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Understanding National Income Accounting: Flow of Funds Analysis

Explore principles and conventions of national income accounting, examining the flow of funds in various sectors like households, businesses, governments, and the foreign sector. Learn about the national balance sheet concept, major sector flows in the Canadian economy, and potential issues with this analysis approach.

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Understanding National Income Accounting: Flow of Funds Analysis

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  1. Chapter 9:Learning Objectives • Flow of Funds Analysis • Relative Contribution of each sector • The National Balance Sheet • A “bridge” to the next section of the text

  2. Principles and Conventions of National Income Accounting • National Balance Sheet vs. National Flow of Funds statement concepts, and their connection • Figure 9.1 : a diagrammatic exposition • By economic sector: • Households • Businesses • Governments • Foreign sector

  3. Income Statement & Balance Sheet

  4. Basic Identities A-L=NW FA(=M+OFA)+NFA-L=NW

  5. Figure 9.2: Flows of funds in the Canadian economy major sector

  6. Figure 9.3: A diagramatic version of the flow of funds

  7. Problems with Flow of Funds Analysis • Distinction between capital vs. current spending ignored • Historical values vs. market values • Nominal vs. real values

  8. Summary • National Income accounting provides a way to summarize how financial flows are organized in the economy • The flow of funds matrix provides the actual measure of the relative financial position of different sectors in the economy

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