Transcript Devaluations

National Income, Saving,
& the Balance of Payments
CHAPTER 12
1
Questions to be Answered
What Information is Provided by Items in:
►
National Income and Product Accounts
►
Balance of Payments Accounts
2
National Income Account Entries
Y
C
I
G
EX
IM
T
GDP
GNP
Consumption
Investment
Government Purchases
Exports
Imports
Tax Receipts
3
Related Quantities
S
CA
G-T
Y-T
Saving
Current Account Balance
Budget Deficit
Disposable Income
4
Balance of Payments Account
Entries
CA
EX
IM
FA
changes in
changes in
Current Account Balance
Exports
Imports
Financial Account Balance
US Assets Held Abroad
Foreign Assets Held in US
5
GNP (Y)

GNP  Output  Income  Spending



Value of output = Income (compensation)
One person’s spending is another’s income,
hence total spending = total income
Per capita income = GNP/population &
measures the standard of living.
6
2000 GNP (Billions of U.S. $’s)
1 U.S.
10000
7 France
1500
2 China
4900
8 Russia
1500
3 Japan
3400
9
1500
4 India
2800
10 Brazil
5 Germany
2000
11 Mexico
900
6
1500
12 Canada
900
7
U.K.
Italy
1500
2000 Population (Millions)
1 U.S.
280
7 France
60
2 China
1250
8 Russia
150
3 Japan
130
9
4 India
1020
5 Germany
6
U.K.
Italy
60
10
Brazil
170
80
11
Mexico
100
60
12
Canada
30 8
GNP per Capita (U.S. $’s)
1 U.S.
36000
7 France
24000
2 China
3900
8 Russia
10000
3 Japan
26000
9
23000
4 India
3000
Italy
10 Brazil
8000
5 Germany
24000
11 Mexico
10000
6
25000
12 Canada
29000
9
U.K.
GNP versus GDP




GNP – ownership, production by US capital
& labor, both here & abroad
GDP – location, production within US
borders by both US & foreign owned capital
& labor
GNP = GDP + NFI
For US, GNP  GDP

Production by US factors abroad
 production by foreign factors in US
10
GNP versus GDP
11
GNP versus GDP
12
GNP versus GDP
13
Demand for Goods in a Closed
Economy

Demand for goods is Y = C + I + G



C – consumption spending by households on
durables, nondurables, & services
I – investment, purchases of physical
investment goods: new houses, buildings,
machinery, & inventories.
G – government purchases of goods &
services
14
Demand for Goods in a Closed
Economy
Investment
(according to the American Heritage College Dictionary)
1. The act of investing.
2. An amount invested.
3. A property or possession acquired for future
financial benefit.
4. A commitment, as of time.
5. A military siege.
15
The National Income Accounts
Figure 12-1: U.S. GNP and Its Components, 2000
16
United States
(billions of $’s)
C
I
6757
1833
68 %
18 %
G
1744
18 %
EX
1097
11 %
IM
1468
-15 %
⇛Y
9963
100 %
17
Japan
(trillions of ¥’s)
C
I
289
133
56 %
26 %
G
EX
IM
83
52
-44
16 %
10 %
-9 %
Y
430
100 %
18
Closed Economy Saving &
Investment

Importance of Saving (S) & Investment (I)

If S & I , capital formation , productivity ,
& per capita income 
19
Closed Economy Saving &
Investment

Saving is the supply of investment
financing, S = SP - (G - T)




Private saving (SP) is the initial source of
financing
SP = (Y - T) - C
The government budget deficit (G – T) is the
financing used by the government
The remainder is available to finance
(physical) investment
20
Closed Economy Saving &
Investment

Saving is also the supply of investment
goods, S = Y - (C + G)



Y is production
C + G is the goods used by households &
government.
The remaining goods are available for use as
investment goods.
21
Closed Economy Saving &
Investment

Algebraically, the supply of investment financing
is equal to the supply of investment goods
S = SP - (G - T) = (Y - T - C) - (G -T) = Y - C - G

In a closed economy, S & I are equal.
Y = C + I + G & S = Y – C – G, hence S = I
22
23
24
The National Income Accounts
Figure 12-1: U.S. GNP and Its Components, 2000
25
United States
(billions of $’s)
C
I
6757
1833
68 %
18 %
G
1744
18 %
EX
1097
11 %
IM
1468
-15 %
⇛Y
9963
100 %
26
Japan
(trillions of ¥’s)
C
I
289
133
56 %
26 %
G
EX
IM
83
52
-44
16 %
10 %
-9 %
Y
430
100 %
27
Demand for Goods in an Open
Economy

Demand for goods is Y = C + I + G + NX


C+I+G is domestic demand for goods (spending)
Net exports (NX) = exports - imports
If NX > 0, we run a trade surplus & international trade 
demand
 If NX < 0, we run a trade deficit & international trade 
demand

28
Current Account Balance (CA)
CA  NX = Y – (C + I + G)
= (Y – C – G) – I
=S–I
CA is goods production less domestic demand
CA is the excess supply of domestic financing
29
Current Account (CA)


