Macroeconomic Accounting Slides for International Finance

Transcription

1 Slides for International Finance American University

2 National Income Accounts Measure national income and value of production Measure value of purchases of newly produced goods Balance of Payments Accounts Record transactions with foreign residents

3 National Income Accounts Record the value of national income that results from production and expenditure. National income the income earned by a nation s factors of production. Expenditure by buyers = income for sellers = the value of production Producers earn income by selling goods and services to buyers.

4 Gross national product (GNP) GNP the market value of all final goods and services produced by a nation s factors of production in a given time period. Factors of Production land (natural resources) labor (workers, entrepreneurs) physical capital (like buildings and equipment).

5 GNP vs GDP National Income and Product Accounts GNP includes the value of final goods and services produced by US-owned factors of production, whether or not those factors are domestically located. GDP measures a country s economic activity as the production taking place within its borders, whether or not the factors of production are domestically owned. A {}}{ C + I + G +EX IM +FP +UTr }{{} } GDP {{ } } GNP {{ } Y T Your book focuses on GNP. The national income accounts focus on GDP. In the US, these are almost equal.

6 Gross Domestic Product (GDP) If we subtract from GNP the net factor payments from abroad (FP) we get GDP, another approximate measure of national income. GDP = GNP - FP GNP = GDP + FP FP (factor payments received from abroad) - (factor payments to abroad) GDP the market value of all final goods and services produced domestically (i.e., within a country) in a given time period.

7 Comparing Economic Activity Across Countries (2015) Country GDP United States China Japan 4.12 Germany 3.36 United Kingdom 2.85 France 2.42 India 2.07 Italy 1.81 Brazil 1.77 Canada 1.55 Russian Federation 1.32

8 Comparing Economic Activity of Different Periods GNP and GDP are measured at market prices. If we want to compare a country s economic activity at different points in time, we need to remove the effects of changes in the overall price level. We need to use real values instead of nominal values.

9 US Real GDP over Time (Linear Scale) Source: graph/fredgraph.png?g=cwy

10 US Real GDP over Time (Ratio Scale) Source: graph/fredgraph.png?g=ivl

11 Getting the Data National Income and Product Accounts 1 Go to series/gdpc1 2 Click "Download»CSV Data"

12 Plotting the Data (Excel) 1 Open GDPC1.csv in your favorite spreadsheet 2 Change the GDPC! field to RealGDP 3 Select all the data (including the headers) 4 Pick Insert»ScatterChart 5 Format the vertical axes to logarithmic scale 6 Change axes ranges to fit.

13 National Income: Seeking A Better Measure GNP is better than GDP as an income measure. But, we should adjust GNP for following: Depreciation of physical capital (implicit loss of income to capital owners) And, we might wish to go over further and include: unilateral transfers to and from other countries payments of expatriate workers sent to their home countries; foreign aid and pension payments sent to expatriate retirees

14 National Income: The NIPA Definition GNP = NNP = NI = Gross domestic product Plus: Income receipts from the rest of the world Less: Income payments to the rest of the world GNP Less: Consumption of fixed capital NNP Less: Statistical discrepancy http: //bea.gov/itable/itable.cfm?reqid=9&step=1

15 Example: GNP and GDP in the Philippines Gross domestic product... 6,338,477 Plus: income receipts from ROW... 1,529,672 Less: income payments to ROW ,130 Equals: Gross National Product... 7,700,018 Date: 2015S2 Units: PHP millions Source: Most of net factor income is measured as remittances from overseas Filipino workers (OFWs), and is often referred to as OFW remittances. Source: http: //dirp3.pids.gov.ph/ris/eid/pidseid0606.pdf

16 Getting the U.S. Data gdp/gdpnewsrelease.htm choose "Text Full Release and Tables find Table 9: Relation of GDP, GNP, and NI

17 GDP and GNP (US, 2015, $billions) Gross domestic product... 18,036.6 Plus: income receipts from ROW Less: income payments to ROW Equals: Gross National Product... 18,242.3

18 GNP and national income (US, 2015Q2, $billions) Gross national product... 18,242.3 Less: Consumption of fixed capital... 2,830.8 Less: Statistical discrepancy Equals: National income... 15,665.2 Q: What income is missing from this concept? A: Net unilateral transfers received from abroad (UTr). Source: gdp/2015/txt/gdp2q15_2nd.txt

19 Not a Measure of Welfare GNP and GDP measure aggregate economic activity. A welfare measure would have to include many other factors, including: the value of leisure time the value of non-market work the costs of environmental destruction

