# Gross Domestic Functional Flows: GDFF = P’Q’ + Π”Κ”; Revision and Technicalities

## [1]

We are working towards a reformation of the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis.  Our revision will, of necessity, first rely upon the existing NIPAs but will be revised into the formulations below.  We call our revision Gross Domestic Functional Flows rather than Gross Domestic Product.  It is an explanatory arrangement.  Though we use historical data for demonstration, the form of the rearrangement is to be applied to current flows.

The serious reader of CWL 15 is by now familiar with the first of these three equations; can understand the second in light of the first; and can grasp their combination in Gross Domestic Functional Flows.

P’Q’ = p’a’Q’ + p”a”Q”Basic R&M

Π”Κ”=π”α”Κ”Pure expansionary surplus+ π”α”Κ”R&M to self

GDFF = P’Q’ + Π”Κ”= p’a’Q’ + p”a”Q”Basic R&M + π”α”Κ”Pure expansionary surplus+ π”α”Κ”Surplus R&M to self

Prior to scrutinizing our revision of the NIPAs, the reader is encouraged to review CWL 15, 53-5.

On adjacent pages are the Diagram of Rates of Flow and a spreadsheet showing our revision of the NIPAs from a statistical compilation into an explanatory form. For an explanation of the BEA’s terms, the reader may consult the BEA’s Glossary (click here):

Our spreadsheet of the Revision of the NIPAs into Explanatory Form is below.  Until we can overcome some technical difficulties, the reader will have to print each of four pages separately, then cut and paste.  No big deal.  The row and column headings will make arranging the four pages easy.  The more difficult task will be working one’s way down and across to understand what we have done.

1. The “statistical” Gross Domestic Product (GDP) replaced by the “explanatory” Gross domestic Functional Flows (GDFF)

Gross Domestic Product= Consumption + Investment + Government + Exports – Imports

is replaced by

Gross Domestic Functional Flows=

P’Q’ + ΠΚ= (p’a’Q’ Basic outlays for basic purchases) + (p”a”Q”Ordinary surplus) + (π”a”ΚPurely expansionary surplus) + (π”a”ΚSurplus R&M to self)

The Gross domestic Product for all of 2016, per the NIPA as of revision date October 27,  2017, was \$18,624.5 billion, that is \$18.6245 trillion.

Diagram of Rates of Flow

Personal Consumption Expenditures                           \$12,820.7

Gross Private Domestic Investment                                  3,057.2

Net Exports of Goods and Services                                    -521.2

Government Consumption and Fixed Expenditures      3,267.8

Gross Domestic Product                                                 \$18,624.5

Here is our 4-page Revision of the NIPA:

An entire year is entirely too long a period for analysis of the “current”, purely dynamic process. Quarterly numbers would be better; monthly numbers would be even better to capture current Gross Domestic Functional Flows.

Again, like the primary, general, and universal specification of the relationships of planetary motion, or like the primary interdependent relativities among the pressure, wind speed, etc. of weather, this specification of the economic process is the specification of the primary relativities or the ideal general relations which explain the current, dynamic process.  It is general and applicable at all times to the secondary coincidental determinations, prices and quantities.  So, in this project, we are seeking simply to present the form of the primary explanatory relativities, which the BEA can apply to timely data so as to perform real analysis of the current process.

1. Consumption of Fixed Capital:

We use Consumption of Fixed Capital for our estimates of the repair and maintenance applied to  existing capital.  The BEA’s Glossary

Consumption and maintenance of fixed capital (CFC). The charge for the using up of private and government fixed capital located in the United States. It is the decline in the value of the stock of fixed assets due to wear and tear, obsolescence, accidental damage, and aging. For general government and for nonprofit institutions that primarily serve individuals, CFC serves as a measure of the value of the current services of the fixed assets owned and used by these entities. Related terms: capital consumption adjustment (CCAdj)capital consumption allowance (CCA).

Capital expenditures are made to both “improve” property and “add to” property plant and equipment; i.e. to repair and maintain depreciated property as well as to expand the stock of capital

Capital expenditures. Expenditures made to acquire, add to, or improve property, plant, and equipment (PP&E). PP&E includes: land, timber, and minerals; structures, machinery, equipment, special tools, and other depreciable property; construction in progress; and tangible and intangible exploration and development costs. Changes in PP&E due to changes in entity—such as mergers, acquisitions, and divestitures—or to changes in accounting methods are excluded. Capital expenditures are measured on a gross basis; sales and other dispositions of fixed assets are not netted against them.

