ABSTRACT
ASSHOWNIN&IGURE 4HEFIRMSSHOWNONTHERIGHTSIDEOFTHEFIGUREPRODUCE GOODSOROUTPUT4ODOSOTHEYMUSTPURCHASELABORFROMHOUSEHOLDSSHOWNON THELEFTSIDEOFTHEFIGUREANDMATERIALSFROMOTHERFIRMS4HENTHEYSELLTHEIRGOODS EITHERTOOTHERFIRMSORTOHOUSEHOLDS'OODSPURCHASEDBYOTHERFIRMSASINPUT INTOTHEIRPRODUCTIONARETERMEDINTERMEDIATECONSUMPTION'OODSPURCHASEDBY HOUSEHOLDSARETERMEDFINALCONSUMPTION-ONEYFLOWSFROMFIRMSTOHOUSEHOLDS INEXCHANGEFORLABOR-ONEYFLOWSFROMHOUSEHOLDSBACKTOFIRMSINEXCHANGEFOR GOODSUSEDFORFINALCONSUMPTION!NDMONEYFLOWSFROMONEFIRMTOANOTHERIN EXCHANGEFORGOODSUSEDFORINTERMEDIATECONSUMPTION
4HEFLOWSINEACHDIRECTIONINTHISSIMPLEECONOMYHAVETOBALANCEEACHOTHER OUT"ECAUSEALLGOODSARECONSUMEDWITHINTHECOUNTRYHOUSEHOLDSWILLUSEALLOF THEIRWAGESTOPURCHASEGOODSFORFINALCONSUMPTION&IRMSRECEIVINGTHATMONEY WILLUSEITEITHERTOPAYWAGESORTOPURCHASEINTERMEDIATEPRODUCTSFROMOTHER FIRMS4HUSONEWAYTOCALCULATETOTALINCOMEFORTHECOUNTRYISASTHETOTALCOM PENSATIONOFEMPLOYEESˆWAGESPLUSBENEFITS4HISMUSTBETHESAMEINMAGNITUDE ASTHETOTALOFFINALCONSUMPTIONBECAUSEHOUSEHOLDSSPENDALLOFTHEIRINCOME EACHYEARTHISPROVIDESASECONDWAYTOARRIVEATTHEVALUEOFTHECOUNTRYSOUTPUT 4HESAMEFIGURECANALSOBEDERIVEDINATHIRDWAYASTHETOTALREVENUEOFFIRMS
LESSTHEAMOUNTTHATTHEYSPENDONINTERMEDIATECONSUMPTION3UPPOSEFOREXAM PLETHATTHISECONOMYINCLUDESAGROCERWHOSELLSICECREAM3HEBUYSITFROMAN ICECREAMCOMPANYWHICHBUYSCREAMFROMADAIRYWHICHBUYSRAWMILKFROMA FARMERWHORAISESCOWS!TEACHSTAGEINTHISPRODUCTIONPROCESSTHEPRODUCER PURCHASESSOMEINTERMEDIATEINPUTSRAWMILKPROCESSEDCREAMORICECREAM USESTHEMINHISORHERBUSINESSPRODUCINGCREAMMAKINGICECREAMORRUNNING AGROCERYSTORE ANDTHENRESELLSTHEMSOMETIMESINADIFFERENTFORMICECREAM INSTEADOFCREAM FORAHIGHERPRICE4HEDIFFERENCEINPRICEBETWEENTHEINPUT GOODSANDTHOSESOLDISCALLEDVALUEADDED4HISISUSEDTOPAYFORLABORPURCHASED FROMHOUSEHOLDSTOREIMBURSETHESELF EMPLOYEDFARMERANDFORPROFITSFORTHE COMPANY4HESUMOFTHEVALUEADDEDATEACHSTAGEINTHEPROCESSWILLBETHESAME ASTHENATIONWIDEEXPENDITUREONTHEFINALPRODUCTBYCONSUMERSOFTHEICECREAM 3OMENUMBERSWILLHELPSHOWHOWTHISWORKS3UPPOSEFORTHEMOMENTTHAT
THEPEOPLEINTHISCOUNTRYBUYONLYICECREAM)FTHATWEREREALLYSOOFCOURSETHEY WOULDSOONGETSICKANDNEEDTOPURCHASEDOCTORSSERVICESBUTTHISISNOTTHEREAL WORLD 4ABLE SHOWSTHEFLOWSOFMONEYANDGOODSINVOLVEDINTHEPRODUCTIONOF ICECREAMTHROUGHOUTTHEECONOMY4HEhGROCERYSTOREvROWINTHEhVALUEOFSALESv COLUMNSHOWSTHATTHEFINALCONSUMPTIONOFICECREAMISTHESAMEASTHE EARNINGSFROMICECREAMPRODUCTIONOFBUSINESSESINTHEECONOMYˆTHESUMOFTHE hVALUEADDEDvCOLUMN"ECAUSETHISSIMPLEEXAMPLEHASNOTCONSIDEREDTHECOSTOF BUSINESSEQUIPMENTTHISFIGUREISALSOTHESAMEASTHEWAGESPLUSFARMEARNINGS WHICHWASTHEFIRSTMETHODOFMEASURINGTHETOTALINCOMEOFTHEECONOMY 4HISEXAMPLESHOWSWHYTOTALINCOMECANNOTBEDERIVEDSIMPLYBYADDINGTHE
RECEIPTSOFALLFIRMSINTHEECONOMY$OINGTHATFORTHEABOVEEXAMPLEWOULDRESULT INTHEFOLLOWING
DAIRIES ICECREAMERIES GROCERIES TOTALRECEIPTS
"UT THISDOUBLECOUNTS THEOUTPUTATEACHSTAGE THE FOR THEDAIRY INCLUDESTHEPRODUCEDBYTHEFARMERTHEFORTHEICECREAMERY INCLUDESTHEFORTHEDAIRYANDSOON!VOIDINGSUCHDOUBLECOUNTINGIS ACRUCIALISSUEINNATIONALINCOMEACCOUNTING)NTHEREALWORLDITCANBEDIFFICULT WHENFIRMSARERELUCTANTTORELEASETHEFULLDETAILSOFTHEIRCOSTSTRUCTURES !LTHOUGHITMAYSEEMOBVIOUSWHATTHISECONOMYINCLUDESASINCOMEAFEW
RULESDEFINEIT'OODSSOLDTHISYEARAREINCLUDEDBUTNOTTHOSETHATAREPROCESSED ANDRESOLDSUCHASTHERAWMILKBOUGHTBYTHEDAIRYORTHECREAMBOUGHTBYTHEICE CREAMCOMPANY4HEECONOMYSINCOMEINCLUDESONLYTHOSEGOODSPRODUCEDBYTHE FARMERTHEDAIRYTHEICECREAMERYANDTHEGROCERYANDTHEYAREVALUEDATTHEPRICE FORWHICHTHEYARESOLD4HISLEAVESOUTAMAJORCATEGORYOFLABORˆTHATPROVIDEDIN THEHOMEBYPEOPLEWHOARENOTPAIDFORITSUCHASCLEANINGCOOKINGORCHILDCARE !LTHOUGHTHISISAMAJORLIMITATIONOFTHENATIONALINCOMEACCOUNTSTHISBOOKWILL NOTADDRESSITDIRECTLYASITISFORTHEMOSTPARTUNRELATEDTOTHEENVIRONMENT!LSO
MENTSUCHASTHECOWSCONSUMPTIONOFGRASSANDTHEIREMISSIONSOFMETHANETHE LANDONWHICHTHEGRASSGROWSANDTHEPOLLUTIONEMITTEDBYTHEPROCESSINGPLANTS 3UCHISSUESARETHESUBJECTOFTHISBOOK /NESIMPLEEQUATIONTERMEDANACCOUNTINGIDENTITYDESCRIBESSOMEOFTHEKEY
RELATIONSHIPSAMONGTRANSACTIONSINTHISECONOMY
TOTALVALUEOFPRODUCTIONINTHEECONOMY PAYMENTSTOFACTORSOFPRODUCTIONLABORINTHISCASE SUMOFVALUEADDEDACROSSTHEFIRMS EXPENDITUREONFINALPRODUCTORCONSUMPTION OUTPUTLESSINTERMEDIATECONSUMPTION
