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Proprietors' Income (Line 8)

Proprietors' income measures the earnings of unincorporated businesses-proprietorships, partnerships, and producers' cooperatives-from their current business operations. It does not, however, include supplementary income of individuals derived from renting property. Capital gains and losses are excluded, and no deduction is made for depletion.

See also Rental income of persons, below.

Rental Income of Persons (Line 9)

Rental income of persons consists of money earned by persons from the use of their real property, such as a house, store, or farm. This category also includes imputed net rent of owneroccupants of nonfarm dwellings, and royalties received by persons from patents, copyrights, and rights to natural resources. Income received by persons primarily engaged in the real estate business is excluded here, but is counted in line 8, Proprietors' income.

This item does not include rent and royalties received by corporations and governments.

See also Imputation, p. 76.

Corporate Profits (Before Tax) and Inventory Valuation Adjustment (Line 10)

Corporate Profits Before Taxes (Line 11)

Corporate profits (before tax) and inventory valuation adjustment represent the earnings of corporations organized for profit, adjusted to remove the effect of inventory profits. Separately, line 11, corporate profits before taxes, is the net earnings of corporations organized for profit measured before payment of Federal and State profit taxes. Profits are reported without deduction for depletion charges, exclusive of capital gains and losses, but with other adjustments discussed in line 11.

Inventory valuation adjustment (line 16) is made in an attempt to remove the distortion of profits figures resulting from rising or falling prices reflected in the accounting practice of figuring costs of raw materials and components at original cost rather than replacement costs.

Corporate profits before taxes are the net earnings of corporations organized for profit measured before payment of Federal and State profit taxes. They are, however, net of indirect business taxes (line 20). They are reported without deduction for depletion charges and exclusive of capital gains and losses and intercorporate dividends.

Estimates of corporate profits before taxes for the National Income and Product Accounts are based on the annual tabulations of corporate income tax returns compiled by the Internal Revenue Service (IRS) with several adjustments. Depletion allowances are included. Estimates are made of profits not reported to the IRS, but disclosable by audit. Intercorporate dividends and capital gains are deducted. Bad debt expenses are measured by actual losses, not additions to reserves. And the profit or loss of bankrupt firms includes the gain from unsatisfied debt. Oil-well drilling costs are capital

Corporate Profits Before Taxes (Line 11) (Cont'd)

Corporate Profits Tax Liability (Line 12)

Corporate Profits After Taxes (Line 13)

Dividends (Line 14)

ized, State income taxes are added, as are the profits of Federally-sponsored lending agencies. And the costs of trading or issuing corporate securities are deducted. Income earned abroad is adjusted to equal the amount reported in the balance-of-payments statement. This procedure produces estimates of corporate profits in the business sector consistent with the other components of the income and product accounts.

Corporate profits before taxes published in the National Income and Product Accounts are different conceptually from those reported by business firms to their shareholders. Profits reported to shareholders reflect accounting practices which vary from those in the National Income and Product Accounts-particularly in the treatment of depreciation charges, the use of reserve methods of accounting, and the recognition of earnings on foreign investments.

See also Depletion allowance, p. 74.

Corporate profits tax liability reflects Federal and State taxes levied on corporate earnings.

In the national accounts, taxes on corporate profits are recorded on an accrual basis. In other words, they are assigned to the period when the profits are earned, rather than the period when the taxes are actually paid to the Internal Revenue Service or State governments.

Corporate profits after taxes are the earnings of U.S. corporations organized for profit after liability for Federal and State taxes has been deducted.

See also Depletion allowance, p. 74.

Dividends are cash payments made by corporations organized for profit to stockholders who are U.S. citizens. Capital gains distributions by mutual funds are not included here.

Dividends normally account for 40 to 60 percent of after-tax profits each year. Dividends in the form of additional shares of stock-for instance noncash payments such as a stock split -are excluded.

Undistributed Profits (Line 15)

Undistributed profits are the portion of a corporation's profit remaining after taxes and dividends have been paid. It is one of the two main components of the corporate cash flow (gross retained earnings of business); the second is capital consumption allowances.

Inventory Valuation Adjustment (Line 16)

The inventory valuation adjustment is applied to book profitsprofits before taxes-in order to exclude the gains or losses due to differences between the replacement cost of goods

Inventory Valuation Adjustment (Line 16) (Cont'd)

Net Interest. (Line 17)

taken out of inventory and their recorded acquisition cost. Such an adjustment is necessary because many business firms do not keep their books in terms of current market prices, but rather at original cost or some other basis.

This adjustment is required to prevent overstatement or understatement of earned profits in periods of changing prices. Generally, this item carries a minus sign during periods when prices of goods carried in inventory are rising, and a plus sign when inventory prices are falling.

Net interest measures the excess of interest payments made by the domestic business sector over its interest receipts, plus net interest received from abroad.

Interest paid by one business firm to another business firm is a transaction within the business sector and has no effect on the net interest payments or receipts of the sector. The same is true of interest payments within other sectors-as from one individual to another, or one government agency to another.

National Income (Line 18)

National income represents aggregate earnings which arise from the current production of goods and services. Earnings are recorded in the forms in which they are received, inclusive of taxes on those earnings. These earnings consist of compensation of employees, the profits of corporate and unincorporated enterprises, net interest, and the rental income of persons.

Because of the manner in which the National Income and Product Accounts are organized, national income is restricted to the earnings of the private sector of the economy plus wages and salaries earned by government employees. The profits of Government enterprises are not included in national income, but instead are treated as charges against the value of output not attributable to any particular factor of production.

Business Transfer Payments (Line 19)

Business transfer payments represent money paid by the business sector to persons for which no goods or services are received in return. Thus, there is no offsetting contribution to the economy's productive process. Major items included in this line are corporate gifts to nonprofit institutions, consumer bad debts, and personal injury payments by business to persons other than employees. Estimates of unrecovered thefts of cash and capital assets and cash prizes are also included.

Indirect Business Tax and Nontax Liability (Line 20)

Indirect business tax and nontax liability consists of those tax liabilities paid by business, other than employer contributions for social insurance (line 6) and corporate income taxes (line 12). Sales taxes, excise taxes, and real property taxes paid by businesses are the principal types of indirect taxes. Although these taxes are paid by a business firm, it is

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Gross Private Domestic Investment (Line 28)

Gross private domestic investment is composed of line 29, Fixed investment and line 34, Change in business inventories. Separately, fixed investment-new additions and replacements -is the change in private capital brought about through purchases of durable equipment and construction by business and nonprofit institutions. The basic purpose of fixed investment is to increase the capacity to produce goods and services for future consumption.

The change in business inventories represents the value of the increase or decrease in physical stock of goods held by business. Included in these inventories are raw materials, semifinished goods, and finished goods ready for sale or shipment.

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