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Chapter 2 from Concepts and Methods of the U.S. National Income and Product Accounts

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Chapter 2 “Fundamental Concepts” from Concepts and Methods of the U.S. National Income and Product Accounts comprises public domain material from the Bureau of Economic Analysis, U.S. Department of

Commerce.

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CHAPTER 2: FUNDAMENTAL CONCEPTS

(Updated: November 2011)

Scope of the Estimates

Production boundary

Asset boundary

Market and nonmarket output

Geographic coverage

Income and saving

GDP and Other Major NIPA Measures

Three ways to measure GDP

Major NIPA aggregates

Principal quantity and price measures

Classification

Sector

Type of product

Function

Industry

Legal form of organization

Accounting Framework

Accounting principles

Conceptual derivation of the NIPAs

The summary NIPAs

Scope of the Estimates

Production boundary

One of the fundamental questions that must be addressed in preparing the national

economic accounts is how to define the production boundary—that is, what parts of the

myriad human activities are to be included in or excluded from the measure of the

economy’s production. According to the international System of National Accounts

(SNA), “Economic production may be defined as an activity carried out under the control

and responsibility of an institutional unit that uses inputs of labour, capital, and goods and

services to produce outputs of goods or services. There must be an institutional unit that

assumes responsibility for the process of production and owns any resulting goods or

knowledge-capturing products produced or is entitled to be paid, or otherwise

compensated, for the change-effecting or margin services provided.” 1

1 Commission of the European Communities, International Monetary Fund, Organisation for Economic Co-

operation and Development, United Nations, and the World Bank, System of National Accounts 2008: 6.24

at http://unstats.un.org/unsd/nationalaccount/SNA2008.asp.

CHAPTER 2: FUNDAMENTAL CONCEPTS

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Under this definition, certain natural processes may be included in or excluded

from production, depending upon whether they are under the ownership or control of an

entity in the economy. For example, the growth of trees in an uncultivated forest is not

included in production, but the harvesting of the trees from that forest is included.

The general definition of the production boundary may then be restricted by

functional considerations. In the SNA (and in the U.S. accounts), certain household

activities—such as housework, do-it-yourself projects and care of family members—are

excluded, partly because by nature these activities tend to be self-contained and have

limited impact on the rest of the economy and because their inclusion would affect the

usefulness of the accounts for long-standing analytical purposes, such as business cycle

analysis. 2

In the U.S. economic accounts, the production boundary is further restricted by

practical considerations about whether the productive activity can be accurately valued or

measured. For example, illegal activities, such as gambling and prostitution in some

states, should in principle be included in measures of production. However, these

activities are excluded from the U.S. accounts because they are by their very nature

conducted out of sight of public scrutiny and so data are not available to measure them.

Asset boundary

In general, the boundary for assets in the U.S. economic accounts is comparable

to that for production. According to the SNA, assets “are entities that must be owned by

some unit, or units, and from which economic benefits are derived by their owner(s) by

holding or using them over a period of time.” 3 Economic assets may be either financial

assets or nonfinancial assets. Financial assets consist of all financial claims—that is, the

payment or series of payments due to a creditor by a debtor under the terms of a

liability—shares or other equity in corporations plus gold bullion held by monetary

authorities as a reserve asset. 4 These assets are covered in the flow of funds accounts,

which are maintained by the Federal Reserve Board.

Two broad categories of nonfinancial assets are identified. Produced assets are

assets that have come into existence as a result of a production process. The three types

of produced assets are the following: fixed assets (such as machinery), inventories, and

valuables (such as jewelry and works of art). Nonproduced assets are assets that arise

from means other than a production process; a primary example is naturally occurring

resources, such as mineral deposits and uncultivated forests. 5

2 SNA 2008: 6.28–6.29.

3 SNA 2008: 1.46.

4 SNA 2008: 11.7–11.8.

5 BEA does not prepare estimates of the stocks of nonproduced assets, though it does prepare estimates of

net purchases and sales of these assets. However, in the mid-1990s, BEA developed an analytical

framework for a set of environmental accounts along with prototype estimates for the value of the stocks of

mineral resources. See “Integrated Economic and Environmental Satellite Accounts,” Survey 74 (April

CHAPTER 2: FUNDAMENTAL CONCEPTS

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At present, BEA prepares estimates of capital stocks for private and government

fixed assets, inventories owned by private business, and consumer durable goods (which

are treated like fixed assets in these accounts). 6

 Fixed assets are produced assets that are used repeatedly, or continuously, in the processes of production for more than 1 year. BEA’s estimates cover structures,

equipment, and software, but not cultivated assets such as livestock or orchards.

The acquisition of fixed assets by private business is included in the NIPA

measure “gross private domestic investment,” and the acquisition of fixed assets

by government is included in the NIPA measure “government consumption

expenditures and gross investment.” The depreciation of fixed assets—that is, the

decline in their value due to wear and tear, obsolescence, accidental damage, and

aging—is captured in the NIPA measure “consumption of fixed capital.” 7

 The stock of private inventories consists of materials and supplies, work in process, finished goods, and goods held for resale. The change in private

inventories is included in the NIPA measure “gross private domestic investment.”

 Consumer durable goods are tangible commodities purchased by consumers that can be used repeatedly or continuously over a period of 3 or more years (for

example, motor vehicles). Purchases of these goods are included in the NIPA

measure “personal consumption expenditures.”

Thus, in the NIPAs, acquisitions of fixed assets by private business and by government

are treated as investment, but acquisitions of consumer durable goods by households are

treated as consumption expenditures rather than as investment. This treatment is in

accordance with the NIPA convention that nonmarket household production is outside

the scope of GDP. 8

Sometimes, the asset boundary may change as a result of changes in definition or

in the ability to measure or value an asset. For example, in the upcoming 2013

comprehensive revision of the NIPAs, BEA will begin treating research and development

spending and the production of long-lived artistic originals as capital investment, thus

adding to the stocks of fixed assets. 9

1994): 33–49; and “Accounting for Mineral Resources: Issues and BEA’s Initial Estimates,” Survey 74

(April 1994): 50–72. 6 See “Fixed Asset Tables,” www.bea.gov/national/FA2004/index.asp; see also “Methodology,” Fixed

Assets and Consumer Durable Goods in the United States, 1925–97, September 2003, go to www.bea.gov

and click on “National,” then on “Methodologies,” and then on “Fixed Assets and Consumer Durable

Goods.” 7 In the 2009 comprehensive revision, BEA introduced a new treatment of disasters in which the value of

irreparable damage to, or the destruction of, fixed assets is no longer recorded as consumption of fixed

capital; see Eugene P. Seskin and Shelly Smith, “Preview of the 2009 Comprehensive Revision of the

NIPAs: Changes in Definitions and Presentations,” Survey 89 (March 2009): 11–15. 8 However, estimates of the stocks of consumer durables are included in household balance sheets in the

Federal Reserve Board’s flow of funds accounts as well as in BEA’s stock estimates. 9 See Jennifer Lee and Andrew G. Schmidt, “Research and Development Satellite Account Update,” Survey

90 (December 2010): 16–55, and see Rachel H. Soloveichik, “Research Spotlight: Artistic Originals as

Capital Assets,” Survey 91 (June 2011): 43–51.

CHAPTER 2: FUNDAMENTAL CONCEPTS

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Market and nonmarket output

The output that is included in the economic accounts is in the form of “market,”

“produced for own use,” or “nonmarket.” Most production and distribution takes place

within the market economy—that is, goods and services are produced for sale at prices

that are “economically significant.” 10

Thus, the current market price of the produced good

or service provides a rational and viable basis for valuing this production.

Output for own final use consists of goods and services that are retained by the

owners of the enterprises that produced them. Such output includes food produced on

farms for own consumption, special tools produced by engineering firms for own use,

and specialized software developed or improved in-house rather than purchasing custom-

made software from a software development company. Goods or services produced for

own final use are valued at the market prices of similar products or by their costs of

production. 11

Nonmarket output consists of goods and of individual or collective services that

are produced by nonprofit institutions and by government and are supplied for free or at

prices that are not economically significant. Individual services, such as education and

health services, are provided at below-market prices as a matter of social or economic

policy. Collective services, such as maintenance of law and order and protection of the

environment, are provided for the benefit of the public as a whole and are financed out of

funds other than receipts from sales. The values of the nonmarket output of nonprofits

and of government are estimated based on the costs of production. 12

In the NIPAs, a number of imputations for own-use and nonmarket transactions

are made in order to include in the accounts the value of certain goods and services that

have no observable price and are often not associated with any observable transaction. 13

Additionally, imputations keep the accounts invariant to how certain activities are carried

out (for example, an employee may be paid either in cash or in kind). 14

Both a measure of

production and the incomes associated with that production are imputed (for example, the

imputation for food furnished to employees is included in PCE and in personal income).

