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
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
2000 GNP (Billions of U.S. $ s) 1 U.S. 10000 7 France 1500 2 China 4900 8 Russia 1500 3 Japan 3400 9 Italy 1500 4 India 2800 10 Brazil 1500 5 Germany 2000 11 Mexico 900 6 U.K. 1500 12 Canada 900 7 2000 Population (Millions) 1 U.S. 280 7 France 60 2 China 1250 8 Russia 150 3 Japan 130 9 Italy 60 4 India 1020 10 Brazil 170 5 Germany 80 11 Mexico 100 6 U.K. 60 12 Canada 30 8 GNP per Capita (U.S. $ s) 1 U.S. 36000 7 France 24000 2 China 3900 8 Russia 10000 3 Japan 26000 9 Italy 23000 4 India 3000 10 Brazil 8000 5 Germany 24000 11 Mexico 10000 6 U.K. 25000 12 Canada 29000 9 Chapter 12 3
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
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
The National Income Accounts Figure 12-1: U.S. GNP and Its Components, 2000 16 United States (billions of $ s) C 6757 68 % I 1833 18 % G 1744 18 % EX 1097 11 % IM 1468-15 % Y Y 9963 100 % 17 Japan (trillions of s) C 289 56 % I 133 26 % G 83 16 % EX 52 10 % IM -44-99 % Y 430 100 % 18 Chapter 12 6
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
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 22 23 24 Chapter 12 8
The National Income Accounts Figure 12-1: U.S. GNP and Its Components, 2000 25 United States (billions of $ s) C 6757 68 % I 1833 18 % G 1744 18 % EX 1097 11 % IM 1468-15 % Y Y 9963 100 % 26 Japan (trillions of s) C 289 56 % I 133 26 % G 83 16 % EX 52 10 % IM -44-99 % Y 430 100 % 27 Chapter 12 9
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
Recession 2001? GDP 2000 III 9875 2000 IV 9953 2001 I 10028 2001 II 10050 2001 III 10098 2001 IV 10153 2002 I 10313 31 Recession 2001 nominal GDP real GDP 2000 III 9875 9219 2000 IV 9953 9244 2001 I 10028 9230 2001 II 10050 9193 2001 III 10098 9186 2001 IV 10153 9249 2002 I 10313 9363 32 33 Chapter 12 11
Recession 2001 2000 IV 2001 III C 6289 I 1755 G 1593 NX -419 Y 9244 9186 34 Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 G 1593 NX -419 Y 9244 9186 35 Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 1563 G 1593 NX -419 Y 9244 9186 36 Chapter 12 12
Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 1563 G 1593 1633 NX -419 Y 9244 9186 37 Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 1563 G 1593 1633 NX -419-419 Y 9244 9186 38 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
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) = $100000 - $10000 = $90000 40 Current Account for B-landB Interest and Dividends for Mr. & Mrs. B: $13000 Interest Payments for Mr. & Mrs. B: $ 1000 Net Factor Income = $13000 - $1000 = $12000 41 Current Account for B-landB Current Account Balance = NX + NFI = -$10000 + $12000 = $2000 GNP = GDP + NFI = C + I + G + CA = $90000 + $12000 = $102000 = $100000 + $2000 = $102000 (=Y) 42 Chapter 12 14
Financial Account for B-landB Option 1 Add $2000 to Checking Account Foreign Assets increase by $2000 Financial Account Balance = -$2000 CA + FA = $2000 - $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 - $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 - $2000 = 0 45 Chapter 12 15
46 The Balance of Payments Accounts Table 12-2: U.S. Balance of Payments Accounts for 2000 47 National Income Accounting for an Open Economy Figure 12-2 U.S. CA & Net Foreign Wealth Position, 1977-2000 48 Chapter 12 16
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) 0.02 0.01 0-0.01-0.02-0.03-0.04 1959 1962 1966 1969 1973 1976 1980 1983 1987 1990 1994 1997 50 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
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
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
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