income estimates for 26 countries covering all or part of the period 1929-1938. In the same year, the League’s Committee on Statistics first took up the problem of international comparability of income estimates. World War n temporarily slowed down the spread of national income work, but it stimulated some important qualitative developments.

In his General Theory of Employment, Interest and Money (published in 1936), J. M. Keynes made national product and the expenditures for final products by the chief economic sectors central to his theory of income determination. In the fall of 1939, the preparation of official national income estimates was authorized in Great Britain. Under Keynes’s guidance, Richard Stone and James Meade in the Central Statistical Office completed a set of income and expenditure estimates—published as background for the 1941 budget. The initial estimates were later elaborated into appropriation accounts for the major sectors, linked to the consolidated production account by appropriate debit and credit entries, and published in a Treasury White Paper in 1946. The economic accounting approach was independently developed in the Netherlands and Norway during the war, and the estimates were published soon after the occupations were ended.

After World War n, the evolution and adoption of economic accounting spread rapidly. The development of macroeconomic theory and the possibility of using income accounts as background for full-employment and development policies were important factors. The United Nations based its dues assessments on a formula involving national income and provided technical assistance to nations instituting national income estimates. Measurement of National Income and the Construction of Social Accounts, published in 1947 by the League of Nations Committee of Statistical Experts, was helpful to countries undertaking estimating work. In 1953, the publication by the UN Statistical Office of A System of National Accounts and Supporting Tables (hereafter called the SNA) further promoted consistency in national accounting estimates. Interest in the field also was stimulated by the formation of the International Association for Research in Income and Wealth, which has held biennial meetings since 1947.

During the first postwar decade, the number of countries with national income estimates grew from 39 to 93. During the following decade, the preparation of such estimates became almost universal. The thrust of current work is toward improving the quality of the basic data and derived estimates and toward elaborating the basic sector accounts. In 1965, the Statistical Office of the United Nations began circulating a proposed revision of the SNA which would integrate national income accounts with financial (flow-of-funds) accounts and balance sheets, as well as inputoutput tables. The United Nations plans to complete the revision by 1968 and to use the new integrated system both as a guide for member countries and as a consistent format for international reporting and comparisons.

The economic accounting structure

Accounts provide a systematic and informative approach to organizing data about economic transactions. The balance of the accounts reflects economic and accounting truisms. In the case of production, the value of production (receipts from sales, plus the value of inventory change) is equal to the costs of producing the output, including a residual “operating surplus,” or profit. In appropriation accounts, a disposition is made of all incomes —by expenditure, transfer payments, or saving. In capital accounts, additions to capital must be financed by saving, net capital transfers, or net borrowing. In balance sheets, the asset position of any unit or sector is balanced by liabilities plus a residual net worth. The use of balancing accounts is statistically advantageous in providing checks on estimates or in permitting the estimation of important variables as residuals.

The accounting rule that for each credit there must be a corresponding debit reflects the twosided nature of transactions. For each sale there must be a purchaser; for each payment, a receipt; and for each acquisition of an asset, an equal liability must be incurred. Statistically, this means that all transactions are kept sight of, and none is lost in the myriad real and financial transactions of an economy.

The structure of accounts, devised so as to provide a useful summary picture of economic activities, has several main dimensions: (1) the sectors or groupings of transactors to be distinguished; (2) the chief forms of economic activity for which separate accounts (or “subaccounts”) are to be set up; and (3) the chief types of items, or transaction classes, which should be distinguished within the accounts or in more detailed supporting tables.

Before examining these dimensions, it should be noted that the structure of economic accounts conditions the form of data collection, and vice versa. Greater detail and complexity in the accounts is attained, not only at a greater financial cost but also at the possible cost of some loss in clarity. Once a structure has been adopted, there is a cost in loss of continuity when it is changed or basically revised.

Sectors of the economy

Sectors are groupings of transactors similar in economic motivation and behavior, or at least more like each other than they are like the transactors grouped into a different sector. The United Nations SNA distinguishes three chief sectors, which are basic to most systems of economic accounts, although each may be further subdivided.

