International Econ Notes

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Chapter 12
National Income Accounting and the Balance of Payments

National Income Accounts

Gross National Product is the value of all final goods and services produced by its factors of production and sold on the mkt in a given time period. It can be divided into: 1. consumption
2. investment
3. govn’t purchase
4. current account balance

Capital Depreciation and National Transfers
GNP has to be equal to national income. In order for this to hold we need to make some adjustments.

1. GNP doesn’t take into account the economic loss due to the tendency of machinery and structures to wear out as they are used – depreciation. It tends to reduce the income of capital owners. GNP – depreciation = Net National Product

2. Unilateral transfers are pensions to retired citizens living abroad, foreign aid, etc. Net unilateral transfers are part of a country’s income but are not part of its product and they must be added to NNP in calculations of national income. National Income = NNP + Unilateral Transfers

Gross Domestic Product
The gross domestic product (GDP), a basic measure of an economy's economic performance, is the market value of all final goods and services produced within the borders of a nation in a year. GDP is supposed to measure the volume of production within a country’s borders. GNP = GDP + net receipts of factor income from the rest of the world. The net receipts are primarily the income domestic residents earn on wealth they hold in other countries less the payments domestic residents make to foreign owners of wealth that is located in the domestic country. GDP doesn’t correct (GNP does) for the portion of countries’ production carried out using services provided by foreign-owned capital.

NATIONAL INCOME ACCOUNTING FOR AN OPEN ECONOMY

Consumption – the portion of GDP purchased by private households. Investment – the part of output used by private firms to produce future output is called investment. Government purchases – any goods and services purchased by federal, state or local governments (transfer payments not included)

The national Income Identity for an Open Economy
Closed economy: Y = C + I + G
Open Economy: Y = C + I + G + X – IM
Current Account and Foreign Indebtedness
The difference between exports of goods and services and imports of goods and services is known as the current account balance. CA = EX – IM
When a country’s exports exceed its imports then there is a current account surplus and if imports exceed exports it is called current account deficit.

It also measures the size and the direction of international borrowing. When a country imports more than it exports it is buying more from foreigners then it sells to them and must somehow finance this current account deficit. Since the country can import more then it exports only if it can borrow the difference from foreigners, a country with a current account deficit must be increasing its net foreign debts by the amount of the deficit. Similarly, a country with a current account surplus is earning more from its exports then it spends on imports. This country finances the current account deficit of its trading partners by lending to them. The foreign wealth of a surplus country rises because foreigners pay for any imports not covered by their exports using IOUs that they will eventually have to redeem. A country’s current account balance = the change in its net foreign wealth. CA = Y – (C + I + G)

International borrowing and lending are called Intertemporal trade – country with a current account deficit is importing present consumption and exporting future consumption and vice versa.

Saving and Current Account
S - National Saving is the portion of output – Y that is not devoted to household consumption – C or govn’t purchases - G. S = Y – C - G
Closed economy: S = I
Open economy: S = I + CA
An open economy can save either by building up its capital stock or by acquiring foreign wealth,...
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