National Account

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National Accounts
•  Gross Domestic Product (GDP) measures the final value of all goods and services that are produced within a country in a given time period. •  There are 4 types of expenditure: 1.  2.  3.  4. 

Consumption: expenditure by domestic residents Investment: expenditure by firms on plants & equipment Government purchases: expenditure by governments on goods and services Net exports (exports minus imports): net expenditure by foreigners on domestic goods and services

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GDP = Expenditure on a Country’s Goods and Services
National income = value of production

Y = Cd + Id + Gd + EX

expenditure on production

= (C-Cf) + (I-If) + (G-Gf) + EX = C + I + G + EX – (Cf + If +Gf) = C + I + G + EX – IM = C + I + G + NX Domestic expenditure Net expenditure by foreigners
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National Accounts
•  Gross National Product (GDP) measures the final value of all goods and services that are produced by domestic factors of production in a given time period. •  Q=Y+NFP •  Net Factor Payments (NFP) is the income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy. It includes wages and interest or dividend payments. 3

Expenditure and Production in an Open Economy •  Q= Y+NFP = C + I + G +NX+NFP •  Current account (CA) measures the size and direction of international borrowing. •  CA=NX+NFP •  Q= Y+NFP = C + I + G +CA

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Expenditure and Production in an Open Economy
CA = NX+NFP = Q – (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: net exports < 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 ♦ 

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US Current Account As a Percentage of GDP, 1960–2004
surplus

2% 1% 0% -1% 1960 -2%
1965 1970 1975 1980 1985 1990 1995 2000

deficit

-3% -4% -5% -6% year Source: Bureau of Economic Analysis, US Department of Commerce 6

US Current Account, 1960–2004
100
billions of current dollars

0 -100 1960 -200 -300 -400 -500 -600 -700 year Source: Bureau of Economic Analysis, US Department of Commerce 1965 1970 1975 1980 1985 1990 1995 2000

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US Current Account and Net Foreign Wealth, 1977–2003

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Saving and the Current Account
•  National saving (S) = national income (Q) that is not spent on consumption (C) or government purchases (G). •  Q – C – G •  (Q – C – T) + (T – G) •  Sp + Sg = S

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How Is the Current Account Related to National Saving?
CA = Q – (C + I + G ) implies CA = (Q– C – G ) – I CA + I = S current account + investment = national saving current account = net foreign investment

•  A country that imports more than it exports has low national saving relative to investment. 10

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 implies a financial capital inflow or negative net foreign investment.

•  When S > I, then CA > 0 and net foreign investment and financial capital outflows for the domestic economy are positive. 11

How Is the Current Account Related to National Saving? (cont.) CA = Sp + Sg – I = Sp – government deficit – I •  Government deficit is negative government saving ♦  equal

to G – T

•  A high government deficit causes a negative current account balance, all other things equal. 12

Balance of Payments Accounts
•  A country’s balance of payments accounts accounts for its payments to and its receipts from foreigners. •  Each international transaction enters the accounts twice:...
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