(1) The enterprise sector includes all business firms and other organizations that produce goods and services for sale at prices generally intended to cover costs. This sector includes private corporations and cooperatives, other than nonprofit institutions serving households; unincorporated private enterprises, including self-employed craftsmen and professional men; nonprofit institutions serving other enterprises; all households and institutions in their capacity as landlords; and all public enterprises.

For flow-of-funds accounts, it is necessary to distinguish between financial enterprises, by major classes, and others. The nonfinancial subsector may be further subdivided by industry classes. These industries may be made up either of establishments or of firms. The former is preferable for production accounts; the latter, for financing accounts. Due to the greater heterogeneity of multiestablishment firms, meaningful disaggregation cannot be carried as far as it can with industries of establishments, although the latter are also seldom fully homogeneous, producing only the primary products in terms of which these industries are defined.

(2) The household sector includes households and private nonprofit institutions rendering services chiefly to households. The units of this sector are the chief recipients of income from production and spend the bulk of income to satisfy wants. Households comprise single individuals, families, and persons living together in institutions. The nonprofit institutions included in the sector render services to household members or to the public at large, and are supported primarily through dues, fees, grants, and miscellaneous sales. Pension trust funds also are included in this sector.

When data permit, it is useful to separate households, nonprofit institutions, and private trust funds. Other subsectors have been proposed, as for farm and nonfarm households and for major income size classes. The SNA provides a separate supporting table for a “rural sector,” of particular importance in less developed countries.

(3) The general government sector comprises agencies of central, state, and local governments that perform common services, supported by general tax revenue, which cannot as conveniently be provided by enterprises. Social security and other public trust fund arrangements are generally included. Financial agencies and funds may be segregated, and subsectors may be provided for central, state, and local governments separately, with possible further groupings of agencies according to major functions.

Forms of economic activity

The SNA distinguishes three major forms of economic activity in terms of which the sector accounts may be subdivided: production, appropriation and disposition of income, and capital formation. To these may be added a fourth, when the capital account is confined to real capital formation, namely, the financing of capital formation. Finally, the net result of capital transactions and revaluations may be shown in balance sheets as of successive points in time. In later sections, each of these forms of accounts will be discussed.

Types of transactions

The economic accounts themselves contain major classifications of flows by significant characteristics. They distinguish between goods and services, by major categories; transfer or tax payments; saving or purchases of financial claims; factor income, by major legal organization form and by the chief nonfactor charges against product; and so on. Much more extensive detail is generally provided in supporting tables. These show time series for the key variables of the accounting presentation, which generally relates only to the most recent period. The groupings and degree of detail depend on what is regarded as analytically useful. The economic analyst will more frequently use the detail in supporting tables than he will the sector accounts, but the accounts are indispensable as an organizing framework to display the interrelationships among the many component variables.

Sources of data

Data are seldom collected primarily for use in the economic accounts. Rather, they are collected for other purposes but are also used as the basis for estimates according to national income concepts and framework. Thus, national income estimates are eclectic, being pieced together from a variety of sources and by various methods.

The chief sources are occasional industrial and other economic censuses, sample surveys of businesses and households, tax returns, reports on government expenditures, foreign trade and payments statistics, employment and payroll tabulations from social insurance records, reports of regulatory and supervisory agencies, company reports, and trade association and other private estimates.

The reported data used by national income estimators frequently must be processed extensively. For example, corporate profits data are audited and valuation adjustments are computed to eliminate gains or losses due to methods of costing inventories or of estimating depreciation allowances. In the case of expenditures for commodities, an alternative to the use of data on retail sales, or other final sales (which are not usually classified by commodity), is the commodity-flow method. This involves taking the data on manufacturers’ sales or shipments, by type, adjusting for exports and imports, adding distributive markups and excise taxes, and adjusting for changes in distributors’ inventories.

Some check on reliability is furnished by the accounting identities. For example, the statistical discrepancies among the estimates of national product made by the expenditure, income, and sector value-added approaches are revealing and may provide clues to possible errors in the estimates.

