National Income, Saving, & the Balance of Payments

Transcription

1 National Income, Saving, & the Balance of Payments CHAPTER 12 1 Questions to be Answered What Information is Provided by Items in: National Income and Product Accounts Balance of Payments Accounts 2 National Income Account Entries Y C I G EX IM T GDP GNP Consumption Investment Government Purchases Exports Imports Tax Receipts 3 Chapter 12 1

2 Related Quantities S CA G-T T Y-T T Saving Current Account Balance Budget Deficit Disposable Income 4 Balance of Payments Account Entries CA EX IM FA changes in changes in Current Account Balance Exports Imports Financial Account Balance US Assets Held Abroad Foreign Assets Held in US 5 GNP (Y) GNP Output Income Spending Value of output = Income (compensation) One person s spending is another s income, hence total spending = total income Per capita income = GNP/population & measures the standard of living. 6 Chapter 12 2

3 2000 GNP (Billions of U.S. $ s) 1 U.S France China Russia Japan Italy India Brazil Germany Mexico U.K Canada Population (Millions) 1 U.S France 60 2 China Russia Japan Italy 60 4 India Brazil Germany Mexico U.K Canada 30 8 GNP per Capita (U.S. $ s) 1 U.S France China Russia Japan Italy India Brazil Germany Mexico U.K Canada Chapter 12 3

4 GNP versus GDP GNP ownership,, production by US capital & labor, both here & abroad GDP location,, production within US borders by both US & foreign owned capital & labor GNP = GDP + NFI For US, GNP GDP Production by US factors abroad production by foreign factors in US 10 GNP versus GDP 11 GNP versus GDP 12 Chapter 12 4

5 GNP versus GDP 13 Demand for Goods in a Closed Economy Demand for goods is Y = C + I + G C consumption spending by households on durables, nondurables, & services I investment, purchases of physical investment goods: new houses, buildings, machinery, & inventories. G government purchases of goods & services 14 Demand for Goods in a Closed Economy Investment (according to the American Heritage College Dictionary) 1. The act of investing. 2. An amount invested. 3. A property or possession acquired for future financial benefit. 4. A commitment, as of time. 5. A military siege. 15 Chapter 12 5

6 The National Income Accounts Figure 12-1: U.S. GNP and Its Components, United States (billions of $ s) C % I % G % EX % IM % Y Y % 17 Japan (trillions of s) C % I % G % EX % IM % Y % 18 Chapter 12 6

7 Closed Economy Saving & Investment Importance of Saving (S) & Investment (I) If S & I,, capital formation,, productivity, & per capita income 19 Closed Economy Saving & Investment Saving is the supply of investment financing, S = S P - (G - T) Private saving (S P ) is the initial source of financing S P = (Y - T) - C The government budget deficit (G T) is the financing used by the government The remainder is available to finance (physical) investment 20 Closed Economy Saving & Investment Saving is also the supply of investment goods, S = Y - (C + G) Y is production C + G is the goods used by households & government. The remaining goods are available for use as investment goods. 21 Chapter 12 7

8 Closed Economy Saving & Investment Algebraically, the supply of investment financing is equal to the supply of investment goods S = S P - (G - T) = (Y - T - C) - (G -T) = Y - C - G In a closed economy, S & I are equal. Y = C + I + G & S = Y C G, hence S = I Chapter 12 8

9 The National Income Accounts Figure 12-1: U.S. GNP and Its Components, United States (billions of $ s) C % I % G % EX % IM % Y Y % 26 Japan (trillions of s) C % I % G % EX % IM % Y % 27 Chapter 12 9

10 Demand for Goods in an Open Economy Demand for goods is Y = C + I + G + NX C+I+G is domestic demand for goods (spending) Net exports (NX) = exports - imports If NX > 0, we run a trade surplus & international trade demand If NX < 0, we run a trade deficit & international trade demand 28 Current Account Balance (CA) CA NX = Y (C + I + G) = (Y C G) I = S I CA is goods production less domestic demand CA is the excess supply of domestic financing 29 Current Account (CA) CA surplus implies an outflow of goods, an outflow of financing, & an in net foreign assets CA deficit implies an inflow of goods, an inflow of financing, & a in net foreign assets 30 Chapter 12 10

