National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview
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Part Two

If the accounting structure is to be of any use in analyzing economic events, the analyst must not be confused by the two types of relationships that it implies: those which can be seen (accounting relationships) and those which cannot be seen (functional relationships). The accounting relationships are nothing in themselves, but they are everything in that they provide the framework in which functional relationships can be estimated or guessed. The accounting relationships show what is and has been, but not necessarily what people are striving for or have striven for. The functional relationships represent the end result of economic events as they are willed --not by what society thinks are its goals--but by the set of psychological propensities and legal facts within which people live and function. There is always a tendency for the accounts to drive toward equality between accounting and functional relationships, and the achievement of this end is the essence of (static) economic equilibrium. A major task of the economist is to sort out the forces which upset equilibrium and those which tend to restore it; the accounting framework is a tempered climate in which this task is carried out.

If this does not make sense to you, go ahead and study Part Two. But come back and reread this page when you have finished.


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