As the national economic accounts become more widely used, the requirements of the estimators become more influential in the design of census questionnaires and other statistical surveys. As basic data collection systems are improved and directed more toward their use in national income estimation, the economic accounts become more accurate.

The production account

National income and product may be viewed as the sums of the debit and credit sides of a consolidated product account. National income is generally defined as the income accruing to the residents of a nation from the use of their labor and property in production, while national product is the market value of the resulting final goods and services. The chief components of income and product are shown in Table 2 and SNA accounts 1 and 2 are shown in Table 3; these tables will be discussed later. In the next section, we view income and product as the consolidation of production accounts for the various producing industries. But first it is necessary to clarify the definition of the income and product aggregate to which value is added by the various industries.

Final and intermediate products

Final product must be related to the goals of a people. Both individual and social goals usually involve satisfaction of wants (creation of utility) and security. The material wants of human beings, present and future, are satisfied by production of consumer goods and services and by additions to capital stock (real net investment), which enhance future productive capacity. Some theorists, notably Irving Fisher, would confine final output to consumption goods. But in that case, output would not be invariant under changes in the proportion of income saved. Moreover, saving represents potential current consumption, as well as additions to capacity for future production, which in itself is a social goal.

The goal of security involves national defense and maintenance of the internal social fabric. It can be argued that these goals are instrumental; but if they are admitted to a position of coordinate importance with the goal of creation of positive present and future utility, then most of the costs of general government would qualify as final. The communist countries, which follow the material product system, exclude both public and private services. Payments for these services are counted as transfers of income.

Once final products are defined, it is then possible to exclude “intermediate products” from national product in order to avoid double counting. That is, intermediate products, such as raw materials and semifabricated goods, are those consumed in the production process. Since their value is included in the value of final products, only the latter should be counted if duplications are to be avoided. Final product is sometimes called net output as distinguished from a gross, duplicative total of outputs at all stages of production.

Statistical agencies, which have a preference for objective procedures, have defined final products as those which are not resold during the accounting period. To implement this approach, they divide the economy into producing and consuming sectors. The producing sector is primarily composed of enterprise operations on current account. When enterprise accounts are consolidated, their intrasector purchase and sales transactions cancel, and only their sales to final purchasers remain.

The major final purchasing sectors are generally taken to be households as consumers, business on capital account, general government, and the restof-the-world. Exports of goods and services to other countries are final sales; however, the value of imports is usually netted against exports, since imports are intermediate products whose value is included in final sales. The purchases of business on capital account are new construction, improvements to land, durable equipment, and additions to inventories. These items are not sold during the current period, although they are gradually amortized or liquidated. In each period, depreciation allowances are deducted from gross fixed investment in order to obtain net investment.

Blanket application of the consuming sector approach does not always produce clear-cut results. Some household consumption expenditures, such as purchases of uniforms worn on the job or transportation to and from work, might fairly be classed as intermediate products. Conversely, some outlays of the enterprise sector which are charged to current expense might well be classed as final purchases. Examples are small tools, certain intangible investments such as research and development costs, and certain welfare services for employees which could be reclassified as consumption. Finally, many economists have argued that certain activities of general governments are intermediate in that they promote production by enterprises. Some would go so far as to count all outlays on national and internal security as intermediate, including as final only direct collective consumption and additions to public wealth.

These issues have not been wholly resolved in the literature. Obviously, the movement and composition of national product will differ somewhat, depending on the concepts and estimating conventions adopted.

Economic and noneconomic activity

In line with their predilection for objective rules, official national income estimators have tended to delimit income and product in terms of those transactions which pass through organized markets, plus value “imputations” for activities that have major market counterparts. This approach reflects the position of Pigou ([1920] 1960, p. 31) that “just as economic welfare is that part of total welfare which can be brought directly or indirectly into relation with the money measure, so the national dividend is that part of the objective income of the community, including, of course, income derived from abroad which can be measured in money.”

