International Economics College 1
National Income & Balance of Payments
NOTE USE THE AMERICAN PERSPECTIVE (AS WE USE AMERICAN BOOK)
International Economics Studies:
- Economic interactions among different nations, that make up global economy.
- How inhabitants of nations interact through the flow of trade (goods and
services) and the flow of money and investments.
Two fields in international economics:
1. International Finance (Open economy macroeconomics/International
monetary economics)
2. International Trade
National Income account
Gross National Product (GNP): the value of all final foods and services
produced by a nation’s factors of production in a given time period (looks at
nationality of the owner).
Gross Domestic Product (GDP): measures the final value of all goods and
services, produced within a country (looks geographical where it is produced).
GDP = GNP – (Payments for home factors of production, produced abroad) +
(Payments for foreign factors of production, produced at home)
GNP is calculated by adding the value of expenditures on the final goods and
services that are produced, which are:
1. Consumption
2. Investment
3. Government purchases
4. Current account balance (export – import)
National income (Y) = C + I + G + CA
Products that are not purchased by households or the government are counted as
inventory investment by firms
Alternative representation of national income equation:
Everything available at home = Everything consumed/sold
Home production + Import = Home expenditures + export
Y + IM = (C + I + G) + EX
Net Foreign Assets: determine whether a country is a creditor of debtor nation by
measuring the difference in value of overseas assets owned by a nation, minus the
value of its domestic assets that are owned by foreigners (current account).
CA = EX – IM = Y – (C + I + G)
, - When export > import (CA>0 = current account surplus):
More income, than expenditures net foreign asset increase
- When export < import (CA<0 = current account deficit):
More expenditures, than income net foreign asset decrease
National Savings (S): national income that is not spent on consumption or
government purchases
S=Y–C–G
= Private Savings (Sp) + Government Savings (Sg)
= (Y – C – T) + (T – G) (T = taxes)
Current Account = national savings – investment
CA = S – I or I = S – CA
How to interpret this formula?
Countries can finance investments either by saving or by acquiring foreign funds. Our
savings are available to facilitate investments. What people save is used by banks to
channel through firms so they can invest. If our savings are not sufficient, we need
money from abroad. Foreigners are importing to our country, earning our assets. And
these assets are made available for us to invest.
CA = Sp + Sg – I
CA = (Sp – I) + (T – G)
Twin Deficit: refers to economies that have both a fiscal deficit (nation’s spending
exceeds revenue) and current account deficit (overseas spending exceeds revenue).
Balance of Payments
Balance of Payments: flow of all payments for transactions conducted between
home country and the rest of the world.
BOP: CA + Financial Account = errors (should be 0)
Provides information on nations profit or loss account (current account) and the
resulting change in a country’s net worth (compare with a firm’s balance sheet). It
accounts for its payments to and its receipts from foreigners during a certain period.
Each international transaction enters the accounts twice: once as a credit item (+)
and once as a debit item (-).
Three Main accounts on the balance of payments:
1. Current Account:
a. Import and export
b. Factor income: income on factors of production
c. Unilateral transfer: a one-way transfer of money, goods, or services
from one party to another (gift/aid)
2. Capital Account: records special transfers of assets (but minor account, so
NOT IMPORTANT!)
, 3. Financial Account: accounts for flows of financial assets, the difference
between sales of domestic assets to foreigners and purchases of foreign
assets by domestic citizens
Example 1:
You import a DVD of a Japanese computer game by using your debit card. The
Japanese game producer deposits the money in its bank account in San Francisco.
The bank credits the account by the amount of the deposit.
Debit: DVD purchase
–$30
(Current account: US good import)
Credit (“sale”) of deposit in account by bank
+$30
(Financial account: US asset sale)
Example 2:
You buy a share of British Petroleum (BP). BP deposits the money in a US bank.
Debit: Stock purchase –$90
(Financial account: U.S. asset purchase)
Credit: Bank deposit +$90 (financial
account, U.S. asset sale)
Types of financial (capital) flows:
Portfolio investment: aim is to acquire return on equity.
Foreign direct investment (FDI): capital flow to a country to create or expand
production abroad.
Two major components of the Financial Account:
1. Official (international) reserve assets (FA reserve portion):
Foreign assets held by central banks to cushion against financial instability,
also to prevent exchange rate movements.
2. All other (private) assets (FA non-reserve portion)
The level of net central bank financial flows is called the official settlements
balance or ‘balance of payments’.