The largest NIPA imputation is that made to approximate the value of the services

provided by owner-occupied housing. This imputation is made so that the treatment of

owner-occupied housing in the accounts is comparable to that for tenant-occupied

housing (which is valued by rent paid), thereby keeping GDP invariant as to whether a

house is owned or rented. In the NIPAs, the purchase of a new house (excluding the value

10

Prices are “economically significant” when they have a significant influence on the amounts the

producers are willing to supply and on the amounts the purchasers are willing to buy; see SNA 2008: 6.95. 11

See SNA 2008: 6.114, 6.124–6.125. 12

See SNA 2008: 6.128–6.129. 13

The SNA reserves the term “imputation” for situations in which a transaction must be “constructed” as

well as “valued.” See SNA 2008: 3.75. 14

For a complete list of the NIPA imputations, see NIPA table 7.12, “Imputations in the National Income

and Product Accounts”; go to BEA’s website at www.bea.gov, and click on “National,” and then on

“Interactive Tables.”

CHAPTER 2: FUNDAMENTAL CONCEPTS

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of the unimproved land) is treated as an investment, the ownership of the home is treated

as a productive enterprise, and a service is assumed to flow, over its economic life, from

the house to the occupant. For the homeowner, the value of this service is measured as

the income the homeowner could have received if the house had been rented to a tenant.

Another large imputation is that made to account for services (such as checking-

account maintenance and services to borrowers) provided by banks and other financial

institutions either without charge or for a small fee that does not reflect the entire value of

the service. For the depositor, this “imputed interest” is measured as the difference

between the interest paid by the bank and the interest that the depositor could have earned

by investing in “safe” government securities. 15

For the borrower, it is measured as the

difference between the interest charged by the bank and the interest the bank could have

earned by investing in those government securities.

Geographic coverage

Another important consideration is the geographic boundary that defines what is

included in the accounts. In the NIPAs, and in the industry accounts, the “U.S. estimates”

cover the 50 states and the District of Columbia. This treatment aligns gross domestic

product (GDP), the principal measure of U.S. production, with other U.S. statistics, such

as population and employment. In BEA’s International Transactions Accounts (ITAs),

Puerto Rico and other islands in the Pacific Ocean and the Caribbean Sea that are

designated as commonwealths and territories of the United States are also treated as part

of the domestic economy. 16

In the NIPAs, a distinction is made between “domestic” measures and “national”

measures. Domestic measures cover activities that take place within the geographic

borders of the United States, while national measures cover activities that are attributable

to U.S. residents. 17

Thus, domestic measures are concerned with where an activity takes

15

For more information, see Dennis J. Fixler, Marshall B. Reinsdorf, and George M. Smith, “Measuring

Services of Commercial Banks in the NIPAs, Changes in Concepts and Methods,” Survey 83 (September

2003): 33–44. 16

See NIPA table 4.3B, “Relation of Foreign Transactions in the National Income and Product Accounts to

the Corresponding Items in the International Transactions Accounts.” Effective with the 2009

comprehensive revision, BEA includes most transactions between the U.S. government and economic

agents in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands

in federal government receipts and expenditures. Thus, like private transactions (such as trade in goods and

services), government transactions with these areas are treated as transactions with the rest of the world.

BEA’s long-run goal is to make the geographic coverage in the NIPAs consistent with that in the ITAs (see

Seskin and Smith, 15–16). 17

“U.S. residents” includes individuals, governments, business enterprises, trusts, associations, nonprofit

institutions, and similar organizations that have the center of their economic interest in the United States

and that reside or expect to reside in the United States for 1 year or more. (For example, business

enterprises residing in the United States include U.S. affiliates of foreign companies.) In addition, U.S.

residents include all U.S. citizens who reside outside the United States for less than 1 year and U.S. citizens

residing abroad for 1 year or more who meet one of the following criteria: owners or employees of U.S.

business enterprises who reside abroad to further the enterprises’ business and who intend to return within a

CHAPTER 2: FUNDAMENTAL CONCEPTS

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place, while national measures are concerned with to whom the activity is attributed. For

example, GDP measures the value of goods and services produced by labor and property

located in the United States, while gross national product (GNP) measures the value of

goods and services produced by labor and property supplied by U.S. residents. Thus, for

an assembly plant that is owned by a Japanese auto company and located in the United

States, all of its output is included in GDP, but only a portion of the value of its output is

included in GNP. And, for an assembly plant that is owned by a U.S. auto company and

located in Great Britain, none of its output is included in GDP, but a portion of the value

of its output is included in GNP.

Income and saving

Some economic theorists have broadly defined income as the maximum amount

that a household, or other economic unit, can consume without reducing its net worth;

saving is then defined as the actual change in net worth. 18

In the NIPAs, the definition of

income is narrower, reflecting the goal of measuring current production. That is, the

NIPA aggregate measures of current income—gross domestic income (GDI) for

example—are viewed as arising from current production, and thus they are theoretically

equal to their production counterparts (GDI equals GDP). NIPA saving is measured as

the portion of current income that is set aside rather than spent on consumption or related

purposes.

Consequently, the NIPA measures of income and saving exclude the following

items that affect net worth but are not directly associated with current production:

 Capital gains, or holding gains, which reflect changes in the prices of existing assets and thus do not represent additions to the real stock of produced assets;

 Capital transfers, which reflect changes in the ownership of existing assets; and

 Events, such as national disasters, that result in changes in the real stock of existing assets but do not reflect an economic transaction.

Thus, for example, the NIPA estimate of personal income includes ordinary dividends

paid to stockholders, but it excludes the capital gains that accrue to those stockholders as

a result of rising stock prices. Personal saving is equal to personal income less personal

outlays and personal taxes; it may generally be viewed as the portion of personal income

that is used either to provide funds to capital markets or to invest in real assets such as

residences. 19

reasonable period; U.S. government civilian and military employees and members of their immediate

families; and students who attend foreign educational institutions. 18

Other theorists have limited this definition to expected income, a definition that would include regular

capital gains but would exclude an unexpected windfall, such as a jackpot lottery payoff. 19

See Marshall B. Reinsdorf, “Alternative Measures of Personal Saving,” Survey 84 (September 2004):

17–27; see also Maria G. Perozek and Marshall B. Reinsdorf, “Alternative Measures of Personal Saving,”

Survey 82 (April 2002): 13–24.

CHAPTER 2: FUNDAMENTAL CONCEPTS

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GDP and Other Major NIPA Measures

Three ways to measure GDP

In the NIPAs, GDP is defined as the market value of the final goods and services

produced by labor and property located in the United States. Conceptually, this measure

can be arrived at by three separate means: as the sum of goods and services sold to final

users, as the sum of income payments and other costs incurred in the production of goods

and services, and as the sum of the value added at each stage of production (chart 2.1).

Although these three ways of measuring GDP are conceptually the same, their calculation

may not result in identical estimates of GDP because of differences in data sources,

timing, and estimation techniques.

1. As the sum of goods and services sold to final users. This measure, known as the

expenditures approach is used to identify the final goods and services purchased by

persons, businesses, governments, and foreigners. It is arrived at by summing the

following final expenditures components.

 Personal consumption expenditures, which measures the value of the goods and services purchased by persons—that is, households, nonprofit institutions that

primarily serve households, private noninsured welfare funds, and private trust

funds.

 Gross private fixed investment, which measures additions and replacements to the stock of private fixed assets without deduction of depreciation. Nonresidential

fixed investment measures investment by businesses and nonprofit institutions in

nonresidential structures and in equipment and software. Residential fixed

investment measures investment by businesses and households in residential

structures and equipment, primarily new construction of single-family and

multifamily units.

 Change in private inventories, which measures the value of the change in the physical volume of inventories owned by private business over a specified period.

 Net exports of goods and services, which is calculated as exports less imports. Exports consist of goods and services that are sold or transferred by U.S. residents

to foreign residents. Imports consist of goods and services that are sold or

transferred by foreign residents to U.S. residents.

 Government consumption expenditures and gross investment, which comprises two components. Current consumption expenditures consists of the spending by

general government in order to produce and provide goods and services to the

public. Gross investment consists of spending by both general government and

government enterprises for fixed assets that benefit the public or that assist

government agencies in their productive activities.

CHAPTER 2: FUNDAMENTAL CONCEPTS

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Chart 2.1—Three Ways to Measure GDP

Thus, GDP is equal to personal consumption expenditures (PCE) plus gross private

domestic fixed investment plus change in private inventories plus government

consumption expenditures and gross investment plus exports minus imports. In this

calculation, imports offset the non-U.S. production that is included in the other final-

expenditure components. For example, PCE includes expenditures on imported cars as

well on domestically produced cars; thus, in order to properly measure domestic

production, the sales of foreign-produced cars that are included in PCE are offset by the

negative entry in the imports of these cars. 20

2. As the sum of income payments and other costs incurred in the production of

goods and services. This measure, known as the income approach, is used to examine the

purchasing power of households and the financial status of businesses. The aggregate

measure, referred to as GDI, is derived by summing the following components.