Imputations generally made for nonmarket activities include those for payments in kind, the rental value of owner-occupied houses, certain financial services for which only indirect payment is made (such as interest forgone in return for the checking services of commercial banks), and food produced and consumed on farms. In an effort to expand somewhat the area of imputations, the United Nations SNA recommended imputations at sales value for all primary output (from hunting, fishing, forestry, and mineral extraction, as well as from farming), whether sold or used by the producers, and for products of their own trades consumed by the producers.

Even with the somewhat expanded range of imputations suggested by the SNA, it is apparent that national income and product, as generally measured, fall considerably short of a measure of all activity contributing to economic welfare. It is difficult to draw a precise line between economic and other activity, but the former may be thought of as activity engaged in primarily for the sake of the income or benefit produced, while noneconomic activity is engaged in primarily for its own sake. Prominent types of unpaid economic activity for which a value might be imputed, given adequate data, are the services of housewives and other unpaid household labor, volunteer labor, schoolwork, and the rental value of durable goods (in addition to houses) owned by households, nonprofit institutions, and governments.

Because of the greater importance of household production in less developed countries, it is apparent that income and product estimates tied closely to market criteria can give distorted results in temporal or international comparisons. The chief requirement for expanding imputations is adequate data on the volume of unpaid resources (or their product) and the corresponding values. Exploratory studies may reveal the possibility of more extensive imputations than are now deemed feasible.

Most national income statistics are restricted to legal economic activity. The SNA suggests the somewhat looser term “voluntary,” which would exclude extortion but would include black-market transactions. Serious statistical problems arise when the results of any forms of illegal activity are admitted to the accounts, although comparability among nations may thereby be increased.

Gross and net product

As explained above, national income and product are net measures in that double counting of intermediate products is avoided. Frequently, however, the measures are presented gross of capital consumption allowances. That is, investment estimates are presented gross of the fixed capital outlays required to offset the decline in value of the existing stock of fixed capital goods as they age—a decline due to wear, tear, accidental damage, and obsolescence.

Conceptually, net investment and net national product measures are preferable to gross measures in that they indicate net additions to capital stocks and the potential consumable income of the community, respectively. Gross investment and gross national product measures are statistically more reliable, however, because of the difficulties in measuring depreciation in current market values. “Gross” measures are also of intrinsic interest, since capital is consumed when gross investment falls short of capital consumption allowances.

National and domestic product

Domestic income and product relate to the productive activity carried on within the geographical boundaries of a nation, regardless of the residence of the owners of the resources used. In estimating national income, income accruing to residents of a country from their property or labor used abroad is added, while income paid to foreign residents is subtracted.

In SNA account 1, gross product is presented on a domestic basis. In account 2, national income is presented, and to domestic product at factor cost is added “net factor income payments from the rest of the world.” This dual treatment emphasizes that product is best studied on a domestic basis, so that it need not be split according to residency of owners; whereas income is more meaningfully related to the command over resources, domestic or foreign, exercised by the residents of a nation.

Valuation

The national product is generally valued at market prices, while national income represents the factor cost of the same collection of final goods and services. In addition to time series of the national income and product at current market prices or factor costs, the final products and the factor services may be valued in constant dollars (as of some base period) to eliminate the effect of price changes.

Market prices have the advantage of providing an available, objective valuation standard, permitting the aggregates to be readily broken down by types of goods and services purchased, by sector. Market valuation is appropriate for welfare analysis, since rational consumers push outlays for different products to the point where the ratios of their marginal utilities are equal to the ratios of the prices paid for them.

Relative market prices are not equal to relative factor costs per unit, however, because of the influence of indirect business taxes and subsidies (which may be regarded as negative business taxes). National income and product would be equal only if there were no indirect business taxes and subsidies or if they were offsetting. Relative unit costs and prices would be proportionate only if indirect business taxes less subsidies had the same relative incidence on all products.

For purposes of production analysis, national product at factor cost is usually considered the preferable basis of valuation, in order to reveal the relative volume of factor services absorbed by various products and/or industries. However, relative factor costs per unit still tend to be distorted by the effects of market imperfections on factor prices. Factor cost estimates are not usually available by product, but only by industry, which is the usual basis for production and productivity studies.

