THE FLOW-OF-FUNDS ACCOUNTS
The accounting framework depends on certain definitional equalities, such as income equals product, saving equals investment, transfer payments made equal transfer payments received, and so forth. We shall now extend the framework to cover financial assets and liabilities, including money. Every financial asset is someone else's liability, and this equality lies at the core of the flow-of-funds accounting equations.
Not only does the equality of financial assets and liabilities provide a structure for understanding interrelated financial claims, but these claims are closely tied to the concepts learned in the national product accounts. The proceeds of saving, for example, must be used to acquire assets or to reduce liabilities; a sector may invest only if it saves or else reduces its assets or incurs liabilities.
National product data are thus not complete without a complementary set of accounts to show the manner in which one sector's saving is used to finance the investment of another sector, and the impact of financial transactions on income and product.