The National Income and Product Accounts, Schemes and Mind Maps of History

Download The National Income and Product Accounts and more Schemes and Mind Maps History in PDF only on Docsity! THE NATIONAL INCOME AND PRODUCT ACCOUNTS Roy H. Webb This article is the first of a series that will be pub- lished by this Bank under the title Macroeconomic Data: A User’s Guide. That book will contain in- troductions to important series of macroeconomic data, including prices, employment, production, and money. It will replace “Keys to Business Fore- casting,” which has been distributed since 1964. Al- though there are many sources that describe data con- cepts, surprisingly few deal with practical problems that may confront users. A characteristic of Macro- economic Data will be that its articles discuss the seemingly small points that can make the difference between successful and unsuccessful attempts to use data. It would be hard to overstate the value of the na- tional income and product accounts to economists. They summarize the millions of economic transac- tions that occur in the nation each day and present the data in a readily comprehensible form. Their important role can be observed by noting that dis- cussions of current economic conditions usually focus on real gross national product (GNP) and its com- ponents. In addition, macroeconomic research criti- cally depends on the hundreds of interrelated items in the accounts. This article is an introduction to the national in- come and product accounts. It briefly describes the history of the accounts, explains basic concepts, de- tails the main structure of the accounts, and reviews the movement of key elements over time. Through- out the article there are cautions for users who might expect more than the accounts can deliver. And fi- nally, it provides suggestions for additional reading for readers who would like to learn more than is pro- vided in this brief introduction to the accounts. This paper benef i t ed f rom he lpfu l comments by Carol S. Carson, Marvin Goodfriend, Thomas M. Hum- phrey, David L. Mengle, Robert P. Parker, and John R. Introduction History National income and product accounts are a fairly recent invention. Prior to World War I they were prepared for only a few countries by individual investigators who wished to study particular ques- tions, such as understanding the effects of govern- ment budgetary actions. During the interwar period governments became increasingly involved in the preparation of national economic accounts. In part this was because govern- ments had relatively inexpensive access to data such as tax returns and other documents that individuals and firms were required to file. Also, a growing in- terest in using government fiscal actions to influence national economic performance increased the demand for detailed information on the current state of the economy. In the United States, the Commerce Department first prepared national income estimates in the early 1930s; national product estimates followed in the early forties. These estimates played an important role in economic planning in the United States during World War II. The widespread intellectual acceptance of John Maynard Keynes’s The General Theory of Employ- ment, Interest, and Money did much to stimulate in- terest in the accounts. Keynes emphasized macro- economic relationships-that is, relationships stated at a highly aggregated level, such as the relation between national investment and national product. Keynes also strongly advocated the use of national fiscal policy to moderate fluctuations of national out- put and to stimulate long-term growth. The major uses of income and product accounts-appraisal of current conditions, the analysis of fiscal policy, fore- casting economic activity, and research concerning the relations of macroeconomic aggregates-all fit comfortably within a Keynesian framework. Many users today, however, would not label themselves as Keynesians. Use of the accounts has grown far be- yond any single group. FEDERAL RESERVE BANK OF RICHMOND 11 Preparation The national income and product ac- counts are now prepared by the Bureau of Economic Analysis (BEA), an agency of the United States Commerce Department. The BEA has prepared estimates for most items going back to 1929. Most of the data used by the BEA are first collected by other branches of the government for purposes other than constructing national income accounts. One important source of data is the tax returns of firms and individuals. Another is the large and varied group of surveys that are conducted at regular in- tervals. Important examples include Census Bureau surveys of retailers and manufacturers, and Labor Department surveys of prices. Although some data series like personal income are published monthly, most items are only available at quarterly or annual intervals. Estimates for a par- ticular quarter are first released during the third week after the end of that quarter. At that time, the BEA has data for about two-thirds of GNP; it there- fore estimates the remaining items. As the BEA continues to receive data, the preliminary estimates are revised twice at monthly intervals. Then in July of each year, further revisions are published along with estimates for series that are published annually. Finally, new information, conceptual changes, and statistical changes are incorporated by benchmark re- visions, which occur about every five years. Gross National Product Defined GNP is the most widely followed statistic in the income and product accounts. It can be succinctly defined as the market value of current, final, national production during a specific interval of time. That succinct definition, however, requires a bit of ex- planation, Value Market value means that, when possible, goods and services are valued at prices actually paid in market transactions. In some cases, such as na- tional defense and other services provided by the gov- ernment, there are no market prices available. An alternative estimate of the value of those products, such as the cost of production for goods and services provided by government agencies, is therefore sub- stituted for market value. For another important item, owner-occupied housing, an estimated rental value is included in GNP.1 And some transactions 1 In effect, the homeowner is treated as a business that rents the home to itself. This has several effects for the accounts, including: (1) spending for new homes is part of business investment; (2) the estimated rental value that occur outside the marketplace are excluded from GNP. Examples include production