So, for both the private sector and the government, we have made repair and maintenance of capital equal to the Consumption of Fixed Capital and assumed that the difference between Fixed Investment and the Consumption of Fixed Capital equals Purely Expansionary Investment.  This difference measurement must be refined by the BEA and others to the extent practically possible.  For the good of the nation and the globe, the BEA is invited and requested to develop an explanatory scheme.

the analysis itself will provide rather convincing indicators, and as expertise develops the new tricks of a new trade, there well may be discovered methods of attaining a sufficient accuracy for practical purposes. [CWL 15, 72]

1. Residential

The BEA’s Glossary describes Residential expenditures and structures:

Residential structures. Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers’commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment. Related terms: residential fixed investmentfixed investment.

Goods for extended personal consumption, such as durable furniture and privately-owned houses, contribute to a standard of living over a long period of time, however, they exit the processof production-for-exchange once and for all when the builder is paid to effect that sale which completes that product and enables the builder to carry on another round of production.[2]

The community of economists, politicians, and journalists lack an understanding of the economic process as strictly the current, dynamic process, an aggregate of current rates of current activities.  This failure regarding “currency” and “rates,” plus the failure to be scientifically analytic at an adequate level of abstraction, prevents them from identifying the precise functional difference between capital goods and houses; they mistakenly confuse functional capital, which remains in the process as a factor of production, and durable goods such as houses, which exit the productive process forever upon sale.

We have adjusted the NIPA’s flow of consumer goods by adding the producing and purchase of a residence. I.e housing is not treated as a surplus-capital product.

1. The financing of expansion

We are following the unassailable principles of scientific macroeconomics.  By those principles, purely expansionary investment is financed by what we call pure surplus income,[3]whose source may be either savings or, if necessary in the initial instance, credit from the money-creating banking system.  Pure surplus income underpins an expanding economy.  It must be explicitly identified in an explanatory theory; and it must be measured and monitored in the assessment and management of the economy.

Let be the fraction of surplus expenditure E” that goes to new fixed investment.  Thus the rate of total surplus expenditure consists of (1-v) E” for R&M of old fixed investment plus vE” for new fixed investment.

This pure surplus income is quite an interesting object.  When v is greater than zero, it is a rate of income over and above all current requirements for the standard of living, since that is provided by I’, and as well over and above all real maintenance and replacement expenditure, since that is provided by (1-v)I”. [CWL 15, 146]

Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15, 153]

Expansionary investment money flows absolutely must be distinguished from R&M money flows; it must be isolated and measured and monitored as a separate activity because: a) it depends upon savings and credit for its financing, b) it signals a tendency in the economic process due to lags to monetary and absolute rising prices in the basic circuit, c) it is necessary for conveying the understanding of the legitimacy of correlated, pure surplus, income flows swelling but unidentified beneath the veil of so-called corporate profits, dividends, retained earnings, and salaries; i.e. it is a key element in the precise analytical understanding of how the subsurface currents in the economy really function.  And, as we have said often elsewhere, to understand pure surplus income is to understand all of Functional Macroeconomic Dynamics.

The credit and savings constituting pure surplus income are treated below in “Dealings with the Redistributive Function.”

1. Consumer credit

Our Revision isolates the consumer credit currently being issued (symbolized simply as M’ = D’-s’I) to purchase basic goods and services over and above the amount of income currently being earned.  The consumer credit is composed of consumer borrowing by both private consumers and by the government.  This particular credit phenomenon is explained as entrepreneurs receiving back more money (M’) than they laid out (p’a’Q’ + p”a”Q”Basic R&M).  The diagram identifies it as the third tributary to the basic income constituting basic demand.  In the aggregate, at one end of M’ the private consumers and government incur financial liabilities (borrowing money); at the other end the entrepreneurs receive the extra money and purchase (lend money), directly or indirectly, financial assets, such as commercial loans and government bills and bonds.

To many, government spending is tricky; in Functional Macroeconomic Dynamics it is simple and perfectly explainable in terms of its relations in the economic process as shown by a superposed circuit passing out of the Redistributive Function rather than along the (c’O’ = p’a’Q’) function. [CWL 15, 173-76]

Government (deficit) spending is simple.  In each interval Z’ is spent at the basic final market for any type of goods or services that have no tendency to accelerate the productive process, while Z” is spent at the surplus final market for goods and services with that tendency.  There results a corresponding increment in income )to entrepreneurs) which, as it has nothing to buy at either final market, is counted as surplus and is moved to the Redistributive Function where directly or indirectly it purchases government securities.  Thus in each interval, labor, land, and capital are providing Z’ + Z” of goods and services.  Those who do the required monetary saving are built into a solid and richly endowed rentier class at the rate Z’ + Z” per interval.  The community possesses the goods and services but, unless it is going into business deliberately, their productive value will be slight.  Finally, the public debt mounts by the same rate, Z’ + Z” per interval. [CWL 15, 176]

The liability-credit balance of the borrowing government is a fiscal deficit; an analogous liability-credit to the everyday borrowing consumer is a personal deficit, i.e. a shortfall in income or an overspending of income, whichever way it is to be understood properly in the phase of the economic process.

