National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview

Chapter 13
THE MONETARY SYSTEM (Continued)

It has always been the custom, in Nolandia, for the Academy of Scholars to convene annually to review the national product accounts. At the end of 17X, only a few years after the establishment of the central bank, these discussions were extended to include the flow-of-funds accounts as well. During the first presentation in which the two systems were considered together, there was detailed questioning on the meaning of the accounts, since only a few scholars had had a chance to learn the flow- of-funds system thoroughly. Among these few was Scholar Q, who undertook to lead the discussion. The following is recorded in the Academy annals:

SCHOLAR Q. Let us open this meeting with a consideration of the national product accounts, which are outlined in Table 13-1. As you see, the accounts are divided into two parts, so as to facilitate their comparison with the flow-of-funds system. Part 1 contains transactions in goods, services, and transfer payments, in which one sector has dealt with another; there are external contra-debits and contra-credits in the three sector accounts. In part 2, the saving and investment items are isolated; here every debit in a sector account is offset by a credit in the saving and investment account, and vice versa.

Now, as you can see, the gross national product in Nolandia for the past year has been $7001p, of which $500 has been consumed ($4001g by households and $1001i by the government) and $2001k invested. This is a fairly high ratio of investment to GNP. The bulk of the saving for this investment was done by the producers themselves, who set aside $1151l in undistributed profits, in addition to $351m accumulated through depreciation allowances. Producers paid taxes of $501c, and they distributed $5001a to the factors of production, in the form of wages, dividends, interest, rent, and the like.

Thus business saved $1501l+1m to finance investment of $2001k. The rest of the saving, or $50 more, must have come from other sectors. We see, however, that the government ran a deficit, or dissaved to the tune of

-260-

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