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National income and product accounts background

This page is about the concepts and conventions used in calculating the national income and product accounts (NIPA).

Summary

4 Apr 2010

The national income and product accounts (NIPA), calculated by the Bureau of Economic Analysis, are a double entry accounting system of all US production of goods and services and the income that results. Every payment for goods or services is recorded as a payment from one sector to another (or the same) sector, where the sectors are business, household, government, and rest-of-world.

The accounts also treat savings and investment. For each sector there is a production account, an income and outlay account, and a capital account. The treatment of some items differs between these accounts. For example, transfer payments are included in income in an income and outlay account, but not in a production account.

The treatment of homes occupied by the owner sometimes causes confusion. An owner-occupant is treated as a pair of entities. One is a tenant, who pays an imputed gross rent, included in Personal Consumption Expenditures (PCE) and thence in GDP, for the service provided by the house. The other entity is a landlord, who runs a small business owning and renting the house; the landlord has a net income, included in Personal Income (PI) and thence in National Income, constituting the gross rent less mortgage interest, property tax, maintenance, insurance and depreciation.

Highlights

Clippings below covered through Oct 2009.

Main definition (10 Dec 2008) The national income and product accounts, maintained since 1947 by the BEA, are a double entry accounting system of all US production of goods and services, and the income that results. In the words of the BEA, “The NIPAs display the value and composition of national output and the distributions of incomes generated in its production. … to help answer three basic questions. First, what is the output of the economy—its size, its composition, and its use? Second, what are the sources and uses of national income? Third, what are the sources of saving, which provides for investment in future production?”


Main conceptual framework (4 Apr 2010)

  • Production of goods and services is at the core. The basic transaction is payment for goods or services. The accounts are a double entry, accural-based, system. Each transaction recorded as a payment by one sector and a receipt by another, or the same, sector. Only production owned by institutions is counted (not, for example, household chores)
  • The main aggregates are between sectors, which are defined as:
    • Business: Mainly for-profits, but also, e.g., Federal Reserve banks and government enterprises (e.g. Post Office and city-managed utilities).
    • Households and institutions: The households and institutions sector comprises households and some associated nonprofits such as churches. The gross value added of households is measured by the services of owner-occupied housing and the compensation paid to domestic workers.
    • General government: The general government sector comprises federal, state and local government agencies. 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.
    • “the rest-of-the-world” sector, covers transactions between the United States and foreigners.
  • The accounts for each sector are:
    • 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. Production accounts do not include transfer payments.
    • The income and outlay account records the sources of the sector’s income, its current outlays, and its saving. Income and outlay accounts do include transfer payments.
    • 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.
  • The accounts treat capital as well as production. Key handling of assets:
    • Market value: All assets are carried at current market value.
    • Produced assets: The three types of produced assets are: fixed assets, such as machinery; inventories; and valuables. BEA produces estimates of the stocks of private and government fixed assets, of inventories owned by private business, and of consumer durable goods (which are treated like fixed assets in these accounts), but not of valuables.
    • Acquisition of fixed assets: The acquisition of fixed assets by private business is included in the NIPA measure “gross private domestic investment,” the acquisition of fixed assets by government is included in the NIPA measure “government consumption expenditures and gross investment.” The depreciation of fixed assets is captured in the NIPA measure “consumption of fixed capital.” Purchases of consumer durable goods are treated as consumption expenditures.
    • Inventories: The change in private inventories is included in the NIPA measure “gross private domestic investment.”
  • Income and saving: NIPA aggregate measures of current income 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 capital gains and capital transfers and include ordinary dividends. 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.
  • Domestic vs National. 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. 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.



