ECONOMIC accounts, like company accounts, may be of three types: (1) flow accounts, represented by national income statements, (2) asset-liability accounts, which are best represented at present by monetary statistics, and (3) a combination of the two that are probably best referred to as source-and-use-of-funds statements.1 Study of these three types may contribute to an understanding of economic activities. The purpose of this paper is to explore some of the relationships between the first two types, with a view to examining some of the basic problems to be considered in the construction of the third type. In particular, a draft of a possible source-and-use-of-funds statement drawn from the national income and financial accounts of an economy is presented, and some of its uses are indicated.

Abstract

ECONOMIC accounts, like company accounts, may be of three types: (1) flow accounts, represented by national income statements, (2) asset-liability accounts, which are best represented at present by monetary statistics, and (3) a combination of the two that are probably best referred to as source-and-use-of-funds statements.1 Study of these three types may contribute to an understanding of economic activities. The purpose of this paper is to explore some of the relationships between the first two types, with a view to examining some of the basic problems to be considered in the construction of the third type. In particular, a draft of a possible source-and-use-of-funds statement drawn from the national income and financial accounts of an economy is presented, and some of its uses are indicated.

ECONOMIC accounts, like company accounts, may be of three types: (1) flow accounts, represented by national income statements, (2) asset-liability accounts, which are best represented at present by monetary statistics, and (3) a combination of the two that are probably best referred to as source-and-use-of-funds statements.1 Study of these three types may contribute to an understanding of economic activities. The purpose of this paper is to explore some of the relationships between the first two types, with a view to examining some of the basic problems to be considered in the construction of the third type. In particular, a draft of a possible source-and-use-of-funds statement drawn from the national income and financial accounts of an economy is presented, and some of its uses are indicated.

In the draft statement, it is suggested that the national income accounts, the balance of payments statement, the government finance records, the monetary statistics, and other financial accounts for a country be consolidated in a final summary form. The term “national income statement” as used here includes the traditional national income, expenditure, and appropriation accounts that are presently constructed in a large number of countries. The term “financial account” includes those accounts that describe the asset-liability positions of certain sectors of the economy and therefore the sources and uses of funds arising not from the purchase and sale of goods, services, or real estate, but from borrowing and lending, and the purchase and sale of financial obligations, including money and quasi-money.2 It is not suggested that this draft is necessarily the one that will prove most useful for economic analysis; rather, the draft is intended to provide an example of the form that such a statement might take. Although other formulations will probably prove more useful, this draft suggests the manner in which various statements might be drawn together to provide one set of accounts indicating the magnitude of certain problems facing the authorities in individual countries.

Basic Structure of Financial Source-and-Use-of-Funds Statement

In the construction of this draft, it is proposed that an economy be divided into the following seven sectors and that economic accounts should summarize the transactions between and within those sectors: Sector 1, Household; Sector 2, Enterprises; Sector 3, Public Corporations; Sector 4, Local Governments; Sector 5, Central Government; Sector 6, Foreigners; Sector 7, The Monetary System.

While these sectors are similar to those recommended in the report submitted to the United Nations by a group of national income experts,3 two variations are suggested here: (1) that a separate sector be established for the Monetary System,4 and (2) that government enterprises as defined by the U.N. experts5 plus the government sector be divided into two sectors, Central Government and Local Governments. If only national income accounts are considered, the monetary system is not especially important. If, however, the development of additional forms of social accounting are considered, the monetary system immediately assumes enormous importance because of the relative size of its activities in asset transfers and because the purposes for which the monetary system holds assets are so different from those of any other sector.6 The U.N. experts proposed that local governments be combined with the central government, and that government agencies be combined with business. It is proposed here that the division of accounts into sectors be based on the different motivations influencing the activities of the members of each sector. If this is accepted as the proper basis for determining the composition of appropriate economic sectors, statistics should measure separately the accounts of each group that is uniquely motivated. It is clear that the central government is motivated differently from other parts of the economy. The central government is that part of the economy that is able to assume responsibility for the maintenance of a satisfactory level of economic activity. Therefore it can, for example, be expected to increase its expenditures at a time when those parts which are motivated by considerations of profit or loss reduce their expenditures. This consideration either does not apply or applies to only a limited degree to the decisions of local governments. The consolidation of central and local government financial accounts would combine those data that economic accounts should separate. Similarly, government enterprises as defined by the U.N. experts form a group whose motivation is subject to decision by the government, and the consolidation of their accounts with those of private enterprises also would combine those data which the economic accounts should separate.7

