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Chapter 12
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• National income accounts
– measures of national income
– measures of value of production
– measures of value of expenditure
• National saving, investment and the
current account
• Balance of payments accounts
• National income accounts:
– Record expenditures that contribute to a country’s
income and output.
• Balance of payments accounts:
– Record the composition of the current account
balance and the transactions that finance it.
The National Income Accounts
• Gross Domestic Product (GDP)
= “domestic production”
The value of final goods and services produced domestically
(i.e., within a country’s borders) in a given time period.
• Gross National Product (GNP)
= “production by national factors”
The sum of domestic and foreign expenditure on the goods
and services produced by the nations’ factors of
production.
“domestic production” ≠ “production by national
factors” then GDP ≠ GNP:
– E.g., a U.S. factory located in Mexico contributes
to Mexico’s GDP but to the United States’ GNP.
– GNP = GDP + net receipts of factor income and
other ‘unilateral’ transfers from the rest of the
world.
GNP equals the total value of final expenditures:
GNP = Y = C + I + G + EX - IM
(12-1)
C = Consumption = amount consumed by private domestic
residents
*
I = Investment = amount set aside by private domestic
firms for future production
G = Government purchases = amount used by the
government
EX - IM = exports minus imports of goods and services
to foreigners = 0 in a closed economy
• Since World War II, on average, in the United States:
•
•
•
•
Consumption
Investment
Government purchases
Net exports




65 percent of GNP
15 percent of GNP
20 percent of GNP
0 percent of GNP
Imports and Exports
As a Fraction of GDP
50%
45%
Percentage of GDP
40%
35%
30%
25%
20%
15%
10%
5%
0%
Canada
imports
France
exports
Germany
Italy
Japan
Mexico
UK
US
National Income (NI), Trade balance (TB and
Current Account (CA)
NI=Income earned over a period of time, within or outside a
country, by a country’s factors of production.
Unless otherwise noted: GNP = National Income = Y
TB = EX - IM.
CA=TB+ net factor payments and other transfers from abroad.
We will ignore this difference in much of our analysis, so that:
EX - IM = TB = CA
surplus
US Current Account As a Percentage
of GDP, 1960–2004
2%
1%
0%
-1% 1960
1965
1970
1975
1980
1985
1990
1995
2000
deficit
-2%
-3%
-4%
-5%
-6%
year
Source: Bureau of Economic Analysis, US Department of Commerce
US Current Account, 1960–2004
billions of current dollars
100
0
-100 1960
1965
1970
1975
1980
1985
1990
1995
2000
-200
-300
-400
-500
-600
-700
year
Source: Bureau of Economic Analysis, US Department of Commerce
External balances in 2004: TB and CA
National Saving
– S=the portion of income, Y, not consumed either
by households (C) or by the government (G):
S=Y-C-G
– Since Y=C+G+I+CA, then:
S = I + CA
– A closed economy (CA=0) can spend its saving
on physical capital accumulation: S=I. An open
economy can use its saving to (i) add to its capital
stock or (ii) acquire foreign wealth: S=I+CA.
A country running a current account deficit is
eating off its wealth, held as net foreign assets
(NFA), or adding to its net foreign liabilities (and
vice versa). Similar to an individual that borrows
to finance his current consumption or investment
in capital goods. (E.g., student loans...)
The change in a country’s NFA equals its CA,
or the difference between how much it saves
and how much it invests at home:
NFA = CA = EX - IM = Y - (C + I + G)=S-I
US Current Account and Net Foreign Wealth, 1977–03
Government contribution to national saving
• Taxes, T = government’s income.
• National saving=Private saving Sp + government saving,
Sg: S = Sp + Sg
Private saving:
Government saving:
Sp = Y - T - C
Sg = T - G
CA = S - I = Sp + Sg - I = (Y - T – C) + (T - G) - I
(12-2)
This is an identity not a theory. It only says that we cannot change the
government’s budget, T-G, without changing something else. What
happens? Two views:
1. “Twin deficit”: a higher public deficit, G-T, worsens the CA.
