NIPA Methodology
National Income Accounting and
the Flow of Funds

National income accounting aims to answer two
fundamental questions:
 What is the size and composition of the US
economy?
 How was this output produced and distributed?
National Income Accounting and
the Flow of Funds


National income accounting aims to answer two
fundamental questions:
 What is the size and composition of the US
economy?
 How was this output produced and distributed?
These questions are answered in three quarterly reports.



NIPA (National Income and Product Accounts) - BEA
Capital Finance Account (Flow of Funds) – Federal Reserve
Input/Output Accounts - BEA
The Business Sector

Businesses have three common
accounting statements for financial
reporting
Balance Sheet
 Statement of Income and Retained Earnings
 Statement of Change in Financial Position


With a little manipulation, we can
transform these into economic accounting
reports
The Balance Sheet

The Basic underlying identity of a firm’s
balance sheet is
Assets = Liabilities + Stockholder Equity
The Balance Sheet
Assets
Current Assets
Financial Assets
Cash & Equivalent
Accounts Receivable
Inventories
Securities
Fixed Assets
Plant & Equipment
less accumulated depreciation
Liabilities
Current Liabilities
Loans
Accounts Payable
Bonds
Stockholders Equity
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
Liabilities
Current Liabilities: $1,573
Loans
Accounts Payable: $1,573
Bonds:
Other: $16,978
Plant & Equipment: $6,078
less accumulated depreciation: $3,855 Stockholders Equity $61,020
Other: $65,074
Total Assets: $79,571
Total Liabilities: $79,571
The Balance Sheet

The Basic underlying identity of a firm’s
balance sheet is
Assets = Liabilities + Stockholder Equity

The Balance sheet gives a nice overview,
but doesn’t really indicate how income was
generated or who received payments
Statement of Income/Retained Earnings

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
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

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
Plus Interest/Dividends Received:
Less Interest Paid
Plus Gains on Sale of
Assets/Securities
Equals Net Income Before Tax:
Less Corporate Tax
Equals Operating Income
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
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
Plus Interest/Dividends Received:
Less Interest Paid
Plus Gains on Sale of
Assets/Securities
Equals Net Income Before Tax:
Less Corporate Tax
Equals Operating Income
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
Source
Use
Corporate Tax
Dividends Paid - Dividends
Received
Addition to Retained Earnings
- Gains on Sale of
Assets/Securities
Equals Net Income Before Tax
-
Dividends Received
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
Source
Use
Corporate Tax
Dividends Paid - Dividends
Received
Undistributed Profits
Profit
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

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
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

In addition to the business sector, there will be
corresponding accounts for
 Household & Non Profits
 Government
 Foreign (BOP Accounts)

These individual tables can then be consolidated
into a national account by adding across sectors
and making the appropriate cancellations


Taxes Paid = Receipts By Government
Transfers Paid = Transfers Received
NIPA Accounts

The NIPA account is a configuration that includes
 NIP (National Income and Product): Consolidated
Product account and the Business appropriations
account
 Personal Income and Outlays: Household
Appropriation Account
 Government Receipts and Expenditures: Government
Appropriations Account
 Foreign Transactions: Foreign Appropriations and
Savings/Investment Accounts
 Gross Saving/Investment: Domestic Portion of
Consolidated Saving/Investment Accounts
Capital Finance (Flow of Funds)

The Flow of Funds is a detailed look at the
savings/investment accounts
 “Changes in Liabilities” are subtracted from both sides
do that the Left hand side of the chart is “Sources of
Funds” and the RHS is “Uses of Funds”
 The Data is disaggregated by asset type (Deposits,
Loans, Securities, Trade Credit) and by Sector
(Business, Financial, Household, Government, and
Foreign)
Input/Output Accounts

The Input/Output Tables illustrate the flows
of goods and services across sectors of
the economy

The national production accounts are
disaggregated across industries and
commodity.
GDP 2004Q2 (Billions)
Category
Amount (B)
% of Total
Growth
Consumption
$8,146.2
70%
4.0%
Investment
$1,891.2
16%
12%
Government
$2,172.9
18%
6%
Net Exports
-561.0
-4%
----
GDP
$11,649.3
100%
6.0%
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 2004Q2
Category
Amount(B)
% of Total
Growth
Wages
$6,600.6
69%
5%
Proprietor’s
Income
$902.8
9%
14%
Rental Income
$173.8
2%
2%
Corporate
Profits
$1294.2
14%
36%
Interest
$546.9
6%
-4%
National
Income
$9518.3
100%
6%
Personal Income/Outlays 2004Q2
Category
Amount(B)
% of Total
Personal
Income
$9614.8
100%
Taxes
$1030.3
10%
Consumption
$8146.2
85%
Interest
$296.3
3%
Personal
Savings
142.0
2%
Savings/Investment 2004Q2
Category
Amount(B)
% of Total
Gross
Investment
$1631.3
100%
Depreciation
$1355.0
85%
Private Saving
$142.0
9%
Undistributed
Profits
$506.7
31%
Government
-$372.4
-25%
Borrowing by Sector 2004Q1
Category
Amount(B)
% of Total
Total
$2801.3
100%
Financial Sector
$805.7
28%
Federal Government
$466.0
17%
State & Local Government $149.7
5%
Non-Financial Business
$303.3
11%
Household
$1008.2
37%
Foreign
$68.4
2%