0. Review: Accounting Identities (GDP and Balance of Payments)

Question 1

Balance of Payments

Answer 1

BP = CA + KA

(Balance of Payments =

Current Account +

Private Capital or Financial Account)

BP = ORT

(Balance of Payments = Official Reserve Transactions)

Question 2

1. Current Account (CA)

Answer 2

1.1. Merchandise

1.2. Services

1. 2.1. Transport
2. 2.2. Tourism
3. 2.3. Business & Professional Services

1.3. Primary Income / Investment Income

1.4. Secondary Income / Unilateral Transfers

1. 4.1. Government Grants
2. 4.2. Private Remittances

Question 3

2. Financial or Capital Account (KA)

Answer 3

2.1. Direct Investment 2.2. Portfolio Investment (Securities and Banking Flows) 2.2.1. Long-term Portfolio Investments 2.2.2. Short-term Portfolio Investments

Question 4

3. Official Reserve Transactions (ORT)

Answer 4

3.1. Change in domestic assets held by foreign central banks 3.2. Change in foreign assets held by domestic central bank 3.2.1. Gold 3.2.2. IMF Credits / Special Drawing Rights 3.2.3. Foreign exchange reserves

Question 5

Merchandise Balance

Answer 5

1. Current Account 1.1. Merchandise Exports - Merchandise Imports

Question 6

Balance of Goods and Services

Answer 6

1. Current Account 1.1. Merchandise 1.2. Service 1.2.1. Transport 1.2.2. Tourism 1.2.3. Business and Professional Services

Question 7

Balance of Goods, Services, and Income

Answer 7

1.1. Merchandise 1.2. Services 1.2.1. Transport 1.2.2. Tourism 1.2.3. Business & Professional 1.3. Primary Income / Investment Income

Question 8

Basic Balance

Answer 8

1. Current Account Balance 2. Financial / Private Capital Account 2.1. Direct Investment 2.2. Portfolio Investment (Securities and Banking Flows) 2.2.1. Long-term Portfolio Investments

Question 9

Overall Balance of Payments

Answer 9

1. Current Account 1.1. Merchandise 1.2. Services 1.2.1. Transport 1.2.2. Tourism 1.2.3. Business & Professional 1.3. Primary Income / Investment Income 1.4. Secondary Income / Unilateral Transfers 1.4.1. Government Grants 1.4.2. Private Remittances 2. Capital Account 2.1. Direct Investment 2.2. Portfolio Investment (Securities and Banking Flows) 2.2.1. Long-term Portfolio Investments 2.2.2. Short-term Portfolio Investments

Question 10

GDP

Answer 10

Gross Domestic Product is the value of goods and services produced in the economy.

Question 11

GNP

Answer 11

Gross National Product = GDP + Investment Income from Abroad

Question 12

GNI

Answer 12

Gross National Income = GNP + Income from Unilateral Transfers

Question 13

NNI

Answer 13

Net National Income = GNI - Depreciation of Capital Stock

Question 14

What is the difference between GDP, GNP, and GNI?

Answer 14

GDP is the value of goods and services produced in the economy.

GNP = GDP + investment income from abroad

GNI = GNP + unilateral transfers

Question 15

Derive the National Saving Identity

Answer 15

Income = Output

(assuming no transfers / investment income)

Y = GDP

C + S + T = C + I + G + X - M

S + (T - G) = I + X - M

S + BS = I + X - M

NS = I + CA

NS - I = CA

Question 16

What are the two ways of decomposing GDP?

Answer 16

1. Expenditure side of the GDP

Y = C + I + G + X - M

(Consumption + Investment + Government Spending + Net Exports)

2. Income side of GDP

Y = Yd + T (Disposable Income + Taxes)

Y = C + S + T (Consumption + Savings + Taxes)