Chapter 1: Introduction
A. Introduction
In the early 21st century, nations are more closely linked than ever before through trade in goods and services,
flows of money and investment in each other’s economies.
➔ Policy makers and business leaders in every country must pay attention to changing economic
circumstances around the world.
This graph gives us the levels of US exports and imports as
shares of Gross Domestic Product (GDP) from 1960 to 2019.
➔ There is a long-term upward trend
International trade has roughly tripled in importance
compared to the economy as a whole.
Imports and exports fell in 2009 during the global economic
crisis and in 2020 during the COVID-19 pandemic.
➔ Close link between world trade and the overall economy.
This graph gives the average of imports and exports as a share of the Gross Domestic
Product (GDP) for a sample of countries.
We can see that the US relies less on international trade than almost any other
country thanks to its size and the diversity of its resources.
Belgium is a small open economy that is very dependent on exports and imports
from other countries.
B. Some actual topics
In recent years there has been high inflation because of some major geopolitical and economical happenings.
➔ In 2022 the Financial Times made “Inflation“ the word of the year.
Over a long period of time, we had very low, even negative,
interest rates. But when high inflation arrived the different
central banks had to take some measures in order to slow
the inflation. To do so they increased the interest rates, in
order to slow down inflation. Since February 2024 the
inflation goes down. That means that there is less inflation
(but still inflation).
Because the inflation is decreasing, the central banks are
now lowering the interest rates.
But because of Trump’s radical economic policies, there will be big changes in international trades.
,Chapter 2: National Income Accounting and the Balance of Payments
A. Preview
International macroeconomics studies how interactions of national economies influence the worldwide
pattern of industrial activity.
This chapter is the first step in our study of international macroeconomics by explaining the accounting
concepts economists use to describe a country’s level of production and its international transactions.
We will use two different tools for that, namely the National Income Accounting and the Balance of Payments
Accounting
B. National Income Accounts
National income accounts record the value of national income that results from production and expenditure.
➔ It is the income earned by a nation’s factors of production.
We will analyze the national income identity. Producers earn income from buyers who spend money on goods and services.
➔ So the amount of expenditure by buyers = the amount of income for sellers = the value of production.
The expenditure of one person is the income of another person hence why national income is equal
to national expenditures.
Gross National Product (GNP)
Gross National Product (GNP) is the value of all final goods and services produced by the country’s factors of
production and sold on the market in a given time period.
This graph gives us the Gross National Product of America in the first
quarter of 2020. The GNP is divided in its 4 components.
Deviding the GNP in its 4 components is usefull to analyses the current
economic state of a country. It can also help to preduct future economic
trends or happenings. By using the GNP we can compare different
countries.
Breaking down Gross Domestic Product (GDP)
In 2004 germany was not doing that well in terms of economic growth while France and Spain were in better
shape. Germany had an economic growth of 2% and France had one of 4,5%.
From 2012 to 2015 Germany contributed the most
to growth in the euro-zone. Both central and
surrounding areas have depended on international
demand for their exports. This makes Europe
vulnerable to any slowdown in global growth.
In the early 2000s Chaina had incredible growth rates. Their growth was at 10-11%
in 2006. This is a very high growth rate that is not sustainable.
China’s economy is driven by investment which accounts over 40% of the GDP.
Since 2005, net exports have contributed more than 20% of growth. The
contribution of household consumption is lower than in the West.
➔ In short we can say that their growth is unbalanced
,China needed to rebalance its economy during that time, by increasing consumption. It is important to understand
how distorted China's economy now is, in 2007. Personal consumption was just 35% of GDP. Meanwhile, China was
investing 11% of GDP abroad in foreign assets. This is a problem as it raises also ethical questions. The money that
flows out of China could have been used to improve the wellbeing of the poor Chinese population.
Chinese growth is unbalanced. It is highly dependent on investment as a source of demand and
driver of supply. In a sense China is the most ‘capitalist’ economy ever. Between 1997 and 2009,
gross investment rose from 32% to 46% of the GDP, while household consumption fell. This must
be the lowest share of consumption in any significant economy ever. In a country with that mch
poor people it is shocking.
