Chapter 1 “Introduction” 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 1: INTRODUCTION

(Updated: November 2011)

What are the NIPAs?

How did the NIPAs originate?

How are the NIPA estimates used?

How useful are the NIPA estimates?

How are the NIPA estimates prepared?

Why are the NIPA estimates revised?

Where are the NIPA estimates available?

What are the NIPAs?

The national income and product accounts (NIPAs) are one of the three major

elements of the U.S. national economic accounts. The NIPAs display the value and

composition of national output and the distribution of incomes generated in its

production. (For information on the concepts and definitions underlying the NIPAs, see

“Chapter 2: Fundamental Concepts.”)

The other major elements of the U.S. national economic accounts are the industry

accounts, which are also prepared by the Bureau of Economic Analysis (BEA), and the

flow of funds accounts, which are prepared by the Federal Reserve Board. The industry

accounts consist of the input-output (I-O) accounts, which trace the flow of goods and

services among industries in the production process and which show the value added by

each industry and the detailed commodity composition of national output, and the gross

domestic product (GDP) by industry accounts, which measure the contribution of each

private industry and of government to GDP. 1 The flow of funds accounts record the

acquisition of nonfinancial and financial assets (and the incurrence of liabilities)

throughout the U.S. economy, the sources of the funds used to acquire those assets, and

the value of assets held and of liabilities owed. 2

In addition, BEA prepares two other sets of U.S. economic accounts: the

international accounts, which consist of the international transactions (balance of

payments) accounts and the international investment position accounts; and the regional

accounts, which consist of the estimates of GDP by state and by metropolitan area, of

state personal income, and of local area personal income. 3 Finally, the U.S. Bureau of

1 See Mary L. Streitwieser, “A Primer on BEA’s Industry Accounts,” Survey of Current Business 89 (June

2009): 40–52. See also U.S. Bureau of Economic Analysis, Concepts and Methods of the U.S. Input-Output

Accounts (September 2006); go to www.bea.gov, and click on “Industry,” “Methodologies,” and then

“Benchmark input-output.” 2 See U.S. Board of Governors of the Federal Reserve System, Guide to the Flow of Funds Accounts

(Board of Governors, Washington, DC, 2006); and see Albert M. Teplin, “The U.S. Flow of Funds

Accounts and Their Uses,” Federal Reserve Bulletin (July 2001): 431–441. 3 Go to www.bea.gov; click on “International” and then on “Methodologies,” and also click on “Regional”

and then on “Methodologies.”

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Labor Statistics prepares estimates of productivity for the U.S. economy (which are partly

based on the estimates of GDP). Altogether, the system of U.S. economic accounts

presents a coherent, comprehensive, and consistent picture of U.S. economic activity.

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? The NIPA estimates are presented in a set

of integrated accounts that show U.S. production, income, consumption, investment, and

saving. The conceptual framework of the accounts is illustrated by seven summary

accounts, and detailed estimates are provided in approximately 300 supporting NIPA

tables. The NIPA information is supplemented by a set of fixed-asset accounts, which

show the U.S. stock of fixed assets and consumer durable goods. 4

The NIPAs feature some of the most closely watched economic statistics that

influence the decisions made by government officials, business persons, and households.

Foremost among these estimates is GDP, the most widely recognized measure of the

nation’s production. In particular, the quarterly estimates of inflation-adjusted GDP

provide the most comprehensive picture of current economic conditions in the United

States. Other key NIPA estimates include the monthly estimates of personal income and

outlays, which provide current information on consumer income, spending, and saving,

and the quarterly estimates of corporate profits, which provide an economic measure of

U.S. corporate financial performance.

How did the NIPAs originate?

The NIPAs trace their origin back to the 1930s, when the lack of comprehensive

economic data hampered efforts to develop policies to combat the Great Depression. In

response to this need, the U.S. Department of Commerce commissioned future Nobel

Laureate Simon Kuznets to develop estimates of national income. He coordinated the

work of a group of researchers at the National Bureau of Economic Research and of his

staff at the Commerce Department, and initial estimates were presented in a 1934 report

to the U.S. Senate, National Income, 1929–32.

As the United States transitioned to a wartime economy in the early 1940s, it

became apparent that planning for the war effort required a measure of national

production. Annual estimates of “gross national expenditure,” which gradually evolved to

gross national product (GNP), were introduced early in 1942 to complement the estimates

of national income. 5 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

4 See U.S. Bureau of Economic Analysis, 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.” 5 Until 1991, GNP was the featured measure of U.S. production. For an explanation of the difference

between GNP and GDP, see the section “Geographic coverage” in chapter 2.

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1947. The accounts presented a framework for classifying and recording the economic

transactions among major sectors: households, businesses, government, and international

(termed “rest of the world”). This framework placed the GNP statistics in the broader

context of the economy as a whole and provided a more complete picture of how the

economy works. 6

Since then, the national accounts have continued to expand in response to

demands for better and more detailed information on the U.S. economy. At the end of

1999, the Commerce Department named the invention and ongoing development of the

NIPAs and its marquee measure GDP as “its greatest achievement of the century.” 7

How are the NIPA estimates used?

