Transcript Chapter 12 Balance of Payments Accounting

The National Income Accounts
 Gross national product (GNP)
• The value of all final goods and services produced by a
country’s factors of production, whether in-country or
abroad and sold on the market in a given time period
GNP is calculated by adding up the market value of all
expenditures on final output
Y = C + I + G + EX – IM
Y = C + I + G + CA
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National Income Accounting
for an Open Economy
Consumption
•The portion of GNP purchased by the private sector
to fulfill current wants
Investment
•The part of output used by private firms to produce
future output
Government Purchases
•Any goods and services purchased by federal, state,
or local governments
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The National Income Accounts
Figure 12-1: U.S. GNP and Its Components, 2000
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The National Income Accounts
National Product and National Income
• National Income: income earned by a nation’s factors of
production over some period of time.
– NI equals a country’s GNP net of receipts not available for
distribution (depreciation, indirect business taxes).
– Unilateral transfers from foreigners add to NI but not to GNP.
Gross Domestic Product (GDP)
• GDP measures the volume of production within a country’s
borders.
• GDP = GNP – [Net receipts of factor income from abroad].
– Income earned from production abroad obviously doesn’t
count in gross domestic product.
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National Income Accounting
for an Open Economy
• GNP is the sum of domestic and foreign expenditure on
the goods and services produced by domestic factors of
production, whether in-country or abroad:
Y = C + I + G + EX – IM
where:
–
–
–
–
–
–
Y is GNP
C is consumption
I is investment
G is government purchases
EX is exports
IM is imports
• In a closed economy, EX = IM = 0.
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National Income Accounting
for an Open Economy
 The Current Account and Foreign Indebtedness
• Current account (CA) balance
CA = EX – IM = Y – (C + I + G)
CA measures the size and direction of international
borrowing.
– If we import more than we export (CA<0), we must pay for
the difference by borrowing from foreigners.
– A country’s current account balance equals the change in its
net foreign wealth.
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National Income Accounting
for an Open Economy
CA = National income – (Domestic residents’ spending)
Y – (C+ I + G) = CA
CA balance is what we produce (Y) minus domestic demand
or “absorption”.
– We can “live beyond our means” if we run a current account
deficit, import more than we export, and borrow the difference
from foreigners.
CA balance is the excess supply of domestic financing.
– If we produce and earn more than we “absorb” (CA>0), we
necessarily lend our “excess” saving to foreigners
» Think of Japan
– If we want foreigners to buy more currently produced things from
us than we buy from them, we must lend them the difference
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The U.S. Current Account and Net Foreign Wealth Position, 1977-2000
… and our current account deficit has widened BIG TIME since 2000
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National Income Accounting
for an Open Economy
 Saving and the Current Account
• National saving (S): the portion of output, Y, that is not
devoted to consumption, C, or government purchases, G.
S = Y – C – G = Investment in a closed economy.
A closed economy can save only by building up its capital stock
An open economy can save either by building up its capital stock
or by acquiring foreign wealth
S = Y – C – G = I + CA
If saving doesn’t finance domestic investment, it’s got to finance
foreign investment.
CA surplus = Net Foreign Investment.
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Private and Government Saving
Domestic and Net Foreign Investment
Private saving (Sp): The part of disposable income that is
saved rather than consumed
Government Saving (Sg ): The excess of tax revenue (T)
over government spending (G)
Sources of Income = Uses of Income
C + I + G + CA = T + Sp + C
I = Sp + (T – G) – CA = Nat’l Saving + Capital Inflows
Nat’l Borrowing = – CA = (I – Sp) + (G – T) Twin Deficits
Sp = I + CA – Sg = I + CA – (T – G) = I + (G – T) + CA
Private saving must either finance domestic investment, a
government deficit, or it must be invested abroad.
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The Balance of Payments Accounts
 Three types of international transactions are recorded in
the balance of payments:
• Exports or imports of goods or services appear in the
current account
• Purchases or sales of financial assets appear in the
financial account
– The financial account is a new accounting category
– These transactions used to be included in the capital account
• Transfers of wealth between countries are recorded in the
capital account
– Magnitudes of transactions in this account are relatively small
– Most of what used to appear in the capital account now
appears in the financial account.
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The Fundamental Balance of Payments Identity
•Any international transaction automatically gives rise to two
offsetting entries in the balance of payments resulting in a
fundamental identity:
Current account + financial account + capital account = 0
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The Balance of Payments Accounts:Examples
of Paired Transactions
• A U.S. citizen pays $200 for dinner at a French restaurant in France by charging
•
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his Visa credit card (the U.S. trades assets for services).
This transaction enters the U.S. CA with a negative sign (a $200 import).
It is a $200 credit in the U.S. financial account (the French have lent us $200).
A U.S. citizen buys a $1000 Italian typewriter; the Italian company deposits the
$1000 in its account at Citibank in New York (the U.S. trades assets for goods).
This transaction enters the U.S. CA with a negative sign (a $1000 import).
It shows up as a $1000 credit in the U.S. financial account ($1000 inflow to Citi).
A U.S. citizen buys a $95 newly issued share of stock in the UK oil giant British
Petroleum (BP), paying with a check drawn on his money market account. BP
deposits the $95 in its own U.S. bank account at Citibank (the U.S. trades assets
for assets).
– The share enters the U.S. financial account with a negative sign (-$95, a
financial outflow).
– The check shows up as a $95 credit in the U.S. financial account (+$95, a
financial inflow to Citibank).
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The Balance of Payments Accounts
Table 12-2: U.S. Balance of Payments Accounts for 2000
(billions of dollars)
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The Balance of Payments Accounts
Table 12-2: Continued
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The Balance of Payments Accounts
 Official Reserve Transactions
• Central bank
– The institution responsible for managing the supply of
money
• Official international reserves
– Foreign assets held by central banks as a cushion
against national economic misfortune
• Official foreign exchange intervention
– Central banks often buy or sell international reserves in
private asset markets to affect macroeconomic
conditions in their economies.
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The Balance of Payments Accounts
• Official settlements balance (Balance of Payments): the
sum of the current account balance, the capital account
balance, the nonreserve portion of the financial account
balance, and the statistical discrepancy.
– The U.S. Balance of Payments in 2000 was -$35.6 billion, that is, the
balance of official reserve transactions with its sign reversed.
– Foreign central banks increased their dollar holdings by $35.9
billion while the Fed increased its holdings of foreign currencies by
$0.3 billion, a balance of $35.6 billion flowing out of the US.
– A negative balance of payments may signal that a country is
running down its international reserve assets or incurring
debts to foreign monetary authorities.
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