It is proposed that, for each sector of the economy, all monetary transactions be analyzed in the form outlined in Statement A, The Basic Structure of the Financial Source-and-Use-of-Funds Statement for a Sector. This statement opens with some of the entries for each sector from the usual national income and expenditure statement, and concludes with the savings and the direct investment by each sector. Direct investment is here defined as the purchase of real assets. The difference between the savings and investment of a sector measures the financing that it provides for other sectors, or the financing that it must draw from other sectors. This financing is analyzed in terms of borrowing and the acquisition of claims, including direct lending by sectors, to provide a statement of the financial transactions between and within sectors that lead to changes in the net asset position of each sector. Either the borrowings of each sector or the lending of each sector may be analyzed to show changes in the inter-sector relations within an economy. Since the borrowing by (or transfer of financial obligations from) one sector from each other sector is equal to the lending (or the acquisition of claims) by each of these other sectors to the borrowing sector, it is obvious that for every inter-sector sale of claims entry (including direct borrowing) there will be a corresponding inter-sector acquisition of claims entry. Consequently, only the transfer or the acquisition entries need be analyzed in detail. In this formulation, the acquisition of assets has been analyzed in the belief that changes in asset holdings are likely to be more significant than changes in debt positions.

The statement of the basic structure for the accounts of a sector identifies the symbols used to describe the transactions within and between sectors that might be included in a system of financial accounts.

Statement A.

The Basic Structure of the Financial Source-and-Use-of-Funds Statement for a Sector1

article image

Identified here as sector i.

At factor cost.

These entries differ slightly from the total goods and services payments and receipts as defined in the Balance of Payments Manual (Table I, items 1-8) of the International Monetary Fund. It is suggested here that investment income (Table I, item 6), other direct factor payments (Table IX, items 1, 2, 3, 4, 5, 9, 10, 11, 12, and parts of 14), and the tax and subsidy components of all items be separately allocated.

Other than money and quasi-money.

The superscripts to the symbols are of two different types: only one number in the superscript indicates that the symbol describes the total transactions of this type for the sector; two numbers in the superscript indicate a transaction between sectors or within a sector. The first number in the superscript identifies the sector making a payment to the sector indicated by the second number in the superscript. Thus L15 identifies the changes in central government debt holdings of households. In a system of direct transactions, this symbol would describe the money payments between households (Sector 1) and central government (Sector 5). The financial system, however, has many triangular transactions. Thus, this symbol would include the purchase of government debt from enterprises with an offsetting entry describing changes in the government debt holdings of enterprises (L25). In fact, it represents a transfer of money, associated with the purchase and sale of securities from or by households, that would accrue to the central government unless there were offsetting sales or purchases of government securities by other sectors. In the absence of household transactions in securities, these would have had to be matched by government transfers of money to or from these other sectors.

The subscripts differentiate between similar but different types of transfer. The symbols are used to indicate the similarity between transactions and the subscripts, the dissimilarity. Thus, all income transfers are identified by the symbol Y, while income produced, factor income, and disposable income are identified by the subscripts p, f, and n. Taxes and subsidies are identified by the symbols T and G, while direct payments are identified by the subscript d, and indirect payments by the subscript i.

For the purposes of this paper, there appear to be no serious conceptual problems involved in the definition of the entries in this set of accounts, provided mutually consistent measurements are used for all the transactions identified. For instance, investment is defined to include only the acquisition of and improvements to real capital equipment. It can be measured either gross or net (i.e., including or excluding allowances for depreciation and obsolescence), provided a consistent definition of consumption and consequently of savings is adopted. The savings of the government are defined as the government’s surplus. Here the magnitude of the total will be determined by the accounting decisions made regarding the allocation of government expenditure for the acquisition of permanent resources to consumption or to investment accounts. Any allocations, however, will have equal effect on the size of the calculated totals for the government’s surplus (savings) and its investment. The savings of the foreign sector are defined as the sum of the net payments by the country on both goods and services and donations accounts. The investments of the foreign sector are defined as including only the purchase of real capital in the country. The other items in the foreign capital account are included in the financial transactions between foreigners and domestic residents. Changes in the community’s holdings of money and quasi-money are considered to be of such significance in the asset-liability position of each sector that it is desirable to indicate them separately; therefore they are separated from other claims on the monetary system held by the nonbanking sectors.8 It may be argued that other similar changes in asset holdings should be shown separately; for instance, changes in short-term government debt holdings might be treated on the same basis as quasi-money.9

