National Income Accounts and Balance of Payments Accounting

Expenditure Measures

Absorption is the sum of purchases by three sectors of the economy: household, corporate, and government sectors. Current dollar absorption

PAA ≡ PCC + PII + PGG Constant dollar absorption

A ≡ C + I + G

Absorption Deflator

Deflators are the ratio of current dollar to constant dollar.

Absorption deflator is a weighted average of different category deflators.

C GA IA C I G

P C P GP A P IP P P PA C I G

C GIA C I GA A AP P P P

Categories C- Personal Consumption

Expenditure Consumer Durables Consumer Non-Durables Consumer Services

I – Gross Capital Formation Change in Stocks -

Inventories Gross Fixed Capital Formation

Residential Investment Non-Residential Investment

Structures Machinery & Equipment

G – Government Expenditure

Net Exports

Domestic goods can also be sold overseas, while domestic absorption can also be satisfied by imports.

The nominal trade balance is PNXNX = PEXEX - PIMIM

The real trade balance is NX = EX - IM

GDP

GDP goods produced domestically are equal to those goods sold domestically less domestic demand satisfied by imports plus domestic goods. PQQ = PCC + PII + PGG + PEXEX – PIMIM Q = C + I + G + EX - IM

Domestic Income Income from domestic residents (GNP) may

come from domestic or foreign sources. Also, income generated from domestic sources (GDP) may go, in part, to foreign owners, creditors, or workers.

Net Transfers (NT) is income from foreign sources paid to domestic residents minus income from domestic sources paid to foreign residents.

GNP = GDP + NT

Current Account Current Account is Net Current funds

earned overseas. Income may be earned overseas

through producing goods domestically and selling goods abroad or playing a hand in producing goods overseas (as a worker, entrepreneur, or capitalist).

Current Account is NX + NT ≡ CA

Table 1. U.S. International Transactions[Millions of dollars]

(Credits +; debits -)/1/ 1998 1999 2000 2001 2002 2003Current account -209557 -296822 -413443 -385701 -473944 -530668

Exports of goods and services and income receipts 1194803 1259665 1421429 1293345 1242739 1314888 Exports of goods and services 933495 966443 1070980 1006653 975940 1020503 Goods, balance of payments basis/2/ 670416 683965 771994 718712 681833 713122 Services/3/ 263079 282478 298986 287941 294107 307381 Transfers under U.S. military agency sales contracts/4/ 17405 15928 13790 12539 11943 12491 Travel 71325 74801 82400 71893 66728 64509 Passenger fares 20098 19785 20687 17926 17046 15693 Other transportation 25604 26916 29803 28442 29195 31833 Royalties and license fees/5/ 35626 39670 43233 40696 44219 48227 Other private services/5/ 92095 104493 108287 115614 124181 133818 U.S. Government miscellaneous services 926 885 786 831 795 810 Income receipts 261308 293222 350449 286692 266799 294385 Income receipts on U.S.-owned assets abroad 258871 290474 347614 283761 263861 291354 Direct investment receipts 103963 131626 151839 128665 147291 187522 Other private receipts 151307 155651 191929 151535 113267 99135 U.S. Government receipts 3601 3197 3846 3561 3303 4697 Compensation of employees 2437 2748 2835 2931 2938 3031Imports of goods and services and income payments -1355917 -1509732 -1779188 -1632465 -1657301 -1778117 Imports of goods and services -1098363 -1229695 -1449324 -1369345 -1397675 -1517011 Goods, balance of payments basis/2/ -917103 -1029980 -1224408 -1145900 -1164728 -1260674 Services/3/ -181260 -199715 -224916 -223445 -232947 -256337 Direct defense expenditures -12185 -13335 -13473 -14835 -19101 -25117 Travel -56483 -58963 -64705 -60200 -58044 -56613 Passenger fares -19971 -21315 -24274 -22633 -19969 -20957 Other transportation -30363 -34139 -41425 -38682 -38407 -44768 Royalties and license fees/5/ -11235 -13107 -16468 -16538 -19235 -20049 Other private services/5/ -48174 -56035 -61688 -67675 -75271 -85829 U.S. Government miscellaneous services -2849 -2821 -2883 -2882 -2920 -3004 Income payments -257554 -280037 -329864 -263120 -259626 -261106 Income payments on foreign-owned assets in the United States -250560 -272082 -322345 -255034 -251246 -252573 Direct investment payments -38418 -53437 -56910 -12783 -46460 -68657 Other private payments -127988 -138120 -180918 -159825 -128672 -111874 U.S. Government payments -84154 -80525 -84517 -82426 -76114 -72042 Compensation of employees -6994 -7955 -7519 -8086 -8380 -8533Unilateral current transfers, net -48443 -46755 -55684 -46581 -59382 -67439 U.S. Government grants/4/ -13270 -13774 -16714 -11517 -17097 -21865 U.S. Government pensions and other transfers -4305 -4406 -4705 -5798 -5125 -5341 Private remittances and other transfers/6/ -30868 -28575 -34265 -29266 -37160 -40233

Worsening Current Account

US Current Accounts

-600000

-500000

-400000

-300000

-200000

-100000

0

1000001961

1967

1973

1979

1985

1991

1997

2003

Years

Mil

lio

n U

S

Net Exports

NT

National Savings Savings = private sector savings + public

sector savings. Define TAX = Net Taxes = Tax Revenues

less transfer payments (social welfare, etc.).