4HE3.!CALLSTHISVALUEGROSSDOMESTICPRODUCT'$0 !REALECONOMYWOULDBE MUCHMORECOMPLEXAND'$0WOULDINCLUDEANUMBEROFADDITIONALCOMPONENTS BUTITSSTRUCTUREWOULDBEANALOGOUS
.OWTHEHYPOTHETICALECONOMYWILLBECOMEABITMORECOMPLEXAS SHOWN IN &IGURE )NORDERTOPRODUCEANDSELLICECREAMTHEFIRMSNEEDTOUSEMACHIN ERYˆTERMEDINVESTMENTGOODSORCAPITALEQUIPMENTˆINADDITIONTOINTERMEDI ATECONSUMPTIONOFLABORMILKANDOTHERPRODUCTS4OPAYFORTHEIRINVESTMENTS THEYMAYKEEPSOMEOFTHEREVENUETHEYRECEIVEANDREDUCETHEAMOUNTTHEYPAY THEIRWORKERS4HE3.!CALLSTHEAMOUNTTHEYKEEPGROSSOPERATINGSURPLUSBUTIT CANALSOBETHOUGHTOFINBROADTERMSASPROFITSORTHEMONEYEARNEDBYTHEUSE OFCAPITALEQUIPMENT&IRMSCOULDALSOBORROWMONEYFROMHOUSEHOLDSTOPAYFOR CAPITALINVESTMENTSINTHATCASEHOUSEHOLDSWOULDCONSUMEONLYSOMEOFTHEIR INCOMEANDWOULDSAVETHERESTSOTHATITWOULDBEAVAILABLEFORFIRMSTOBORROW
!NADDITIONALWRINKLEARISESIFHOUSEHOLDSCONSUMELESSTHANTHEFIRMSHAVEPRO DUCEDTHATYEARINTHATCASETHEFIRMSHOLDONTOTHEEXCESSGOODSWHICHENTER INTOINVENTORIESFORSALETHENEXTYEAR)NVENTORIESARECONSIDEREDTOBEAFORMOF INVESTMENTALTHOUGHTHEYARENOTCAPITALINVESTMENT &ORTHESEFIRMSTOBEABLETOPURCHASEINVESTMENTGOODSSOMEONEHASTOPRO
DUCETHEM)NTHEVERYSIMPLEECONOMYNOONEWASPRODUCINGMACHINERYTHAT COULDBEUSEDFORPRODUCTION3UPPOSEHOWEVERTHATSOMEOFTHEFARMERSFIND MINERALSONTHEIRLANDWHICHTHEYBEGINEXTRACTINGFORSALECAREFULLYPROTECTING THEENVIRONMENTSOTHATTHEYCANSTILLRAISECATTLEANDSELLMILK 3OMEOFTHEICE CREAMFIRMSDECIDETODIVERSIFYANDINADDITIONTOTHEIRFOOD PROCESSINGACTIVITY THEYBUILDPLANTSTOMANUFACTUREMACHINESUSINGTHEMINERALSEXTRACTEDBYTHE FARMERSMINERSASINPUTS )NTHESIMPLESTEXAMPLEEACHFIRMHADONLYONEKINDOFCUSTOMERTHENEXTSTAGE
INTHEICECREAMPRODUCTIONCHAIN.OWSOMEOFTHEFIRMSHAVESEVERALKINDSOFCUS TOMERS4HEFARMERSMINERSSELLMILKTOTHEDAIRIESANDMINERALSTOTHECREAMERIES MANUFACTURERS4HECREAMERIESMANUFACTURERSSELLICECREAMTOTHEGROCERSAND MACHINESTOTHEDAIRIESANDTHEGROCERS4HEYALSOUSETHEIROWNMACHINESTOMAKE ICECREAM-OREOVERTHEYMAYSELLAPPLIANCESSUCHASREFRIGERATORSANDAIRCONDI TIONERSTOHOUSEHOLDSASFINALCONSUMPTION4HUSTHEYARENOWSELLINGICECREAMFOR INTERMEDIATECONSUMPTIONBYGROCERSASBEFORE MACHINESFORCAPITALINVESTMENT BYOTHERBUSINESSESANDAPPLIANCESFORFINALCONSUMPTIONBYHOUSEHOLDS !LTHOUGHTHISEXAMPLEISCONSIDERABLYMORECOMPLICATEDTHANTHEPREVIOUSONE
THESAMEBASICPRINCIPLESHOLD4ABLE SHOWSTHEFINANCIALRELATIONSHIPSAMONG THEPLAYERS INTHEECONOMY6ALUEADDEDINEACHINDUSTRY ISSTILLEQUALTOTOTAL PRODUCTIONLESSINTERMEDIATECONSUMPTIONTHOUGHTHEFARMERSMINERSANDTHE
'$0ISSTILLEQUALTOTHESUMOFVALUEADDEDACROSSALLOFTHEINDUSTRIESANDTOTOTAL PRODUCTIONINTHEECONOMYLESSTOTALINTERMEDIATECONSUMPTION "ECAUSEFIRMSINTHEMORECOMPLEXECONOMYSELLTOSEVERALDIFFERENTINDUSTRIES
RATHERTHANONLYONE4ABLE HASAMORECOMPLEXSTRUCTURETHAN4ABLE 4HE FIRSTTHREECOLUMNSOFFIGURESSHOWHOWMUCHOFEACHINDUSTRYSOUTPUTISUSEDFOR INVESTMENTFINALCONSUMPTIONANDINTERMEDIATECONSUMPTION4HISSHOWSTHAT ALLTHEOUTPUTOFTHEFARMERSMINERSANDDAIRIESGOESTOINTERMEDIATECONSUMP TION4HEICECREAMOUTPUTOFTHECREAMERIESMANUFACTURERSGOESTOINTERMEDIATE CONSUMPTIONBYGROCERSANDTHEMACHINESGOTOINVESTMENT%ACHINDUSTRYSTOTAL PRODUCTIONGIVENINTHENEXTCOLUMNISTHESUMOFTHATINDUSTRYSPRODUCTIONFOR INVESTMENTFINALCONSUMPTIONANDINTERMEDIATECONSUMPTION 4HENEXTCOLUMNSHOWSHOWMUCHINTERMEDIATECONSUMPTIONEACHINDUSTRY
PURCHASES4HISCOLUMNRETAINSTHESIMPLESTRUCTUREOF4ABLE DAIRIESPURCHASE ALLTHERAWMILKPRODUCEDBYFARMERSICECREAMERIESPURCHASEALLTHECREAMMADE BYDAIRIESANDGROCERSPURCHASEALLTHEICECREAMFROMCREAMERIES!LLGROCERYOUT PUTGOESTOFINALCONSUMPTIONANDTHECITIZENSEATALOTOFICECREAM6ALUEADDED ISSTILLEQUALTOTHEVALUEOFPRODUCTIONLESSTHEINTERMEDIATECONSUMPTIONBUTNOW SOMEVALUEADDEDGOESTOWAGESANDSOMEISRETAINEDBYTHEFIRMSFORINVESTMENT )NTHISEXAMPLETHEFARMERSSPENDALLOFTHEIRVALUEADDEDONWAGESANDDONOT
MAKEANYINVESTMENTS4HEOTHERTHREEINDUSTRIESRETAINATOTALOFAMONG THEMFORINVESTMENTS.OTEHOWEVERTHATTHECREAMERIESMANUFACTURERSARESELL INGWORTHOFMACHINES7HEREDOESTHEOTHERCOMEFROM4HETOTAL OFWAGESPAIDTOWORKERSISBUTONLYISSPENTONFINALCONSUMP TION(OUSEHOLDSARETHUSSAVINGOFTHEIRWAGESWHICHTHEYLENDTOTHE INDUSTRIESTOFINANCETHEIRCAPITALINVESTMENTS 4HEACCOUNTINGIDENTITIESINTHISECONOMYCHANGESLIGHTLYFROMTHEPREVIOUSONE