within house- holds and illegal activities. By focusing on market values, it is indeed possible to add apples and oranges. The focus on market values is a key insight that has powerfully aided eco- nomic analysts. It allows one to combine production from vastly different activities into a meaningful aggregate. Current Current production simply means that GNP for a year only includes production that oc- curred during that year, Final The concept of final product is less ob- vious; its necessity can best be illustrated with an example. Suppose that one farmer grows a bushel of wheat, mills the wheat, bakes bread, and sells the bread in front of the farmhouse. Another farmer grows a bushel of wheat but sells it to a miller, who sells flour to a baker, who then sells bread. In each case the contribution to GNP is the value of the bread, the final product. Yet if the dollar value of all sales in the market were simply added up, the second example would have a higher sum than the first. In other words, simply adding all sales would overstate GNP ; that error is often referred to as double counting. To avoid that error, one can focus on the value added in each step of production. In the second example, the contribution to GNP of the baker is the difference between the revenues from selling bread and the cost of the flour. The values added by the baker, miller, and farmer in the second example would sum to the value of the bread and would therefore equal the value added by the farmer- miller-baker in the first case. National National product refers to the output of productive factors of a particular nation. Produc- tion from the labor of a nation’s residents and the capital of its residents’ corporations is therefore in- cluded in gross national product. Many countries prefer to focus on gross domestic product (GDP), the output of productive factors located within a par- ticular nation. The distinction between national and domestic product is most important for locating the value added by multinational firms. The value added by overseas branches of American firms is included in United States GNP, but not United States GDP. of owner-occupied housing is part of consumer spending; and (3) the rental value minus expenses, such as interest, taxes, and depreciation, is part of personal income. 12 ECONOMIC REVIEW, MAY/JUNE 1986 Their interest receipts are treated as income ; their payments of most of their income to the U. S. Trea- sury are included in the BEA’s measure of corporate tax payments. Other income Proprietors’ income includes earn- ings of individuals and partnerships from unincor- porated businesses, such as physicians’ practices, farms, and law firms. Rental income of persons in- cludes items such as rental receipts and royalties. It also includes the estimated rental value of owner- occupied housing minus housing expenses. Net in- terest is a fairly complicated item. In broad terms, it represents individuals’ receipts of interest income from businesses and from foreign sources minus in- dividuals’ interest payments.4 Non-income items Other charges against GNP are non-income items, most importantly capital con- sumption allowances and indirect business taxes. The latter includes federal excise taxes and state and local sales and property taxes. Definitions of income There are several defini- tions of income that are published in the income and product accounts. National income, the total in- come from current production, is the sum of em- ployee compensation, proprietors’ and rental income, corporate profits, and net interest. More attention is paid to personal income, which includes wages, salaries and other labor income ; proprietors’ and rental income; and personal receipts of interest, divi- dends, and transfer payments. A closely related measure, disposable personal income, is personal in- come minus personal tax payments and other pay- ments to government agencies. Movements over Time Countless books and articles containing studies of long-term growth, cyclical change, and shifting pat- terns of economic life have been based on data from the national income and product accounts. Only a few broad features will be mentioned in this section. A striking feature is the amount of economic growth that is revealed. Chart 1 illustrates the move- ment of real GNP from 1929 to 1985. Despite the Great Depression and other fluctuations, real GNP increased fivefold during that interval-a 2.9 percent compound annual rate of growth. Chart 1 also il- 4 Some arcane adjustments for households’ dealings with financial institutions are also included. Those adjust- ments also affect estimates of consumer spending for fi- nancial services. Chart 1 REAL GNP lustrates the massive decline of real GNP during the Great Depression, the equally massive expansion during World War II, and the smaller fluctuations of output in the postwar period. Chart 2 reveals similar growth, but less fluctuation, in real consumer spending and disposable income. The accounts also reveal some important changes in the structure of the economy. The expanded role of government is illustrated by its spending for goods and services, which has risen from less than 9 percent of GNP in 1929 to more than 20 percent in 1985. Foreign trade also plays a more important role in the economy than it has in the past, with exports rising from about 5 percent of GNP in the 1930s to 11 percent in the 1980s. Chart 2 CONSUMER SPENDING & INCOME FEDERAL RESERVE BANK OF RICHMOND 15 Cautions Considering the amount of data consistently meas- ured over time and the complex interrelations re- vealed among disparate items, the national income and product accounts are a remarkable achievement. In part because the accounts do so much so well, users can be tempted to expect more of the accounts than they can deliver. A few potential problems have already been mentioned; in this section other po- tential pitfalls are discussed. First, it should be emphasized that the national in- come and product accounts only measure production, spending and income. They were not designed to measure economic welfare-that is, how highly in- dividuals evaluate the economic rewards they receive minus the cost of obtaining them. Despite the limit- ed focus of the accounts, it is still common for some observers to see differences in national product be- tween nations as evidence of different standards of living. Such comparisons should be discounted for many reasons, a few of which follow: (1) Some items included in GNP do not di- rectly raise individual welfare. For example, mili- tary spending is like intermediate product-it