20 Welfare-Focused Measures of Economic Activity Green GDP Gross National Happiness Human Development Indicator

21 Green GDP National Income and Product Accounts incorporates costs of lost biodiversity accounts for costs of climate change accounts for resource depletion Resource: gross_domestic_product

22 Resistance to Environmental Accounting 1993 the Bureau of Economic Analysis began working the Integrated Environmental and Economic Accounts initial results showed that GDP numbers were overstating the impact of mining companies to the nation s economic wealth. Mining companies did not like this Rep. Mollohan, (D, West Virginia) coal country, sponsored an amendment to the 1995 Appropriations Bill that stopped the Bureau of Economic Analysis from working on revising the GDP. It passed.

23 Gross National Happiness National_Happiness emphasizes on conservation of the natural environment emphasizes sustainability currently lacks a metric

24 Inequality-Adjusted Human Development Index (IHDI) composite of indicators per capita income education life expectancy inequality missing indicators: sustainability political freedom gender inequality unemployment

25 Top IHDI Countries National Income and Product Accounts Country Income- Gini Norway 25.8 Australia 35.2 New Zealand 36.2 United States 40.8 Ireland Liechtenstein n.a. Netherlands 30.9 Canada 32.6 Sweden 25.0 Germany 28.3 Japan 24.9

26 Newly Produced Goods We can categorize newly produced goods by expenditure source: consumption (C) investment (I) government expenditures (G) current account (CA)

27 GNP by Expenditure Component Sum the values of all newly produced final goods and services. Types of expenditure: Consumption: by consumers Investment: by firms (buildings & equipment & inventory) Government: government s purchases of goods and services Current account (exports minus imports): net expenditure by foreigners on domestic goods and services

28 GNP = Expenditure National Income and Product Accounts Y = C d + I d + G d + EX = (C C f ) + (I I f ) + (G G f ) + EX = C + I + G + EX (C f + I f + G f ) = C + I + G + EX IM = C + I + G + CA Absorption: C + I + G GNP: absorption + current account

29 Getting the U.S. Data gdp/gdpnewsrelease.htm choose "Text Full Release and Tables find Table 3: Gross Domestic Product find C, I, G, and X-M

30 Creating the Basic Column Chart Add headers in a rows B1:D1: C, I, G, and NX fill in the data (from the news release) immediately below the headers select the headers and data insert a 2D column chart

31 Components of US GDP 15 Trillions of US Dollars C I G NX 2015 US GDP (USD 17.9T)

32 Creating the Percentages Column Chart Start with your previous workbook in cell F2, enter =SUM(B2:E2) select cell F2 and change the name box to GDP. (When you define a name, Excel defaults to using absolute cell reference, which is what we want) in B3 enter =B2/GDP and then copy this formula to the next 3 cells select the cells, right click, and format the values to percentages select the headers and your values in row 3, and insert a 2D column chart

33 Components of US GDP (as pct) 100 Percentage of GDP C I G NX 2015 US GDP (USD 17.9T)

34 GDP Components: Personal Consumption Gross Domestic Product: 18,037 Personal consumption... 12,284 Goods... 4,012 Durable goods... 1,355 Nondurable goods... 2,657 Services... 8,272 Country US Period 2015 Source national/gdp/gdpnewsrelease.htm

35 GDP Components: Investment Gross Domestic Product: 18,037 Gross private domestic investment... 3,057 Fixed investment... 2,963 Nonresidential... 2,311 Structures Equipment... 1,086 Software and r&d Residential Change in private inventories Country US Period 2015 Source national/gdp/gdpnewsrelease.htm

36 GDP Components: Government Expenditure Gross Domestic Product: 18,037 Government consumption expenditures and gross investment... 3,218 Federal... 1,225 National defense Nondefense State and local... 1,993 Country US Period 2015 Source national/gdp/gdpnewsrelease.htm

37 GDP Components: Net Exports Gross Domestic Product: 18,037 Net exports of goods and services Exports... 2,264 Goods... 1,498 Services Imports... 2,786 Goods... 2,291 Services Country US Period 2015 Source national/gdp/gdpnewsrelease.htm

38 National saving (S) National Income and Product Accounts National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G). S = Y C G S = (Y C T ) + (T G) S = S p + S g

39 National Saving and the Absorption approach: CA = Y - (C + I + G ) Current account surplus spending < less than national income we must be lending abroad (on net) This implies a financial capital outflow or positive net foreign investment. Current account deficit spending > national income we must be borrowing abroad (on net) This implies a financial capital inflow or negative net foreign investment.