The national product may be adjusted for price changes in order to reveal the movements of constant-price-weighted physical volumes, or “real product,” through time. Instead of weighting physical units of the various final products by base-period prices, real product is generally obtained by dividing expenditures at current prices, grouped by types of goods and services, by appropriate price indexes with the base-period value of 100 per cent. When the constant-price expenditure series are aggregated, and the series valued at current prices is divided by this aggregate, the resulting “implicit deflator’ is in effect a variable-weighted price index with respect to the component product groupings.

The real product estimates are necessarily affected by any defects of the price deflators. Thus, they may not adequately reflect changes in quality of goods, and cyclical movements may be distorted if quoted prices fail to catch changes in collateral terms of sale. Special problems are posed by nonmarket products, particularly services of government and nonprofit institutions, although some progress has been made in measuring work units of various types and weighting them by unit costs. There are also difficulties in deflating expenditures for nonstandard products, such as new construction and custom-built equipment.

Factor cost, by type, may be deflated by appropriate factor price indexes. Alternatively, units of factor services, such as man-hours worked in the case of labor, may be weighted by base-period factor prices, such as average hourly compensation. The result is a measure of real factor cost, or “input.” By comparing such measures with real product, or “output,” productivity measures can be derived. In a progressive economy, output typically rises by more than input, resulting in a “productivity increment,” or an increase in the ratio of output to input. The productivity ratio may also be obtained as the ratio of input prices to output prices [seeProductivity]

Production by sector and industry

Production is primarily a function of the enterprise sector, but households, nonprofit institutions, and general governments also hire factor services and contribute to the total value of product.

Gross and net output of enterprises

Production accounts for enterprises represent rearrangements of their income (profit and loss) statements. The income statement shows receipts from sales and other sources, costs of production, and the residual profit, or “operating surplus.” Receipts from productive activity may be put on the credit side of a double-entry account; costs and net income are placed on the debit side. Production accounts are much the same as income statements, except that they also reflect inventory change. When the production accounts of the enterprises within an industry, or the sector, are consolidated, the transactions among the enterprises within the industry (sector)—that is, intermediate product purchases and sales—cancel out, and the net output, or “value added,” of the sector is left. If net production accounts are set up for enterprises and industries by subtracting intermediate purchases from gross output, as illustrated in the hypothetical accounts of Table 1, then net output (gross product) and value added (income and nonfactor charges) can be summed to obtain sector and national totals.

Corporate enterprises show profit as distinct from other types of factor income; accounts of unincorporated enterprises show net entrepreneurial income as the residual. This consists of labor as well as of property income, and the total before tax is credited to the household sector (instead of just the dividends, as for corporations).

Special treatment is required for financial intermediaries. In the case of commercial banks, for example, interest received on assets represented

by deposits, but not paid to depositors, is taken as a measure of the services provided depositors. Value added, or factor and nonfactor costs, is equal to actual and imputed service charges, less purchases from other enterprises.

Value added by nonenterprise sectors

Since, by definition, the nonenterprise sectors do not sell their outputs, the net output approach is not available for measuring the product of these sectors. But income originating can be estimated in terms of the factor costs and nonfactor charges against product. Indirect taxes and subsidies are not relevant to the government sector. Some countries also do not impute interest and depreciation charges to capital owned by governments, but calculate the income and product of governments only in terms of employee compensation. The compensation of domestic employees is counted as originating in the household sector, but usually no return is imputed to the durable equipment owned by households. A return is imputed to owner-occupied dwellings, but homeowners are counted for this purpose as being in the enterprise sector.

Deflation of industry product

Deflation of industry product to eliminate the effects of price changes is not performed directly. Since value added is the difference between two flows, gross production and purchases of intermediate products, each flow is deflated separately by an appropriate price index, and real industry product is taken as the difference. This method is called “double deflation.” The aggregate of real product for all industries should be identical with real final product, if consistent price deflators are used.