 Compensation of employees, which is the total remuneration of employees in return for their work on domestic production. Wages and salaries primarily

consist of the monetary remuneration of employees. Supplements consist of

employer contributions for employee pension and insurance funds and of

employer contributions for government social insurance.

20

The offset covers the foreign-produced portion of the value of these sales; the domestic value-added

(such as the margin provided by domestic dealerships) on imported cars is measured by the difference

between the two and is included in GDP.

GDP The sum of final

expenditures

GDI The sum of income payments

and costs incurred in

production

Gross Value Added The sum of gross value

added—gross output less

intermediate purchases—

across all private industries

and government

Personal consumption

expenditures

Gross private domestic fixed

investment

Change in private inventories

Government consumption

expenditures and gross investment

Net exports

Compensation of employees

Taxes on production and

imports less subsidies

Net operating surplus

Consumption of fixed capital

Gross output

= =

Equals: Gross value added

Less: Intermediate purchases

CHAPTER 2: FUNDAMENTAL CONCEPTS

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 Taxes on production and imports, which consist of taxes payable on products when they are produced, delivered, sold, transferred, or otherwise disposed of by

their producers (including federal excise taxes and state and local sales taxes) and

of other taxes on production, such as taxes on ownership of assets used in

production (including local real estate taxes). These taxes do not include taxes on

income.

 Subsidies, which are subtracted in the calculation of GDI, are monetary grants by government agencies to private business (for example, federal subsidies to

farmers) and to government enterprises at another level of government (for

example, federal subsidies to state and local public housing authorities).

 Net operating surplus, which is a profits-like measure that shows the incomes earned by private enterprises from current production. It is calculated by

deducting the costs of compensation of employees, taxes on production and

imports less subsidies, and consumption of fixed capital from value added, but

before taking account of financing costs (such as net interest) and other payments

(such as business current transfer payments). Net operating surplus plus

consumption of fixed capital is equal to gross operating surplus.

 Consumption of fixed capital, which is the economic charge for the using up of private and government fixed capital located in the United States. It is defined as

the decline in the value of the stock of assets due to wear and tear, obsolescence,

accidental damage, and aging. 21

Thus, GDI is equal to compensation of employees, plus taxes on production and

imports less subsidies, plus net operating surplus, plus consumption of fixed capital.

Subsidies are implicitly included in the measure of net operating surplus, but because

they do not represent incomes paid or costs incurred in domestic production, they must be

subtracted in calculating GDI. In the NIPAs, subsidies are shown as a subtraction from

“taxes on imports and production” because they are transfers from government to

business and thus, in effect, represent a negative tax by government.

3. As the sum of “value added” by all industries in the economy. This measure,

known as the value-added, or production, approach, is used to analyze the industrial

composition of U.S. output. In the input-output (I-O) accounts, value added is defined as

the difference between an industry’s gross output (sales or receipts plus other operating

income and inventory change) and its intermediate inputs (goods and services that are

purchased for use in production). When value added is aggregated across all industries in

the economy, industry sales to and purchases from each other cancel out, and the

remainder is industry sales to final users, or GDP. 22

21

In the 2009 comprehensive revision, BEA introduced a new treatment of disasters in which the value of

irreparable damage to, or the destruction of, fixed assets is no longer recorded as consumption of fixed

capital; see Eugene P. Seskin and Shelly Smith, 11–15. 22

In the I-O accounts, “all industries” includes government industries (such as the U. S. Postal Service) and

certain “special industries” (such as owner-occupied housing).

CHAPTER 2: FUNDAMENTAL CONCEPTS

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The I-O accounts focus on gross output because they are designed to measure the

productive activities and interrelationships of all industries, regardless of whether the

goods and services produced by these industries are for intermediate or for final use.

Thus, gross output is sometimes referred to as “gross duplicated domestic output,”

because it double-counts the industry output that is purchased by other industries and

used as inputs for their production. Because GDP counts only industry sales to final

users, it is sometimes referred to as a “nonduplicative” measure of production in the

economy.

To illustrate, a new car shipped from an auto assembly plant reflects not only the

costs and profit associated with final assembly but also the costs and profit associated

with all of the stages of production that preceded final assembly. At an earlier stage, the

tires that were put on that car were recorded as output of the tire plant and reflected the

costs and profit associated with their manufacture. Thus, in gross output, the value of the

tires is counted twice—once in the value of the auto manufacturer’s output and once in

the value of the tire manufacturer’s output. Further, including the value of the rubber and

metal that were shipped to the tire plant would constitute triple counting, and so on. In

contrast, in the measurement of auto-industry value added, the value of the tires shipped

to the assembly plant represents an intermediate input and so is subtracted from the value

of the shipments of completed cars from the assembly plant.

Because the nation’s total value added is equal to its GDP and the nation’s total

gross output is equal to its GDP plus its total intermediate inputs, total gross output is

much larger than GDP. For 2002 (the most recent benchmark year for the I-O accounts),

U.S. gross output was $19.2 trillion, while GDP was $10.6 trillion.

Major NIPA aggregates

In the NIPAs, the measure of domestic production that is derived as the sum of

the final expenditures components is referred to as GDP, and the measure that is derived

as the sum of the income payments and the costs incurred in production is referred to as

GDI. These two measures and their components make up the “Domestic Income and

Product Account,” the first of the summary NIPA accounts (see the section “Accounting

Framework”). In general, the source data for the expenditures components are considered

more reliable than those for the income components, and the difference between the two

measures is called the “statistical discrepancy.”

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-11

Chart 2.2 illustrates the relationships between GDP, GDI, and several other

important aggregate NIPA measures. These measures are distinguished by whether they

are “product” or “income,” “gross” or “net,” and “domestic” or “national.” In general,

one moves

 from a “product” measure to an “income” measure by subtracting the statistical discrepancy,

 from a “gross” measure to a “net” measure by subtracting consumption of fixed capital (CFC), and

 from a “domestic” measure to a “national” measure by subtracting net income payments to the rest of the world (or equivalently, by adding net income receipts

from the rest of the world). 23

Chart 2.2—Relationships Between Major NIPA Measures of Income and Product

Gross national product (GNP), which was discussed earlier in this chapter (see

the section “Geographic coverage”), is equal to GDP minus net income payments to the

rest of the world.

Net domestic product (NDP) is a measure of how much of the nation’s output is

available for consumption or for adding to the nation’s wealth. It is equal to GDP minus

CFC.

23

Net income payments to the rest of the world is equal to current payments to the rest of the world

(primarily income paid to foreign residents on investments in U.S. assets) less current receipts from the rest

of the world (primarily income received by U.S. residents on investments in assets abroad).

- Net income

payments to the

rest of the world = GNI -

Consumption of

fixed capital =

- Consumption of

fixed capital = NDI - Net income

payments to the

rest of the world =

- Consumption of

fixed capital = NNP - Statistical

discrepancy =

- Statistical

discrepancy = GNI

- Statistical

discrepancy = NDI

- Net income

payments to the

rest of the world = NNP

GDI Gross domestic income

GDP Gross domestic product

GNI Gross national income

GNP Gross national product

NDI Net domestic income

NDP Net domestic product

NI National income

NNP Net national product

NDP

GDI

NI

GNP- Net income

payments to the

rest of the world =GDP

- Consumption of

fixed capital =

- Statistical

discrepancy =

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-12

Gross national income (GNI) measures the costs incurred and the incomes earned

in the production of GNP. It is equal to GNP minus the statistical discrepancy. It is also

equal to GDI minus net income payments to the rest of the world.

Net national product (NNP) is the net market value of goods and services

produced by labor and property supplied by U.S. residents (see the earlier description of

GNP). It is equal to GNP minus CFC. It is also equal to NDP minus net income payments

to the rest of the world.

Net domestic income (NDI) measures the costs incurred and the incomes earned in

the production of NNP. It is equal to NNP minus the statistical discrepancy. It is also

equal to GDI minus CFC.

National income is the sum of all net incomes earned in production (and thus it

could also be termed “net national income”). It is equal to GNI minus CFC, NNP minus

the statistical discrepancy, and NDI minus net income payments to the rest of the world.

It is also equal to the sum of compensation of employees, proprietors’ income with

inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj),

rental income with CCAdj, corporate profits with IVA and CCAdj, net interest and

miscellaneous payments, taxes on production and imports less subsidies, business current

transfer payments (net), and current surplus of government enterprises.

The following are several other important NIPA aggregates.

Personal income is the income that persons receive in return for their provision of

labor, land, and capital used in current production and the net current transfer payments

that they receive from business and from government. 24

Personal income is equal to

national income minus corporate profits with inventory valuation and capital

consumption adjustments, taxes on production and imports less subsidies, contributions

for government social insurance, net interest and miscellaneous payments on assets,

business current transfer payments (net), current surplus of government enterprises, and

wage accruals less disbursements, plus personal income receipts on assets and personal

current transfer receipts. 25

Gross domestic purchases is the market value of goods and services purchased by

U.S. residents, regardless of where those goods and services were produced. It is equal to

GDP minus net exports. It is also equal to the sum of PCE, gross private domestic

investment, and government consumption expenditures and gross investment.