➔ China has a highly unbalanced economy with low share of consumption and high share of
investment. In 2013 private consumption is 35 % of GDP, roughly half the share in the US.
Different cases per country in the slides of chapter 2
National Income Identity
National Income (NI) must equal the Gross National Product (GNP).
This is only correct if GNP is adjusted →
• Depreciation reduces the income of capital owners
o NI = GNP – depreciation = NNP (Net National Product)
• Unilateral transfers are gifts from/to foreigners (are part of income but not product. Must be added at the NNP)
o NI = GNP – depreciation + net transfers
• Sales taxes
o NI = GNP – depreciation + net transfers – indirect business taxes
This distinction is of little importance for macroeconomic analysis. So the GNP and National Income are
used interchangeably.
Difference between Gross National Product (GNP) and Gross Domestic Product (GDP)
Gross National Product (GNP) is the value of all final goods and services produced by a country’s factors of
production. We only look at the nationality of the producer.
Gross Domestic Product (GDP) is the volume of production within a country’s borders. We only look at the
location of the producer.
➔ GNP = GDP - 'domestic' income earned by foreigners + 'foreign' income earned by domestic residents.
➔ GNP = GDP + net receipts of factor income from the rest of the world.
Example : An American company in Brussels with American capital and labor. Where will the value-added show
up? In the GDP of Belgium and not in the American GDP. In the GNP of America and not in the Belgian GNP.
C. National Income Accounts for an open economy
The Current Account and Foreign Indebtedness
The current account (CA) is the difference between exports and imports of goods and services. It is equal to
the national income (NI) less the spending of foreigners. CA = Y – (C + I + G)
➔ Current Account (CA) deficit = EX < IM
➔ Current Account (CA) surplus = EX > IM
, ➔ If there is a CA deficit, the country is buying more from foreigners than it sells to them and must somehow
finance this CA deficit. This means that the spendings are higher than the income. This deficit is financed
by borrowing abroad. The foreign indebtedness increases by the amount of the deficit.
A country that runs a CA deficit needs to borrow from the rest of the world in order to finance this CA deficit. A
country that runs a CA surplus, finances the CA deficit of its trading partners by lending to them.
The US is the world’s biggest debtor. Other countries are financing its CA deficit year after year. The US has a strong
economy, but it is financed by borrowing from the rest of the world. In relative terms the deficit is still manageable.
The Valuation Effect
Foreign wealth = financial claims that the US has on the rest of the world – financial claims that the rest of the
world has on the US.
Foreign wealth = foreign assets owned by the US – US assets owned by foreigners.
In early 2000s, America had a CA deficit. To finance this deficit, it had to borrow this amount
from the rest of the world. So, the foreign wealth should have gone down with this amount.
But America's net external liabilities (= foreign wealth) increased. How is this possible?
At this time the dollar was weak, and the stock market was doing well so there was a
high rate of return. Because of those 2 things there was an import valuation effect.
➔ It is important to know that the valuation effect can also go in the other direction
There is a trade imbalance. China exports a lot to the US, but the US has hardly anything to export in return.
This deficit is to a large part a bilateral trade deficit with China. China lends money to the US.
The countries with a CA surplus are mainly China, Japan and Germany. These are countries with CA surpluses,
they lend money the countries with a deficit. The US has not had a CA surplus in years
Automatic adjustment
The currencies of economies with large Current Account (CA) deficits should depreciate compared to the
currencies of countries with CA surpluses, which will appreciate.
If a country has a CA deficit, we expect the currency to weaken because the demand for their assets will be
lower. This lower currency will have a positive effect on the export.
➔ The domestic goods and services become cheaper for trading partners when the domestic currency
weakens, leading to more demand from them and, thus, more exports.
The currencies of many countries with large deficits had enjoyed big gains until recently. Now, at last, currency
markets have started to see sense. This paradox is the result of the carry trade.
Carry trade is an investment strategy where the investor borrows in a country where the interest rates are low.
He then uses this money to invest in another country in another currency with a higher interest rate.