Relationship to input-output tables

The input-output, or interindustry relationships, matrix is, in effect, a disaggregation of the industry production accounts. The sales of each industry are shown horizontally on a “to-whom” basis for industries and final demand sectors. The purchases of each are shown vertically on a “from-whom” basis in terms of industries and suppliers of factor services. [SeeInput-output analysis.]

The appropriation accounts

Separate appropriation accounts show the receipt and disposition of income by sector. The receipt of income by a sector differs from its generation of “primary” income from production; disposition of income includes not only current final purchases credited to the production account but also transfer payments (including taxes) and saving. The relationship of the sector accounts to the production account and to each other is shown in Table 2. Table 2 is based on the U.S. accounts, which illustrate the basic approach more simply than do the UN accounts, discussed later.

In addition to the consolidated production account and the three sector appropriation accounts, there are a rest-of-the-world account, which shows consolidated foreign transactions of the nation, and a saving-investment account. Actually, the U.S. accounts do not provide for a business sector account, but it is implicit in the accounting framework.

The appropriation account entries consist of four major types of items. First, there are the primary income flows, consisting of factor costs and the nonfactor charges against product, each of which is a debit to the consolidated production account and, in most cases, a credit to one of the several sectoral appropriation accounts. Next, there are the secondary income flows, consisting of

nonbusiness taxes and transfer payments, which represent redistributions of income among the sec tors. Then there are the final purchases, credits to the producing account and debits to the other accounts. Finally, there are the balancing items, con sisting of savings of the several sectors, which are credits to the saving-investment accounts, and of net foreign investment, which is a debit.

It should be noted that the U.S. system does not recognize capital formation by the household and government sectors. If purchases of durables were so identified, domestic investment would be increased accordingly, and the saving of the two sectors would be correspondingly increased.

An alternative method of presentation is that of the United Nations SNA, which deconsolidates the national saving-investment account to show “capital reconciliation” accounts for each sector. Sector capital accounts are necessary to provide a link to financial accounts.

The capital account

The UN standard system, as well as the U.S. and most other national systems of accounts, incorporates the Keynesian identity of saving and investment. That is, gross domestic investment plus net foreign investment is equal to the sum of gross saving of the several domestic sectors. Alternatively, one can consider gross domestic investment to be financed by gross domestic saving plus net borrowing from abroad. If the latter item is negative (net lending), this of course reduces the source of finance for domestic investment.

The identity of saving and investment at the national level does not hold for the component sectors. If each appropriation account is confined to the use of income for current purchases, taxes, other transfers, and saving, the saving item (a debit) is brought down to the capital account as a credit. There it may be supplemented by net capital transfers received and by net borrowing to provide the sources of funds for capital formation and for net capital transfers made to other sectors. When the sector capital accounts are consolidated, the net borrowing and net capital transfers (plus and minus) among domestic sectors cancel out, and the identity of aggregate saving and investment is restored. The sectoral capital accounts are useful as a first step in revealing the financial interrelationships among the sectors, in showing the increase in net worth of each sector resulting from saving plus net capital transfers received (but not from revaluations), as well as possibly showing the net increase in tangible and financial assets.

This general approach is followed in the SNA, whose six basic accounts are produced in Table 3. It will be noted that in addition to current accounts, “capital reconciliation accounts” are shown for households and private nonprofit institutions, general government, and the rest-of-the-world in accounts 4, 5, and 6, respectively. Unincorporated business income is routed through the household account, so saving and capital formation of unincorporated businesses are included in the household capital reconciliation account. Corporate savings and capital formation are merged into Account 3, domestic capital formation. No separate account is shown for corporate business (or all business); since business makes no final purchases other than capital formation, a current account and a separate capital account are not indispensable, but would contribute to a more systematic presentation.