Final sales of domestic product is equal to GDP less change in private

inventories. It is also equal to the sum of PCE, gross private fixed investment,

24

“Persons” consists of households, nonprofit institutions that primarily serve households, private

noninsured welfare funds, and private trust funds. 25

For more information, see State Personal Income 2005 Methodology at

www.bea.gov/regional/docs/spi2005.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-13

government consumption expenditures and gross investment, and net exports of goods

and services. 26

Final sales to domestic purchasers is equal to gross domestic purchases less

change in private inventories. It is also equal to the sum of PCE, gross private fixed

investment, and government consumption expenditures and gross investment.

Principal quantity and price measures

The market values and imputations used to measure GDP and the other NIPA

estimates are in current dollars—that is, they reflect transactions in terms of their value in

the periods in which they take place. Although many technical problems arise in

preparing these estimates, measuring the change in current-dollar GDP from one period

to the next is conceptually straightforward, because it is the actual change in spending

that occurs in the economy between the two time periods.

For many analyses, it is useful to separate the changes in current-dollar GDP that

are due to changes in quantity from those that are due to changes in price. 27

However,

aggregate quantity change and aggregate price change cannot be observed directly in the

economy. Instead, these changes must be calculated, and the calculation method is

determined by analytic requirements. In the NIPAs, the changes in quantities and prices

are computed from chain-type indexes that are calculated using a Fisher formula. (For a

discussion of the statistical methods used to prepare these measures, see “Chapter 4:

Estimating Methods.”)

In the NIPAs, the featured measure of growth in the U.S. economy is the percent

change in real GDP—that is, the quantity-change measure for GDP from one period to

another. 28

Thus, changes in real GDP provide a comprehensive measure of economic

growth that is free of the effects of price change.

In the NIPAs, the featured measure of inflation in the U.S. economy is the percent

change in the price index for gross domestic purchases. This index measures the prices of

goods and services purchased by U.S. residents, regardless of where the goods and

services were produced. It is derived from the prices of PCE, gross private domestic

investment, and government consumption expenditures and gross investment. Thus, for

example, an increase in the import price of a foreign-produced car would raise the prices

26

While analytically useful, the interpretation of final sales of domestic product is complicated by the fact

that additions to inventories come from both domestic production and imports. Source data are not

available to distinguish the portion of imported goods that flows into inventories from the portion that is

sold directly, so the measure does not, strictly speaking, identify the sales from domestic product. 27

In this separation, changes in the quality of the goods and services provided are treated as changes in

quantity. 28

Until 1991, GNP was the featured measure of U.S. production; see “Gross Domestic Product as a

Measure of U.S. Production,” Survey 71 (August 1991): 8.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-14

paid by U.S. residents and thereby directly affect the price index for gross domestic

purchases. 29

Another aggregate price measure is the price index for GDP, which measures the

prices of goods and services produced in the United States. In contrast to the price index

for gross domestic purchases, the GDP price index would not be directly affected by an

increase in the import price of a foreign-built car, because imports are not included in

GDP.

Another important NIPA price measure is the PCE price index, which measures

the prices paid for the goods and services purchased by “persons.” This index is

frequently compared with the consumer price index, which is produced by the Bureau of

Labor Statistics. The two indexes are similar, but there are differences in terms of

coverage, weighting, and calculation. 30

Further, BEA provides variants of the above price indexes that exclude their

particularly volatile food and energy components. These variants are sometimes used to

indicate the “core inflation” in the U.S. economy.

BEA publishes several aggregate measures of real income as counterparts to its

aggregate measures of real production. Real GDI is calculated as current-dollar GDI

deflated by the implicit price deflator (IPD) for GDP; real GNI is calculated as current-

dollar GNI deflated by the IPD for GNP; and real net domestic income is calculated as

current-dollar net domestic income deflated by the IPD for net domestic product. 31

In addition, BEA prepares alternative measures of real GDP and real GNP that

measure the real purchasing power of the income generated from the production of the

goods and services by the U.S. economy. These measures, which in the NIPAs are called

command-basis GDP and command-basis GNP, reflect the impact of changes in the

terms of trade as well as changes in production. 32

In calculating command-basis GDP,

exports and imports of goods and services are each deflated by the price index for gross

domestic purchases to yield exports on a command-basis and imports on a command

basis; then, command-basis exports are added to, and command-basis imports are

subtracted from, real gross domestic purchases. 33

The calculation of command-basis GNP

is the same, except income receipts from the rest of the world are deflated along with

29

This example assumes the entire price increase is passed on to the car buyer—that is, the wholesale or

retail margins are unchanged. 30

See Clinton P. McCully, Brian C. Moyer, and Kenneth J. Stewart, “Comparing the Consumer Price Index

and the Personal Consumption Expenditures Price Index,” Survey 87 (November 2007): 26–33. 31

Implicit price deflators for an aggregate or component are calculated as the ratio of the current-dollar

value to the corresponding chained-dollar value, multiplied by 100 (see the section “Chained-dollar

measures” in chapter 4). 32 In the SNAs, these measures are referred to as real GDI and real GNI. However, as noted in the preceding paragraph, BEA uses a different method to derive those aggregates. 33

In this case, adding and subtracting these estimates is acceptable because all three aggregates are derived

using the same deflator.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-15

exports, and income payments to the rest of the world are deflated along with imports. 34

In effect, the calculations are the same as deriving command-basis GDP (GNP) by

deflating current-dollar GDP (GNP) by the price index for gross domestic purchases.

Thus, the command-basis measures are alternative measures of real GDP and real GNP

that reflect the prices of purchased goods and services, while the primary measures of

real GDP and real GNP reflect the prices of produced goods and services.

BEA also prepares several measures that show the relationship between the prices

that are received by U.S. producers and the prices that are paid by U.S. purchasers. The

broadest measure, the trading gains index, is the ratio of the GDP price index to the price

index for gross domestic purchases. An increase (decrease) in this ratio would indicate an

increase (decrease) in the purchasing power of the income generated in producing GDP.

Successively narrower measures specifically focus on the relationship between the prices

of the U.S. goods and services that are produced for consumption by the rest of the world

and the prices of the goods and services that are produced by the rest of the world for

U.S. consumption. The terms of trade index, is the ratio of the price index for exports of

goods and services to the price index for imports of goods and services; ratios for the

terms of trade in goods and in nonpetroleum goods are also prepared. Movements in

these trading indexes reflect the interaction of several factors—including movements in

exchange rates, changes in the composition of traded goods and services, and changes in

producers’ profit margins.

In addition, BEA provides statistical measures that supplement the current-dollar,

quantity-index, and price-index measures. Foremost among these are measures of the

contributions of major components to the percent change from the preceding year or

quarter in real GDP, in other principal product-side aggregates, in GDP prices, and in

gross domestic purchases prices. BEA also provides measures of the percentage shares of

current-dollar GDP and GDI that are accounted for by their major components.

Classification

The application of common classification systems for the NIPAs, and for all of

the U.S. economic accounts, is extremely important because classification provides the

structure necessary to prepare and present the estimates uniformly and consistently.

Further, common classifications enable users to effectively compare and analyze data

across the broad spectrum of economic statistics.

34

This methodology for calculating the command-basis aggregates was introduced in the 2010 annual

revision of the NIPAs; see Eugene P. Seskin and Shelly Smith, “Annual Revision of the National Income

and Product Accounts,” Survey 90 (August 2010): 21. For additional technical and historical background,

see Marshall B. Reinsdorf, “Terms of Trade Effects: Theory and Measurement,” Review of Income and

Wealth 56 (June 2010): S177-S205.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-16

In the NIPAs, the estimates of production and expenditures may be classified by

sector, by type of product, and by function, while the estimates of income may be

classified by industry and by legal form of organization.

Sector

For measuring domestic production in the NIPAs, the contribution, or value

added, of various institutions can be broken down into three distinct groups, or sectors—

business, households and institutions, and general government (table 2.1). A fourth

sector, “the rest-of-the-world,” covers transactions between U. S. residents and foreign

residents.

Table 2.1—Gross Value Added by Sector Gross domestic product

Business

Nonfarm

Farm

Households and institutions

Households

Nonprofit institutions serving households

General government

Federal

State and local

Note. Adapted from NIPA table 1.3.1.