TOTALVALUEOFPRODUCTIONINTHEECONOMY '$0 PAYMENTSTOFACTORSOFPRODUCTIONWAGESANDPROFITSINTHISCASE SUMOFVALUEADDEDACROSSFIRMS EXPENDITUREONFINALPRODUCTORCONSUMPTIONPLUSINVESTMENTGOODS OUTPUTLESSINTERMEDIATECONSUMPTION
4HESYSTEMALSONOWINCORPORATESTWONEWIDENTITIES
SAVINGSINCOMEnCONSUMPTIONn
SAVINGSNETINVESTMENT
4HENEXTLEVELOFCOMPLEXITYADDSAGOVERNMENTTOTHEECONOMY)TCOLLECTSTAXES FROMFIRMSANDHOUSEHOLDSDECREASINGTHEAMOUNTTHEYCANCONSUMEBUTPROVID INGINRETURNPUBLICSERVICESSUCHASPOLICEEDUCATIONHEALTHSERVICESTRASHCOL LECTIONANDTHEMILITARY4HEGOVERNMENTFURNISHESTHESESERVICESBYPURCHASING INTERMEDIATECONSUMPTIONANDHIRINGEMPLOYEESWHORECEIVEWAGESJUSTASANY
OTHERPRODUCERWOULDDO4HEPRODUCTSARENOTSOLDTOTHEPUBLICTHROUGHAFREE MARKETHOWEVERBUTAREPROVIDEDINRETURNFORTAXES 4HEINTRODUCTIONOF THEGOVERNMENT INTOTHESYSTEMCHANGESTHEEQUATIONS
THATREPRESENTTHEECONOMY4OTALEXPENDITURESONFINALPRODUCTMUSTNOWINCLUDE THOSEOFTHEGOVERNMENTASWELLASHOUSEHOLDSSO
'$0FINALCONSUMPTIONINVESTMENTGOVERNMENTCONSUMPTION
&IGURE INTRODUCESTHEGOVERNMENTINTOTHEFLOWCHART!SITSHOWSTHEGOV ERNMENTBUYSLABORFROMHOUSEHOLDSANDGOODSFROMFIRMSINRETURNFORWHICHIT PAYSTHEMMONEY)NADDITIONHOUSEHOLDSANDFIRMSPAYTAXESTOTHEGOVERNMENT ANDRECEIVESERVICESINRETURN4HESERVICESARENOTDIRECTLYPRICEDINTHEACCOUNTS THEIRVALUEISREPRESENTEDBYTHEEXPENDITURESMADETOPRODUCETHEMBUTTHATDOES NOTCAPTUREWHATTHEYACTUALLYMAYBEWORTHTOTHESOCIETY-OREOVERTHEMON ETARYVALUEOFTHELABORANDGOODSPURCHASEDDIRECTLYBYTHEGOVERNMENTISUSUALLY GREATERTHANTHETAXESITCOLLECTSMOSTGOVERNMENTSRUNATADEFICITANDMAKEUP THEDIFFERENCEBYBORROWING
)NPRACTICENOCOUNTRYISSELF SUFFICIENT)NADDITIONTOCONSUMINGDOMESTICALLY PRODUCEDICECREAMTHEHOUSEHOLDSINTHISEXPANDEDECONOMYPURCHASECLOTHES IMPORTEDABBREVIATED-FORhI-PORTSv FROMTHERESTOFTHEWORLDANDHOUSEHOLDS INOTHERCOUNTRIESPURCHASEICECREAMEXPORTED8FORhE8PORTSv FROMTHISCOUNTRY 5NLIKEDOMESTICCONSUMPTIONIMPORTSDONOTCREATEJOBSFORPEOPLEINTHISECON
#ONVERSELYEXPORTSCREATEJOBSANDINCOMEFORPEOPLEHEREATHOMEBUTWITHOUT ACORRESPONDINGINCREASEINDOMESTICALLYCONSUMEDGOODS%XPORTSANDIMPORTS NEEDNOTBETHESAMEVALUEINFACTTHEYUSUALLYDIFFER4HEDIFFERENCEBETWEENTHE TWOEXPORTSLESSIMPORTSISSOMETIMESCALLEDNETEXPORTSORTHEBALANCEOFTRADE! COUNTRYTHATIMPORTSMORETHANITEXPORTSWILLHAVEANEGATIVEBALANCEOFTRADEONE THATIMPORTSLESSTHANITEXPORTSWILLHAVEAPOSITIVEBALANCEOFTRADE %XPORTSAREANOTHERPOSSIBLEUSEFORDOMESTICPRODUCTIONINADDITIONTOTHE
INVESTMENTFINALCONSUMPTION&#ORSIMPLY# INTERMEDIATECONSUMPTION)# ANDGOVERNMENTCONSUMPTION' SHOWNINTHEEARLIEREXAMPLES4HETOTALUSEOF DOMESTICPRODUCTIONISTHESUMOFTHESEFIVEUSES4HISCONCEPTOFTHENOUNUSETO MEANTHEALLOCATIONOFTHEECONOMYSPRODUCTIONWILLCOMEUPINLATERDISCUSSIONS OFBOTHTHECONVENTIONALANDTHEENVIRONMENTALACCOUNTS)TISPARALLELEDBYTHE USEOFSUPPLYTOMEANTHEGOODSAVAILABLETOTHEECONOMYFROMPRODUCTIONPLUS IMPORTS4OTALSUPPLYANDTOTALUSESMUSTBEEQUALSO
PRODUCTIONIMPORTSINVESTMENT&#)#'EXPORTS
3UBTRACTING INTERMEDIATE CONSUMPTIONAND IMPORTS FROMEACH SIDEGIVES THE FOLLOWING
PRODUCTIONn)#&#'INVESTMENTEXPORTSnIMPORTS
'$0WASDEFINEDEARLIERASPRODUCTIONLESSINTERMEDIATECONSUMPTIONSOTHISIS ANOTHERWAYTOEXPRESSTHEVALUEOF'$0)TISINFACTACOMPLETEDEFINITIONOFTHE COMPONENTSOF'$0ASPRESENTEDINTHENATIONALINCOMEACCOUNTSOFTENWRITTEN WITHTHEFOLLOWINGABBREVIATIONS
'$0#)#'8n-
&IGURE EXTENDSTHEFLOWCHARTONCEAGAINTOINCORPORATETRANSACTIONSWITHTHE 2/7INTOTHESCHEME
4HEDISCUSSIONSOFARHASBEENABOUTMONEYANDGOODSTHATFLOWTHROUGHTHEECON OMYINASINGLEYEARASIFTHEECONOMYCONSUMESEVERYTHINGITPRODUCESINTHEYEAR ITISMADE4HEINPUTSINTOPRODUCTIONINCLUDEDINTERMEDIATECONSUMPTIONINVEST MENTSANDLABORALLOFWHICHWEREBOUGHTINTHEYEARTHEYWEREUSEDFORPRODUC TIONTHATWOULDHAPPENTHATYEAR)NREALITYTHOUGHPRODUCTIONDEPENDSBOTHON INPUTSMADETHATYEARANDONINVESTMENTSMADEINPREVIOUSYEARS#APITALINVEST MENTSLASTFORMANYYEARS%ACHYEARWEBUYALITTLEBITMORECAPITALEQUIPMENTˆ REPLACEAMACHINEPERHAPSORGETANEWCOMPUTERˆANDRETIREALITTLEBITOFOLD CAPITALEQUIPMENTSUCHASTEARINGDOWNANOLDSHEDTHATCANNOLONGERBEUSEDOR GIVINGTHEOLDCOMPUTERTOANEPHEW"UTMOSTLYWECONTINUETOUSETHEEQUIPMENT THATWEBOUGHTINTHEPASTFEWYEARS 4HEDISTINCTIONBETWEENTHEEQUIPMENTWECONTINUETOUSEYEARAFTERYEARON
