NATIONAL INCOME ACCOUNTING

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CHAPTER 12
NATIONAL INCOME ACCOUNTING AND BALANCE OF
PAYMENTS
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NATIONAL INCOME ACCOUNTS
Two measures of national income GNP and GDP
GNP is the value of final goods and services
produced by the factors of production (of a
nation) and sold on the market at a given time
period. Division of GNP Y C I G
EX-IM GDP is the value of final goods and
services produced by the factors of production
(within borders) and sold on the market at a
given time period.
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Examples Honda US, Caterpillar Germany GNP
GDP R, where R net income from abroad The
divergence of GNP and GDP in some
countries Pakistan Saudi Arabia Brazil
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The National Income Identity Y C I G EX
- IM The Current Account and Foreign
Indebtedness CA EX - IM When CA gt0, CA
surplus. When CA lt 0, CA deficit When CA lt
0, the countrys expenditures exceed its
production Therefore, the country must borrow the
difference from foreigners. Re-arranging the
national income identity yields CA Y - (C I
G) When CA lt 0, the country is doing an
intertemporal substitution It is foregoing future
consumption in favor of current consumption.
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Saving and the Current Account National saving is
expressed as S Y - C - G or as S I
CA Private and Government Saving Private saving
can be expressed as Government saving is
defined as Case Study Do Government Budget
Deficits Worsen the CA?
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THE BALANCE OF PAYMENTS ACCOUNTS International
transactions involve the purchase and sale of
goods, services, and assets. Any transaction
resulting in a payment to foreigners is entered
in the BOP accounts as a debit and is given a
negative (-) sign. Any transaction resulting in a
receipt from foreigners is entered in the BOP
accounts as a credit and is given a positive ()
sign. Two types of transactions are recorded
in the BOP 1. Export or import of goods and
services gt CA 2. Purchase or sale of assets gt
KA
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Examples of Paired Transactions Every
international transaction enters the BOP twice,
once as a credit and once as a debit. Examples
Capital Inflows and outflows The Fundamental
BOP Identity Because any international
transaction automatically gives rise to two
offsetting entries in the BOP, CA KA 0
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The Statistical Discrepancy Although in theory
CAKA0, in reality this is not the case because
data from different sources may differ in
coverage, accuracy, and timing. The two sides
of the BOP are balanced by adding statistical
discrepancy. (See Table 12.2.) Official Reserve
Transactions This is a capital account
transaction involving purchase or sale of
official reserve assets by central banks.
Central banks often buy or sell international
reserves in private asset markets to affect
macroeconomic conditions in their economies.
Official transactions of this type are called
official foreign exchange intervention.