chapter 12 l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 12 PowerPoint Presentation
Download Presentation
Chapter 12

Loading in 2 Seconds...

play fullscreen
1 / 25

Chapter 12 - PowerPoint PPT Presentation


  • 309 Views
  • Uploaded on

Chapter 12 Supplementary Notes expenditure on production Net expenditure by foreigners Domestic expenditure GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = ( C-C f ) + ( I-I f ) + ( G-G f ) + EX

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 12' - paul


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 12

Chapter 12

Supplementary Notes

gnp expenditure on a country s goods and services

expenditure

on production

Net expenditure

by foreigners

Domestic

expenditure

GNP = Expenditure on a Country’s 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

imports and exports as a fraction of gdp
Imports and Exports As a Fraction of GDP

Imports and exports as a percentage of GDP by country, 2000. Source: OECD

gnp and gdp
GNP and GDP
  • Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period.
  • GNP = GDP + factor payments from foreign countries - factor payments to foreign countries
  • GNP = GDP + net factor income from abroad
expenditure and production in an open economy
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
saving and the current account
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)

 S = Sp + Sg

  • National saving = private saving + govt saving
how is the current account related to national saving
How Is the Current Account Related to National Saving?

CA = Y – (C + I + G )

 CA = (Y – C – G ) – I

CA = S – I

current account = national saving – investment

current account =net foreign investment

Note: I is domestic investment

  • A country that exports more than it imports invests in foreign countries (by lending the CA surplus to foreigners).
how is the current account related to national saving cont
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 deficit.
    • a current account deficit or negative net foreign investment implies a financial capital inflow (through international borrowing).
how is the current account related to national saving cont13
How Is the Current Account Related to National Saving? (cont.)

CA = Sp + Sg – I

= Sp – GD – I

  • GD, Government deficit (= G – T), is negative govt saving
  • A high government deficit causes a negative current account balance, all other things equal.
inverse relationship between public saving and current account
Inverse Relationship Between Public Saving and Current Account?

Source: Congressional Budget Office, US Department of Commerce

balance of payments accounts
Balance of Payments Accounts
  • A country’s balance of payments accounts record its payments to and its receipts from foreigners.
  • Record all international transactions in goods, services, assets

Services: travel, transportation, royalties, etc.

Assets: bank loans, deposits, stocks, bonds, etc.

3 broad accounts
3 Broad Accounts
  • The balance of payment accounts are separated into 3 broad accounts:
    • current account: accounts for flows of goods and services (imports and exports).
    • financial account: accounts for flows of financial assets (financial capital).
    • capital account: flows of special categories of assets (capital), typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks.
credit and debit
Credit and Debit
  • Double-entry bookkeeping: Each international transaction enters the BoP accounts twice: once as a credit (+) and once as a debit (-).
  • Credit: sale of domestic goods, services, assets to foreigners
  • Debit: purchase of foreign goods, services, assets from foreigners
some useful tips
Some useful tips
  • Credit: we sell to foreigners
  • Debit: we buy from foreigners
  • Treat payment as if we sell the financial assets (e.g., deposits). Receipts are treated as if our purchase of financial assets.
  • The payment part is recorded on the other side of the BoP table.
  • Exceptions: unilateral transfers, debt forgiveness
example 1
Example 1
  • You import a DVD of Japanese anime by using your debit card.
  • The Japanese producer of anime deposits the funds in its bank account in San Francisco. The bank credits the account by the amount of the deposit.
example 2
Example 2
  • You invest in the Japanese stock market by buying $500 in Sony stock.
  • Sony deposits your funds in its Los Angeles bank account. The bank credits the account by the amount of the deposit.
example 3
Example 3
  • US banks forgive a $100 M debt owed by the government of Argentina through debt restructuring.
  • US banks who hold the debt thereby reduce the debt by crediting Argentina's bank accounts.
more terms
More Terms
  • Private financial transactions include direct investment, portfolio investment (security purchases), and bank claims and liabilities.
  • Financial transactions are also classified either short-term or long-term. Long-term means maturity longer than or equal to 1 year.
  • “Official” means assets treated as foreign reserves. They include foreign currencies, gold, Special Drawing Rights, and reserve position at the IMF.
  • Balance of payments = current a/c + capital a/c + non-reserve financial a/c
capital inflow and outflow
Capital inflow and outflow
  • Financial (capital) inflow
    • Foreigners loan to domestic citizens by acquiring domestic assets.
    • Foreign owned (sold) assets in the domestic economy are a credit (+)
    • A surplus on the financial account implies net inflow of foreign capital.
  • Financial (capital) outflow
    • Domestic citizens loan to foreigners by acquiring foreign assets.
    • Domestically owned (purchased) assets in foreign economies are a debit (-)
    • A deficit on the financial account implies net outflow of foreign capital.