Business: The business sector comprises all corporate and noncorporate

businesses that are organized for profit, other entities that produce goods and services for

sale at a price intended at least to approximate the costs of production, and certain other

entities that are treated as businesses in the NIPAs. These other entities include mutual

financial institutions, private noninsured pension funds, cooperatives, nonprofit

organizations (that is, entities classified as nonprofit by the Internal Revenue Service in

determining income tax liability) that primarily serve business, federal reserve banks,

federally sponsored credit agencies, and government enterprises. The gross value added

of the business sector is measured as GDP less the gross value added of households and

institutions and of general government. 35

Households and institutions: The households and institutions sector comprises

households and nonprofit institutions serving households (NPISHs). The gross value

added of households is measured by the services of owner-occupied housing and the

compensation paid to domestic workers. The gross value added of NPISHs is measured

by the compensation paid to the employees of these institutions, the rental value of fixed

35

Measures of gross value added for financial and for nonfinancial corporations are also shown in the

NIPA tables. They are calculated based on the costs incurred and the incomes earned from production.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-17

assets owned and used by these institutions, and the rental income of persons for tenant-

occupied housing owned by these institutions. 36

General government: The general government sector comprises all federal

government and state and local government agencies except government enterprises. The

gross value added of general government is measured as the sum of the compensation of

the employees of these agencies and of their consumption of fixed capital.

Type of product

In the NIPAs, classifications by type of product—goods, services, and

structures—are presented for GDP and for the components of final sales of domestic

product (table 2.2). 37

Table 2.2—Gross Domestic Product by Major Type of Product Gross domestic product

Final sales of domestic product

Change in private inventories

Goods

Final sales

Change in private inventories

Durable goods

Final sales

Change in private inventories

Nondurable goods

Final sales

Change in private inventories

Services

Structures

Note. Adapted from NIPA table 1.2.1.

Goods are tangible products that can be stored or inventoried. By convention,

certain intangibles, such as software, are also included in this category.

Services are products, such as medical care, that cannot be stored and are usually

consumed at the place and time of their purchase. Government consumption

36

For more information on NPISHs, see the technical note in “Chapter 5: Personal Consumption

Expenditures.” 37

Development of the North American Product Classification System (NAPCS), the commodity

counterpart to the North American Industry Classification System (see the section “Industry”) by the

United States, Canada, and Mexico is ongoing. NAPCS is designed to be an integrated and comprehensive

list of products, product definitions, and product codes organized using a demand-side, market-oriented

classification framework for both goods and services.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-18

expenditures, which are for services produced by government, are included in this

category. 38

By convention, goods purchased by U.S. residents abroad are also included.

Structures are products—such as commercial buildings, highways, dams, and

single-family houses—that are usually constructed at the location where they will be used

and that typically have long economic lives.

Function

“Functional” classifications identify the purposes or objectives for which

expenditures are made. In the NIPAs, functional breakdowns of expenditures are

provided for PCE and for government expenditures.

For PCE, a new classification system was introduced in the 2009 comprehensive

revision (see “Chapter 5: Personal Consumption Expenditures”). 39

In the new structure,

expenditures by function are classified into the following broad categories (table 2.3).

These classifications are largely consistent with the SNA “Classification of Individual

Consumption by Purpose” (COICOP). 40

Table 2.3—Personal Consumption Expenditures by Function Personal consumption expenditures

Food and beverages purchased for off-premises consumption

Clothing, footwear, and related services

Housing, utilities, and fuels

Furnishings, household equipment, and routine household maintenance

Health

Transportation

Communication

Recreation

Education

Food services and accommodations

Financial services and insurance

Other goods and services

Net foreign travel and expenditures abroad by U.S. residents

Final consumption expenditures of nonprofit institutions serving households

Note. Adapted from NIPA table 2.5.5.

38

The value of these services, most of which are not sold in the market, is measured by the cost of inputs:

compensation, CFC, and purchased goods and services less own-account investment and sales to other

sectors (which are reflected in other final expenditures components, such as PCE). 39

See also Clinton P. McCully and Teresita D. Teensma, “Preview of the 2009 Comprehensive Revision of

the National Income and Product Accounts: New Classifications for Personal Consumption Expenditures,”

Survey 88 (May 2008): 6–17. 40

McCully and Teensma, 14.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-19

The functional classifications for government were updated in 2000. 41

These

classifications are largely consistent with the SNA “Classification of the Functions of

Government” (COFOG). 42

For the federal government, expenditures are classified into

nine categories, and for state and local governments, expenditures are classified into eight

categories (national defense is omitted) (table 2.4).

Table 2.4—Government Consumption Expenditures and Gross Investment by Function Government

General public service

National defense

Public order and safety

Economic affairs

Housing and community services

Health

Recreation and culture

Education

Income security

Note. Adapted from NIPA table 3.15.5.

Industry

The North American Industry Classification System (NAICS) is the official

industry classification system for the United States. 43

NAICS was developed during the

1990s through a collaborative effort by the United States, Canada, and Mexico to

facilitate better comparisons of the economies of the three countries. 44

Prior to the

adoption of NAICS, most U.S. statistics were based on the Standard Industrial

Classification (SIC) system for classification. 45

The SIC system, which was developed in

the late 1930s, was concentrated in manufacturing, which dominated the U.S. economy at

that time. The switch from the SIC to NAICS provided more detailed classifications for

services industries and for high-tech industries. Moreover, by organizing establishments

based on their production methods rather than on the products they produced, NAICS

provided a better conceptual basis for industrial classification.

41

See Karl Galbraith, “Government Spending by Function: A New Presentation,” Survey 80 (June 2000):

18–23. See also Bruce E. Baker, Pamela A. Kelly, and Brooks B. Robinson, “Estimates of Real

Government Consumption Expenditures and Gross Investment by Function,” Survey 84 (October 2004): 5–

10. 42

SNA 2008: 9.99. 43

See Office of Management and Budget, North American Industry Classification System, United States,

2002 (Washington, DC: Bernan Press, 2002); and Office of Management and Budget, North American

Industry Classification System, United States, 1997 (Washington, DC: Bernan Press, 1998). 44

For information of the development and implementation of NAICS, see John Kort, “The North American

Industry Classification System in BEA’s Accounts,” Survey 81 (May 2001): 7–13. 45

See Office of Management and Budget, Statistical Policy Division, Standard Industrial Classification

Manual, 1987 (Washington, DC: U.S. Government Printing Office (GPO), 1988); Office of Management

and Budget, Statistical Policy Division, Standard Industrial Classification Manual,1972 (Washington, DC:

GPO, 1972); and Bureau of the Budget, Standard Industrial Classification Manual,1942 (Washington, DC:

GPO, 1942).

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-20

NAICS was introduced into the national economic accounts in late 2002 with the

release of the 1997 benchmark I-O accounts, which were based on the 1997 Economic

Census. Effective with the 2003 comprehensive revision, NAICS became the industry

classification system for the NIPAs.

In the NIPAs, industrial distributions are presented for national income and most

of its components, capital consumption allowances, employment and hours, and the

change in private inventories and the stock of private inventories (see, for example, table

2.5 below). 46

For income and employment, the classification of the estimates for 1998

forward is based on NAICS; for inventories, the classification of the estimates for the

first quarter of 1997 forward is based on NAICS. In general, the estimates by industry

before these dates are on an SIC basis. 47

Industrial distributions of government activities are not provided; instead, they are

combined into a single category. For most series, separate estimates are shown for the

activities of the federal government, of state and local governments, and of government

enterprises.

Table 2.5—National Income Without Capital Consumption Adjustment by Industry National income without capital consumption adjustment

Domestic industries

Private industries

Agriculture, forestry, fishing, and hunting

Mining

Utilities

Construction

Manufacturing

Durable goods

Nondurable goods

Wholesale trade

Retail trade

Transportation and warehousing

Information

Finance, insurance, real estate, rental, and leasing

Professional and business services

Educational services, health care, and social assistance

Arts, entertainment, recreation, accommodation, and food services

Other services, except government

Government

Rest of the world

Note. Adapted from NIPA table 6.1D.

46

An industrial distribution of fixed investment based on data collected from establishments is prepared as

part of the procedure used to estimate fixed assets. For further information, see “Methodology, Fixed Assets

and Consumer Durable Goods in the United States, 1925–97,” September 2003; go to www.bea.gov, and

click on “National,” then on “Methodologies,” and then on “Fixed Assets and Consumer Durable Goods.” 47

NAICS-based estimates for GDP by industry and for fixed assets are available for earlier periods.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-21

The industrial distributions for wages and salaries and for inventories are

generally based on data collected from “establishments,” while those for the other NIPA

components are generally based on data collected from “companies” (also called

“enterprises,” or “firms”). Companies consist of one or more establishments owned by

the same legal entity or group of affiliated entities. Establishments are economic units,

generally at a single physical location, where business is conducted or where services or

industrial operations are performed (for example a factory, mill, store, hotel, movie

theater, mine, farm, airline terminal, sales office, warehouse, or central administrative

office). Establishments are classified into an industry on the basis of their principal

production method, and companies are classified into an industry on the basis of the

principal industry of all their establishments. Because large multi-establishment

companies typically contain establishments that are classified in different industries, the

industrial distribution of the same economic activity on an establishment basis can differ

significantly from that on a company basis. For example, the measure of employment by

steel-manufacturing companies will include the employment of establishments that do not

manufacture steel but are part of companies that are classified as steel-manufacturing

companies. Similarly, this measure will exclude the employment of establishments that

manufacture steel but are part of companies that are not classified as steel-manufacturing

companies.