THEONEHANDANDTHEPURCHASESANDRETIREMENTSOFEQUIPMENTONTHEOTHERISAN EXAMPLEOFAMOREGENERALCONCEPTOFSTOCKSANDFLOWSWHICHHASAPPLICABILITYFAR
BEYONDEITHERACCOUNTINGORTHEENVIRONMENT#ONSIDERARESERVOIRBEHINDADAM 4HERESERVOIRHASALOTOFWATERINITTHEWATERBEHINDTHEDAMISASTOCK7HENIT RAINSUPSTREAMWATERFLOWSINTOTHERESERVOIRANDTHELEVELBEHINDTHEDAMRISES 4HERAINWATERCREATESAFLOWINTOTHERESERVOIRWHICHINCREASESTHESTOCKBEHIND THEDAM)FHYDROLOGISTSRELEASEWATEROVERTHEDAMTHATISAFLOWOUTOFTHERESER VOIRWHICHDECREASESTHESTOCKBEHINDTHEDAM 4HECONCEPTOFSTOCKSANDFLOWSHASAPPLICATIONINPERSONALFINANCIALPLANNING
ASWELL4HEMONEYYOUHAVESAVEDINTHEBANKISASTOCK9OURPAYCHECKISAREGULAR FLOWINTOTHEBANKANDYOUREXPENDITURESAREAFLOWOUTOFIT)FYOUEARNMORETHAN YOUSPENDYOUWILLINCREASEYOURSTOCKBUTIFYOUSPENDMORETHANYOUEARNYOU WILLDECREASEYOURSTOCK )NTHENATIONALINCOMEACCOUNTSEXISTINGINVESTMENTSAREASTOCK%ACHYEAR
SOMEADDITIONALINVESTMENTGOODSAREACQUIRED)NADDITIONEACHYEARSOMEEXIST INGINVESTMENTSMUSTBERETIRED4HEACCOUNTSCALLTHERETIREMENTSFROMSTOCKSCON SUMPTIONOFFIXEDCAPITAL#&# ORMORECOLLOQUIALLYDEPRECIATION 4HEDEDUCTIONOF#&#ISMADEAFTER'$0ISCALCULATEDITCONSTITUTESTHEDIFFER
ENCEBETWEEN'$0ANDNETDOMESTICPRODUCT.$0
.$0'$0n#&#
4HEACTUALMEASUREMENTOFDEPRECIATIONCANBEQUITEDIFFICULTHOWEVERSOINPRAC TICECOUNTRIESOFTENHAVETOUSE'$0RATHERTHAN.$0ASANINCOMEMEASURE4HE ESTIMATIONOFDEPRECIATIONISAMAJORANDCHALLENGINGELEMENTINENVIRONMENTAL ACCOUNTINGANDTHISBOOKWILLCOMEBACKTOITATMANYPOINTS
4HE3.!ISASTRUCTUREDINTEGRATEDACCOUNTINGSYSTEMUSEDTOPRESENTDATAON STOCKSANDFLOWS4HEACCOUNTSPROVIDEASYSTEMATICWAYTOTRACKANUMBEROFDIF FERENTELEMENTSOFTHEECONOMY
N CHANGESINOWNERSHIPOFGOODSSERVICESANDASSETSTHROUGHSALESWAGEPAY MENTSANDINVESTMENTTHESEAREREFERREDTOCOLLECTIVELYASTRANSACTIONSINTHE ACCOUNTS
N ACTORSINTHEECONOMYSUCHASHOUSEHOLDSFIRMSNONPROFITORGANIZATIONSAND SOONTHESEAREREFERREDTOASUNITSINTHEACCOUNTSAND
N ASSETSWHICHINCLUDEMANUFACTUREDCAPITALSUCHASFACTORIESNATURALCAPITAL SUCHASFARMSANDFINANCIALINSTRUMENTSSUCHASSECURITIES
-OSTECONOMICFLOWSTRACKEDBYTHEACCOUNTSINVOLVETRANSACTIONSˆEXCHANGESOF GOODSANDSERVICESCOLLECTIVELYTERMEDPRODUCTS ASSETSORMONEYˆBETWEENDIF FERENTUNITSOFTHEECONOMY4HEACCOUNTSALSOTRACKAFEWONE WAYTRANSFERSFOR WHICHNOTHINGISGIVENINRETURNSUCHASGOVERNMENTSUBSIDIES4HE3.!CLASSIFIES TRANSACTIONSINTOTHREEBROADTYPES#%#ETALn
N 4RANSACTIONSINGOODSANDSERVICESCOVERPRODUCTSTHATAREPRODUCEDORSOLDFOR INTERMEDIATEORFINALCONSUMPTIONORFORINVESTMENTDOMESTICALLYORINTERNA TIONALLY
N $ISTRIBUTIVETRANSACTIONSCONCERNTHEALLOCATIONOFTHEINCOMEGENERATEDBY PRODUCTIONTOCOMPENSATETHEFACTORSOFPRODUCTIONATERMINECONOMICSTHAT REFERSTOLANDLABORANDCAPITALˆTHATISTHEINPUTSTOPRODUCTIONOTHERTHAN INTERMEDIATECONSUMPTION
N 4RANSACTIONSINFINANCIALINSTRUMENTSINCLUDEGOLDCURRENCYSECURITIESLOANS STOCKSHARESANDSOON
)NTHENATIONALACCOUNTSDISTRIBUTIVETRANSACTIONSINCLUDEWAGESSALARIESAND OTHERBENEFITSPAIDTOWORKERSTAXESONPRODUCTIONANDIMPORTSSUBSIDIESPAID BYTHEGOVERNMENTANDINCOMEONPROPERTYINTERESTONBANKHOLDINGSDIVIDENDS ONSTOCKANDRENTPAIDONLANDORBUILDINGS )NADDITIONUNITSGIVEEACHOTHER INCOMEUSUALLYINTHEFORMOFMONEYWITHOUTRECEIVINGANYTHINGINRETURN4HIS TYPEOFTRANSACTIONISCALLEDATRANSFER4HELARGESTTRANSFERSARETAXESANDGOVERN MENTSUBSIDIESSMALLERAMOUNTSCONTRIBUTEDASGIFTSTOCHARITIESARELESSIMPOR TANTMONETARILYTHOUGHQUITEIMPORTANTPOLITICALLY )NADDITIONTOTRANSACTIONSTHEVALUEOFASSETSMAYCHANGEANDTHESECHANGES
AREACCOUNTEDFORASOTHERACCUMULATION4HESEINCLUDETHEDEPRECIATIONOFCAPITAL
PRICECHANGESTHESEAREREFERREDTOASCAPITALORHOLDING GAINSORLOSSES)NADDI TIONOTHERACCUMULATIONINCLUDESCHANGESINTHEVALUEOFASSETSASARESULTOFNATU RALDISASTERSCATASTROPHESSEIZUREANDOTHERUNPREDICTABLEEVENTS
4HEDISCUSSIONABOVEREFERREDLOOSELYTOHOUSEHOLDSFIRMSANDTHEGOVERNMENT ASTHEPLAYERSINTHEHYPOTHETICALECONOMY)NTHEMOREPRECISELANGUAGEOFTHE ACCOUNTSEACHACTORISANINSTITUTIONALUNITATERMTHATREFERSTOANYINDIVIDUALOR ORGANIZATIONTHATMIGHTBEAPLAYERINTHEECONOMY)NSTITUTIONALUNITSAREGROUPED INTOBROADERINSTITUTIONALSECTORS4HEACCOUNTSTRACKTHEFLOWSOFMONEYANDPROD UCTSWHICHINTHE3.!INCLUDEBOTHGOODSANDSERVICES AMONGTHESECTORSAND UNITS 4HENATIONALECONOMYINCLUDESFIVEINSTITUTIONALSECTORS
N MANUFACTURINGFIRMSORENTERPRISES SUCHASTHEDAIRIESANDICECREAMERIESTHE TECHNICALTERMISNONFINANCIALCORPORATIONS