While there may be no serious conceptual problems involved, there are many statistical problems to be faced in the development of a complete system of financial economic accounts. Some of these statistical problems are very close to the realm of conceptual problems. One of the best known is the determination of the institutions that should be included in the banking sector and the liabilities that should be considered to be money, quasi-money, or other liabilities of the banking system. For members of a community, money, however defined, does not distinguish itself by a sharp line from other assets and, correspondingly, monetary institutions do not always distinguish themselves in a conveniently sharp way. There is, in fact, a whole range of assets having more or less of the monetary quality, and there is a whole range of institutions that are, in varying degree, monetary institutions. In constructing economic accounts, it is necessary, particularly in the determination of the monetary sector and of the items that should be included as money or quasi-money, to impose arbitrary distinctions. In using accounts constructed on the lines suggested here, the arbitrary distinctions that have been imposed must always be borne in mind. The exact position of arbitrary dividing lines must be remembered, as well as the fact that the sharp differentiation implied in many of the categories used for statistical purposes may not in fact be found in real life. The necessity for imposing these arbitrary distinctions does not, however, make it futile to construct a system of accounts along the lines suggested. No matter what decisions are taken, a system of accounts can be conceived that will be mutually consistent and that will demonstrate the means by which the community’s financial requirements have been met. Provided that the arbitrary distinctions which have been made are not forgotten, the repercussions of the financial flows that were associated with the community’s economic activities can be analyzed.

The conceptual problems to be faced are problems relating to basic concepts, rather than to definition. As indicated on pages 328–29, considerable work has already been done in this field, largely by individual institutions working independently. All the statements produced by these institutions differ in form and content. The problem that must be faced by each compiler is: “What is the best form for a system of financial accounts?” The draft system suggested here is intended only to provide a formal statement of a system that might be considered for adaptation by compilers and analysts of financial data.

There may be serious accounting problems to be faced in the adoption of mutually consistent definitions throughout this system of accounts. At present, national income accounts generally are based on the principle enunciated by the U.N. experts that transactions should be recorded “at the moment when a sum of money, or the equivalent, becomes due and assignable in respect of obligations to, goods sold or services rendered by, an enterprise, institution or person. The magnitudes appearing in the system must therefore in principle be considered not as actual payments and receipts but as flows of payables and receivables.”10 In other words, national income accounts are accrual accounts. Financial accounts, and particularly those recording money holdings, are records of changes in asset and liability holdings and consequently usually are records of completed payments, including payments made by the transfer of acceptable debt obligations.11 It would be desirable if all economic accounts could be put on a consistent basis (or bases). Here it is suggested that, insofar as one is interested in changes in asset-liability positions, the basis to be adopted should be that of completed payments. Some work has been done already on this basis in the development of current transactions accounts similar to national income accounts. Further work in this direction would be valuable.

Form of a Combined Statement of Financial Source-and-Use-of-Funds Accounts

A statement of financial source-and-use-of-funds accounts, combining the accounts of all sectors as outlined in the basic structure for the accounts of a sector, may be drafted in accordance with the suggestions given in Statement B. In this statement, symbols are provided for intra-sector transactions, except for the government, foreign, and banking sectors. It is assumed that consolidated accounts will normally be prepared for the government and banking sectors; consequently, for these sectors there can be no intra-sector entries. An entry for financial transactions between foreigners would be meaningless in the national statement.

It would be reasonable to present a statement excluding all intra-sector accounts. Their inclusion envisages a set of financial accounts outlining the total changes in a community’s outstanding assets and liabilities, and their exclusion would present a picture limited to changes in the financial relations between sectors. While the latter form of statement would be useful, and may in fact prove to be the only one obtainable for most countries, the form presented here appears to be more useful.

Statement B.