11 Recession 2001? GDP 2000 III IV I II III IV I Recession 2001 nominal GDP real GDP 2000 III IV I II III IV I Chapter 12 11

12 Recession IV 2001 III C 6289 I 1755 G 1593 NX -419 Y Recession IV 2001 III C I 1755 G 1593 NX -419 Y Recession IV 2001 III C I G 1593 NX -419 Y Chapter 12 12

13 Recession IV 2001 III C I G NX -419 Y Recession IV 2001 III C I G NX Y REVIEW Closed Economy: GNP = Spending = Output = Income Open Economy: Spending = C + I + G Output = C + I + G + NX (= GDP) Income = C + I + G + NX + NFI (= GNP) = C + I + G + CA (= GNP = Y) 39 Chapter 12 13

14 Current Account for B-landB Spending for Mr. & Mrs. B $100,000 = C; I = G = 0 Combined wages for Mr. & Mrs. B $90000 = Exports C = Imports; NX = -$10000 Output = C + I + G + NX (GDP) = $ $10000 = $ Current Account for B-landB Interest and Dividends for Mr. & Mrs. B: $13000 Interest Payments for Mr. & Mrs. B: $ 1000 Net Factor Income = $ $1000 = $ Current Account for B-landB Current Account Balance = NX + NFI = -$ $12000 = $2000 GNP = GDP + NFI = C + I + G + CA = $ $12000 = $ = $ $2000 = $ (=Y) 42 Chapter 12 14

15 Financial Account for B-landB Option 1 Add $2000 to Checking Account Foreign Assets increase by $2000 Financial Account Balance = -$2000 CA + FA = $ $2000 = 0 43 Financial Account for B-landB Option 2 Reduce Visa Balance by $2000 Foreign Liabilities decrease by $2000 Financial Account Balance = -$2000 CA + FA = $ $2000 = 0 44 Financial Account for B-landB Option 3 Put $2000 under bed Foreign Assets increase by $2000 Financial Account Balance = -$2000 CA + FA = $ $2000 = 0 45 Chapter 12 15

16 46 The Balance of Payments Accounts Table 12-2: U.S. Balance of Payments Accounts for National Income Accounting for an Open Economy Figure 12-2 U.S. CA & Net Foreign Wealth Position, Chapter 12 16

17 Is the US the World s Largest Debtor? Yes, in 1997 net debt was close to $900 billion, the world s largest However, US net debt was 11% of GNP. Argentine net debt is $120 Billion But this is 40% of GNP (interest is 4% of GNP) 49 Twin Deficits US Trade Deficits in the 1980 s US Trade Deficits (% of GDP) Twin Deficits US Trade Deficits in the 1980 s 1980 s - our trade deficits to 3.5% of GDP due to government budget deficits. In the 1980 s, taxes & government spending Thus the demand for goods & we imported foreign goods Also the demand for financing & we borrowed from foreigners 51 Chapter 12 17

18 52 Financial Account Gives details of s in net foreign assets Financial account balance = sales of US assets to foreigners purchase of foreign assets by US Mirror image of the CA balance, CA + FA = 0 53 The Balance of Payments Accounts Table 12-2: Continued credits debits 54 Chapter 12 18

19 Current Account Transactions Examples The US buys a $50 sweater from the British, & the British use the $50 to buy a US computer game. (The US trades goods for goods.) Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 55 Current Account Transactions Examples A US investor trades a British investor a $50 US bond for a British bond of equivalent value. (The US trades assets for assets.) Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 56 Current Account Transactions Examples The US buys a $50 sweater from the British, & the British use the $50 to buy a US government bond. (The US trades assets for goods.) Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 57 Chapter 12 19

20 Current Account Transactions Examples A British tourists sells a US bond & uses the proceeds on a trip to Disney World. (The US trades services for assets.) Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 58 Current Account Transactions Examples A US plant in Britain earns 50 pounds & deposits these profits in a London bank (The US trades services for assets.) Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 59 Current Account Transactions Examples US gives Israel $5 million in foreign aid, & Israel uses the 5 million to buy US military goods. Effect on CA? CA = NX + net investment income + net transfers = in net foreign assets 60 Chapter 12 20