NIPA imputed rent (4 Apr 2010) Under the NIPA, a homeowner-occupant is treated as a pair of entities. One is a tenant, who pays an imputed gross rent, included in Personal Consumption Expenditures (PCE) and thence in GDP, for the service provided by the house. The other entity is a landlord, who runs a small business owning and renting the house; the landlord has a net income, included in Personal Income (PI) and thence in National Income, constituting the gross rent less mortgage interest, property tax, maintenance, insurance and depreciation. The income of the landlord entity is essentially the operating profit of the business, and so is naturally much smaller than the expenditure of the tenant entity.

Imputed (gross) rent is calculated as the number of owner-occupied units, times the average rent of equivalent tenant-occupied units, in several property value tiers, using Census data.

The goal of imputation, in general, is to keep the accounts invariant when the same goods are produced/consumed in different ways. The same shelter is provided by a house whether the house is owned by the occupant or by someone else. Imputed rent may seem more natural if one imagines the extreme case of a society where everyone raises their own food and builds their own houses; without imputation the GDP would be zero.


Release and revision schedule (4 Apr 2010) The advance, second, and third estimates for the recent quarter appear first in press releases and a little later in the tables.

  • Quarterly: Advance about a month after the end of the quarter. Second about two months after the end of the quarter. Third about three months after the end of the quarter.
  • Annual revisions each cover the previous three calendar years.
  • Comprehensive revisions at about 5yr intervals may revise any old data and include new methodology. Sometimes the results are substantially changed; see second 31 Jul 2009 clipping for an example.

Sources

The BEA produces a large amount of documentation. The core resource for understanding the nature of the accounts is the NIPA Handbook

See also

Clippings below were used in the construction of this page

More on personal income

Oct 2006. BEA background paper on personal income methodology.

http://www.bea.gov/regional/pdf/spi2005/Complete_Methodology.pdf

“State Personal Income 2005 Methodology”

“This guide presents the conceptual framework, the data sources, and the statistical methodologies used by the Regional Economic Measurement Division of the Bureau of Economic Analysis (BEA) to estimate personal income for states. Personal income is defined as the income received by, or on behalf of, all the residents of an area (nation, state, or county) from all sources. It consists of the income received by persons from participation in production, from government and business in the form of transfers, and from government in the form of interest (which is treated like a transfer receipt). Alternatively, personal income can be defined as the sum of wage and salary disbursements, supplements to wages and salaries, proprietors’ income, dividends, interest, and rent, and personal current transfer receipts, less contributions for government social insurance, plus an adjustment for residence. The residence adjustment is necessary because data for some income components are compiled on a place of work basis and there are many people who commute to a job in a state different from that in which they reside. Disposable personal income is the income that is available to persons for spending or saving. It is calculated as personal income less personal current taxes paid to Federal, state, and local governments. Persons consists of individuals, nonprofit institutions that primarily serve individuals, private noninsured welfare funds, and private trust funds. The last three categories are referred to as “quasi-individuals.” The state estimates of personal income are designed to be conceptually and statistically consistent with the national estimates of personal income in the National Income and Product Accounts (NIPA). Therefore, the state definitions of personal income and its components are essentially the same as those used by the NIPA.”

Transfer payments are not included in GDP

Undated. Infoplease

http://www.infoplease.com/cig/economics/consumption-investment-government.html

“GDP and the Players Three”

“Government spending on goods and services averages about 20 percent, or one fifth, of total GDP. The government takes in an amount equal to more than one fifth of GDP in taxes, but a portion of that money, equal to about 10 percent of GDP, goes to transfer payments rather than expenditures on goods and services. Transfer payments include Social Security, Medicare, unemployment insurance, welfare programs, and subsidies. These are not included in GDP because they are not payments for goods or services, but rather means of allocating money to achieve social ends.”

Benchmark revision Jul 2009

31 Jul 2009. BEA “Articles” page.

http://www.bea.gov/national/an1.htm

“2009 comprehensive revision

On July 31, 2009, the Bureau of Economic Analysis (BEA) will release the results of a comprehensive, or benchmark, revision of the national income and product accounts (NIPAs). The comprehensive revision will incorporate the results of the 2002 benchmark input-output (I-O) accounts as well as changes in definitions, classifications, statistical methods, source data, and presentation.”