40 National Saving and the current account = net foreign investment Rewrite this as CA = (Y C G) I = S I (1) current account = national saving - investment A country that imports more than it exports has low national saving relative to investment.

41 Absorption Approach to the CA = EX IM = Y (C + I + G) (2) Absorption C + I + G When production > domestic expenditure, exports imports: current account >0. 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. A country exports less than it imports, it earns less income from exports than it spends on imports net foreign wealth is decreasing

42 National Income and Product Accounts Data Source: https: //research.stlouisfed.org/fred2/series/netfi

43 U.S. (CA/GDP) Data Source: fred2/series/bpbltt01usq188s

44 U.K. (CA/GDP) Source: United Kingdom Balance of Payments - The Pink Book

45 Euro Area (%GDP) Source: balance/html/index.en.html

46 U.S. Exports and Imports Source: transactions/2015/pdf/trans115.pdf

47 Investment Finance National Income and Product Accounts Countries can finance investment either by saving or by acquiring foreign funds equal to the current account deficit. Recall CA = S - I When S > I, then CA > 0 so that net foreign investment and financial capital outflows for the domestic economy are positive. I = S - CA

48 Twin Deficits National Income and Product Accounts CA = S I = (S p + S g ) I = (S p FiscalDeficit) I = (S p I) FiscalDeficit Government deficit is equal to G - T. G-T>0 is negative government saving. A rising government deficit is associated with a declining current account balance when other factors remain constant.

49 Twin Deficits vs. Ricardian Equivalence Late 1990s: EU governments slashed deficits from 5.4% to 0.8% of GDP. (Required to participate in January 1999 launch of euro.) The current account for EU countries was little changed. Why? Private saving decreased by about the same amount! Explanations: Household wealth increases. Financial wealth rose in this period. Ricardian equivalence.

50 No Twin Deficits in EU (%GDP) Year CA Sp I G-T

51 Balance of Payments Accounts Balance of Payments Accounts A country s balance of payments accounts record its payments to and its receipts from foreign residents. An international transaction involves two parties. Each transaction enters the accounts twice: once as a credit (+) and once as a debit (-). Credit (+): outflow of value Debit (-): inflow of value

52 Balance of Payments Accounts Financial Flows Financial inflow: Foreigners loan to domestic citizens by buying domestic assets The outflow of ownership of domestic assets (sold to foreigners) is a credit (+) Financial outflow: Domestic citizens loan to foreigners by buying foreign assets The inflow of ownership of foreign assets (purchased by domestic citizens) is a debit (-)

53 Balance of Payments Accounts Balance of Payments: The Accounts The balance of payments accounts are separated into 3 broad accounts: current account: records flows of goods and services (imports and exports). financial account: records flows of financial assets (financial capital). capital account: records flows of special categories of assets (capital): typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks.

54 Balance of Payments Accounts BoP Accounts Always Balance Double entry of each transaction. Three accounts should sum to zero: current account + capital account + financial account = 0 (In reality we include a statistical discrepancy due to recording problems.)

55 Balance of Payments Accounts BoP Sub Accounts: CURRENT ACCOUNT Merchandise Trade Services tourism transportation business, professional and other services Primary Income (Factor Services) Investment Income Employee Compensation Secondary Income (Unilateral Current Transfers) government grants government pensions private remittances and other transfers (including taxes and workers remittances)

56 Balance of Payments Accounts U.S. CA Components (Quarterly Rates) Source: transactions/2015/pdf/trans115.pdf

57 Balance of Payments Accounts World Trade Volume World Trade Volume, 1990 = 100 Source: e/world_trade_report14_e.pdf

58 Balance of Payments Accounts World Trade Volume World Exports Relative to GDP Source: e/world_trade_report14_e.pdf

59 Balance of Payments Accounts BoP Sub Accounts: CAPITAL AND FINANCIAL ACCOUNT Capital Account Unilateral Capital Transfers (debt forgiveness, investment grants) Acquisition/Disposal of IPRs Financial Account (Private) Direct Foreign Investment Portfolio Investment (long term and short term) Financial Account (ORT) (gold, IMF credits and SDRs, foreign exchange reserves) Changes in domestic assets held by foreign monetary authority Changes in foreign assets held by domestic monetary authority Statistical Discrepancy (reported in Financial Account)

60 Balance of Payments Accounts Official Settlements Balance Official Settlements Balance = -ORT Sometimes called the balance of payments.