can provide necessary protection that allows other economic activity to proceed, but is not valued for its own sake. Citizens of a nation that is able to obtain adequate defense for 1 percent of GNP can consume and invest more, thus having a higher standard of living, than citizens of a nation with the same GNP who had to spend 10 percent of GNP for defense. (2) Some items are not included in GNP that do make people better off. For example, unpaid household work may be highly productive but is not included in the national income and product accounts. (3) There may be unmeasured external effects that result from productive activity. For example, the production of electric power may involve an un- measured damage of pollution from burning coal. Two countries could have the same GNP but dif- fer in the cleanliness of air and water. (4) Other countries may use different data sources or even different concepts to produce in- come and product estimates. Socialist countries, for example, will lack many market prices used in the U. S. accounts, Also different governments may not have access to similar quantities or quali- ties of data. A second caution is that it is possible that the defi- nition of an item in the accounts may not be the best definition for a particular study. For example, many economists have studied the relationship between consumer saving at one time and consumer spending during later time periods. The definition of saving in the accounts is probably not appropriate for that question, however, since capital gains and losses are excluded from per- sonal income and saving (because they do not result from current production). Their potential importance is illustrated by rising stock and bond markets in 1985, which added hundreds of billions of dollars to consumer wealth but were not income or saving as defined in the income and product accounts. Third, the construction of the national accounts requires choosing among alternatives that each has drawbacks. One example is converting nominal ex- penditures to real magnitudes. The decision to esti- mate constant dollar values has greatly enhanced the utility of the accounts. There are side effects, how- ever. The BEA’s approach is to define one year as a base year and to compare conditions in other years with the base year. That is, “real” magnitudes in other years are hypothetical values, such as quanti- ties exchanged in 1960 valued at prices paid in transactions in 1982. Constructing those hypo- thetical values allows the tracking of changes in volumes of particular items over time, but can also distort relationships in the accounts. For ex- ample, from 1958 to 1973 net exports in current dollars were positive each year, averaging over $7 billion. When measured in 1982 dollars, however, net exports were negative in 15 of the 16 years, averaging -$18 billion. The actuality of a trade surplus was therefore converted into a “real” deficit by using 1982 as a base period. Fourth, the data that the BEA receives from other government agencies may not be accurate. For example, to the extent that individuals or firms file inaccurate tax returns in order to reduce their tax liabilities, the tax collectors will give the BEA inaccurate data. Moreover, if someone has given false information to one government agency, the likelihood of that person giving false reports to other agencies is increased. Census surveys, therefore, could also be affected by tax-induced misreporting of income and expenditure. Although 16 ECONOMIC REVIEW, MAY/JUNE 1986 the BEA does attempt to estimate tax-induced misreporting, there is no way to determine the ac- curacy of those estimates. These cautions should not prevent one from using the accounts. Rather, the cautions should prompt the user to think about the problem and the data before simply assuming that the data are appropriate. The limitations of the accounts are real, but should be kept in perspective. The accounts provide consis- tently estimated data for more than fifty years for hundreds of items. They provide an unsurpassed picture of economic performance. As the longtime head of the BEA George Jaszi put it, the income and product accounts “are eminently useful in macro- economic analysis if they are not regarded as a pre- cision instrument and . . . may be lethal if they are.” Suggestions for Additional Reading There is a large literature on the subject of na- tional income and product accounts. Rather than attempting to survey the whole field, a few sources are mentioned which should be especially helpful to readers who wish to pursue the subject. The Survey of Current Business (SCB), pub- lished monthly by the Commerce Department, con- tains recent estimates of items in the income and product accounts and articles on selected topics re- lated to national income accounting. One of the most useful publications on the subject is the N a - tional Income supplement to SCB, 1954 edition, parts II-IV. It contains 132 large format pages of detailed definitions and discussion of the methodology for estimating components of the accounts. More recent discussions are contained in “The National Income and Product Accounts of the United States: An Overview,” SCB February 1981, and “An Introduc- tion to National Economic Accounting,” SCB March 1985. For many readers, less technical summaries of the accounts may be useful. Introductory economics text- books usually contain descriptions of the accounts ; a particularly good presentation is contained in Paul Samuelson’s Economics. Also, The U.S. Economy Demystified by Albert T. Sommers has a clear, user- oriented description and discussion of the accounts. Building on the framework of the BEA’s accounts, Robert Eisner has constructed a set of statistics that attempt to narrow the gap between national product accounts and statistics that more directly attempt to estimate economic welfare. “The Total Incomes Systems of Accounts,” SCB January 1985, contains a discussion of his approach and detailed tables of data for selected years. Finally, it may be of interest to study the history of national income accounts. A prime source is John W. Kendrick, “The Historical Development of National Income Accounts,” History of Political Economy, Fall 1970. A more narrow focus on U. S. accounts is given by Carol S. Carson, “The History of the United States National Income and Product Ac- counts,” Review of Income and Wealth, June 1975. Further insight into the design of the U. S. accounts can be found in George Jaszi’s “An Economic Accountant’s Audit,” American Economic Review, May 1986. FEDERAL RESERVE BANK OF RICHMOND 17