1 Flashcards
GNP definition
Value of all final G&S produces by a nation’s factor of production in a given time period
TorF : GNP measures the value of final goods/services
regardless of where in the world the production process is taking place
T
are goods produced by a canadian firm that produces in canada counted in GNP
yes
are goods produced by a canadian firm that produces in italy counted in GNP
yes
are goods produced by an italian firm that produces in canada counted in GNP
no
how is GNP calculated?
by adding expenditures on final G&S:
- consumption
- investment
- gvnt purchases
- current account
how is the current account calculated?
CA= net exports + net income from abroad + net unilateral transfers
what is the GNP mathematical equation?
Y = C + I + G + CA
what are the components of the current account?
- net exports
- net income from abroad
- net unilateral transfers
what is the net income from abroad?
interest and dividend payments on international assets, earning of firms and worker operating in foreign countries
what is the net unilateral transfers?
remittances, donations, aids, pensions from abroad
is the net unilateral transfers small or large in developed countries?
small
what is the national income identity for a closed economy?
Y = C + I + G
what is the national income identity for a open economy?
Y = C + I + G + CA
what does CA represent in the national income identity for a open economy
it is the net expenditure by foreign individuals and institutions
what does C + I + G represent in the national income identity for a open economy
it is the net expenditure by domestic individuals and institutions
what does it mean when CA<0
- Y < C + I + G (production is less than domestic expenditures)
- IM > EX
- Canada is borrowing from abroad to finance part of domestic expenditures
what does it mean when CA>0
- Y > C + I + G (production is more than domestic expenditures)
- IM < EX
- Canada is lending to foreigners
what is the definition of GDP
value of all final goods and services that are produced within a country in a given time period
what is the difference between GDP and GNP
GNP = C+I+G+CA GDP = C+I+G+NX
how can we calculate GDP with GNP?
GDP = GNP - net income from abroad - net unilateral transfers
shoes made in a nike plant in korea are recorded in GDP or GNP or both?
- recorded in US GNP
- not recorded in US GDP
toyota plant in Kentucky are recorded in GDP or GNP or both?
- not recorded in US GNP
- recorded in US GDP
Ford car produced in Detroit and sold in France are recorded in GDP or GNP or both?
- recorded in both GNP and GDP
what is national saving (S)?
it is national income (Y) that is not spent on private consumption (C) or gvnmt consumption (G)
what is the national saving identity?
S = Y - C - G
or
S = I + CA
what is the CA identity?
CA = S - I
when there is a CA surplus (CA>0), it means that national saving…
is greater than investment (S>I)
when there is a CA deficit (CA<0), it means that national saving…
is lower than investment (S
national saving can be decomposed in …
private saving (Sp) and government saving (Sg)
what is private saving?
the part of disposable income (national income minus taxes) that is saved rather than consumed
what is the private saving identity?
Sp = Y - T - C
or
Sp = I + CA - (T - G)
what is government saving?
tax revenue minus government purchases
what is the gvnmt saving identity?
Sg = T - G
what happens when T
tax revenue does not cover gvnmt expenditures, the gvnmt issues debt to finance the deficit
what are the 3 forms that a country’s saving can take?
- investment in domestic capital (I)
- purchases of foreign assets (CA)
- purchases of domestic gvnmt debt (issued to finance T>G)
what does the BoP accounts record?
it records both the flows of G&S and flows of financial assets across countries
what are the 3 types of international transactions that the BoP records
- current account (CA)
- financial account (FA)
- capital account (KA)
what is the current account?
CA: flows of G&S (IM & EX), interest and dividend payments, unilateral transfers
what is the financial account?
flows of financial assets
what is the capital account?
flows of special categories of assets (capital): typically nonmarket, non-produces or intangible assets like debt forgiveness, copyrights and trademarks
is the capital account small or large in developed countries?
small
what is the financial account identity?
sales of domestic assets to foreigners - purchases of foreign assets by domestic citizens
FA: are sales of domestic assets to foreigners a financial inflow or outflow (credit or debit)?
it is a financial inflow = credit (+)
because the domestic economy acquires money during the transaction
FA: are purchases of foreign assets by domestic citizens a financial inflow or outflow (credit or debit)?
it is a financial outflow = debit (-)
because the domestic economy gives up money during the transaction
what are the 3 main subcategories of the FA?
- official (international) reserve assets
- all other assets
- statistical discrepancy
what is the official (international) reserve assets?
foreign assets held by central banks: foreign gvnmt bonds, foreign currency, gold
what is the key principle of BoP accounting?
each international transaction involves 2 parties: once as a credit (+) and once as a debit (-)
due to the double entry of each transaction, the BoP accounts will balance by the following equation:
CA + FA + KA = 0
how does the BoP records a canadian purchase of a Fiat from Italy paying 30K CAD dollars?
CAD CA = -30K
CAD FA = +30K because foreigners are acquiring a CAD asset (CAD dollars)
how does the BoP records a canadian buying apple shares for 10K US dollars?
CAD FA = - 10k since canadian acquires foreign asset
CAD FA = + 10k since foreigners acquire a CAD asset (CAD dollars needed to get US dollars)
how does the BoP records the CAD bank forgiving a 50M debt owed by the gvnmt of Argentina?
CAD FA = +50M since foreigners are acquiring a CAD asset (CAD dollars)
CAD KA = -50M since there is a transfer to Argentina
