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Learning Resource

Fundamental Concepts The US national income and product accounts (NIPAs) are a set of economic accounts

that provide the framework for presenting detailed measures of US output and income.

The NIPAs are based on a consistent set of concepts and definitions. This chapter

establishes the type and scope of the economic activities that are covered by the NIPA

measures, and it describes several of the principal NIPA measures of these activities. It

then discusses the classifications used in presenting the NIPA estimates, and it

describes the accounting framework that underlies the 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, which 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 labor, 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" (European

Commission, International Monetary Fund, Organization for Economic Cooperation

and Development, United Nations, World Bank, 2008, section 6.24).

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

production, depending on 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 US 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 (European Commission et al., 2008, sections 6.28–6.29).

In the US 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 US 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 asset boundary in the US 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" (European Commission et al., 2008,

sections 11.7–11.8).

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

(European Commission et al., 2008, sections 11.7–11.8). 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. There are three

types of produced assets: 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. The Bureau of Economic Analysis (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, the BEA developed an

analytical framework for a set of environmental accounts along with prototype

estimates for the value of the stocks of mineral resources (BEA, 1994, pp. 33–49, 50–

72).

At present, the 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) (BEA, 2003).

Fixed assets are produced assets that are used repeatedly, or continuously, in the

processes of production for more than one year. The 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. In the 2009

comprehensive revision, the 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 (Seskin & Smith, 2009, pp. 11–

15).

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 three 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; 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 the BEA's stock estimates.

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 2013 comprehensive

revision of the NIPAs, the BEA began treating research and development spending and

the production of long-lived artistic originals as capital investment, thus adding to the

stocks of fixed assets.

Market and Nonmarket Output

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

produced for final 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. 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 (European Commission et al., 2008,

section 6.95). 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 their own consumption, special tools produced by engineering firms for their

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 (European Commission et al., 2008, sections 6.114,

6.124–6.125).

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

(European Commission et al., 2008, sections 6.128–6.129).

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.

The SNA reserves the term imputation for situations in which a transaction must be

constructed as well as valued (European Commission et al., 2008, section 3.75).

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. (BEA, table

7.12). 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 personal consumption expenditures (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 gross domestic product (GDP)

invariant as to whether a house is owned or rented. In the NIPAs, the purchase of a

new house (excluding the value 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 (Fixler, Reinsdorf, &

Smith, 2003). 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 US estimates

cover the 50 states and the District of Columbia. This treatment aligns GDP, the

principal measure of US production, with other US statistics, such as population and

employment. In the 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.

Effective with the 2009 comprehensive revision, the BEA includes most transactions

between the US government and economic agents in Guam, American Samoa, the

Northern Mariana Islands, Puerto Rico, and the US 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. The BEA's long-run goal is to make the geographic coverage in

the NIPAs consistent with that in the ITAs.

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 US residents. US 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 one year or more. (For example, business

enterprises residing in the United States include US affiliates of foreign companies.)

In addition, US residents include all US citizens who reside outside the United States

for less than one year and US citizens residing abroad for one year or more who meet

one of the following criteria: owners or employees of US business enterprises who

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

reasonable period; US government civilian and military employees and members of

their immediate families; and students who attend foreign educational institutions.

Thus, domestic measures are concerned with where an activity takes 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 US residents. Therefore, 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 US 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. 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.

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 (BEA, 2012).

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 (see the chart below, "Three Ways to Measure GDP"). 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.

There are three ways to measure GDP:

1. The expenditures approach is the sum of goods and services sold to final users. This

measure 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 US residents

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

transferred by foreign residents to US residents.

Government consumption expenditures and gross investment, which comprises

two components. Current consumption expenditures consists of the spending by

general government 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.

Three Ways to Measure GDP

The chart illustrates the three ways GDP is measured. The box on the left shows the

elements that make up the expenditures approach, the middle box shows the elements

of the income approach, and the box on the right shows the value-added approach.

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-US 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, 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. 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.

2. The income approach is the sum of income payments and other costs incurred in the

production of goods and services. This measure is used to examine the purchasing

power of households and the financial status of businesses. The aggregate measure,

referred to as gross domestic income (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.

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. 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. (Seskin & Smith, pp. 11–15).

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. The value-added (or production) approach is the sum of value added by all

industries in the economy. This measure is used to analyze the industrial composition

of US 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. In the I-O accounts, all industries

includes government industries (such as the US Postal Service) and certain special

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