It is equal to the sum of:
CA + FA (non-reserve) + Statistical discrepancy
Also, correct:
BOP = - FA (reserve)
|BOP| = |FA (reserve) surplus|
National Income & Balance of Payments
NOTE USE THE AMERICAN PERSPECTIVE (AS WE USE AMERICAN BOOK)
International Economics Studies:
- Economic interactions among different nations, that make up global economy.
- How inhabitants of nations interact through the flow of trade (goods and
services) and the flow of money and investments.
Two fields in international economics:
1. International Finance (Open economy macroeconomics/International
monetary economics)
2. International Trade
National Income account
Gross National Product (GNP): the value of all final foods and services
produced by a nation’s factors of production in a given time period (looks at
nationality of the owner).
Gross Domestic Product (GDP): measures the final value of all goods and
services, produced within a country (looks geographical where it is produced).
GDP = GNP – (Payments for home factors of production, produced abroad) +
(Payments for foreign factors of production, produced at home)
GNP is calculated by adding the value of expenditures on the final goods and
services that are produced, which are:
1. Consumption
2. Investment
3. Government purchases
4. Current account balance (export – import)
National income (Y) = C + I + G + CA
Products that are not purchased by households or the government are counted as
inventory investment by firms
Alternative representation of national income equation:
Everything available at home = Everything consumed/sold
Home production + Import = Home expenditures + export
Y + IM = (C + I + G) + EX
Net Foreign Assets: determine whether a country is a creditor of debtor nation by
measuring the difference in value of overseas assets owned by a nation, minus the
value of its domestic assets that are owned by foreigners (current account).
CA = EX – IM = Y – (C + I + G)
, - When export > import (CA>0 = current account surplus):
More income, than expenditures net foreign asset increase
- When export < import (CA<0 = current account deficit):
More expenditures, than income net foreign asset decrease
National Savings (S): national income that is not spent on consumption or
government purchases
S=Y–C–G
= Private Savings (Sp) + Government Savings (Sg)
= (Y – C – T) + (T – G) (T = taxes)
Current Account = national savings – investment
CA = S – I or I = S – CA
How to interpret this formula?
Countries can finance investments either by saving or by acquiring foreign funds. Our
savings are available to facilitate investments. What people save is used by banks to
channel through firms so they can invest. If our savings are not sufficient, we need
money from abroad. Foreigners are importing to our country, earning our assets. And
these assets are made available for us to invest.
CA = Sp + Sg – I
CA = (Sp – I) + (T – G)
Twin Deficit: refers to economies that have both a fiscal deficit (nation’s spending
exceeds revenue) and current account deficit (overseas spending exceeds revenue).
Balance of Payments
Balance of Payments: flow of all payments for transactions conducted between
home country and the rest of the world.
BOP: CA + Financial Account = errors (should be 0)
Provides information on nations profit or loss account (current account) and the
resulting change in a country’s net worth (compare with a firm’s balance sheet). It
accounts for its payments to and its receipts from foreigners during a certain period.
Each international transaction enters the accounts twice: once as a credit item (+)
and once as a debit item (-).
Three Main accounts on the balance of payments:
1. Current Account:
a. Import and export
b. Factor income: income on factors of production
c. Unilateral transfer: a one-way transfer of money, goods, or services
from one party to another (gift/aid)
2. Capital Account: records special transfers of assets (but minor account, so
NOT IMPORTANT!)
, 3. Financial Account: accounts for flows of financial assets, the difference
between sales of domestic assets to foreigners and purchases of foreign
assets by domestic citizens
Example 1:
You import a DVD of a Japanese computer game by using your debit card. The
Japanese game producer deposits the money in its bank account in San Francisco.
The bank credits the account by the amount of the deposit.
Debit: DVD purchase
–$30
(Current account: US good import)
Credit (“sale”) of deposit in account by bank
+$30
(Financial account: US asset sale)
Example 2:
You buy a share of British Petroleum (BP). BP deposits the money in a US bank.
Debit: Stock purchase –$90
(Financial account: U.S. asset purchase)
Credit: Bank deposit +$90 (financial
account, U.S. asset sale)
Types of financial (capital) flows:
Portfolio investment: aim is to acquire return on equity.
Foreign direct investment (FDI): capital flow to a country to create or expand
production abroad.
Two major components of the Financial Account:
1. Official (international) reserve assets (FA reserve portion):
Foreign assets held by central banks to cushion against financial instability,
also to prevent exchange rate movements.
2. All other (private) assets (FA non-reserve portion)
The level of net central bank financial flows is called the official settlements
balance or ‘balance of payments’.
It is equal to the sum of:
CA + FA (non-reserve) + Statistical discrepancy
Also, correct:
BOP = - FA (reserve)
|BOP| = |FA (reserve) surplus|