2. “Ricardian Equivalence”: a higher public deficit is offset by
increased savings. (Japan’s stubborn CA surplus as an example.)
Does Government Deficit creates CA deficit?
US current account and public saving relative to GDP,
1960-2004
Percent of GDP
4%
2%
0%
-2%
-4%
-6%
-8%
1960
1965
1970
1975
1980
current account
1985
1990
public saving
1995
2000
Sources of current account changes
(share of GDP)
current
account
=
statistical
- investment +
error
savings
1981-1986
- 3.4
=
- 4.4
-
- 1.0
+
0.0
1991-2000
- 4.6
=
+ 1.1
-
+ 4.1
+
- 1.7
Current Account Balance: the 1980s and the
1990s
• High deficit reflecting low savings in 1980s (bad!)
• High deficit reflecting high investment since mid-1990s
(good!)
• But also low (public) savings
US CA, Private S & I and Government S:1970-2004
Balance of Payments Accounts
• A country’s balance of payments accounts
accounts for its payments to and its receipts
from foreigners.
• BOP=CA + FA + KA
CA=current account; FA=financial account; KA=capital account
• Each international transaction enters the
accounts twice: once as a credit (+) and once as
a debit (-).
Types of international transactions recorded in
the BOP
• CA: Purchases or sales (exports or imports) of goods
or services.
Exports=receipts from foreigners:
+
Imports=payments to foreigners:
• FA: Purchases or sales of financial assets (factories,
securities, claims on bank accounts, etc.)
Outflows of capital= Purchases of assets
Inflows of capital= Sales of assets
+
• KA: Asset transfers and other non-market transactions
(e.g., debt forgiveness). Ex:
Debt forgiveness (outflows of funds):
A foreigner transferring funds to the U.S.
+
How does the BOP balances?
Examples
•
You import a DVD of
Japanese anime by using
your debit card.
• The Japanese producer
of anime deposits the
funds in its bank account
in San Francisco. The
bank credits the account
by the amount of the
deposit.
DVD purchase
(current account)
–$30
Credit (“sale”) of bank
account by bank
(financial account) +$30
• You invest in the
Japanese stock market
by buying $500 in Sony
stock.
• Sony deposits your funds
in its Los Angeles bank
account. The bank
credits the account by the
amount of the deposit.
Purchase of stock
(financial account)
–$500
Credit (“sale”) of bank
account by bank
(financial account)
+$500
• US banks forgive a $100
M debt owed by the
government of Argentina
through debt
restructuring.
• US banks who hold the
debt thereby reduce the
debt by crediting
Argentina's bank
accounts.
Debt forgiveness: nonmarket transfer
(capital account)
–$100 M
Credit (“sale”) of bank
account by bank (financial
account)
+$100 M
The Fundamental Balance of Payments Identity
• Since every international transaction automatically
gives rise to two offsetting entries, the balance of
payments accounts satisfy a fundamental identity:
Current Account Balance +
Financial Account Balance +
Capital Account Balance =
__________________________
0
(except for statistical discrepancy!
which reflects different sources and timing of data)
Case study
The Growing U.S. Current Account Deficit
150 Years of U.S. Trade Balance
Percent of GDP.
8%
6%
4%
2%
0%
-2%
-4%
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
1860
-6%
Until 1997 the United States
borrowed from advanced economies
CA, blns of dollars
Non-U.S. advanced economies
300
200
100
0
-100
Rest of the world
-200
United States
-300
-400
2000
1995
1990
1985
1980
1975
-500
Since 1997 the U.S. has drained savings
from all the world
300
Non-U.S. advanced economies
200
100
0
-100
-200
Rest of the world
United States
-300
-400
2000
1995
1990
1985
1980
1975
-500