A. Introduction
In the early 21st century, nations are more closely linked than ever before through trade in goods and services,
flows of money and investment in each other’s economies.
➔ Policy makers and business leaders in every country must pay attention to changing economic
circumstances around the world.
This graph gives us the levels of US exports and imports as
shares of Gross Domestic Product (GDP) from 1960 to 2019.
➔ There is a long-term upward trend
International trade has roughly tripled in importance
compared to the economy as a whole.
Imports and exports fell in 2009 during the global economic
crisis and in 2020 during the COVID-19 pandemic.
➔ Close link between world trade and the overall economy.
This graph gives the average of imports and exports as a share of the Gross Domestic
Product (GDP) for a sample of countries.
We can see that the US relies less on international trade than almost any other
country thanks to its size and the diversity of its resources.
Belgium is a small open economy that is very dependent on exports and imports
from other countries.
B. Some actual topics
In recent years there has been high inflation because of some major geopolitical and economical happenings.
➔ In 2022 the Financial Times made “Inflation“ the word of the year.
Over a long period of time, we had very low, even negative,
interest rates. But when high inflation arrived the different
central banks had to take some measures in order to slow
the inflation. To do so they increased the interest rates, in
order to slow down inflation. Since February 2024 the
inflation goes down. That means that there is less inflation
(but still inflation).
Because the inflation is decreasing, the central banks are
now lowering the interest rates.
But because of Trump’s radical economic policies, there will be big changes in international trades.
,Chapter 2: National Income Accounting and the Balance of Payments
A. Preview
International macroeconomics studies how interactions of national economies influence the worldwide
pattern of industrial activity.
This chapter is the first step in our study of international macroeconomics by explaining the accounting
concepts economists use to describe a country’s level of production and its international transactions.
We will use two different tools for that, namely the National Income Accounting and the Balance of Payments
Accounting
B. National Income Accounts
National income accounts record the value of national income that results from production and expenditure.
➔ It is the income earned by a nation’s factors of production.
We will analyze the national income identity. Producers earn income from buyers who spend money on goods and services.
➔ So the amount of expenditure by buyers = the amount of income for sellers = the value of production.
The expenditure of one person is the income of another person hence why national income is equal
to national expenditures.
Gross National Product (GNP)
Gross National Product (GNP) is the value of all final goods and services produced by the country’s factors of
production and sold on the market in a given time period.
This graph gives us the Gross National Product of America in the first
quarter of 2020. The GNP is divided in its 4 components.
Deviding the GNP in its 4 components is usefull to analyses the current
economic state of a country. It can also help to preduct future economic
trends or happenings. By using the GNP we can compare different
countries.
Breaking down Gross Domestic Product (GDP)
In 2004 germany was not doing that well in terms of economic growth while France and Spain were in better
shape. Germany had an economic growth of 2% and France had one of 4,5%.
From 2012 to 2015 Germany contributed the most
to growth in the euro-zone. Both central and
surrounding areas have depended on international
demand for their exports. This makes Europe
vulnerable to any slowdown in global growth.
In the early 2000s Chaina had incredible growth rates. Their growth was at 10-11%
in 2006. This is a very high growth rate that is not sustainable.
China’s economy is driven by investment which accounts over 40% of the GDP.
Since 2005, net exports have contributed more than 20% of growth. The
contribution of household consumption is lower than in the West.
➔ In short we can say that their growth is unbalanced
,China needed to rebalance its economy during that time, by increasing consumption. It is important to understand
how distorted China's economy now is, in 2007. Personal consumption was just 35% of GDP. Meanwhile, China was
investing 11% of GDP abroad in foreign assets. This is a problem as it raises also ethical questions. The money that
flows out of China could have been used to improve the wellbeing of the poor Chinese population.
Chinese growth is unbalanced. It is highly dependent on investment as a source of demand and
driver of supply. In a sense China is the most ‘capitalist’ economy ever. Between 1997 and 2009,
gross investment rose from 32% to 46% of the GDP, while household consumption fell. This must
be the lowest share of consumption in any significant economy ever. In a country with that mch
poor people it is shocking.