The capital transfers among the sectors relate to items that are not generally considered by the recipient (payer) as augmenting (reducing) current income but, rather, as affecting the amount and composition of assets. Examples are death and gift taxes, capital levies, investment grants, and compensation for war damage. All public transfers among nations are counted as capital grants. The monetary capital transfers, like capital gains and losses, influence expenditures only indirectly and might be excluded from the system. It should be added that net capital transfers from households and government to domestic capital formation include the net real capital formation of these sectors, so that a comprehensive view of tangible capital formation may be obtained in Account 3. However, it would be useful to segregate the real and financial capital transfers, so that the sector origin of domestic tangible investment could be seen.

Net borrowing is the balancing item in the several capital accounts and represents the difference between the net changes in financial liabilities and in financial assets. If negative, it represents net lending; the item may as well be carried on the debit side of the account.

Relation to flow-of-funds

As the UN document describing the SNA states with respect to lending and borrowing, “No further classification of these flows is undertaken in the system since, to produce meaningful results this would require a greater number of sectors including, in particular, a separate sector for banks and other financial intermediaries. These are now consolidated with other corporations in Account 3 and the present flows of lending and borrowing have therefore a relatively limited analytical significance” (United Nations, Statistical Office 1964, p. 37).

The proposed revision of the SNA, which is planned for completion in 1968, will elaborate the sector accounts in order to integrate financing (flow-of-funds) subaccounts. The revised SNA is not available as this is written, but the main requirements for integration are clear. First, separate sector accounts must be set up for nonfinancial and financial business. Next, net borrowing or lending, the balancing item in the capital reconciliation accounts, must be carried down to the financing account. In the financial accounts, the excess of saving over tangible investment, or “net lending” from the saving-investment (or capital reconciliation) account, may be handled in alternative ways. In the Canadian transactions account, saving minus tangible investment of each sector is entered as a credit (source of funds) along with increases in all the various types of liabilities, which also represent financial sources. On the debit side are entered all the uses of funds, as reflected in acquisition of assets of various types. In principle,

total sources and uses of funds must balance, although in practice a residual statistical discrepancy entry must be made to offset errors of various types in the component estimates.

The U.S. Federal Reserve Board (FRB) uses a somewhat different format for its flow-of-funds summary table, as shown in Table 4. In effect, the FRB combines the saving-investment and financial accounts for the various nonfinancial and financial sectors, and the total economy. The table starts with gross saving (line 1) and gross investment (line 4). Gross investment is defined as the sum of gross (private) tangible capital expenditures (line 5) and “net financial investment.” The latter item is obtained as the difference between direct estimates of financial uses (net acquisition of assets, line 11) and financial sources of funds (increases in liabilities, line 12). The bulk of the table consists of an itemization of more than two dozen types of financial claims which provide the specific sources and/or uses of funds (lines 13 through 43 ). A further breakdown of types of claims would be possible if its usefulness warranted the additional cost.

Note that in principle, gross saving and gross investment are equal for each sector, as well as for the total economy, when gross investment includes net financial investment as well as tangible capital expenditures. In practice, there are sector discrepancies (line 44) resulting from statistical errors. It should also be observed that financial flows for each sector are generally recorded on a net transaction basis for each category. That is to say, the asset entry represents funds used to acquire assets of that type, less funds realized for disposition of assets of the same type during the accounting period; the liability entry represents funds raised by borrowing, less repayments of the same type of claims in the stated accounting period. It has been suggested that it would be more informative if data could be provided showing gross financial flows for the various categories.

For the economy as a whole, saving and investment for all the sectors are summed. The intersectoral financial flows cancel out within the domestic economy, as do transactions in previously existing tangible assets. National investment is seen (in the last column of Table 4) to consist of gross tangible new investment, plus a financial component consisting of the increase in net financial claims on foreigners. Gross saving equals gross investment so defined, except for the statistical discrepancy.

The FRB flow-of-funds system is not fully coordinate with the U.S. Commerce Department’s national income sector accounts. The division of the economy into sectors is somewhat different; in particular, the income accounts do not segregate a financial sector, which is essential to a flow-offunds system. An integrated system requires uniform sectors which accommodate the needs of financial accounts as well as of appropriation and saving—investment accounts. Further, the definitions and estimates of common items now differ. For example, the FRB defines household purchases of durable goods as investment and estimates the corresponding capital consumption allowances as part of gross saving of households, while the Commerce Department counts gross outlays for durable goods as current consumption expenditure. Obviously, a common set of definitions and estimates is requisite to an integrated system.