Moreover, individual industry series are not fully comparable over time. First, the

composition of industries may change because of revisions to NAICS or to the SIC. This

factor affects estimates based on establishment data and on company data. Second,

historical comparability may be affected by a change over time in the industrial

classification of the same establishment or company. For example, the classification of a

company may change as a result of shifts in the level of consolidation of entities for

which company reports are filed or as a result of mergers and acquisitions. This factor

affects company-based estimates much more than establishment-based estimates.

In addition, some NIPA tables show the following special industry groupings:

Financial industries consists of the NAICS industry “Finance and insurance” and

of “Offices of bank holding companies” and “Offices of other holding companies” in the

NAICS industry “Management of companies and enterprises.” Finance and insurance

consists of Federal Reserve banks; credit intermediation and related activities; securities,

commodity contracts, and investments; insurance carriers and related activities; and

funds, trusts, and other financial vehicles.

Nonfinancial industries consists of all other private industries.

Private goods-producing industries consists of the following NAICS divisions:

agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.

Private services-producing industries consists of the following NAICS divisions:

utilities; wholesale trade; retail trade; transportation and warehousing; information;

finance and insurance; real estate and rental and leasing; professional, scientific, and

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-22

technical services; management of companies and enterprises; administrative and waste

management services; educational services; health care and social assistance; arts,

entertainment, and recreation; accommodation and food services; and other services,

except government.

Legal form of organization

For the domestic business sector in the NIPAs, classification by legal form of

organization is shown for national income and its components. Legal forms of

organization are based on IRS filing requirements for corporate business and for

noncorporate business, which comprises sole proprietorships and partnerships, other

private business, and government enterprises (employee compensation and current

surplus of enterprises) (table 2.6).

Table 2.6—National Income by Legal Form of Organization National income

Domestic business

Corporate business

Noncorporate business

Sole proprietorships and partnerships

Other private business

Government enterprises

Households and institutions

General government

Rest of the world

Note. Adapted from NIPA table 1.13.

Corporate business: This legal form comprises all entities required to file federal

corporate tax returns, Internal Revenue Service (IRS) Form 1120 series. It includes

mutual financial institutions and cooperatives subject to federal income tax, private

noninsured pension funds, nonprofit institutions that primarily serve business, Federal

Reserve banks, and federally sponsored credit agencies.

Sole proprietorships: This legal form comprises all entities that are required to

file IRS Schedule C (Profits or Loss from Business) or Schedule F (Farm Income and

Expenses) or that would be required to file if the proprietor met the filing requirements.

Partnerships: This legal form comprises all entities that are (or would be)

required to file federal partnership income tax returns, IRS Form 1065 (U.S. Partnership

Return of Income).

Other private business: This legal form comprises (1) all entities that are (or

would be) required to report rental and royalty income on IRS Schedule E (Supplemental

Income and Loss) of the individual income tax return and (2) tax-exempt cooperatives.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-23

Government enterprises: This legal form consists of government agencies that

cover a substantial proportion of their operating costs by selling goods and services to the

public and that maintain their own separate accounts. For example, the U.S. Postal

Service is a federal government enterprise, and public water and sewage agencies are

local government enterprises.

Accounting Framework

The NIPAs consist of a set of integrated accounts that provide statistics on the

output of the U.S. economy. The NIPA accounting framework is designed to provide

context for these statistics, so that they are presented logically, consistently, and

according to established economic-accounting principles and standards. The NIPAs are

generally consistent with the SNA, which now serves as the internationally accepted set

of guidelines for the compilation of national accounts. 48

For an in-depth discussion of the conceptual framework of the NIPAs and the

NIPA summary accounts, see U.S. Bureau of Economic Analysis, An Introduction to

National Economic Accounting, Methodology Paper No. 1 (updated), September 2007. 49

Accounting principles

Double-entry bookkeeping is one of the most fundamental principles used in

economic accounting and in financial accounting. In financial accounting, activities that

affect the resources available to a business are recorded at least once as a source of

financing (credit) and at least once as a use of financing (debit). Thus, double-entry

bookkeeping provides a means to validate the accounting entries, because the sum of the

entries on each side of an account must be equal. In national economic accounting, each

transaction is recorded as a payment by one sector and as a receipt by the same sector or

by another sector—for example corporate income tax is a payment by a corporation and a

receipt of the government. 50

In addition to providing a means to validate entries, this

system also provides alternative ways to calculate a measure when complete information

is not available for one of the sectors.

The accrual-accounting method is another principle important to both financial

and economic accounting. This method is generally used to ensure that related revenues

and expenses are recorded in the same accounting period. In accrual accounting, revenues

48

See Charles Ian Mead, Karin E. Moses, and Brent R. Moulton, “The NIPAs and the System of National

Accounts,” Survey 84 (December 2004): 17–32. 49

Go to www.bea.gov, and click on “National,” then on “Methodologies.” 50

A fully articulated set of national accounts (showing payments and receipts by all sectors) actually leads

to a quadruple-entry system (in which each transaction is recorded as a debit and a change in assets for one

sector and as a credit and a change in assets for another sector) . However, transactions are usually recorded

only twice in the NIPAs because the changes in assets or liabilities that are associated with the changes in

revenues or expenses are recorded in the Federal Reserve Board’s flow of funds accounts.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-24

are recorded when they are earned, and expenses are recorded when they are incurred,

regardless of when the cash is actually received or paid. The accrual-accounting method

may be contrasted to the cash-accounting method, which records revenues when cash is

received and expenses when cash is paid.

Financial accounting and economic accounting generally apply different

principles in valuing transactions. In financial accounting, assets (and depreciation) are

commonly valued at historical costs—that is, at the prices relevant at the time of the

acquisition; subsequent changes in the value of these assets are ignored. In economic

accounting, assets (and depreciation) are valued at current costs—that is, at the market

prices that prevail at the time they are valued. In preparing the NIPAs, various

adjustments, such as the inventory valuation adjustment and the capital consumption

adjustment, are made so that the estimates will reflect current costs rather than historical

costs.

Conceptual derivation of the NIPAs

The NIPAs represent consolidations of the production, the income and outlay, and

the saving and investment accounts for each sector of the economy (business, households,

government, and foreign). These sector accounts, in turn, represent aggregations of the

accounts belonging to individual transactors in the economy, regardless of whether

formal accounting statements exist explicitly for all of them.

Specifically, for each sector, the production account records the value of the

production that is attributable to that sector and the uses of the income arising from that

production. The income and outlay account records the sources of the sector’s income, its

current outlays, and its saving. The saving and investment account (also known as the

capital account) records the sector’s gross saving and gross investment, where gross

investment is net acquisitions of assets less net increase in liabilities.

Chart 2.3 illustrates the relationship between the summary NIPAs and the

underlying production, income and outlay, and saving and investment accounts for the

sectors of the economy.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-25

Chart 2.3—NIPA Summary Accounts

The NIPA summary “domestic income and product account” represents a

consolidation of the production accounts for business, households and institutions, and

general government.

The income and outlay accounts for the sectors are shown in three separate

summary accounts. Income and outlays for the personal sector, including income

accruing to unincorporated businesses, are shown in the “personal income and outlay

account.” Income and outlays for the government sector, including income accruing to

government enterprises, are shown in the “government current receipts and expenditures

account. Income and outlays for business enterprises and for households and institutions

in their role as producers are shown in the “private enterprise income account.” In order

to provide analytically useful aggregates associated with all private business, the

coverage in this account includes the income and outlays of unincorporated businesses as

well as those of corporate businesses.

The saving and investment accounts are consolidated into a single summary

“domestic capital account.” For saving, a breakdown by sector is shown for corporate,

personal, and government saving. For investment, because of source data limitations, the

breakdown is shown for private fixed and inventory investment and for government fixed

investment.

The transactions for the foreign (or rest-of-the-world) “sector”—that is,

transactions between U.S. residents and foreign residents—are shown separately in two

summary accounts. Current receipts and expenditures, such as exports and imports of

goods and services, are shown in the “foreign transactions current account,” and capital

transactions, such as capital transfers, are shown in the “foreign transactions capital

account.”

Business Government Personal

Production

Income and outlay Private enterprise

income (Account 2)

Government current

receipts and expenditures

(Account 4)

Personal income and

outlay (Account 3)

Saving and

investment

Foreign transactions

capital account

(Account 7)

Domestic capital account (Account 6)

Domestic accounts

Economic sectors

Foreign transactions

current account

(Account 5)

Rest of the worldTransactions

Domestic income and product account (Account 1)

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-26

The summary NIPAs

The seven summary NIPAs constitute the accounting framework for presenting

the value of production, distribution, consumption, and saving for the U.S. economy. 51

(For a full presentation of the summary accounts, see table 2.A at the end of this chapter.)