Real Public Savings = T – G ≡ SG

Private Sector Savings is Disposable Income minus Consumption

Real Private Saving = Q +NT – T – C = SP

Savings Private Savings can occur through household

saving or business saving Household savings occur when households

earn income (as wages, interest or dividends) that they do not consume.

Business Investment occurs when firms keep profits instead of paying them as dividends.

Prevalence of two types of savings depends on importance of equity finance in the financial system. Business savings is a bigger source of funds in NA than Europe or Asia.

Capital & Financial Account

There are two ways to finance domestic investment

Capital & Financial Account represents net capital inflows which finance domestic investment net of savings.

Real Capital & Financial Account = I - S

C & FAccount = -Current Account

As an accounting identity, I – S = I – (SG + SP)

= I – (T – G + Q +NT – C – T) = C + I + G – Q – NT = -NX - NT

Intuitively, if you earn more income overseas than you pay out, you can acquire foreign assets.

Capital Account Capital & Financial Account includes both

Capital Account (direct transfers of capital, often through debt forgiveness or default) and Financial Account which represents acquisition or Sale of Financial assets.

Financial Account divided into 5 categories1. Reserve Asset – Official holdings of foreign

reserves2. Bank Lending3. Portfolio Investment – Stocks & Bonds4. Direct Investmnet- Ownership stakes in equity5. Other

1998 1999 2000 2001 2002 2003Capital and financial account

Capital account39 Capital account transactions, net -740 -4843 -809 -1083 -1260 -3079

Financial account40 U.S.-owned assets abroad, net (increase/financial outflow (-)) -347829 -503640 -569798 -366768 -198014 -28341441 U.S. official reserve assets, net -6783 8747 -290 -4911 -3681 152342 Gold/7/ ..... ..... ..... ..... ..... .....43 Special drawing rights -147 10 -722 -630 -475 60144 Reserve position in the International Monetary Fund -5119 5484 2308 -3600 -2632 149445 Foreign currencies -1517 3253 -1876 -681 -574 -57246 U.S. Government assets, other than official reserve assets, net -422 2750 -941 -486 345 53747 U.S. credits and other long-term assets -4678 -6175 -5182 -4431 -5251 -727948 Repayments on U.S. credits and other long-term assets/8/ 4111 9559 4265 3873 5701 798149 U.S. foreign currency holdings and U.S. short-term assets, net 145 -634 -24 72 -105 -16550 U.S. private assets, net -340624 -515137 -568567 -361371 -194678 -28547451 Direct investment -142644 -224934 -159212 -142349 -134835 -17379952 Foreign securities -124204 -116236 -121908 -84644 15889 -7233753 U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns-38204 -97704 -138790 -8520 -45425 -2893254 U.S. claims reported by U.S. banks, not included elsewhere -35572 -76263 -148657 -125858 -30307 -1040655 Foreign-owned assets in the United States, net (increase/financial inflow (+))423569 740210 1046896 782859 768246 82917356 Foreign official assets in the United States, net -19903 43543 42758 28059 113990 24857357 U.S. Government securities -3589 32527 35710 54620 89016 19456858 U.S. Treasury securities/9/ -9921 12177 -5199 33700 60466 16968559 Other/10/ 6332 20350 40909 20920 28550 2488360 Other U.S. Government liabilities/11/ -3326 -2863 -1825 -2309 137 -56461 U.S. liabilities reported by U.S. banks, not included elsewhere -9501 12964 5746 -29978 21221 4942062 Other foreign official assets/12/ -3487 915 3127 5726 3616 514963 Other foreign assets in the United States, net 443472 696667 1004138 754800 654256 58060064 Direct investment 179045 289444 321274 167021 72411 3989065 U.S. Treasury securities 28581 -44497 -69983 -14378 100432 11343266 U.S. securities other than U.S. Treasury securities 156315 298834 459889 393885 285500 25098167 U.S. currency 16622 22407 5315 23783 21513 1664068 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns23140 76247 170672 66110 77990 8401469 U.S. liabilities reported by U.S. banks, not included elsewhere 39769 54232 116971 118379 96410 75643