1. Normal crossovers in a functional understanding

The Diagram illustrates and the Revision identifies the circulation of the functional “crossovers” composed of the basic circuit’s sending money (i’O’) over to the surplus circuit for repair and maintenance of display shelves, warehouses, trucks, offices, computer hardware and software, checkout devices, etc. and the surplus circuit’s workers crossing money back over (c”O” = p”a”Q”) to the basic circuit for carrots, shoes, etc.

The operations ratios and personal propensities in both circuits – R&M as a percent of total outlays of producers, and the propensities to consume of workers in both circuits should be somewhat similar.  Thus, if 20% of basic outlays go out of the basic circuit into the surplus circuit to purchase repair and maintenance items while 80% remains for the standard of living of the basic circuit’s workers, then 80% of surplus outlays (for R&M of both circuits) will go to the basic circuit for a standard of living for workers in the surplus circuit.[4]

1. Functional Flows in the Surplus Circuit

There are four operative functional flows in the surplus circuit – three wholly within the surplus circuit plus the one  –  just mentioned  —  passing through, (i’O’ ≅p”a”Q”Cost of basic circuit’s R&M). The three flows wholly within the surplus circuit are

1) the capital goods producers maintaining their own capital plant and machinery (π”α”Κ”Surplus R&M paid to self),

2.a and 2.b) (π”α”Κ”Purely expansionary),

2.a) capital-goods producers expanding the stock of their existing capital by, means of pure surplus income, whether borrowed through (S”-s”O”)or saved (i”O” = π”α”Κ”Purely expansionary) and

2.b) the amount borrowed by emergent surplus firms drawing on the redistributional function through (D”-s”I”) to acquire plant and equipment (i.e. units of enterprise getting into the capital-goods production business by,first, borrowing to acquire plant and equipment in order to, later, produce plant and equipment.)

1. Dealings with the Redistributive Function:

The BEA Table 5.1 Savings and Investment by Sector  (make this a click here)  https://www.bea.gov/scb/pdf/2017/05%20May/0517_selected_nipa_tables.pdf(page 112 of 138)

provides the dollar amount of net lending and borrowing on lines 35-41.  One is challenged to determine the gross magnitudes of the lending andborrowing that net to the BEA’s net magnitudes of lending orborrowing for each sector.

In the private sector, while one group of private individuals may borrow much out of the Redistributive Function in the form of mortgage loans and credit-card debt, another group of private individuals may direct much of their incomes into the Redistributive Function for liquidity reserves, relending, or speculation.

A little less than halfway down the attached spreadsheet of the Revision, we display the “horizontal-vertical” dealings with the Redistribution Function.  We also show a table entitled NIPA Table 5.1 netting to \$461.3 billion of borrowing, with columns for Private Business Households, and Government.

Normally there are flows along all eight of the vertical and horizontal channels.  Both circuits borrow and lend for supply and demand.  We show on our spreadsheet our initial detection of borrowing and lending, and we request the BEA and Fed to provide an accurate and fuller presentation

Credit to the surplus circuit would go through S” in the case of investment over and above the pure surplus income available to existing producers, and through D” in the case of new units of enterprise trying to get into the business.  Because we cannot distinguish S” from D” in the NIPAs, we have had to run all this through S”, thus categorizing all credit to the surplus circuit as credit to surplus supply.

The balance of Net Borrowing and Lending by Private Business, classified as (D”-s”I”) in the NIPAs, is \$36.1 billion of net lending (Table 5.1 line 37).  We began with private business saving-lending of \$620.6 billion (Table 5.1, line 4) and forced out \$584.5 for D”, private business borrowing to get to \$36.1 billion net saving and lending.

On any turnover, then, the possible sources of surplus income are the flows of money into surplus transitional receipts, namely, 1.) existing surplus firms maintaining the level of the previous turnover by spending on surplus supply the sum of i”O” and i’O’, 2.) existing surplus firms increasing the level of previous turnover by drawing on the redistributional function by (S”-s”O”), 3.) emergent surplus firms drawing on the redistributional function by (D”-s”I”) to acquire plant and equipment (i.e. units of enterprise getting into the capital-goods production business by acquiring plant and equipment in order to produce plant and equipment.). [CWL 15, 145]

1. Households:

To get an indication of the key amounts of borrowing vs. lending for households – incurrence of financial liabilities vs. acquisition of financial assets – we have selectively used the Fed’s Z.1 Flow of Funds Matrix,https://www.federalreserve.gov/releases/z1/current/html/default.htm

(click here).  Households’ and Non-Profit Institutions’ functional dealings with the redistributive function are (NIPA Table 5.1, line 38) a positive \$433.9 billion in that entity’s sense (opposite to our ±convention) that they were net lenders in the economy.  They had a pretty good year overall.  That is, they purchased financial assets, such as stocks, bonds, and other loan obligations.  We took as credit \$513.8 billion (Federal Reserve’s Matrix Z.1, line 29) and forced out \$947.7 billion for private lending, includinga discrepancy of \$147.2 billion, to get back to the NIPA’s net lending of \$433.9 billion (Table 5.1, line 38).

