A blog post from BEA Director Vipin Arora
One of the best analogies I’ve ever heard for a balance sheet is that it’s like a selfie—it provides a snapshot at a specific point in time. I guess the difference is that the balance sheet provides a summary of assets and liabilities at that point in time—not some picture where I look lost and confused eating a piece of pizza.
Most of us associate balance sheets with private companies. And why wouldn’t we? Balance sheets have evolved over time in conjunction with double-entry bookkeeping, which emerged in the 13th and 14th centuries in Europe as a way for merchants to record, cross-check, and classify their business accounts. As double-entry bookkeeping modernized and spread throughout Europe and the rest of the world—and particularly with the emergence of joint-stock companies—the balance sheet took on its modern form.
Somewhere along the way people also realized that the balance sheet framework would be useful beyond private business. For example, personal balance sheets that provide a snapshot of an individual’s net worth are very popular. As are public sector balance sheets, such as those available annually in the Financial Report of the United States Government. At the Bureau of Economic Analysis, there are two important products I’d like to highlight that represent statistical balance sheets.
The first, our international investment position (IIP) accounts, are the balance sheet of our external assets and liabilities. The IIP accounts show the accumulated value of U.S.-owned financial assets in other countries and U.S. liabilities to residents of other countries. The difference between assets and liabilities is the U.S. net international investment position.
While the IIP accounts represent a statistical balance sheet of external financial assets and liabilities, the integrated macroeconomic accounts (IMAs) for the United States provide a more comprehensive statistical balance sheet of U.S. financial and non-financial assets and liabilities for the U.S. economy. The IMAs were developed jointly with the Federal Reserve Board and link production and income to changes in net worth on the balance sheets of households, businesses, and governments—information that historically has been unavailable from one source.
As with company balance sheets, both the IIP accounts and the IMAs provide key insights related to assets and liabilities at a given point in time. Each conveys important information on the risks and vulnerabilities of our economy to changes in market conditions, as well as on the links between different sectors of our economy and to the rest of the world. For example, understanding the types of investment held by foreign owners as recorded in the IIP accounts can shed light on the vulnerability of the U.S. economy to changes in external market conditions. And linking production, income, and types of financial and nonfinancial assets and liabilities to changes in net worth, as in the IMAs, allows for a better understanding of major developments in the U.S. economy.