N FINANCIALCORPORATIONSSUCHASBANKSWHICHFACILITATEBORROWINGANDLENDING BETWEENDIFFERENTUNITS
N GOVERNMENTSINCLUDINGTHOSEATTHENATIONALSTATEANDLOCALLEVELS N HOUSEHOLDSAND N NONPROFITORGANIZATIONSORhNONPROFITINSTITUTIONSSERVINGHOUSEHOLDSv.0)3(S ASTHEYARECALLEDINTHEACCOUNTS
4HISLASTSECTORISANARROWERGROUPOFUNITSTHANWOULDBEENCOMPASSEDBYTHE CONCEPTOFNONPROFITORGANIZATIONSASUSEDINTHE5NITED3TATES4HECRITERIONISNOT WHETHERTHEYARELEGISLATIVELYEXEMPTFROMPAYINGINCOMETAXBUTWHETHERTHEY AREPROVIDINGCHARITABLESERVICESTOHOUSEHOLDS4HUSMOSTCHURCHESAREINCLUDED INTHISCATEGORYBUTMOSTRESEARCHINSTITUTIONSAREINCLUDEDINONEOFTHEOTHER SECTORS %ACHOFTHESESECTORSISSUBDIVIDEDACCORDINGTOASTANDARDCLASSIFICATIONSYS
TEMSETOUTINTHE3.!)NPARTICULARMANYCOUNTRIESCLASSIFYTHEPRODUCTIVEACTIV ITYOFNONFINANCIALCORPORATIONSUSINGTHE)NTERNATIONAL3TANDARD)NDUSTRIAL#LAS SIFICATION)3)# SYSTEM4HE)3)#LIKEMOSTCLASSIFICATIONSYSTEMSISHIERARCHICAL INSTRUCTURE)TFIRSTDIVIDESALLECONOMICACTIVITYINTOSEVENTEENCATEGORIESEACH ASSIGNEDALETTERASSHOWNIN4ABLE 7ITHINTHEBROADCATEGORIESACTIVITIESAREBROKENDOWNINTODIVISIONSWHICH
AREASSIGNEDTWO DIGITCODES%ACHDIVISIONISSUBDIVIDEDINTOGROUPSDESIGNATED WITHTHREE DIGITCODESANDEACHGROUPISFURTHERDIVIDEDINTOCLASSESWITHFOUR DIGITCODES-ANUFACTURINGFOREXAMPLEHASTWO DIGITDIVISIONS3ECTORISTHE MANUFACTUREOFFOODPRODUCTSANDBEVERAGESITINTURNHASFIVETHREE DIGITGROUPS OFWHICHISTHEMANUFACTUREOFDAIRYPRODUCTS'ROUPHASONLYONEFOUR DIGITCLASSSODAIRYACTIVITIESARENOTFURTHERSUBDIVIDED!LLOFTHEACTIVITYOF THESIMPLESTVERSIONOFTHEICECREAMECONOMYWOULDFALLINTOCLASS 4HEUSEOFINTERNATIONALLYACCEPTEDCLASSIFICATIONSYSTEMSISCRUCIALTOENSURE
THECOMPATIBILITYOFRELATEDDATASYSTEMS3UPPOSESOMEONEDECIDEDTOBUILDA DATABASEONEMPLOYMENTBYINDUSTRIALSECTORBUTINSTEADOFUSING)3)#THISPER
SONINVENTEDHISORHEROWNCLASSIFICATIONSYSTEMINWHICHCOMPANIESPRODUCING DESSERTSWEREINONECATEGORYANDTHOSEPRODUCINGMAINDISHESWEREINANOTHER 4HENWITHIN)3)#EMPLOYEESMAKINGICECREAMWOULDFALLUNDERONEEMPLOY MENTCODEALONGWITHCANDYANDPASTRYWORKERSWHILEEMPLOYEESMAKINGCHEESE ANDYOGURTWOULDFALLUNDERANOTHEREMPLOYMENTCODEALONGWITHPEOPLEMAKING SOUP)FTHEOUTPUTDATAWERESTILLCLASSIFIEDUSING)3)#THEEMPLOYMENTDATACOULD NOTBELINKEDTOTHEOUTPUTDATABECAUSENOSIMPLEWAYEXISTSTOLINKTHETWOCLAS SIFICATIONSYSTEMS4HEDESIRABILITYOFUSINGUNIFORMCLASSIFICATIONSYSTEMSISAN ISSUETHROUGHOUTTHEDEVELOPMENTOFECONOMICANDOTHER INFORMATIONSYSTEMS ITSIMPORTANCECANNOTBEOVEREMPHASIZED #LASSIFYINGFIRMSACCORDINGTO)3)#CODEISNOTALWAYSSTRAIGHTFORWARD-OST
ENTERPRISESUNDERTAKEONLYONETYPEOFACTIVITY3OMEENTERPRISESHOWEVERUNDER TAKEANUMBEROFDIFFERENTACTIVITIESMAKINGITDIFFICULTTOPLACETHEMINASINGLE INDUSTRY!LTHOUGHTHESEAREFEWINNUMBERTHEYAREVERYLARGEINSIZEANDIMPOR TANTINTERMSOFTHELEVELOFTHEIRECONOMICACTIVITY4HEACCOUNTSHANDLETHISWITH TWOSTRATEGIES&IRSTENTERPRISESARESUBDIVIDEDINTOESTABLISHMENTSANDTHECLAS SIFICATIONMAYBEDONEATTHELEVELOFTHEESTABLISHMENTRATHERTHANTHEENTERPRISE !NESTABLISHMENTISAUNITTHATCARRIESOUTALLOFITSACTIVITIESATASINGLELOCATIONAND ENGAGESINONEPREDOMINANTTYPEOFACTIVITY&OREXAMPLEONEFACTORYOWNEDBYA MULTINATIONALCOMPANYCOULDCONSTITUTEANESTABLISHMENT 3ECONDTHEACTIVITIESOFTHEENTERPRISEORESTABLISHMENTARECLASSIFIEDASPRIN
CIPALSECONDARYORANCILLARY0RINCIPALANDSECONDARYACTIVITIESMUSTINVOLVEPRO DUCTIONOFGOODSANDSERVICESTHATCOULDBESOLDTOANOTHERCOMPANYEVENIFINFACT THEYMIGHTNOTACTUALLYBESOLD3OMETIMESTHEPRODUCTSAREUSEDELSEWHEREWITHIN THECOMPANYSUCHAS IFONEESTABLISHMENTPRODUCEDPARTS FORUSEBYANOTHER ESTABLISHMENTWITHINTHESAMEFIRM4HEPRINCIPALACTIVITYISTHEONETHATCONTRIB
BERELATIVELYINSIGNIFICANTINVALUEIFTHEYAREALMOSTASIMPORTANTASTHEPRINCIPAL ONETHEYFORMTHEBASISFORDEFININGANADDITIONALESTABLISHMENT!NCILLARYACTIVI TIESPRODUCEGOODSANDSERVICESTHATARENOTINTENDEDFORSALEELSEWHERESUCHAS CLEANINGSERVICESWITHINTHEPLANTACCOUNTINGANDRECORDKEEPINGORMARKETING 3EPARATEESTABLISHMENTSARENOTFORMEDFORANCILLARYACTIVITIES THESEACTIVITIES AREINCLUDEDWITHTHEESTABLISHMENTSWHERETHEYAREUSED!LLOFTHEOUTPUTOFTHE ESTABLISHMENTISALLOCATEDTOTHESECTORINTOWHICHITSPRINCIPALACTIVITYFALLS 4HISISOFTENACOMPROMISEESPECIALLYWHENUSINGAVERYDETAILEDINDUSTRIALCLAS
