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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