In Canada and a few other countries, financing accounts are integrated with the basic income accounts, by sector. In determining the structure of integrated flow accounts with respect to sectors and transaction categories, thought must also be given to the desired structure of sector and national balance sheets, since balance sheets are uniquely related to the capital and financing accounts.

Relation to balance sheets and wealth statements

Assets, liabilities, and net worth on sector and combined balance sheets change as a result of investments and saving, lending and borrowing, capital transfers, and capital gains and losses from revaluation of claims due to changes in market prices. Thus, if the capital reconciliation and financing accounts are supplemented by revaluation accounts, balance sheets at successive dates can be prepared by cumulatively adding to an initial balance sheet the net changes shown in the capital and financing accounts.

When balance sheets for all sectors are consolidated, the claims of one domestic sector against another and the corresponding liabilities cancel out, and national net worth (wealth), equal to tangible domestic assets plus net foreign assets, is left. The change in national wealth or net worth is equal to net investment or net saving, as carried in the capital account, plus revaluations [seeNational wealth].

Uses of the economic accounts

Integrated systems of economic accounts of the sort sketched in this article obviously have many uses, actual or potential. They may be discussed briefly under six headings.

(1) Appraisal—public and private organizations use the economic accounts in periodic reviews of the economic situation at the international, national

and regional levels. The reviews often serve as background for projections, for policy recommendations to correct unsatisfactory developments, or for planning adaptive actions.

(2) Analysis—the economic accounts provide a major body of statistics for quantitative analyses of changes or differences in economic aggregates and structure. Production and demand functions are of particular interest. Statistical analyses are often directed toward the testing and refinement of economic theory; they enhance the ability of economists to predict and, thus, to advise on policy issues.

(3) Projections—the economic accounts serve as a background for short-term projections of aggregates and components, based mainly on demand models, and for long-range projections, based mainly on supply models or production functions. The models require that certain exogenous variables, such as government expenditures or the labor force, be estimated from outside the model; however, the estimates of the values of endogenous variables are based on the structural relationships contained within the model. Projections serve as background for adaptive measures by firms and for policy formulation by government agencies.

(4) Goal setting—regional, national, and supranational agencies may set goals in terms of desired and feasible levels or rates of growth of national income and product and their components, such as domestic and foreign investment. Since World War II, many countries have enacted legislation requiring the central government to take the necessary measures to maintain high levels of employment and production relative to capacity. These goals are meaningful only when they can be quantified in terms of the economic accounts and related statistics, and the current situation can be ap praised with reference to the goals.

(5) Policy formulation—current evaluations and projections within the economic accounting framework provide the background needed to determine whether policy actions are required to correct possible discrepancies between actual or projected developments and desired objectives. Just as im portant, the economic relationships revealed by analyses based on the income and product accounts make it possible to predict the consequences of given or alternative policy actions, and the relationships revealed assist policy makers in choosing among policies. If the objective is given in numerical terms, analysis can help policy makers to find the economic measures suitable to the objective.

(6) Planning—knowledge of the current and prospective general economic situations and p tentials, as revealed through the economic accounts, is of obvious value for planning to firms, other private organizations, and governments. Firms project the markets for their goods on the basis of the national market projections. On the basis of their sales projections, they can plan their investment, personnel, and other internal policies. Gov ernment can project the probable public service, investment, and revenue requirements of the nation and can also plan the new construction, training, and other programs necessary to meet these needs. In the semisocialist or wholly socialist countries, the economic accounts must be supplemented by much more detailed data for firms as well as for industries.

It is clear that all the activities just mentioned are facilitated by comprehensive and consistent systems of economic accounts. As their economies grow more complex, most countries are devoting more resources to the development of national income accounts and to the collection of the primary data on which they are based.

John W. Kendrick

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