SIFICATION&OREXAMPLESUPPOSETHEDAIRIESPROCESSMILKFORICECREAMBUTDEVELOP ASECONDARYACTIVITYBAKINGCHEESEDANISHANDOTHERPASTRIES)NTHEORYTHEMILK SHOULDBECLASSIFIEDINCLASSDAIRYPRODUCTIONANDTHEPASTRIESINCLASS BAKEDGOODS)NTHEINTERESTSOFKEEPINGTHESYSTEMMANAGEABLEHOWEVERALLOFTHE DAIRIESACTIVITIESARECATEGORIZEDINTHECLASSOFTHEPRINCIPALACTIVITY3OMEDETAIL ISTHUSLOSTINTHECLASSIFICATION)NTHEENVIRONMENTALACCOUNTSTHISISAPARTICULAR CONCERNWHENTRYINGTOTRACKRECYCLINGINTHEACCOUNTINGSYSTEMASDISCUSSEDIN THESECTIONON2ECYCLINGAND7ASTE-ANAGEMENTIN#HAPTER
7ITHTHEINTRODUCTIONOFIMPORTSANDEXPORTSTHEICECREAMECONOMYNOWTRADES ITSPRODUCTSWITHTHERESTOFTHEWORLD2/7 ANDITMIGHTINVESTINORRECEIVE INVESTMENTFROMTHE2/74OBUILDNATIONALACCOUNTSFORTHISCOUNTRYITISNECES SARYTOBEMUCHMOREPRECISEABOUTWHATEXACTLYISPARTOFTHENATIONALECONOMY ANDWHATISINTHE2/7 4HE3.!HANDLESTHISBY INTRODUCINGTHECONCEPTOFRESIDENCE4RANSACTIONS
INCLUDEDINTHENATIONALACCOUNTSOFANECONOMYARETHOSEOFINSTITUTIONALUNITS THATARERESIDENTWITHINTHEECONOMYWHETHERTHOSETRANSACTIONSAREWITHOTHER RESIDENTINSTITUTIONALUNITSORWITHINSTITUTIONALUNITSRESIDENTSOMEWHEREINTHE 2/7INOTHERWORDSWHETHERTHEYAREDOMESTICTRANSACTIONSORINVOLVEINTERNA TIONALTRADE 4HE3.!DEFINESANINSTITUTIONALUNITASRESIDENTWHENIThHASACENTREOFECO
NOMICINTERESTINTHEECONOMICTERRITORYOFTHECOUNTRYINQUESTIONv#%#ETAL PARAGRAPH )NGENERALRESIDENTUNITSAREONESTHATAREPHYSICALLYLOCATED INTHECOUNTRYIRRESPECTIVEOFTHEIRCOUNTRYOFORIGINORTHENATIONALITYOFTHEIROWN ERSOREMPLOYEES5NITSNOTPHYSICALLYLOCATEDWITHINTHECOUNTRYAREPARTOFTHE 2/7WHICHISTREATEDASASINGLEINSTITUTIONALSECTORWITHOUTDISTINCTIONAMONG COUNTRIESOR)3)#CODES)TISIMPORTANTTOREMEMBERTHATTHISTECHNICALUSEOFTHE TERMRESIDENTTHOUGHINSOMESENSERELATEDTOTHECOMMON%NGLISHLANGUAGEIDEA OFARESIDENCEORHOMEDOESNOTPERTAINTOHOUSING 4HEPRECISEDEFINITIONOFRESIDENCEHASSIGNIFICANTIMPLICATIONSFORSOMEASPECTS
OFTHEENVIRONMENTALACCOUNTSBECAUSETHEACCOUNTSASSIGNPOLLUTIONOROTHER ENVIRONMENTAL IMPACTSTOTHECOUNTRYOFRESIDENCEOFTHEESTABLISHMENTCAUS INGTHEIMPACTˆWHICHISNOTNECESSARILYTHECOUNTRYWHERETHEIMPACTOCCURS 4OUNDERSTANDTHISCONSIDERWHATISMEANTBYECONOMICTERRITORY4HISBASICALLY INCLUDESTHEGEOGRAPHICAREAOVERWHICHTHEGOVERNMENTHASJURISDICTION-ORE PRECISIONISIMPORTANTHOWEVER&IRSTTHEECONOMICTERRITORYOFACOUNTRYINCLUDES THEAIRSPACETERRITORIALWATERSANDCONTINENTALSHELFOVERWHICHTHECOUNTRYCLAIMS
COUNTRYSECONOMICTERRITORY4HISISQUITEIMPORTANTWHENDETERMININGTOWHAT COUNTRYTOASSIGNFISHINGOFFSHOREMININGANDOTHERRESOURCE BASEDECONOMIC ACTIVITIES)TISALSOIMPORTANTWHENCONSIDERINGHOWTOALLOCATECOASTALPOLLUTION 4HEECONOMICTERRITORYOFACOUNTRYALSOINCLUDESTERRITORIALENCLAVESOFTHAT
COUNTRYINOTHERPARTSOFTHEWORLDSUCHASEMBASSIESMILITARYBASESRESEARCH STATIONSANDFOREIGNAIDAGENCIES4HUSTHE3WEDISHEMBASSYIN*APANISPARTOF 3WEDENSECONOMICTERRITORYANDTHE53MILITARYBASESIN'ERMANYAREPARTOFTHE 53ECONOMICTERRITORY)FAPOWERPLANTONA53BASECAUSESPOLLUTIONTHATAFFECTS 'ERMANSLIVINGNEARTHEBASETHATPOLLUTIONWOULDBEINCLUDEDINTHEACCOUNTSOF THE5NITED3TATESASPARTOFITSECONOMICACTIVITYANDWOULDNOTBEINCLUDEDINTHE 'ERMANACCOUNTSORECONOMY)NCONTRASTACOMMERCIALPOWERPLANTOWNEDBYA 53COMPANYANDLOCATEDELSEWHEREIN'ERMANYWOULDBERESIDENTIN'ERMANY ANDITSOUTPUTWOULDBEINCLUDEDINTHE'ERMANRATHERTHANTHE53ACCOUNTS 4HEECONOMICTERRITORYOFACOUNTRYINCLUDESFREETRADEZONESLOCATEDWITHINTHAT
COUNTRYINWHICHANOTHERCOUNTRYCANMANUFACTUREWITHOUTBEINGSUBJECTTOTAR IFFSOROTHERTRADERESTRICTIONS4HUSTHEFREETRADEAREASIN-EXICOWHERE53FIRMS PRODUCEFOREXPORTTOTHE5NITED3TATESOUTSIDEOFREGULAR-EXICANCUSTOMSREGULA TIONSAREPARTOFTHE-EXICANECONOMICTERRITORYNOTTHE53ECONOMICTERRITORY 4HESAMEAPPLIESTOOFFSHOREECONOMICACTIVITYITISACCOUNTEDFORINTHECOUNTRY WHEREITISPHYSICALLYLOCATEDNOTTHEHOMECOUNTRYOFTHECORPORATIONINVOLVED !NOTHERIMPORTANTTERMISCENTEROFECONOMICINTEREST!NINSTITUTIONALUNITIS
CONSIDEREDTOHAVEACENTEROFECONOMICINTERESTINACOUNTRYIFITHASPREMISES THEREHASBEENENGAGINGINECONOMICACTIVITIESTHEREhONASIGNIFICANTSCALEvFORAT LEASTAYEAROROWNSLANDORBUILDINGSTHERE#%#ETALPARAGRAPH 4HISDEFINITIONRAISESAFEWQUESTIONS7HATABOUTINSTITUTIONSOPERATINGINSEV
