National Accounts

Science advances through the interaction between theory and measurement. Without appropriate measurement, there is no way to assess the accuracy of theory quantitatively. Thus, it is no surprise that efforts to measure economic activity date back centuries. Among the early attempts to gauge national income were those of William Petty in the 17th century. By todays standards, Petty s statistics were extremely simplified, but the genesis of the idea was there. Nearly a century later, François Quesnay developed his Tableau Économique, which analyzed intersectoral flows. Quesnay s Tableau was a forerunner of modern day input-output analysis of the type pioneered by Wassily Leontief and is still practiced to this day.

The next major advances in national income accounting came in the early 20th century. Economists on both sides of the Atlantic began to break down systematically the income and expenditures of the national economy into categories such as consumption, saving, investment, government, and trade. Motivation for the development of the national accounts during this period was the desire among policy makers for accurate, timely information about the performance of the economy during the Great Depression and World War II.

A. L. Bowley and Colin Clark performed some of the early work in this area in the United Kingdom, but British efforts to create a system of national accounts took a giant step forward with the work of Richard Stone. Working with Clark and others in the British government during the World War II years, Stone helped create the major definitions used in national income accounting and set up the basic balance sheet concepts. The basic categories of spending and income were quickly incorporated into the growing body of macroeconomic theory research.

In the United States in 1913, the first director of research at the National Bureau of Economic Research, Wesley C. Mitchell, created one of the first definitive treatises on the business cycle. Though it was not actually national income accounting as we know it today, Mitchell's work aimed to quantify cyclical behavior in different sectors. Mitchell's student Simon Kuznets would carry the work further and complete a system of national accounts that resembles the system currently in use.

Both Kuznets and Stone received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Kuznets in 1971 and Stone in 1984). Stone's Nobel citation specifically singles out his work on national accounts. Kuznets received the prize for his empirical research on economic [Page 1178]growth—research that was informed and shaped by his work on national accounts.

Methodology

The crucial measure for any system of national accounts is gross domestic product (GDP), the value of final goods and services produced in a country in a year. GDP has replaced gross national product (GNP) as the primary indicator for countries in the United Nations (UN) National Accounts Main Aggregates Database. The difference between GDP and GNP is simply the net factor flows into or out of the country. Wages paid to foreign workers in the country, for example, are counted in GDP, not in GNP. Another way to look at it is that GNP measures the value of output produced, using domestic factors of production regardless of where they reside. With factor flows making up a significant component of economic activity, the difference between GDP and GNP is no longer trivial, and GDP is a better measure of the economic activity taking place within the country's borders.

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