Chapter 13: National Income Accounting and the Balance of Payments

  • This chapter = “how can economic policy ensure that factors of production are fully employed?
  • Macroeconomics analysis emphasized 4 aspects of economic life
  • Unemployment: Factors that case it and how government can prevent it. Problem is to ensure full employment in economies open to international trade
  • Savings = the world saving rate determines how quickly the world stock of productive capital can grow
  • Trade imbalances - when income = spending then value of imports = exports
  • Money and price level – stability in price levels is an important goal for international macroeconomic policy
  • Tools include:
  • National income accounting = record for expenditures
  • Balance of payments accounting = keeps track of both changes in a country’s indebtedness to foreigners and the fortunes of its exports and import competing industries
  • Also shows connection between foreign transactions and national money supplies
  • Gross national product (GNP) the value of the final goods and services produced by the country’s factors of production and sold on the market in a given time period
  • Because output cannot be produced without air of input factors (like labour, capital, and other factors)
  • GNP does not take into account depreciation… Net national product = GNP – dep.
  • Unilateral transfers = gifts from residents of foreign countries … added to NNP
  • National income = GNP – depreciation + unilateral transfers but for now we say national income = GNP and the difference is of little importance in macroeconomics
  • GDP and GNP don’t really differ too much
  • In open economies, savings do not equal investments (in closed economy they are)
  • Countries can save in the form of foreign wealth by exporting more than they import
  • Countries can disave by reducing their foreign wealth by exporting less than they import
  • Consumption = largest component of GNP
  • Investments = portion of GNP used to increase nation’s stock of capital
  • More variable than consumption
  • Investments here don’t mean like real investments in stocks and stuff it means buying goods or services
  • Government purchases = federal, military spending, cancer research BUT not transfer payments
  • Can include investments and consumption

Closed Economy

  • Y = C + I + G
  • If a final good or service is not purchased by government or consumer right away it gets moved to inventory which increases investments

Open Economy

  • Y = C + I + G + EX – IM
  • since they can spend some income on imports and goods and services can be sold to foreigners so that too

Current Accounts (CA)

  • difference between exports and imports
  • CA = EX – IM …… OR Y – (C + I+ G) = CA
  • When imports > exports current account deficit (opposite = surplus)
  • Changes in current account can be associated with changes in employment
  • Measure size and direction of international borrowing
  • The country as a whole can import more than it exports only if it can borrow the difference form foreigners --- A country with an CA deficit must be increasing its net foreign debts by the amount of its deficit – don’t get this sentence
  • A country’s CA balance = the change in its net foreign wealth

Balance of Payments

  • Payments and receipts from foreigners – Liability Account
  • Receipt of money = credit
  • Payment = debit
  • Types of transactions recorded in BOP
  1. Arise from imports and exports go into CA (export = credit)
  2. Purchase or sale of financial ASSET into FA (USA purchase = debit in FA)
  3. Other activates resulting in wealth transfer = Capital account (copyrights and trademarks… wealth decline in US = debut in US capital account
  • Every transaction is both a debit and credit somewhere… double entry bookkeeping

BOP Identity

  • CA + Capital account = financial account …. Asset = L + SE
  • BOP divides exports and imports into 2 categories
  • Goods
  • Services
  • Income – international interest and dividend payments
  • Income and foreign investments = part of CA bcuz its compensation for services provided by foreign investments
  • Secondary income = unilateral transfers added to GNP (Y)

Financial Account

  • don’t include derivatives
  • official international reserves are foreign assets held by central banks as a caution against national economic misfortune
  • official foreign exchange intervention = when capital banks buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economy, inject money into economy or withdrawing it from circulation
  • BOP = level of net central bank financial flows, CA + capital account – non-reserve portion of FA

Summary

  • GNP = income received by its factors of production… income is divided into parts
  • Closed economy = national saving must equal investments
  • Open economy = GNP equals the sum of C +I +G +EX – IM
  • Trade doesn’t have to be balanced if the economy can borrow and lend to the rest of the world
  • The CA balance = the difference in economy’s outputs and its total use of goods
  • Open economy can save through domestic and foreign investments.
  • National savings = domestic investment + CA
  • All transactions between a country and the rest of the world are recoded in the country’s BOP… pay = debit and receive = credit
  • International asset transactions that are carried out by central banks = included in the FA
  • Reason intervention is important – change money in circulation
  • Deficit in BOP when it is running down its official international reserves or borrowing from foreign central banks


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