Transcript International Business Economics

GDP & GNP & NDP & NNP
 Depreciation = GDP – NDP
 Depreciation = GNP – NNP
 Depreciation = the total of currently
produced machines, parts, inventories
of raw materials, maintenance, etc.
necessary to keep productive capacity
at a given and constant level.
 Hence, Net Product is sustainable
indefinitely.
COMPONENTS OF US GDP (1990s)
Consumption (Roughly)
Investment
General Government
Net exports
TOTAL
As an Equation
69%
15%
17%
-1%
100%
Y = GDP = C + I + G + X - M
Why “NET” exports?
•Consumption, Investment, Government purchases
and Exports include some imported
components and materials (metals, chips,
food products, ideas, fenders, energy,
services, etc.)
•These items can be accounted for when imported
in bulk, but not when integrated into final
products.
•Examples: Automobiles, Airliners, Beef,
Computers.
In other words:
C = CD + CM
I = ID + IM
G = GD + G M
X = XD + X M
Where D => Domestically produced & M =>
Imported. Hence,
Imports = CM + IM + GM + XM
NDP or NNP = Income earned
Once income has been earned, what do the
earners (consumers in general) do with it?
NNP = C + S + T
C still equals consumption, but
S = saving, and
T = taxes paid (to all governments)
Y = Income = NNP or NDP
Y = C + I + G + X-M; but
Y = C + S + T.
So it must be true that
I + G + X-M = S + T.
Therefore,
(I - S) + (G-T) + (X-M) = 0
Basic Accounts
I - S = the investment/saving account; the
two do not have to be equal, but if S > I, there is
money for other things.
G - T = the infamous government budget
deficit or surplus. G-T>0 => deficit.
X - M = the equally infamous current
account or trade deficit or surplus
If G - T > 0 (Budget Deficit)
G - T = Bond sales or government
borrowing; who lends to the government?
If S - I > 0, the excess can be used to
finance the government deficit.
If X - M < 0 (CA deficit) the capital inflow
can also be used.
If G-T>0, then S-I>0, X-M<0 or both.
Why?
SUMMARY
Remember the identity:
(I - S) + (G - T) + (X - M) = 0
(X - M) is large and positive in Japan;
therefore something else must be large and
negative.
(X - M) is large and negative in the US;
therefore something else must be large and
positive.
PROBLEMS
The US budget deficit, (G - T) > 0, recently was
equal to zero, even negative (surplus). Now we
have a deficit again.
What implications does that have for the trade
and saving/investment balances?
Asia’s turmoil => rising US current account or
trade deficits. Does that make sense to you?
Let’s Play With These
Equations
 Y – G = C + I + CA. What if G is
large/small, relative to Y?
 Y – T = C + S. What if T is large/small?
 Y – C = I + G + CA. What if C is
large/small?
 Y – C = S + T. What if C is large/small?
 Y – CA = C + I + G. What if CA < o or C >
0?
More Fun & Games
 S + T = I + G + CA. Net supply = net
demand. Net of consumption.
 Tax revenues provide resources for G.
 Saving provides resources for I.
 CA = Y – C – I – G. Why is CA < 0 in
some countries and not in others?