Each of the entries in a summary account also appears again in that account or in one of

the other summary accounts; most of these entries are also shown in one or more of the

tables that make up the full set of NIPA tables. For example, the item “supplements to

wages and salaries” is shown in line 5 of summary account 1 and in line 14 of summary

account 3; it is also shown in line 8 of NIPA table 1.10 and in line 6 of NIPA table 2.1.

Taken together, the summary accounts constitute a double-entry system in which

a use (or expenditure) recorded in one account for one sector is also recorded as a source

(or receipt) in an account of another sector or of the same sector. This system of

integrated, double-entry accounts provides a comprehensive measure of economic

activity in a consistently defined framework without double-counting. Thus, the NIPAs,

in combination with BEA’s industry, wealth, and other economic accounts, can be used

to trace the principal economic flows among the major sectors of the economy.

Account 1: Domestic Income and Product Account

This account represents an aggregation of the underlying production accounts for

the domestic sectors of the U.S. economy. The right (product) side of the account shows

GDP measured as the sum of goods and services sold to final users rather than as the sum

of value-added by the sectors. The left (income) side of the account shows GDP as

measured by the incomes earned in production—GDI—plus the “statistical discrepancy”

(the difference between GDP and GDI). Product and income are both presented on a

domestic basis—that is, they are produced by labor and property located in the United

States.

Account 2: Private Enterprise Income Account

This account presents information on the sources and uses of the income of

private businesses and other private enterprises. 52

It combines the accounts of private

businesses, of homeowners for owner-occupied housing (which is treated as if it were a

business), and of NPISHs.

51

Prior to the 2003 comprehensive revision, the NIPAs were summarized in five accounts, as shown in

table A on pages 38–39 of the August 2002 Survey. For a discussion of the differences between the old and

new summary accounts, see Nicole Mayerhauser, Shelly Smith, and David F. Sullivan, “Preview of the

2003 Comprehensive Revision of the National Income and Product Accounts: New and Redesigned

Tables,” Survey 83 (August 2003): 8–15. 52

Government enterprises are not included in account 2, because complete estimates on sources and uses of

government enterprise income, notably the income payments and income receipts on assets, are not

currently available. The sources and uses of government enterprise income are included, but not separately

identified, in the government receipts and expenditures account.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-27

Sources of private enterprise income—such as interest receipts on assets and net

operating surplus—are shown on the right side of the account. 53

The left side of the

account shows the uses of income as income payments on assets (such as holders of

financial liabilities and equity claims of other businesses), business current transfer

payments, and income that accrues to the owners of business (namely proprietors’

income, rental income of persons, and corporate profits. Corporate profits, a widely used

measure in the United States, is distributed to government (taxes on corporate income)

and to shareholders (net dividends) or is retained (undistributed profits, which can be

thought of as a measure of corporate saving).

Account 3: Personal Income and Outlay Account

This account shows the sources and uses of income received by persons—that is,

households, NPISHs, private noninsured welfare funds, and private trust funds. The right

side of the account shows the sources of personal income—such as employee

compensation and interest and dividend income. The left side shows personal taxes and

outlays and personal saving, which is derived as personal income minus personal taxes

and outlays.

Account 4: Government Receipts and Expenditures Account

This account summarizes the combined transactions of the federal government

and of the state and local governments. The right side of the account shows government

current receipts—such as tax receipts from persons and contributions for government

social insurance. The left side shows government current expenditures—such as

compensation of government employees and transfer payments to persons—and net

saving, which is derived as current receipts less current expenditures.

Account 5: Foreign Transactions Current Account

This account summarizes all the current transactions between the United States

and the rest of the world. It presents information on receipts and payments associated

with foreign trade and other transactions not involving transfers of assets. The left side of

the account shows current receipts from the rest of the world—mainly exports of goods

and services and income receipts on assets. The right side shows current payments to the

rest of the world—mainly imports of goods and services, income payments on assets, and

current taxes and transfer payments. In addition, it includes the balance on current

account, which is derived as current receipts less current payments.

53

Summary account 2 presents the components of private enterprise income on a national basis—that is,

for income accruing to U.S. residents. Consequently, for the net operating surplus to be shown in account 2

on a domestic basis consistent with summary account 1, several components showing income flows to and

from the rest of the world are added to account 2.

CHAPTER 2: FUNDAMENTAL CONCEPTS

2-28

Account 6: Domestic Capital Account

This account presents information on saving and investment for the economy. The

right side of the account shows gross saving and the statistical discrepancy. Given the

theoretical equality between GDP and GDI, the statistical discrepancy can be viewed as

actual (positive or negative) income that is not captured by the data used to measure GDI

and, therefore, not distributed to the sectors; instead, it is shown as a source of (positive

or negative) saving in this account. The left side of the account shows gross domestic

investment, capital-account transactions (net), and net lending or net borrowing, which is

derived as gross saving and the statistical discrepancy minus gross domestic investment

and capital-account transactions (net).

Account 7: Foreign Transactions Capital Account

This account presents information on transactions between the United States and

the rest of the world that are linked to the acquisition or disposition of nonproduced

nonfinancial assets and capital transfers. The left side of the account shows the balance

on current account. The right side shows capital-account transactions (net) and net

lending or borrowing, which is derived as the balance on current account minus capital-

account transactions (net).

Table A. Summary National Income and Product Accounts, 2010 [Billions of dollars]

Account 1. Domestic Income and Product Account

Line Line

1 Compensation of employees, paid ......................................................................... 7,980.6 15 Personal consumption expenditures (3–3) ............................................................ 10,245.5 2 Wage and salary accruals.................................................................................. 6,417.5 16 Goods ................................................................................................................ 3,387.0 3 Disbursements (3–12 plus 5–11) ................................................................... 6,417.5 17 Durable goods ............................................................................................... 1,085.5 4 Wage accruals less disbursements (4–9 plus 6–13)...................................... 0.0 18 Nondurable goods ......................................................................................... 2,301.5 5 Supplements to wages and salaries (3–14) ....................................................... 1,563.1 19 Services............................................................................................................. 6,858.5 6 Taxes on production and imports (4–16) ................................................................ 1,054.0 20 Gross private domestic investment........................................................................ 1,795.1 7 Less: Subsidies (4–8)............................................................................................. 57.3 21 Fixed investment (6–2) ...................................................................................... 1,728.2 8 Net operating surplus ............................................................................................. 3,673.5 22 Nonresidential................................................................................................ 1,390.1 9 Private enterprises (2–19).................................................................................. 3,689.2 23 Structures .................................................................................................. 374.4

10 Current surplus of government enterprises (4–26) ............................................ –15.7 24 Equipment and software............................................................................ 1,015.7 11 Consumption of fixed capital (6–15)....................................................................... 1,874.9 25 Residential..................................................................................................... 338.1

26 Change in private inventories (6–4) ................................................................... 66.9 12 Gross domestic income ...................................................................................... 14,525.7 27 Net exports of goods and services ........................................................................ –516.9

28 Exports (5–1) ..................................................................................................... 1,839.8 13 Statistical discrepancy (6–21) ................................................................................ 0.8 29 Imports (5–9) ..................................................................................................... 2,356.7

30 Government consumption expenditures and gross investment (4–1 plus 6–3) ..... 3,002.8 31 Federal............................................................................................................... 1,222.8 32 National defense............................................................................................ 819.2 33 Nondefense ................................................................................................... 403.6 34 State and local ................................................................................................... 1,780.0

14 GROSS DOMESTIC PRODUCT............................................................................ 14,526.5 35 GROSS DOMESTIC PRODUCT ........................................................................... 14,526.5

Account 2. Private Enterprise Income Account

Line Line

1 Income payments on assets................................................................................... 2,366.5 19 Net operating surplus, private enterprises (1–9) ................................................... 3,689.2 2 Interest and miscellaneous payments (3–20 and 4–21) .................................... 2,178.8 20 Income receipts on assets ..................................................................................... 2,000.8 3 Dividend payments to the rest of the world (5–14)............................................. 93.8 21 Interest (3–20) ................................................................................................... 1,431.2 4 Reinvested earnings on foreign direct investment in the United States (5–15) 93.9 22 Dividend receipts from the rest of the world (5–6) ............................................. 215.9 5 Business current transfer payments (net) .............................................................. 136.7 23 Reinvested earnings on U.S. direct investment abroad (5–7)............................ 353.8 6 To persons (net) (3–24) ...................................................................................... 38.3 7 To government (net) (4–24)................................................................................ 99.0 8 To the rest of the world (net) (5–19) ................................................................... –0.6 9 Proprietors’ income with inventory valuation and capital consumption

adjustments (3–17) ............................................................................................ 1,036.4 10 Rental income of persons with capital consumption adjustment (3–18) ................ 350.2 11 Corporate profits with inventory valuation and capital consumption adjustments 1,800.1 12 Taxes on corporate income ................................................................................ 411.1 13 To government (4–17) .................................................................................... 387.4 14 To the rest of the world (5–19) ....................................................................... 23.6 15 Profits after tax with inventory valuation and capital consumption adjustments 1,389.1 16 Net dividends (3–21 plus 4–22) ..................................................................... 737.3 17 Undistributed corporate profits with inventory valuation and capital

consumption adjustments (6–12)............................................................... 651.7