1. Government:

In the case of government, we were given by the NIPA a deficit of \$931.4 billion (Table 5.1 line 39). We have classified \$609.7 billion as borrowing D’ in the basic circuit as credit for  a measure of government services.

Consumption of fixed capital (CFC).… For general government and for nonprofit institutions that primarily serve individuals, CFC serves as a measure of the value of the current services of the fixed assets owned and used by these entities. Related terms: capital consumption adjustment (CCAdj), capital consumption allowance (CCA)

And we have forced out \$321.7 billion as borrowing D” in the surplus circuit to sum to \$931.4 billion.

Perforce, we have had to use sector flows to get started with the Revision.  But, sector flows are not purely functional flows.  We are dealing with functionings within and between circuits, not firms existing neatly in sectors..

An ‘accountant’s unity’: that is a category used in (conventional) accounting.  For Lonergan, (conventional) accounting generally denotes an enterprise within common sense which uses descriptive, as contrasted with explanatory terms (on these terms see Insight 37-38/61-62, 178-79/201-3, 247-48/272-73). Insofar as that is true, the accountant’s unity is not an adequate index for the normative, explanatory analysis of the productive process. [CWL 15, 26, ftnt 26]

Households may purchase a desktop computer for use as capital in an at-home business or for consumption in an enjoyable standard of living, or for a combination of both.  An automobile may be used purely as a capital item by a delivery service or purely as a consumer good by an individual. (‘although see Table 1.5.5 line 5 (personal consumption for motor vehicles and parts) and line 35 (investment in transportation equipment).  Airplane services may be charged to a personal vacation or to a corporate investment.

‘Query: How does one distinguish surplus from basic firms?

‘The distinction is not legal … but functional and to be understood by distinguishing the markets at which the firms’ products are sold. ..

‘While this distinction is empirical (resting on matters of fact) it is not empiricist (resting on easily ascertained matters of fact and preferably to be found in tables already drawn up and published).’ CWL 15, 144-45, ftnt 201]

Again, we are dealing with functionings, not firms.

I have insisted on focusing on the central issue: the need of a functional analysis of the productive process and its correlated monetary flow. [McShane 1980,200]

Lonergan’s analysis is concrete but heuristic.  It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria. [McShane 1980, 117]

The division is not a matter of social relations or of property or of the properties of things: it is a functional analysis. … The aim of the analysis is to reveal the possibilities of the productive process as a dynamic system.  One moves forward to that revelation in so far as one appreciates the different ways in which basic and surplus stages may relate. [McShane 1980, 119-20]

The analysis is functional and leads us to define five monetary functions which reveal a set of circulations of money. [McShane 1980, 121]

Now whatever the difficulties of measurement, the functional distinction is undeniably valid. [McShane 1980, 121]

the diagram is an aid to separating and understanding functions.  The circles are not places, nor are they, say, groups of capitalists, workers, bankers, exporters. … The diagram represents the functional journeys. [McShane 2017, 79]

you begin to glimpse the necessity and the plausibility of the functional analysis for the understanding and guiding of the globe’s economy. [McShane, 2017, 81]

We stick with our simple illustrations … to get you used to thinking in terms of these functional distinctions. [McShane, 2017, 85]

The difficulty here is the absence of the functional classifications, basic and surplus, and the rhythmic ramifications.  It is like trying to have a clear view on fire-hazardous chemicals prior to the emergence of the perspectives of Lavoisier and Mendeleev. [McShane, 2017, 87]

There are types of enterprise that in themselves are indifferently basic or surplus.

… a massive long-term acceleration is a massive development of surplus activity.  Further, one is not to think of this increment in Q” as concentrated in firms of certain types.  The distinction between basic and surplus is not a material nor a proprietary but a functional distinction. There are types of enterprise that in themselves are indifferently basic or surplus … [CWL 15, 118]

To review: We are working to revise the NIPAs into an explanatory form.  We have obstacles to overcome.

The NIPAs are based on accountants’ concepts and unities rather than on functional flows.

The NIPAs do not adequately break out borrowing vs. lending among  wage earners, entrepreneurs, and government.