Chapter 13 (2) National Income Accounting and the Balance of Payments.
National Income Accounting and the Balance of Payments
Transcript of National Income Accounting and the Balance of Payments
Chapter 12
National Income Accounting and the Balance of Payments
GNP = Expenditure on a Country’s Goods and Services
Y = Cd + Id + Gd + EX
= (C-Cf) + (I-If) + (G-Gf) + EX
= C + I + G + EX – (Cf + If +Gf)
= C + I + G + EX – IM
= C + I + G + CA
Domestic expenditure
Net expenditureby foreigners
expenditureon production
National income = value ofproduction
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Fig. 12-1: U.S. GNP and Its Components
Source: U.S. Department of Commerce, Bureau of Economic Analysis
Imports and Exports As a Fraction of GDP
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Canada France Germany Italy Japan Mexico UK US
Per
cen
tag
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f G
DP
imports exports
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Canada France Germany Italy Japan Mexico UK US
Per
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DP
imports exports
Imports and exports as a percentage of GDP by country, 2000. Source: OECD
GNP and GDP
• Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period.
• GNP = GDP + factor payments from foreign countries - factor payments to foreign countries
• GNP = GDP + net factor income from abroad
Expenditure and Productionin an Open Economy
CA = EX – IM = Y – (C + I + G )
• When production > domestic expenditure, exports > imports: current account > 0, trade balance > 0– when a country exports more than it imports, it earns more
income from exports than it spends on imports– net foreign wealth is increasing
• When production < domestic expenditure, exports < imports: current account < 0, trade balance < 0– when a country exports less than it imports, it earns less income
from exports than it spends on imports– net foreign wealth is decreasing
US Current Account as a Percentage of GDP, 1960–2004
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
1960 1965 1970 1975 1980 1985 1990 1995 2000
year
Source: Bureau of Economic Analysis, US Department of Commerce
defic
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rplu
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Fig. 12-2: U.S. Current Account and Net Foreign Wealth, 1976–2006
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007 release
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Fig. 12-3: U.S. Gross Foreign Assets and Liabilities, 1976-2006
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007
U.S. Current Account and Net Foreign Wealth
CA
• 2006:CA = -$788 billion
(6.0% of GDP)
GDP = $11,178 billion
• 2007:CA = -$731 billion
(5.3% of GDP)
GDP = $13,875 billion
NIIP
• 2006 – NIIP = -$2,226 billion
• 2007 – NIIP = -$2,442 billion
– Why did the US NIIP change by (-)$216 billion instead of (-)$731 billion?
Saving and the Current Account
• National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G).
Y – C – G
= (Y – C – T) + (T – G)
S = Sp + Sg
• National saving = private saving + govt saving
How Is the Current Account Related to National Saving?
CA = Y – (C + I + G ) CA = (Y – C – G ) – I
CA = S – I
current account = national saving – investmentcurrent account = net foreign investment
Note: I is domestic investment
• A country that exports more than it imports invests in foreign countries (by lending the CA surplus to foreigners).
How Is the Current Account Related to National Saving? (cont.)
CA = S – I or I = S – CA
• Countries can finance investment either by saving or by acquiring foreign funds equal to the current account deficit.
– a current account deficit or negative net foreign investment implies a financial capital inflow (through international borrowing).
How Is the Current Account Related to National Saving? (cont.)
CA = Sp + Sg – I
= Sp – GD – I
• GD, Government deficit (= G – T), is negative govt saving
• A high government deficit causes a negative current account balance, all other things equal.
Inverse Relationship Between Public Saving and Current
Account?
Source: Congressional Budget Office, US Department of Commerce
US current account and public saving relative to GDP, 1960-2004
-8%
-6%
-4%
-2%
0%
2%
4%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Perc
ent o
f GDP
current account public saving
Balance of Payments Accounts
• A country’s balance of payments accounts record its payments to and its receipts from foreigners.
• Record all international transactions in goods, services, assets
Services: travel, transportation, royalties, etc.
Assets: bank loans, deposits, stocks, bonds, etc.
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Table 12-2: U.S. Balance of Payments Accounts for 2006 (billions of dollars)
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Table 12-2: U.S. Balance of Payments Accounts for 2006 (billions of dollars, cont.)
3 Broad Accounts
• The balance of payment accounts are separated into 3 broad accounts:
– current account: accounts for flows of goods and services (imports and exports).
– financial account: accounts for flows of financial assets (financial capital).
– capital account: flows of special categories of assets (capital), typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks.
Credit and Debit
• Double-entry bookkeeping: Each international transaction enters the BoP accounts twice: once as a credit (+) and once as a debit (-).
• Credit: sale of domestic goods, services, assets to foreigners
• Debit: purchase of foreign goods, services, assets from foreigners
Some useful tips
• Credit: we sell to foreigners• Debit: we buy from foreigners• Treat payment as if we sell the financial assets
(e.g., deposits). Receipts are treated as if our purchase of financial assets.
• The payment part is recorded on the other side of the BoP table.
• Exceptions: unilateral transfers, debt forgiveness
Example 1
• You import a DVD of Japanese anime by using your debit card.
• The Japanese producer of anime deposits the funds in its bank account in San Francisco. The bank credits the account by the amount of the deposit.
DVD purchase(current account)
–$30
Credit (“sale”) of bank account by bank (financial account)
+$30
Example 2
• You invest in the Japanese stock market by buying $500 in Sony stock.
• Sony deposits your funds in its Los Angeles bank account. The bank credits the account by the amount of the deposit.
Purchase of stock (financial account)
–$500
Credit (“sale”) of bank account by bank(financial account)
+$500
Example 3
• US banks forgive a $100 M debt owed by the government of Argentina through debt restructuring.
• US banks who hold the debt thereby reduce the debt by crediting Argentina's bank accounts.
Debt forgiveness: non-market transfer(capital account)
–$100 M
Credit (“sale”) of bank account by bank (financial account)
+$100 M
More Terms• Private financial transactions include direct
investment, portfolio investment (security purchases), and bank claims and liabilities.
• Financial transactions are also classified either short-term or long-term. Long-term means maturity longer than or equal to 1 year.
• “Official” means assets treated as foreign reserves. They include foreign currencies, gold, Special Drawing Rights, and reserve position at the IMF.
• Balance of payments = current a/c + capital a/c + non-reserve financial a/c
Capital inflow and outflow
• Financial (capital) inflow – Foreigners loan to domestic citizens by acquiring
domestic assets. – This is a credit (+) transaction in the financial account.– A surplus on the financial account implies net inflow of
foreign capital.• Financial (capital) outflow
– Domestic citizens loan to foreigners by acquiring foreign assets.
– This is a debit (-) transaction in the financial account.– A deficit on the financial account implies net outflow of
foreign capital.
Current account
• Current account surplus (deficit) implies that the country lent to (borrowed from) the ROW in the given year.
Balance of payments
• Surplus: increase in official reserve assets
• Deficit: decrease in official reserve assets
• Discuss– Problems of continuing BoP deficits– Undesirable effects of BoP surpluses
Example
• CA = -$700 billion
• FA = +$500 billion (nonreserve portion)
• BP = ( )
• Explain in words what international transactions occurred in this country.