18 USES OF PRIVATE ENTERPRISE INCOME ........................................................ 5,690.0 24 SOURCES OF PRIVATE ENTERPRISE INCOME................................................ 5,690.0

Account 3. Personal Income and Outlay Account

Line Line

1 Personal current taxes (4–15) ................................................................................ 1,193.9 10 Compensation of employees, received .................................................................. 7,971.4 2 Personal outlays ..................................................................................................... 10,586.9 11 Wage and salary disbursements ....................................................................... 6,408.2 3 Personal consumption expenditures (1–15) ....................................................... 10,245.5 12 Domestic (1–3 less 5–11) .............................................................................. 6,403.0 4 Personal interest payments (3–20) .................................................................... 173.4 13 Rest of the world (5–3) .................................................................................. 5.3 5 Personal current transfer payments ................................................................... 168.0 14 Supplements to wages and salaries (1–5) ........................................................ 1,563.1 6 To government (4–25) .................................................................................... 95.1 15 Employer contributions for employee pension and insurance funds .............. 1,089.9 7 To the rest of the world (net) (5–17) ............................................................... 72.9 16 Employer contributions for government social insurance............................... 473.2

17 Proprietors’ income with inventory valuation and capital consumption 8 Personal saving (6–11) .......................................................................................... 592.8 adjustments (2–9) .............................................................................................. 1,036.4

18 Rental income of persons with capital consumption adjustment (2–10)................ 350.2 19 Personal income receipts on assets ...................................................................... 1,721.2 20 Personal interest income (2–2 plus 3–4 plus 4–7 plus 5–5 less 2–21 less 4–21

less 5–13) ...................................................................................................... 1,003.4 21 Personal dividend income (2–16 less 4–22) ...................................................... 717.7 22 Personal current transfer receipts .......................................................................... 2,281.2 23 Government social benefits (4–4)...................................................................... 2,242.9 24 From business (net) (2–6).................................................................................. 38.3 25 Less: Contributions for government social insurance, domestic (4–19) ................ 986.8

9 PERSONAL TAXES, OUTLAYS, AND SAVING.................................................... 12,373.5 26 PERSONAL INCOME ........................................................................................... 12,373.5

Chapter 2: Fundamental Concepts

Account 4. Government Receipts and Expenditures Account

Line Line

1 Consumption expenditures (1–30) ......................................................................... 2,497.5 14 Current tax receipts ............................................................................................... 2,648.7 2 Current transfer payments...................................................................................... 2,316.8 15 Personal current taxes (3–1) ............................................................................. 1,193.9 3 Government social benefits ............................................................................... 2,259.5 16 Taxes on production and imports (1–6) ............................................................. 1,054.0 4 To persons (3–23) .......................................................................................... 2,242.9 17 Taxes on corporate income (2–13) .................................................................... 387.4 5 To the rest of the world (5–18) ....................................................................... 16.6 18 Taxes from the rest of the world (5–18) ............................................................. 13.3 6 Other current transfer payments to the rest of the world (net) (5–18) ................ 57.3 19 Contributions for government social insurance (3–25 and 5–18) .......................... 991.7 7 Interest payments (3–20) ....................................................................................... 390.2 20 Income receipts on assets ..................................................................................... 144.0 8 Subsidies (1–7) ...................................................................................................... 57.3 21 Interest and miscellaneous receipts (2–2 and 3–20)......................................... 124.4 9 Less: Wage accruals less disbursements (1–4)..................................................... 0.0 22 Dividends (3–21) ............................................................................................... 19.6

10 Net government saving (6–14) ............................................................................... –1,299.0 23 Current transfer receipts ........................................................................................ 194.1 11 Federal ............................................................................................................... –1,273.7 24 From business (net) (2–7) ................................................................................. 99.0 12 State and local ................................................................................................... –25.3 25 From persons (3–6) ........................................................................................... 95.1

26 Current surplus of government enterprises (1–10)................................................ –15.7

13 GOVERNMENT CURRENT EXPENDITURES AND NET SAVING....................... 3,962.8 27 GOVERNMENT CURRENT RECEIPTS ............................................................... 3,962.8

Account 5. Foreign Transactions Current Account

Line Line

1 Exports of goods and services (1–28) ................................................................... 2 Income receipts from the rest of the world ............................................................. 3 Wage and salary receipts (3–13) ....................................................................... 4 Income receipts on assets ................................................................................. 5 Interest (3–20)................................................................................................ 6 Dividends (2–22)............................................................................................ 7 Reinvested earnings on U.S. direct investment abroad (2–23) ......................

1,839.8 702.9

5.3 697.6 127.9 215.9 353.8

9 Imports of goods and services (1–29) ................................................................... 10 Income payments to the rest of the world.............................................................. 11 Wage and salary payments (1–3)...................................................................... 12 Income payments on assets .............................................................................. 13 Interest (3–20) ............................................................................................... 14 Dividends (2–3) ............................................................................................. 15 Reinvested earnings on foreign direct investment in the United States (2–4) 16 Current taxes and transfer payments to the rest of the world (net)........................ 17 From persons (net) (3–7)................................................................................... 18 From government (net) (3–25 plus 4–5 plus 4–6 less 4–18 less 4–19)............. 19 From business (net) (2–8 plus 2–14) ................................................................. 20 Balance on current account, national income and product accounts (7–1) ...........

2,356.7 513.5

14.5 499.0 311.3

93.8 93.9

151.6 72.9 55.7 23.1

–479.2

8 CURRENT RECEIPTS FROM THE REST OF THE WORLD................................ 2,542.7 21 CURRENT PAYMENTS TO THE REST OF THE WORLD AND BALANCE ON

CURRENT ACCOUNT ...................................................................................... 2,542.7

Account 6. Domestic Capital Account

Line Line

1 Gross domestic investment .................................................................................... 2,300.4 10 Net saving .............................................................................................................. –54.5 2 Private fixed investment (1–21).......................................................................... 1,728.2 11 Personal saving (3–8) ........................................................................................ 592.8 3 Government fixed investment (1–30) ................................................................. 505.3 12 Undistributed corporate profits with inventory valuation and capital 4 Change in private inventories (1–26) ................................................................. 66.9 consumption adjustments (2–17) .................................................................. 651.7 5 Capital account transactions (net) (7–2) ................................................................ 0.7 13 Wage accruals less disbursements (private) (1–4)............................................ 0.0 6 Transfer payments for catastrophic losses (net) (7–3)........................................ 0.0 14 Net government saving (4–10) .......................................................................... –1,299.0 7 Other capital account transactions (7–4)............................................................ 0.7 15 Plus: Consumption of fixed capital (1–11) ............................................................. 1,874.9 8 Net lending or net borrowing (–), national income and product accounts (7–5)..... –479.9 16 Private................................................................................................................ 1,540.9

17 Government ....................................................................................................... 334.0 18 General government ...................................................................................... 278.6 19 Government enterprises ................................................................................ 55.4 20 Equals: Gross saving ............................................................................................. 1,820.5

9 GROSS DOMESTIC INVESTMENT, CAPITAL ACCOUNT TRANSACTIONS 21 Statistical discrepancy (1–13)................................................................................ 0.8

(NET), AND NET LENDING .............................................................................. 1,821.3 22 GROSS SAVING AND STATISTICAL DISCREPANCY ........................................ 1,821.3

Account 7. Foreign Transactions Capital Account

Line Line

1 BALANCE ON CURRENT ACCOUNT, NATIONAL INCOME AND PRODUCT ACCOUNTS (5–20) ........................................................................................... –479.2

2 Capital account transactions (net) (6–5)................................................................ 3 Transfer payments for catastrophic losses (net) (6–6)........................................ 4 Other capital account transactions (6–7)............................................................ 5 Net lending or net borrowing (–), national income and product accounts (6–8) ....

6 CAPITAL ACCOUNT TRANSACTIONS (NET) AND NET LENDING, NATIONAL INCOME AND PRODUCT ACCOUNTS ...........................................................

0.7 0.0 0.7

–479.9

–479.2

NOTE. Numbers in parentheses indicate accounts and items of counterentry in the accounts. For example, line 5 of account 1 is shown as “Supplements to wages and salaries (3–14)”; the counterentry is shown in account 3, line 14.

Chapter 2: Fundamental Concepts