The NIPAs provide government policymakers, business decision-makers, academics

and other researchers, and the general public with information that enables them to follow

and understand the performance of the U.S. economy. The following are among the

principal uses of the NIPA estimates.

 Since their inception in the 1930s and 1940s, the NIPAs have become the mainstay of modern macroeconomic analysis. They provide comprehensive and

consistent time series that can be used for measuring the long-term path of the

U.S. economy, for analyzing trends and identifying factors in economic growth

and productivity, and for tracking cyclical fluctuations in economic activity.

 The NIPAs provide the basis for macroeconomic forecasting models. These mathematical models are developed using historical NIPA estimates and other

variables with the aim of predicting short-term economic activity or long-term

economic trends.

 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.

 The NIPA estimates provide critical inputs to the formulation and execution of macroeconomic policy and to the assessment of the effects of these policies. They

are used by the White House and by Congress in formulating fiscal policy and by

the Federal Reserve Board in formulating monetary policy.

6 See Rosemary D. Marcuss and Richard E. Kane, “U.S. National Income and Product Statistics: Born of

the Great Depression and World War II,” Survey 87 (February 2007): 32–46. 7 “GDP: One of the Great Inventions of the 20

th Century,” Survey 80 (January 2000): 6–14.

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 The NIPA estimates are used by the White House and Congress in preparing the federal budget and tax projections.

 The NIPA estimates are used in comparisons of the U.S. economy with the economies of other nations. Comparable international statistics facilitate

assessments of relative economic performance among nations, and they provide

the basis for tracking and analyzing the global economy.

 Detailed NIPA estimates can be used in examining interrelationships between various sectors of the economy. For example, estimates of benefits paid under

government assistance programs track flows of transfer payments from

governments to households.

 The NIPA estimates are used by businesses and individuals in planning financial and investment strategies. Such planning heavily depends on the near- and long-

term prospects for economic growth.

 The NIPAs are an important data source for the other national economic accounts and other economic statistics. For example, the NIPA estimates of owner-

occupied housing, of motor vehicle output, and of bank-service charges are

among the primary source data used in preparing the I-O accounts. In addition,

the NIPA estimates are used in various analytical measures; for example,

business-sector output is used as the numerator in the Bureau of Labor Statistics’

estimates of productivity for the U.S. economy.

 The NIPA framework provides the basis for developing analytical tools such as satellite accounts, which are supplementary accounts that focus on the activities of

a specific sector or segment of the economy. For example, the NIPAs provide the

structural and statistical basis for the research and development satellite

accounts. 8

How useful are the NIPA estimates?

The usefulness of the NIPA estimates is determined by how effective they are in

meeting the above needs. This effectiveness may be summarized in terms of four

characteristics: accuracy, reliability, relevancy, and integrity.

Accuracy. Accuracy may be described in terms of how close the estimates come

to measuring the concepts they are designed to measure. In the case of GDP, the estimate

is accurate when it captures all production for final use but does not include production

for intermediate use. In order to keep pace with innovations in the economy, such as the

development of new online services, BEA must periodically review and update the

8 See Jennifer Lee and Andrew G. Schmidt, “Research and Development Satellite Account Update:

Estimates for 1959–2007,” Survey 90 (December 2010): 16–55.

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definitions and methodologies of the NIPA aggregates and components to ensure that

they represent complete and consistent estimates.

Reliability. Reliability refers to the size and frequency of revisions to the NIPA

estimates. An important indicator of reliability is the effectiveness of the initial estimates

of GDP in providing a useful picture of U.S. economic activity. The results of periodic

studies have confirmed that the initial estimates provide a reliable indication of whether

economic growth is positive or negative, whether growth is accelerating or decelerating,

whether growth is high or low relative to trend, and where the economy is in relation to

the business cycle. 9

Relevancy. Relevancy has two dimensions. First, relevancy refers to the length of

time before the estimates become available. Estimates that are not available soon enough

for the intended use are not relevant. However, there is an implicit tradeoff between

timeliness and accuracy, so BEA has developed a release cycle for the estimates that

addresses this tradeoff (see the section “Why are the NIPA estimates revised?”).

Second, relevancy refers to the ability of the accounts to provide summary and

detailed estimates in analytical frameworks that help answer the questions being asked

about the economy. Issues of relevance change as the economy changes, as policy

concerns evolve, and as economic theory advances. For example, the increased

integration of the world’s monetary, fiscal, and trade policies led to a growing need for

the international comparability of economic statistics. Accordingly, 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 on GDP, investment, and saving. 10

The following are examples of some of the major changes that have been introduced

into the NIPAs to keep them relevant.

 In the 1950s, BEA developed and began to publish inflation-adjusted, or “real,” measures of output.

 In the 1980s, BEA significantly expanded its coverage of international trade in services in response to the proliferation in the volume and types of these global

transactions.

 In the 1990s, BEA introduced more accurate measures of real output and of prices, developed estimates of investments in computer software, instituted the

treatment of government purchases of structures and equipment as investment,

and incorporated improved measures of high-tech products.

9 For more information, see Dennis J. Fixler, Ryan Greenaway-McGrevy, and Bruce T. Grimm, “Revisions

to GDP, GDI, and Their Major Components,” Survey 91 (July 2011): 9–31. 10

For more information, 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. For the latest edition of the SNA,

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