➔ China has a highly unbalanced economy with low share of consumption and high share of
investment. In 2013 private consumption is 35 % of GDP, roughly half the share in the US.
Different cases per country in the slides of chapter 2
National Income Identity
National Income (NI) must equal the Gross National Product (GNP).
This is only correct if GNP is adjusted →
• Depreciation reduces the income of capital owners
o NI = GNP – depreciation = NNP (Net National Product)
• Unilateral transfers are gifts from/to foreigners (are part of income but not product. Must be added at the NNP)
o NI = GNP – depreciation + net transfers
• Sales taxes
o NI = GNP – depreciation + net transfers – indirect business taxes
This distinction is of little importance for macroeconomic analysis. So the GNP and National Income are
used interchangeably.
Difference between Gross National Product (GNP) and Gross Domestic Product (GDP)
Gross National Product (GNP) is the value of all final goods and services produced by a country’s factors of
production. We only look at the nationality of the producer.
Gross Domestic Product (GDP) is the volume of production within a country’s borders. We only look at the
location of the producer.
➔ GNP = GDP - 'domestic' income earned by foreigners + 'foreign' income earned by domestic residents.
➔ GNP = GDP + net receipts of factor income from the rest of the world.
Example : An American company in Brussels with American capital and labor. Where will the value-added show
up? In the GDP of Belgium and not in the American GDP. In the GNP of America and not in the Belgian GNP.
C. National Income Accounts for an open economy
The Current Account and Foreign Indebtedness
The current account (CA) is the difference between exports and imports of goods and services. It is equal to
the national income (NI) less the spending of foreigners. CA = Y – (C + I + G)
➔ Current Account (CA) deficit = EX < IM
➔ Current Account (CA) surplus = EX > IM
, ➔ If there is a CA deficit, the country is buying more from foreigners than it sells to them and must somehow
finance this CA deficit. This means that the spendings are higher than the income. This deficit is financed
by borrowing abroad. The foreign indebtedness increases by the amount of the deficit.
A country that runs a CA deficit needs to borrow from the rest of the world in order to finance this CA deficit. A
country that runs a CA surplus, finances the CA deficit of its trading partners by lending to them.
The US is the world’s biggest debtor. Other countries are financing its CA deficit year after year. The US has a strong
economy, but it is financed by borrowing from the rest of the world. In relative terms the deficit is still manageable.
The Valuation Effect
Foreign wealth = financial claims that the US has on the rest of the world – financial claims that the rest of the
world has on the US.
Foreign wealth = foreign assets owned by the US – US assets owned by foreigners.
In early 2000s, America had a CA deficit. To finance this deficit, it had to borrow this amount
from the rest of the world. So, the foreign wealth should have gone down with this amount.
But America's net external liabilities (= foreign wealth) increased. How is this possible?
At this time the dollar was weak, and the stock market was doing well so there was a
high rate of return. Because of those 2 things there was an import valuation effect.
➔ It is important to know that the valuation effect can also go in the other direction
There is a trade imbalance. China exports a lot to the US, but the US has hardly anything to export in return.
This deficit is to a large part a bilateral trade deficit with China. China lends money to the US.
The countries with a CA surplus are mainly China, Japan and Germany. These are countries with CA surpluses,
they lend money the countries with a deficit. The US has not had a CA surplus in years
Automatic adjustment
The currencies of economies with large Current Account (CA) deficits should depreciate compared to the
currencies of countries with CA surpluses, which will appreciate.
If a country has a CA deficit, we expect the currency to weaken because the demand for their assets will be
lower. This lower currency will have a positive effect on the export.
➔ The domestic goods and services become cheaper for trading partners when the domestic currency
weakens, leading to more demand from them and, thus, more exports.
The currencies of many countries with large deficits had enjoyed big gains until recently. Now, at last, currency
markets have started to see sense. This paradox is the result of the carry trade.
Carry trade is an investment strategy where the investor borrows in a country where the interest rates are low.
He then uses this money to invest in another country in another currency with a higher interest rate.
