International monetary economics
National Income Accounting and the Balance of Payments
Intro
two main parts in Chapter
• national income accounting <<<
• BOP accounting
national income identity: NI = GNP
NI, GNP, GDP
2.1. National Income Accounts (p. 33)
record the value of national income that results from production and expenditure
• national income is often defined to be the income earned by a nation’s factors of
production.
we will analyse national income identity
• producers earn income from buyers who spend money on goods and services
• the amount of expenditure by buyers
= the amount of income for sellers
= the value of production
National Income Accounts: GNP
Gross national product (GNP) is the value of all final goods and services produced by a
nation’s factors of production in a given time period.
• no intermediate goods (!); double counting
• factors of production = workers (labour services), physical capital (like buildings and
equipment), natural resources and others.
• the value of final goods and services produced by US-owned factors of production are
counted as US GNP
• no used goods (!)
GNP is calculated by adding the value of expenditure on final goods and services produced:
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services
4. Current account balance (exports minus imports): net expenditure by foreigners on
domestic goods and services
,Figure 2.1 U.S. GNP and Its Components
? why useful to divide GNP
America’s gross national product for the first quarter of 2016 can be broken down into the
four components shown.
Source: U.S. Department of Commerce, Bureau of Economic Analysis. The figure shows
2016:QI GNP and its components at an annual rate, seasonally adjusted.
National Income Identity (2.1.1, 2.1.2, p. 35)
National Income must equal National Product
! only correct if GNP is adjusted
• depreciation (reduces income of capital owners)
NI = GNP - depreciation = NNP
• unilateral transfers (gifts from/to foreigners)
NI = GNP - depreciation + net transfers
• sales taxes
NI = GNP - depreciation + net transfers
• indirect business taxes
! distinction of little importance for macroeconomic analysis! => two terms are used
interchangeably
,Difference between GNP and GDP (2.1.3, p. 35-36)
GNP is value of all final goods and services produced by a country's factors of production
GDP is volume of production within a country's borders
GNP = GDP - 'domestic' income earned by foreigners + 'foreign' income earned by domestic
residents
GNP = GDP + net receipts of factor income from ROW
different criterion: ‘nationality’ vs. location
Takeaways
A country’s GNP is roughly equal to the income received by its factors of production.
In an open economy, GNP equals the sum of consumption, investment, government
purchases, and the current account.
GDP is equal to GNP minus net income from foreign countries for factors of production. GDP
measures the value of output produced within a country’s borders.
Breaking down GDP
Breaking down GDP … Europe, 2004
, « consumption has only grown relatively modestly, and investment scarcely at all, in
Germany and the rest of the core. Instead, core and periphery alike have relied on
international demand for their exports (see chart). Between 2011 and 2015 the euro area’s
trade surplus rose from just 0.1% of euro-zone GDP to 3.7%.”
“Europe’s addiction to exports leaves it vulnerable to any deceleration in global growth.
Were China’s economy to slow more sharply, or America’s to return to recession, Europe,
too, would see growth wane.”
“After years of near-stagnation, private consumption is growing at about 2 per cent — a rate
Germany has not seen since the dotcom boom of the late 1990s.
For economists, the shift is significant. Germany has long relied on exports, which make up
almost 40 per cent of GDP, to drive growth. The wage restraint showed by German workers
helped underpin that by maintaining competitiveness. ...
There are signs that model could be changing. The slowdown in emerging markets has
tamed demand for German exports. As a result, companies are investing less but German
domestic demand is kicking in and taking up the slack, creating a more balanced economy.
“The [economic] upswing we’re seeing now is consumption-driven,” said Jörg Krämer, chief
economist at Commerzbank. “It’s a paradigm shift in the German growth model.”
National Income Accounting and the Balance of Payments
Intro
two main parts in Chapter
• national income accounting <<<
• BOP accounting
national income identity: NI = GNP
NI, GNP, GDP
2.1. National Income Accounts (p. 33)
record the value of national income that results from production and expenditure
• national income is often defined to be the income earned by a nation’s factors of
production.
we will analyse national income identity
• producers earn income from buyers who spend money on goods and services
• the amount of expenditure by buyers
= the amount of income for sellers
= the value of production
National Income Accounts: GNP
Gross national product (GNP) is the value of all final goods and services produced by a
nation’s factors of production in a given time period.
• no intermediate goods (!); double counting
• factors of production = workers (labour services), physical capital (like buildings and
equipment), natural resources and others.
• the value of final goods and services produced by US-owned factors of production are
counted as US GNP
• no used goods (!)
GNP is calculated by adding the value of expenditure on final goods and services produced:
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services
4. Current account balance (exports minus imports): net expenditure by foreigners on
domestic goods and services
,Figure 2.1 U.S. GNP and Its Components
? why useful to divide GNP
America’s gross national product for the first quarter of 2016 can be broken down into the
four components shown.
Source: U.S. Department of Commerce, Bureau of Economic Analysis. The figure shows
2016:QI GNP and its components at an annual rate, seasonally adjusted.
National Income Identity (2.1.1, 2.1.2, p. 35)
National Income must equal National Product
! only correct if GNP is adjusted
• depreciation (reduces income of capital owners)
NI = GNP - depreciation = NNP
• unilateral transfers (gifts from/to foreigners)
NI = GNP - depreciation + net transfers
• sales taxes
NI = GNP - depreciation + net transfers
• indirect business taxes
! distinction of little importance for macroeconomic analysis! => two terms are used
interchangeably
,Difference between GNP and GDP (2.1.3, p. 35-36)
GNP is value of all final goods and services produced by a country's factors of production
GDP is volume of production within a country's borders
GNP = GDP - 'domestic' income earned by foreigners + 'foreign' income earned by domestic
residents
GNP = GDP + net receipts of factor income from ROW
different criterion: ‘nationality’ vs. location
Takeaways
A country’s GNP is roughly equal to the income received by its factors of production.
In an open economy, GNP equals the sum of consumption, investment, government
purchases, and the current account.
GDP is equal to GNP minus net income from foreign countries for factors of production. GDP
measures the value of output produced within a country’s borders.
Breaking down GDP
Breaking down GDP … Europe, 2004
, « consumption has only grown relatively modestly, and investment scarcely at all, in
Germany and the rest of the core. Instead, core and periphery alike have relied on
international demand for their exports (see chart). Between 2011 and 2015 the euro area’s
trade surplus rose from just 0.1% of euro-zone GDP to 3.7%.”
“Europe’s addiction to exports leaves it vulnerable to any deceleration in global growth.
Were China’s economy to slow more sharply, or America’s to return to recession, Europe,
too, would see growth wane.”
“After years of near-stagnation, private consumption is growing at about 2 per cent — a rate
Germany has not seen since the dotcom boom of the late 1990s.
For economists, the shift is significant. Germany has long relied on exports, which make up
almost 40 per cent of GDP, to drive growth. The wage restraint showed by German workers
helped underpin that by maintaining competitiveness. ...
There are signs that model could be changing. The slowdown in emerging markets has
tamed demand for German exports. As a result, companies are investing less but German
domestic demand is kicking in and taking up the slack, creating a more balanced economy.
“The [economic] upswing we’re seeing now is consumption-driven,” said Jörg Krämer, chief
economist at Commerzbank. “It’s a paradigm shift in the German growth model.”