Benchmark revisions can have major effects

31 Jul 2009. News N Economics.

http://www.newsneconomics.com/2009/07/us-saving-rate-before-and-after-830-am.html

“The US saving rate: before and after 8:30 am today. Rebecca Wilder”

[This is an example of a revision where the substance changed noticeably. The savings rate had previously been thought to be negative at the end of 2005, and this had engendered much discussion. It was revised from -0.7% of disposable personal income to +1.2%. Click through for an impressive graph.]

NIPA handbook chapters 1 and 2

Oct 2009. Primary source from NIPA on the nature of the accounts.

http://www.bea.gov/national/pdf/NIPAhandbookch1-4.pdf

“Concepts and Methods of the U.S. National Income and Product Accounts (Chapters 1–5)”

”[In a NUTSHELL] What are the NIPAs? … The NIPAs display the value and composition of national output and the distributions of incomes generated in its production. … The NIPAs provide information to help answer three basic questions. First, what is the output of the economy—its size, its composition, and its use? Second, what are the sources and uses of national income? Third, what are the sources of saving, which provides for investment in future production? …

[HISTORY] The U.S. national income and product statistics were first presented as part of a complete and consistent double-entry accounting system in the summer of 1947. The accounts presented a framework for classifying and recording the economic transactions among major sectors: households, businesses, government, and international …

[PRINCIPAL INDICATORS] Key NIPA estimates serve as primary indicators of the current condition of the U.S. economy. In particular, the releases of the quarterly estimates of GDP and its components, of the quarterly estimates of corporate profits, and of the monthly estimates of personal income and personal consumption expenditures are closely anticipated and followed by Wall Street investors and analysts, the news media, and the general public. …

[INTERNATIONAL HARMONIZATION] the System of National Accounts (SNA) was developed by the international community in order to facilitate international comparisons of national economic statistics and to serve as a guide for countries as they develop their own economic statistics. BEA actively participated in preparing the 1993 revision of the SNA. Since 1993, BEA has incorporated many improvements to the NIPAs and its other economic accounts that have resulted in increased consistency with major SNA guidelines …

[ORGANIZATION chart] The NIPA estimates are prepared by the staff of the Directorate for National Economic Accounts within the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce. …

[SCHEDULE of data releases] For GDP and most other NIPA series … “Advance” estimates are released near the end of the first month after the end of the quarter. … “Second” and “third” quarterly estimates are released near the end of the second and third months, respectively … Annual revisions of the NIPAs are usually carried out each summer and cover the 3 previous calendar years. … Comprehensive revisions are carried out at about 5-year intervals and may result in revisions that extend back for many years. … Comprehensive revisions also provide the opportunity to make definitional, statistical, and presentational changes that improve and modernize the accounts to … The current quarterly estimates are first available in news releases that are posted on BEA’s website in accordance with a previously published schedule. … Shortly thereafter, the website presentation of the entire set of NIPA tables is updated to reflect the newly released estimates. …

[INSTITUTIONS ARE CENTRAL] According to the United Nation’s 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.” … household activities … are excluded …

[Accounting treatment of ASSETS] Financial assets … are covered in the flow of funds accounts …

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. …

In preparing the nation’s wealth accounts, BEA produces estimates of the stocks of private and government fixed assets, of inventories owned by private business, and of consumer durable goods (which are treated like fixed assets in these accounts). (In principle, the wealth estimates would also include stocks of valuables, but BEA does not prepare estimates for them.)

  • Fixed assets are produced assets that are used repeatedly, or continuously, in the processes of production for more than 1 year. … 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.”
  • 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.”