ERALCOUNTRIES7HENAMULTINATIONALCORPORATIONHASSUBSIDIARIESDOINGBUSINESS INMANYCOUNTRIESEACHSUBSIDIARYMAYBERESIDENTINITSOWNCOUNTRYOFOPERA TIONIRRESPECTIVEOFTHELOCATIONOFTHEMULTINATIONALHEADQUARTERS7HENACORPO RATIONDOESBUSINESSINSEVERALCOUNTRIESWITHOUTFORMALSUBSIDIARIESBUTMEETSTHE OTHERCRITERIAABOVETHENATIONALACCOUNTSTREATTHECORPORATIONSACTIVITIESINEACH COUNTRYASIFTHEYWERESUBSIDIARIESCALLINGTHEMQUASICORPORATIONS7HENACOR PORATIONDOESBUSINESSINAFOREIGNCOUNTRYBUTDOESNOTMEETANYOFTHEABOVE CRITERIAITSACTIVITIESARETREATEDASEXPORTSFROMITSHOMECOUNTRY &ROMANENVIRONMENTALPERSPECTIVEINTERNATIONALTRANSPORTATIONISALSOAKEY
ISSUEINUNDERSTANDINGRESIDENCEBECAUSEITISASIGNIFICANTSOURCEOFPOLLUTION ANDTHEINTRODUCTIONOFEXOTICSPECIES%SSENTIALLYTRANSPORTISHANDLEDACCORDING TOTHESAMEGUIDELINESASOTHERACTIVITY%CONOMICACTIVITIESCARRIEDOUTININTERNA TIONALWATERSORAIRSPACEINVOLVINGTRANSPORTATIONORTHEUSEOFMOBILEEQUIPMENT SUCHASDRILLINGRIGSORFISHINGBOATSAREASSIGNEDTOTHECOUNTRYOFRESIDENCEOFTHE CORPORATIONINVOLVED4HUSTHEREVENUESOFA2USSIANFISHINGVESSELINTHE.ORTH !TLANTICˆOUTSIDEANYCOUNTRYS MILELIMITˆWILLBEINCLUDEDINTHE2USSIAN ACCOUNTS7HENACORPORATIONUNDERTAKESACTIVITIESINANOTHERCOUNTRYSECONOMIC TERRITORYANDISCONSIDEREDRESIDENTTHEREˆEITHERTHROUGHSUBSIDIARIESORASAQUASI CORPORATIONˆITSTRANSPORTATIONACTIVITIESARETREATEDJUSTLIKEITSOTHERACTIVITIES 7HENITISNOTRESIDENTHOWEVERˆFOREXAMPLE$ANISHTRUCKSCROSSING'ERMANY AND3WITZERLANDTOTRANSPORTGOODSTO)TALYˆITSTRANSPORTATIONACTIVITIESAREPARTOF THENATIONALACCOUNTSOFTHECOUNTRYWHOSECOMPANYOWNSTHETRUCKS
4HEPRODUCTIONBOUNDARYSERVESTODEFINEWHICHACTIVITIESSHOULDBEINCLUDEDIN THEACCOUNTSANDWHICHSHOULDNOTBE)NGENERALACTIVITIESENCOMPASSEDWITHIN THEPRODUCTIONBOUNDARYUSELABORANDASSETSTOTRANSFORMINPUTSOFGOODSAND SERVICESINTOOUTPUTSOFOTHERGOODSANDSERVICES&ORANACTIVITYTOBEINCLUDED WITHINTHEPRODUCTIONBOUNDARYITMUSTBEPOSSIBLETOSELLORTRANSFERITSOUTPUT FROMONEECONOMICACTORTOANOTHER4HISDEFINITIONTHEREFOREINCLUDESPRODUC TIONOFALLGOODSANDSERVICESTHATENDUPINMARKETSASWELLASEVERYTHINGTHATIS GIVENAWAYBYGOVERNMENTORNONPROFITORGANIZATIONS3ERVICESTHATCOULDNOTBE PROVIDEDBYATHIRDPARTYAREALWAYSEXCLUDED&OREXAMPLEITISNOTCONCEPTUALLY POSSIBLETOPAYSOMEONEELSETOEXERCISEONYOURBEHALFSOTHISCANNEVERBEAN ECONOMICACTIVITY 4HISDEFINITIONOFTHEPRODUCTIONBOUNDARYLEAVESOUTAFEWKEYTHINGSTHATHAVE
BEENTHESUBJECTOFHEATEDDEBATEAMONGACCOUNTANTSECONOMISTSANDPEOPLE INTERESTEDINMEASURINGWELL BEING/NEISTHEOUTPUTOFUNPAIDLABORINTHEHOME SUCHASCOOKEDFOODCLEANINGSERVICESANDCHILD REARINGSERVICESALTHOUGHTHE SAMEITEMSAREINCLUDEDIFTHEYAREPURCHASED7HENTHEYARENOTMARKETEDTHESE ARELEFTOUTOFTHEACCOUNTSFORANUMBEROFREASONSTHEIRVALUEISDIFFICULTTOMEA SUREITISNOTTAXEDANDITDOESNOTINFLUENCETHEEXCHANGERATEOFTHELOCALCURRENCY TOMENTIONAFEW"ECAUSETHEVALUEOFTHESESERVICESISOFCONSIDERABLEINTEREST SOMECOUNTRIESANDRESEARCHERSARECOMPILINGSATELLITEACCOUNTSTOTRACKTHEMHOW EVERTHISISOUTSIDETHESCOPEOFBOTHTHE3.!ANDTHEENVIRONMENTALACCOUNTS 4HEPRODUCTIONBOUNDARYALSOOMITSTHEPOLLUTIONOROTHERHARMRESULTINGFROM
MANYECONOMICACTIVITIESSUCHASMANUFACTURINGANDTRANSPORTATION4HISISSUEIS VERYMUCHWITHINTHESCOPEOFENVIRONMENTALACCOUNTINGANDISDISCUSSEDATLENGTH IN#HAPTERSTHROUGHONPOLLUTION
.OTSURPRISINGLYTHE3.!ISPRECISEINITSDEFINITIONANDCLASSIFICATIONOFASSETS JUSTASINITSOTHERDEFINITIONSANDCLASSIFICATIONS)NTHE3.!TWOFEATURES DEFINEASSETS&IRSTTHEYMUSTBESUBJECTTOOWNERSHIPRIGHTSALTHOUGHTHEYNEED NOTACTUALLYBEOWNED3ECONDITMUSTBEPOSSIBLEFORTHEOWNERIFTHEREISONE TODERIVEECONOMICBENEFITFROMHOLDINGORUSINGTHEASSETSINECONOMICACTIVITY )TEMSMEETINGTHESECRITERIAARESAIDTOBEhWITHINTHEASSETBOUNDARYv4HEASSET BOUNDARYISQUITELIMITED&OREXAMPLEITDOESNOTINCLUDECONSUMERDURABLES CARSDISHWASHERSSTOVESANDTHELIKE BECAUSETHESERVICESTHEYPROVIDEACCRUETO HOUSEHOLDSANDTHEREFOREDONOTFALLWITHINTHEPRODUCTIONBOUNDARY)FTHEOWNERS OPENEDACATERINGBUSINESSOUTOFTHEIRHOMEHOWEVERTHESEWOULDNOLONGERBE CONSUMERDURABLESTHEYWOULDBECAPITALASSETSOWNEDBYTHEBUSINESSANDWOULD FALLWITHINTHEASSETBOUNDARYBECAUSETHECOOKINGWOULDFALLWITHINTHEPRODUC TIONBOUNDARY4HEASSETBOUNDARYDOESINCLUDEMANYNATURALASSETSPARTICULARLY LANDANDSUBSOILDEPOSITSOFMINERALSASWELLASCULTIVATEDCROPSFORESTSANDANI MALS)TDOESNOTINCLUDENATURALRESOURCESTHATCANNOTBEOWNEDHOWEVERSUCH ASTHEATMOSPHEREORTHESEANORDOESITINCLUDENATURALRESOURCESFROMWHICHIT ISNOTPOSSIBLETOMAKEMONEYSUCHASAFORESTINAPROTECTEDAREA!SDISCUSSEDIN #HAPTERSTHROUGHONASSETACCOUNTINGTHEENVIRONMENTALACCOUNTSBROADEN
