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Chapter # 12

National Income Accounting and

Balance of Payments

Presented by

Nadia

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International Economics

International economics describes and predicts

production, trade, and investment across

countries. It seeks to explain the patterns and

consequences of transactions and interactions

between the inhabitants of different countries,

regarding trade, investment and migration etc.

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Gross Domestic Product (GDP)

GDP measure the market value of all final goods

and services produced within a country in a

given period of time.

Formula for Calculation

GDP = consumption + investment +

(government spending) + (exports imports).

GDP = C + I + G + (X-M)

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Gross National Product (GNP)

GNP measures the market value of all finalgoods and services produced by a countryscitizens or residents.

Formula for CalculationGNP = GDP + NR (Net income inflow fromassets abroad or Net Income Receipts) - NP (Net

payment outflow to foreign assets).(The difference between GDP and GNP comesdown to two factors: ownership and location).

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National Income (NI)

National Income of a country includes GNP lessdepreciation plus net unilateral transfer.

Unilateral transfer includes gifts from residents of

foreign countries like aid, funds and donations etc.Formula for calculation

Net National Product (NNP) =GNP-Depreciation

(NI) = NNP + Net Unilateral TransferOR

NI = GNPDepreciation + Net unilateral Transfer

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Consumption, Investment, Govt

Purchase

The portion of GNP purchased by privatehouseholds to fulfill current wants is calledconsumption.

The part of output used by private firms toproduce future output OR the portion of GNPused to increase the nations stock is calledinvestment.

Any goods and services purchased by thegovernment are called government purchase.

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National Income for Closed and An

Open Economy

Closed Economy

Y= C + I + G

Open Economy

Y = C + I + G + (EX- EM)

Current Account (CA)

CA = EX EM

When a countrys imports exceed from exports ,the country has a current account deficit

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Savings and Current Account

A closed economy can increased its wealth only

by accumulating new capital.

As in a closed economy S = I

But an open economy can save either by building

up its capital stock or by acquiring foreign

wealth. In an open economy savings are not only

equal to investment.

In an open economy S = I + CA

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National Savings (Private Savings +

Government Savings)

Private Saving (Sp) is defined as the part of

disposable income that is saved rather than

consumed.

Disposable income is national income Y less the

net taxes collected by the government from

households and firms.

Sp = Y - T - C

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Continued.

Government income is its net tax revenue T,

and its consumption is government purchase.

So government savings are:

Sg = TG

National Saving

S = Sp + Sg

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Balance of Payments (BOP)Accounts

A countrys BOP accounts keep the record of

both its payment to and its receipts from

foreigners. Any transaction resulting in payment

to foreigners entered in the BOP accounts as a

debit and is given a negative (-) sign. While any

transaction resulting in a receipt from foreigners

is entered in a credit and is given a positive (+)sign.

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Types of international transaction

Three types of international transaction are

recorded in the balance of payments (BOP).

1. Current Account

2. Financial Account

3. Capital Account

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Continued.

Current account of BOP consists of receipts andpayments against exports and imports of goods,services and unilateral transfer.

Financial account of BOP consists of receipts andpayments against exports and imports of financialassets.

Capital account of BOP consists of receipts and

payments against exports and imports ofnonproduced, nonfinancial and possibly intangibleassets like copy rights, trademarks etc.

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Official Reserve Transactions

Official Reserve Transactions are made against thesale or purchase of official reserve assets by centralbanks.

Central bank of any country is the institutionresponsible for the supply of money. Central bankoften buy or sell international reserves in privateasset markets to affect macroeconomic conditions oftheir economies.

Whether a country faces surplus or deficit, toremove such disequilibrium, country have to dependupon officialreserve.

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Thanks!