Intertemporal Approach to the Current Account. GDP vs. GNP. GDP is value of production/ value of income produced within a domestic economy. GNP is value of income earned by residents of domestic economy. GNP = GDP + NFP
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GNP = GDP + NFP
SP = (Y + NFP – T – C)
SP + KA = I + (G-T)
-KA = Y+NFP – I – C – G = [Y - I- C - G] +NFP
-KA = NX + NFP
NIIPt – NIIPt-1 = CAt = NXt + NFPt
NIIPt = (1+r)NIIPt-1 +CAt
CA = S – I – (G-T)
Q: Why does the curve slope down? The greater is interest rate, the more profitable capital must be to invest in it.
Q: What shifts the curve? Increases in technology and labor increases profitability of capital.
B0 = Y0 – T0 – C0 1)
C1=Y1 –T1+(1+r)B0 2)
Q: Why does the curve slope up? Empirical work suggests substitution effect is slightly more powerful than income effect.
Q: What shifts the curve? Changes in current income relative to future income.