Chapter 12,National Income Accounting and the Balance of Payments,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-2,Preview,National income accounts measures of national income measures of value of production measures of value of expenditure National saving, investment and the current account Balance of payments accounts,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-3,National Income Accounts,Records the value of national income that results from production and expenditure. 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 is often defined to be the income earned by a nations factors of production.,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-4,National Income Accounts: GNP,Gross national product (GNP) is the value of all final goods and services produced by a nations factors of production in a given time period. What are factors of production? workers (labor), physical capital (like factories and equipment), natural resources and other factors that are used to produce goods and services. The value of final goods and services produced by US labor, capital and natural resources are counted as US GNP.,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-5,National Income Accounts: GNP (cont.),GNP is calculated by adding the value of expenditure on final goods and services produced. There are 4 types of expenditure: Consumption: expenditure by domestic residents Investment: expenditure by firms on plants & equipment Government purchases: expenditure by governments on goods and services Current account balance (exports minus imports): net expenditure by foreigners on domestic goods and services,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-6,National Income Accounts: GNP (cont.),Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-7,National Income Accounts,GNP is one measure of national income, but a more precise measure of national income is GNP adjusted for following: Depreciation of capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from GNP. Indirect business taxes reduce income to businesses, so the amount of these taxes is subtracted from GNP.,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-8,National Income Accounts (cont.),Another approximate measure of national income is gross domestic product (GDP): Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period. GDP = GNP factor payments from foreign countries + factor payments to foreign countries,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-9,Imports and Exports As a Fraction of GDP,Imports and exports as a percentage of GDP by country, 2000. Source: OECD,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-10,GNP = Expenditure on a Countrys Goods and Services,Y = Cd + Id + Gd + EX = (C-Cf) + (I-If) + (G-Gf) + EX = C + I + G + EX (Cf + If +Gf) = C + I + G + EX IM = C + I + G + CA,National income = value of production,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-11,Expenditure and Productionin an Open Economy,CA = EX IM = Y (C + I + G ) When production domestic expenditure, exports imports: current account 0, trade balance 0 when a country exports more than it imports, it earns more income from exports than it spends on imports net foreign wealth is increasing When production domestic expenditure, exports imports: current account 0, trade balance 0 when a country exports less than it imports, it earns less income from exports than it spends on imports net foreign wealth is decreasing,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-12,US Current Account As a Percentage of GDP, 19602004,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-13,US Current Account, 19602004,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-14,US Current Account and Net Foreign Wealth, 19772003,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-15,Saving and the Current Account,National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G). Y C G (Y C T) + (T G) Sp + Sg = S,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-16,How Is the Current Account Related to National Saving?,CA = Y (C + I + G ) implies CA = (Y C G ) I = S I current account = national saving investment current account = net foreign investment A country that imports more than it exports has low national saving relative to investment.,Copyright 2006 Pearson Addison-Wesley. All rights reserved.,12-17,How Is the Current Account Related to National Saving? (cont.),CA = S I or I = S CA Countries can finance investment either by saving or by acquiring foreign funds equal to the current account de