[VALUING goods and services not sold] Goods or services produced for own final use are valued at the market prices of similar products or by their costs of production. … The value of the nonmarket output of nonprofits and of government is estimated based on the costs of production. …

[IMPUTATIONS] 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). 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. … keeping 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. …

[DOMESTIC vs NATIONAL] 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. … 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. …

[INCOME and SAVING definitions] NIPA aggregate measures of current income … 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 … Capital gains … Capital transfers … Events, such as national disasters … personal income includes ordinary dividends … 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. …

[GDP - Theoretically equivalent approaches] 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 …

  • GDP (final expenditures) = Personal consumption expenditures + Gross private domestic fixed investment + Change in private inventories + Government consumption expenditures and gross investment + Net exports
  • GDI (sum of income payments and costs incurred in production) = compensation of employees + taxes on production and imports, less subsidies + net operating surplus + consumption of fixed capital
  • Gross value added = Gross output less intermediate purchases, across all private industries and government …

[IMPORTS treatment] Imports are subtracted [from GDP] because they are already 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, imports are subtracted in calculating GDP. …

[GDP more reliable than GDI] 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.” …

[AGGREGATES frequently mentioned]

  • 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. …
  • 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 personal consumption expenditures, gross private fixed investment, government consumption expenditures and gross investment, and net exports of goods and services.
  • Final sales to domestic purchasers is equal to gross domestic purchases less change in private inventories. It is also equal to the sum of personal consumption expenditures, gross private fixed investment, and government consumption expenditures and gross investment. …

[INFLATION] The market values and imputations used to measure GDP and the other NIPA estimates are in current dollars … In the NIPAs, the changes in quantities and prices are computed from chain-type indexes that are calculated using a Fisher formula. … the featured measure of inflation in the U.S. economy is the percent change in the price index for gross domestic purchases. … Another aggregate price measure is the price index for GDP, which measures the prices of goods and services produced in the United States. … Another important NIPA price measure is the PCE price index …

[SECTORS] 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” sector, covers transactions between the United States and foreigners. …

  • Business: The business sector comprises … corporate and noncorporate private entities organized for profit … mutual financial institutions, private noninsured pension funds, cooperatives, nonprofit organizations … 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.
  • Households and institutions: The households and institutions sector comprises households and nonprofit institutions serving households (NPISHs). NPISHs provide services in the following categories: religious and welfare, medical care, education and research, recreation, and personal business. 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 assets owned and used by these institutions, and the rental income of persons for tenant-occupied housing owned by these institutions.
  • 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. …

[NAICS] The North American Industry Classification System (NAICS) is the official industry classification system for the United States. 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. Prior to the adoption of NAICS, most U.S. statistics were based on the Standard Industrial Classification (SIC) system for classification. 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. 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. …

[GOVERNMENT ENTERPRISES] 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 STANDARDS] In national economic accounting, each transaction is recorded as a payment by one sector and a receipt by another—for example corporate income tax is a payment by a corporation and a receipt of the government. … accrual accounting … 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. …

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. …

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.”

[Chapter 3: Principal source data. Chapter 4: Estimating methods. Chapter 5: Personal consumption expenditures.]

Lack of info on imports causes GDP and productivity overstatement

9 Nov 2009. NY Times.

http://www.nytimes.com/2009/11/09/business/economy/09econ.html?_r=2&partner=rss&emc=rss

“Economists Seek to Fix a Defect in Data That Overstates the Nation’s Vigor. By LOUIS UCHITELLE”

“The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country. …

Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics. …

At worst, the gross domestic product would have risen at only a 3.3 percent annual rate in the third quarter instead of the 3.5 percent actually reported, according to some experts at the conference. The same gap applies to productivity. …

“What we are measuring as productivity gains may in fact be changes in trade,” said William Alterman, assistant commissioner for international prices at the Bureau of Labor Statistics. …

The same holds for services. An accounting firm in New York with 50 employees outsources some of its functions to less expensive accountants in India: the paperwork on an income tax return, for example. That work comes back to New York by computer transmission and is billed at New York rates, as if it were value added in this country. ”