Ch5 International Econ

8/12/2019 Ch5 International Econ

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1Measuring

MacroeconomicActivity

2

NATIONAL AND

INTERNATIONAL

ACCOUNTS:

INCOME, WEALTH, AND3

Balance of PaymentsAccounts

4External Wealth

5Conclusions

THE BALANCE OF

PAYMENTS

Outline

1. Closed Economy National Accounting: A Reminder

2. Open Economy National Accounting: Basic Identities

.

4. External Wealth

Today: 1 and 2

2 of 99 2008 Worth Publishers International Economics Feenstra/Taylor


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Introduction

At the beginning, I talked about global financialimbalances, and different kinds of surplus and deficits(trade, current account), about the balance between savingand investment, etc.


Now the terms will be properly defined

National Accounting

Apparatus constructed in the 1930s and 1940s

mon uzne s, o e

Richard Stone, Nobel 84


Here, open economy version


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Micro example

Think of a small farm with following accounts

Expenditures

consumption $ 11,797

investment 2,213

total $ 14,010

Income

production $ 13,247


-

total $ 13,197

Balance excluding interest: $ -763

Total balance: $ -813

Macro interpretation

Multiply by 1 bn, and this is the US

Expenditures

consumption bn$ 11,797

investment bn$ 2,213

GNE bn$ 14,010

Income

GDP bn$ 13,247


NFIA bn -50GNI bn$ 13,197

TB bn$ -763

CA bn$ -813


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1. Closed Economy National Account ing: A Reminder

Three approaches to measuring economic activity:

GNE = total expenditure on all final goods and services.

Product approach: GDP

GDP = value of all goods and services produced by firms, lessintermediate goods purchased.


Income approach: GNI

GNI = value of all payments earned by factor residents in theeconomy.

Flow of Payments in a Closed Economy

Gross national expenditure (GNE): total nationalspending on final goods and services.

Three components: C , I, G


GNE = C + I +G


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Understanding the Data

for the National Economic Aggregates

U.S. trends for Gross National Income (GNE)

US Consumption, Investment and Government Expenditures

4000

6000

8000

10000

12000

14000

16000

o n o ars

Governmentexpenditure

Investment

Consumption


0

2000


In a closed economy, GNE must equal total salesby firms of goods excluding sales to other firms.

.

Firms sell intermediate goods and services to other firms.These are excluded to avoid double counting.

Sum of value added: GDP


GDP= GNE


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Firms use revenues in two ways: Payments for intermediate goods and services.

Income payments to factors of production: wages and salaries tolabor, dividends and interest to capital, and rent to landowners.This is value added.


Gross national income (GNI) is the sum of factor income

payments received by national entities.

GNI=GDP

The Circular Flow in a Closed Economy

GNE = GDP = GNI



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2. Open Economy National Accounting: BasicIdentities

In the flow of payments for an open economy, the

flow of spending, income, and production.

GNE, GDP, and GNI need not be equal.

Transactions with rest of the world (ROW) come inbetween


Flow of Payments in an Open Economy

Some home spending is on foreign goods; andsome foreign spending is on home goods.

GDP identity

GDP = GNE + TB


TB = EX IM


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Exports and imports in the U.S.

US Expor t and Impor t Shares in GDP

4

6

8

10

12

14

16

18

20


0

2

Exports Imports

A subtlety: t rade between f irms

Exports and imports include the trade ofintermediate inputs between firms

Globalization and outsourcing trade inintermediate goods increasingly important

Trade flows not a measure of value added.



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Who Makes the iPod?

The retail value of the iPod is $299

(2007).

American companies and workers.

$80 paid to Apple (e.g., design,IP, support)

$75 distribution (e.g., transport/wholesale/retail)

$8 for various domestic


components (U.S.-made parts)

Most of hardware imported fromChina, but using imported inputs(little value added in China)

Reuters/CORBIS


Some home GDP is paid as income to foreigners,and some foreign GDP is paid as income to

.

GNI identity

GNI = GDP + NFIA


NFIA = EXFS IMFS


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Celtic Tiger or Tortoise?

o re an s n us r aGDP originated in foreign-

owned plants in 2004

Ireland is 4th richesteconomy in OECD in terms

of GDP per capita, but 17th

in terms of GNI per capita



Net unilateral transfers (NUT) is the net amount

(foreign aid, remittances)

Gross national disposable income (GNDI) isincome available including transfers.



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From GNI to GNDI: Transfers in Income

In some countriesNUT can be a

of GNDI


Recap

Two key expressions for the open economy

GDP = GNE + TB

Can see why the three measures differ in an open


, .

In a closed economy, TB = NFIA = 0


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The U.S. accounts


The current account balance

Current account balance: definition

= -

= TB+NFIA


National income identity

GNI=GNE+CA


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The current account balance

0

100

Billion dollars

US Trade Balance and Current Account Balance

-700

-600

-500

-400

-300

-200

-100


-900

-800

Trade Balance Current Account Balance

What the Current Account Tells Us

Why is the current account balance an interesting

indicator?



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Ch5 International Econ