THEDEFINITIONOFTHEASSETBOUNDARYSOTHATTHEYCANHANDLENATURALRESOURCESMORE FULLYTHANTHECONVENTIONAL3.!DOES 4ABLE SHOWSTHEOVERALLSTRUCTUREOFTHEASSETCLASSIFICATIONSYSTEM#%#ET
ALn !SSETSAREDIVIDEDFIRSTINTONONFINANCIALANDFINANCIAL.ONFI NANCIALASSETSINCLUDETHOSETHATARETHEOUTCOMEOFPRODUCTIONWITHINTHEECON OMYSUCHASBUILDINGSMACHINERYPLANTATIONSANDCULTIVATEDLIVESTOCK4HEYALSO INCLUDENONPRODUCEDASSETSTANGIBLEOBJECTSSUCHASLANDMINERALSBIOLOGICAL RESOURCESTHATWERENOTPRODUCEDTHROUGHHUMANACTIVITYANDINTANGIBLESSUCHAS PATENTSANDOTHERLEGALCONSTRUCTS.ONPRODUCEDASSETSAREAKEYISSUEINRESOURCE ACCOUNTINGANDASDISCUSSEDIN#HAPTERSTHROUGHTHEENVIRONMENTALACCOUNTS ADDFURTHERDETAILTOTHECLASSIFICATIONSYSTEMTOINCORPORATETHEM&INANCIALASSETS ANDLIABILITIES INCLUDEGOLDCURRENCYSECURITIESSTOCKSHARESANDSOONTHESEARE LESSIMPORTANTINENVIRONMENTALACCOUNTS
!PRODUCTINTHEACCOUNTSISAGOODORSERVICETHATBECOMESAVAILABLEASARESULTOF HUMANPRODUCTIVEACTIVITYWHICHINCLUDESCULTIVATION0RODUCTSCOULDBECONSUMER GOODSTHATAREUSEDUPQUICKLYORTHEYCOULDBECAPITALINVESTMENTSTHATFORMPART OFTHEASSETSTOCKSINTHEECONOMY(EREAGAINTHEACCOUNTSUSEASYSTEMFORCAT EGORIZINGPRODUCTSCALLEDTHE#ENTRAL0RODUCT#LASSIFICATION#0# #%#ETAL n 4HISDIVIDESALLPRODUCTSINTONINEBROADCATEGORIESSUCHASAGRICULTURE FORESTRYANDFISHERYPRODUCTSMETALPRODUCTSMACHINERYANDEQUIPMENTAND BUSINESSSERVICES4HESEAREFURTHERSUBDIVIDEDINTOMOREDETAILEDCATEGORIES !LTHOUGHSOMEPARALLELSEXISTBETWEENTHE)3)#CLASSIFICATIONOFINDUSTRIALSEC
TORSANDTHE#0#THEYDONOTMATCHUPENTIRELY-ANYENTERPRISESORESTABLISH
TIONTITLED7HO!RETHE0LAYERSTHEYARECLASSIFIEDWITHASINGLE)3)#CODE4HEREFORE WHENTALKINGABOUTPRODUCTIONCATEGORIESITISALWAYSIMPORTANTTOBEAWAREOF WHETHERYOUARECLASSIFYINGOUTPUTINTOPRODUCTCLASSESORENTERPRISESINTOINDUS TRIALCLASSESASTHEYWILLNOTBETHESAME4HEDIFFERENCESBETWEENTHESECLASSIFICA TIONSYSTEMSHAVESIGNIFICANTIMPLICATIONSFORTHEUSEOFTHEDATAASSOMEINPUT DATAWILLBEORGANIZEDACCORDINGTOINDUSTRYANDOTHERSACCORDINGTOPRODUCTAND THEYCANNOTALWAYSBECOMPARED
4HE3.!ANNEXESINCLUDEANUMBEROFOTHERCLASSIFICATIONSYSTEMSTHATAREIMPOR TANTTOTHEENVIRONMENTALACCOUNTS4HE#LASSIFICATIONOF)NDIVIDUAL#ONSUMPTION BY0URPOSE#/)#/0 ORGANIZESINFORMATIONABOUTHOUSEHOLDCONSUMPTIONINA THREE TIEREDHIERARCHICALSTRUCTUREWHOSEENTRIESFORWATERSEWERAGECOLLECTION REFUSECOLLECTIONANDOTHERENVIRONMENTALSERVICESARERELEVANTTOENVIRONMENTAL ACCOUNTS4HE#LASSIFICATIONOFTHE&UNCTIONSOF'OVERNMENT#/&/' ISSIMILARLY IMPORTANTINIDENTIFYINGGOVERNMENTACTIVITIESFORENVIRONMENTALPROTECTION4HE #LASSIFICATIONOF.ON 0ROFIT)NSTITUTIONS3ERVING(OUSEHOLDS#/0.) ANDTHE#LAS SIFICATIONOFTHE/UTLAYSOF0RODUCERSBY0URPOSE#/00 DISTINGUISHTHEENVIRON MENTALACTIVITIESOFNONPROFITSANDPRODUCERS
4HENATIONALINCOMEACCOUNTSAREORGANIZEDAROUNDTHESTRUCTUREOFTHEECONOMY PROVIDINGDATAONKEYELEMENTSANDBUILDINGTHEMINTOASINGLEINTEGRATEDSYS TEMTHATCLARIFIESTHELINKSAMONGTHEELEMENTS!TITSCORETHEECONOMYISBUILT OFHOUSEHOLDSANDFIRMSTHEFORMERSELLINGTHEIRLABORANDTHELATTERSELLINGTHE GOODSTHEYPRODUCEWITHTHATLABOR4OTHISFURTHERLAYERSOFCOMPLEXITYAREADDED (OUSEHOLDSSAVESOMEOFTHEIRWAGESANDFIRMSBORROWTHATMONEYTOINVESTIN MACHINERYUSEDFORPRODUCTION4HEGOVERNMENTPROVIDESSERVICESTOTHESOCIETY COLLECTINGTAXESWITHWHICHTOPAYFORTHEMANDPURCHASESGOODSANDSERVICESFROM FIRMSANDLABORFROMHOUSEHOLDS'OODSANDSERVICESAREBOUGHTFROMANDSOLDTO THERESTOFTHEWORLDPUTTINGTHESIMPLEECONOMYINTOAGLOBALCONTEXT!SERIESOF MATHEMATICALFORMULASORIDENTITIESSHOWSTHEQUANTITATIVERELATIONSHIPSAMONG THEDIFFERENTELEMENTSOFTHEECONOMY 4HEACCOUNTSUSEANUMBEROFCONCEPTSANDDEFINITIONSTOORGANIZEINFORMA
TIONABOUTALLOFTHISACTIVITY4HEYORGANIZEINFORMATIONABOUTTHETRANSACTIONSOR EXCHANGESINTHEECONOMYTHEACTORSWITHINTHESYSTEMANDTHEASSETSTHATTHEY HOLD4ODOSOTHEACCOUNTSRELYHEAVILYONANUMBEROFSTANDARDCLASSIFICATIONSYS TEMSFORTYPESOFECONOMICACTIVITYTYPESOFACTORSTYPESOFASSETSANDSOON4HEY ALSORELYONCAREFULDEFINITIONOFWHATCONSTITUTESPRODUCTIONANDWHOORWHAT IS CONSIDEREDTOBERESIDENTWITHINTHEECONOMYVERSUSPARTOFTHERESTOFTHEWORLD 4HECOMPATIBILITYOFDATAWITHINONECOUNTRYSACCOUNTSANDOFONECOUNTRYS ACCOUNTSWITHTHERESTOFTHEWORLDDEPENDSONTHESECLASSIFICATIONSANDDEFINI TIONS!PPRECIATINGTHEIRIMPORTANCEISKEYTOUNDERSTANDINGBOTHECONOMICAND ENVIRONMENTALACCOUNTS