CA surplus implies an outflow of goods, an
outflow of financing, & an  in net foreign
assets
CA deficit implies an inflow of goods, an
inflow of financing, & a  in net foreign
assets
30
Recession 2001?
GDP
2000
2000
2001
2001
2001
2001
2002
III
IV
I
II
III
IV
I
9875
9953
10028
10050
10098
10153
10313
31
Recession 2001
2000
2000
2001
2001
2001
2001
2002
III
IV
I
II
III
IV
I
nominal
GDP
real
GDP
9875
9953
10028
10050
10098
10153
10313
9219
9244
9230
9193
9186
9249
9363
32
33
Recession 2001
2000 IV
C
6289
I
1755
G
1593
NX
Y
-419
9244
2001 III
9186
34
Recession 2001
2000 IV
2001 III
C
6289
6371
I
1755
G
1593
NX
Y
-419
9244
9186
35
Recession 2001
2000 IV
2001 III
C
6289
6371
I
1755
1563
G
1593
NX
Y
-419
9244
9186
36
Recession 2001
2000 IV
2001 III
C
6289
6371
I
1755
1563
G
1593
1633
NX
Y
-419
9244
9186
37
Recession 2001
2000 IV
2001 III
C
6289
6371
I
1755
1563
G
1593
1633
NX
Y
-419
9244
-419
9186
38
REVIEW

Closed Economy:
GNP = Spending = Output = Income

Open Economy:
Spending = C + I + G
Output
= C + I + G + NX
(= GDP)
Income
= C + I + G + NX + NFI (= GNP)
= C + I + G + CA
(= GNP = Y)
39
Current Account for B-land


Spending for Mr. & Mrs. B
$100,000 = C;
I=G=0
Combined wages for Mr. & Mrs. B
$90000 = Exports
C = Imports; NX = -$10000
⇛ Output = C + I + G + NX
(GDP) = $100000 - $10000 = $90000
40
Current Account for B-land


Interest and Dividends for Mr. & Mrs. B:
$13000
Interest Payments for Mr. & Mrs. B:
$ 1000
⇛ Net Factor Income = $13000 - $1000
= $12000
41
Current Account for B-land


Current Account Balance = NX + NFI
= -$10000 + $12000
= $2000
GNP = GDP + NFI = C + I + G + CA
= $90000 + $12000 = $102000
= $100000 + $2000 = $102000
(=Y)
42
Financial Account for B-land

Option 1 Add $2000 to Checking Account
⇛ “Foreign” Assets increase by $2000
⇛ Financial Account Balance = -$2000
CA + FA = $2000 - $2000 = 0
43
Financial Account for B-land
Option 2 Reduce Visa Balance by $2000
⇛ “Foreign” Liabilities decrease by $2000
⇛ Financial Account Balance = -$2000

CA + FA = $2000 - $2000 = 0
44
Financial Account for B-land

Option 3 Put $2000 under bed
⇛ “Foreign” Assets increase by $2000
⇛ Financial Account Balance = -$2000
CA + FA = $2000 - $2000 = 0
45
46
The Balance of Payments Accounts
Table 12-2: U.S. Balance of Payments Accounts for 2000
47
National Income Accounting
for an Open Economy
Figure 12-2
U.S. CA & Net Foreign Wealth Position, 1977-2000
48
Is the US the World’s Largest
Debtor?

Yes, in 1997 net debt was close to $900 billion,
the world’s largest

However, US net debt was 11% of GNP.

Argentine net debt is $120 Billion

But this is 40% of GNP (interest is 4% of GNP)
49
Twin Deficits
US Trade Deficits in the 1980’s
US Trade Deficits (% of GDP)
1997
1994
1990
1987
1983
1980
1976
1973
1969
1966
1962
1959
0.02
0.01
0
-0.01
-0.02
-0.03
-0.04
50
Twin Deficits
US Trade Deficits in the 1980’s


1980’s - our trade deficits  to 3.5% of
GDP due to government budget deficits.
In the 1980’s, taxes  & government
spending 


Thus the demand for goods  & we imported
foreign goods
Also the demand for financing  & we
borrowed from foreigners
51
52
Financial Account



Gives details of ’s in net foreign assets
Financial account balance =
sales of US assets to foreigners
– purchase of foreign assets by US
Mirror image of the CA balance,
CA + FA = 0
53
The Balance of Payments Accounts
Table 12-2: Continued
credits
debits
54
Current Account Transactions
Examples

The US buys a $50 sweater from the British, &
the British use the $50 to buy a US computer
game. (The US trades goods for goods.)
Effect on CA?
CA = NX + net investment income + net transfers
= in net foreign assets
55
Current Account Transactions
Examples

A US investor trades a British investor a
$50 US bond for a British bond of
equivalent value. (The US trades assets
for assets.)
Effect on CA?
CA = NX + net investment income + net
transfers
= in net foreign assets
56
Current Account Transactions
Examples

The US buys a $50 sweater from the British,
& the British use the $50 to buy a US
government bond. (The US trades assets for
goods.)
Effect on CA?
CA = NX + net investment income + net transfers
= in net foreign assets
57
Current Account Transactions
Examples

A British tourists sells a US bond & uses
the proceeds on a trip to Disney World.
(The US trades services for assets.)
Effect on CA?
CA = NX + net investment income + net
transfers
= in net foreign assets
58
Current Account Transactions
Examples

A US plant in Britain earns 50 pounds &
deposits these profits in a London bank
(The US trades services for assets.)
Effect on CA?
CA = NX + net investment income + net
transfers
= in net foreign assets
59
Current Account Transactions
Examples

US gives Israel $5 million in foreign aid, &
Israel uses the 5 million to buy US military
goods.
Effect on CA?
CA = NX + net investment income + net transfers
=  in net foreign assets
60