61 Balance of Payments Accounts BoP Example: Imports You import a DVD of Japanese anime by using your debit card. (Say, Princess Mononoke by Hiyao Miyazaki.) The Japanese producer of anime deposits the money in its bank account in San Francisco. The bank credits the account by the amount of the deposit. Account Amount -$30 Financial Account +$30

62 Balance of Payments Accounts BoP Example: Securities You invest in the Japanese securities market by buying $5000 in Sony bonds. You pay with a check that Sony deposits in its NY bank account. The bank credits the account by the amount of the deposit. Account Amount Financial Account (bond acquired) -$5000 Financial Account (deposit ownership) +$5000

63 Balance of Payments Accounts BoP Example: Debt Forgiveness A US bank forgives a $20M debt owed by the government of Argentina. Here the outflow of value (credit) is evident: forgiveness means that value flows from the US bank to the Argentine government. But what is the other half (debit) side of the transaction? It is handled as an accounting convention and recorded in the Capital account. Account Amount Capital Account (debt forgiveness) Financial Account (deposit ownership) -$20M +$20M

64 NIIP NIIP Puzzles (NIIP) net foreign assets (foreign assets - foreign liabilities) Foreign assets held by the US have grown since 1980, but US liabilities (our debt held by foreigners) have grown more quickly. By the end of 2013, the US international investment position was -$5383 B. The US has the most negative net foreign wealth in the world, and is therefore the world s largest debtor nation.

65 NIIP NIIP Puzzles U.S.: NIIP Data Source: FRED (IIPUSNETIA)

66 NIIP NIIP Puzzles Gross International Investment Positions Both assets and liabilities have grown over time foreign assets = 25% of GDP foreign liabilities = 16% of GDP foreign assets = 104% of GDP foreign liabilities = 123% of GDP foreign assets = 138% of GDP foreign liabilities = 155% of GDP

67 NIIP NIIP Puzzles Gross International Investment Positions

68 Source: BEA National Income and Product Accounts NIIP NIIP Puzzles Net and Gross International Investment Positions

69 NIIP NIIP Puzzles NIIP was measured at "historical value" until original purchase price BEA now uses two different measures affected by capital gains and losses current cost cost today of same direct investment market value price at which assets could be sold

70 NIIP NIIP Puzzles Changes in the NIIP NIIP is affected by: current account (net flow of foreign asset accumulation) capital gains and losses: changes in asset prices in own currency exchange rate changes -> changes in domestic price

71 NIIP NIIP Puzzles NIIP and CA The US current account in 2013 was -$400 B: US net foreign wealth continued to decrease. Source: international/intinv/intinvnewsrelease.htm

72 NIIP NIIP Puzzles U.S.: CA and NFA Source: Krugman, Obstfeld, and Melitz (2014, fig 13.2)

73 NIIP NIIP Puzzles Investment Income: A Puzzle Data Source: BEA

74 NIIP NIIP Puzzles Investment Income: A Puzzle In 2014QI, the US ran a surplus on Investment Income. Income receipts were about $196.5B. Income payments were about $147.7B. Net income receipts were about $48.8B. How can the US NIIP be so negative, yet we have this surplus? Mismeasurement of the NIIP? (But still...!) Differing rates of return on assets and liabilities. Relative return: Higgins (2005) argues that our FDI has a much higher rate of return. Portfolio composition: our accumulated net FDI position is very positive. Source: BEA s June 18 news release

75 NIIP NIIP Puzzles Large gross positions but denomination differs liabilities almost all in dollars assets 70% in foreign currencies so exchange rate changes -> large change in net dollar position 2006 based example for hypothetical 10% depreciation: 10% x (70% x 104%) = 7.3% 7.3% x GDP = 7.3% x $13.2T = $964B bigger than CA deficit

76 NIIP NIIP Puzzles Composition of IIP

77 NIIP NIIP Puzzles CA vs. Change in NIIP: Another Puzzle CA and NIIP (US, $billions) NIIP 2009 (eop) -2,738 NIIP 2008 (eop) -3,494 Delta NIIP 756 CA Q: How can we have CA<0 and Delta NIIP >0?? A: changes in asset prices (as measured in own currency) capital gains on foreign assets (given E) depreciation of E

78 NIIP NIIP Puzzles References See the syllabus.