Combined Statement of Financial Source-and-Use-of-Funds Accounts1

article image

When the balance on current international account is included in savings or investment, total community savings must equal investment and the total of financing for the economy must be zero. However, the savings of any sector need not be equal to its investment. If the savings of a sector are in excess of its investment, the sector will have available financial resources that must be used to purchase claims on or repay debts to other sectors, or to increase its holdings of money and quasi-money. It is largely through the purchases of claims on other sectors that any difference between savings and investment in one sector is transferred to other sectors. Conversely, if a sector’s investment in real resources is in excess of its savings, it will have either to draw on the financial resources of other sectors by borrowing from or transferring claims to them, or to decrease its holdings of money and quasi-money.

Total borrowing from any one sector must, however, equal its lending, and the acquisition of claims on any sector must equal its total borrowing. This does not mean that there is a direct relation between the acquisition of claims on a sector by another sector and borrowing between the two sectors. However, if, as a result of borrowing and the transfer of claims between sectors, the total claims on a sector increase, then the sector concerned must have borrowed an equal amount.

Applications of Financial Accounts

If a statement along the lines of this model were computed for any country, it would provide certain information that would be useful to the authorities, particularly if questions of inflation, deflation, etc., were under consideration. Thus, if in any period the operations of the economic system on income, savings, and investment accounts produce certain financial requirements, these requirements will be met, but in meeting them the asset-liability position of the community will be altered. If the enterprise sector makes investments in real resources larger than it can finance out of its own savings, it will have negative financing. If this negative financing cannot be offset by borrowing from other nonbanking sectors, or the disposal of claims on other sectors, the enterprise sector will have to decrease its holdings of money and quasi-money or borrow from the banking system, either directly through bank loans or by the sale of claims to banks. This excess of investment over savings in the enterprise sector may lead to an increase in the incomes of the household sector. In the first instance, this increase will raise the savings of the household sector, and these savings may in large part be reflected in an increase in the money holdings of households or in financing part of the financing requirements of the enterprise sector. At later dates, however, this increase in money holdings of households may lead to an increase in their consumption and a tendency for the money value of the national income to expand. If under these circumstances production in real terms cannot be increased, commodity and factor prices will tend to rise.12 Statements based on the model outlined here might also be used to estimate the probable effects of contemplated changes in policy. If certain forecasts could be made of the probable volume of savings and investment by individual sectors, and assumptions could be made of the likely changes in assets that the community would accept, then the necessary changes in the accounts of the banking system that would satisfy these developments could be computed. If it were possible to assess the repercussions of these monetary changes on the rest of the economic system, and consequently the possibility of fulfilling the original decisions, a fairly complete forecast could be made of the probable inflationary or deflationary pressures that might be present in the forthcoming period.

The ideas in this paper originated in large part from a privately circulated paper by J. Lips, D. B. J. Schouten, and H. W. J. Bosman. Similar ideas are included in articles by J. Tinbergen and D. B. J. Schouten, “Die Anwendung des Nationalbudgets zur Beurteilung der Währungslage,” Wirtschaftsdienst (Hamburg), April 1954, pp. 199–206, and H. W. J. Bosman, “Enkele Beschouwingen Over het Monetair Overzicht,” Maandschrift Economie (Tilburg), March 1954 (reprinted by the Central Planning Bureau, Overdrukken, Nos. 32 and 30, The Hague, 1954). A formulation of financial accounts similar to that presented here is to be found in Central Planning Bureau, Central Economic Plan, 1954 (The Hague, March 1954), Table IV.4, “Monetary Analysis.” The tables in Netherlands Bank, Report for the Year 1953 (Amsterdam, 1954), Chapter II, are based on ideas similar to those in this paper. An analogous formulation is to be found in Rapports du Service des Etudes Economiques et Financières sur les Comptes Provisoires de la Nation de l’Année 1958 et sur le Budget Economique de l’Année 1954 …, Annex I, Rapport du Groupe de l’Equilibre de la Commission du Financement du Commissariat Général du Plan (Paris, 1954). The Annual Reports of the Bank of Italy contain a table, “The Flow of Savings and the Money Supply,” that provides an analysis of the national financing accounts along somewhat similar lines even if it is directed toward a rather different end. Similar concepts are also used in Morris A. Cope-land, A Study of Moneyflows in the United States (New York, National Bureau of Economic Research, 1952), in a forthcoming compilation of U.S. moneyflows statistics to be published by the Board of Governors of the Federal Reserve System, and in Henry K. Heuser, “Recent Financial Changes in Western Germany,” Federal Reserve Bulletin, October 1954, pp. 1041–50. Insofar as the formulations in this paper involve the use of national balance sheet data, reference should be made to J. R. Hicks, The Social Framework (Oxford, Clarendon Press, 1942 and 1952), Chapter X, for the United Kingdom; to Conference on Research in Income and Wealth, Studies in Income and Wealth (New York, National Bureau of Economic Research), Vol. XII, particularly to the paper by Raymond W. Goldsmith, “Measuring National Wealth in a System of Social Accounting”; and to the work of H. Rijken van Olst, B. Korn, and C. A. Oomens in Statistische en Econometrische Onderzoekingen, Central Bureau of Statistics (Utrecht), Vol. II, No. 3, September 1947, (“Uitkomsten van Enige Berekeningen Bettreffende het Nationale Vermogen in Nederland in 1938”), Vol. IV, No. 1, March 1949 (“Het Nationale Vermogen van Nederland en Zijn Verdeling, Eind 1947”), and Vol. V, No. 3, Third Quarter 1950 (“Het Verband Tussen de Nationale Balans en Het Stelsel der Nationale Jaarrekeningen”). After this paper had been written, a similar analysis of financial accounts was published in H. C. Edey and A. T. Peacock, National Income and Social Accounting (London, Hutchison’s University Library, 1954). Further references are to be found in Milton Gilbert and Richard Stone, Recent Developments in National Income and Social Accounting (Cambridge, University of Cambridge Reprint Series, No. 80, 1954).

*

Mr. Dorrance, of the Statistics Division, has been a lecturer at the London School of Economics, and a member of the staff of the Bank of Canada.

1

This paper is a revision of a paper prepared for discussion by the Third Regional Conference of Statisticians of ECAFE Countries, New Delhi, March 1954, and the Fourth Meeting of Technicians of Central Banks of the American Continent, Washington, May 1954. The author is indebted to Professor R. S. Sayers for several comments that have been incorporated in this paper.

The term “economic accounts” is used in this paper to describe the accounts frequently referred to as “social accounts.” This change in terminology was suggested by Richard Ruggles at the National Bureau of Economic Research, 1954 Conference on Research in Income and Wealth.

2

Time and savings deposits and similar obligations.

3

Statistical Office of the United Nations, A System of National Income Accounts and Supporting Tables: Report prepared by a group of national income experts appointed by the Secretary-General (Studies in Methods, No. 2, New York, 1953).

4

Those institutions that perform the banking functions of creating deposit money and issuing currency, including those institutions that are engaged primarily in the control of money-creating institutions (e.g., central banks).

5

All public enterprises that are financially integrated with general government and do not keep their own reserves apart from working balances.

6

This view is shared by the U.N. experts (Statistical Office of the United Nations, op. cit., p. 39).

7

The sectors suggested here are consistent with those used by the U.K. Central Statistical Office in the presentation of its national income and expenditure accounts, except that a separate sector has been included for the monetary system. See Central Statistical Office, National Income and Expenditure, 1946–53 (London, 1954).

8

It should be noted that quasi-money can take the form of liabilities of institutions outside the monetary system. Building societies and similar corporations should be included in the enterprise sector, even though some of their liabilities can be classed as “quasi-money.”

9

See the treatment in Netherlands Bank, Report for 1953 (Amsterdam, 1954).

10

Statistical Office of the United Nations, op. cit., p. 13.

11

For example, they are likely to record changes in outstanding time payment contracts, but not changes in outstanding consumer charge account debt. See, for instance, “1953 Survey of Consumer Finances, Part IV: Net Worth of Consumers, Early 1953,” Federal Reserve Bulletin, September 1953, pp. 940-47.

12

For further elucidation of the ideas contained in this paragraph, see Graeme S. Dorrance, “Problems in the Field of Financial Statistics,” Statistical Office of the United Nations, Report and Proceedings of United Nations International Seminar on Statistical Organization, 13 October-6 November, 1952 (New York, 1953), pp. 100-101.