Balance Of Payments Flashcards
What are the national income accounts?
Accounts that record the value of national income that results from production and expenditure
What is GNP?
- the value of all final goods and services produced by a nations factors of production in a given time period
What types of expenditure can GNP be broken down into?
- Consumption
- Investment
- Government purchases
- Current account balance (EX-IM)
What adjustments can be made to GNP to make it a more accurate measure of national income?
- Depreciation
- Unilateral transfers
Describe a negative current account
- you import more than you export
- spending more than you produce/your income
- in order to run a CA deficit borrowing from other countries is required
What is GDP?
- another approx. Measure of national income
- measures the final value of all goods and services that are produced within a country in a given time period
What is the relationship between GDP and GNP?
GDP = GNP - payments from foreign countries for factors of production + payments to foreign countries for factors of production
Describe consumption and investment in a closed economy
In a closed economy:
- Y = C + I + G
- no net exports
- total expenditure = total production
Describe savings and investment in a closed economy
- anything not consumed is saved as inventory which counts as investment
- in a closed economy national saving = national investment
S = I
Describe the relationship between GNE, GDP and GNI in a closed economy
In a closed economy:
GNE=GDP=GNI
What is an open economy?
- an open economy is one in which trade of goods and services occurs, this includes trade in assets and capital
What is the equation for GNP in an open economy?
Y = C + I + G + EX - IM
Or
Y = C + I + G + CA
Describe the situation when production (Y) > domestic expenditure (C+I+G)
- in this situation EX > IM
- CA > 0
- CA is running a surplus
- spend less than they produce
- country known as net creditors
- can lend to ROW
- net foreign wealth is increasing
What is net foreign wealth?
Net foreign wealth = foreign assets - foreign liabilities
Describe the situation when production (Y) < domestic expenditure (C+I+G)
- EX < IM
- country is running a CA deficit
- country generated less income that it spends
- to finance deficit country just borrow from ROW
- net debtors
- net foreign wealth is decreasing
What is national saving?
- national is saving is the national income that is not spend on consumption of government purchases
S = Y - C - G
In an open economy what is the relationship between CA, savings and investment
CA = S - I
- means savings and investment do not need to be equal as in a closed economy
Describe the implications of a CA deficit on savings and investment
- a country that imports more than it exports has low national savings relative to investment
- S < I
What does a CA deficit imply
- implies a financial asset inflow or negative net foreign investment
What does a CA surplus imply?
S > I
- implies positive net foreign investment
- financial capital outflows
What is the trade balance?
TB = EX - IM
What is the relationship between GNE and GDP?
GDP = GNE + TB
What is the relationship between GDP and GNI?
GNI = GDP + NFIA
What is net unilateral transfers (NUT)?
NUT = unilateral transfers country received from ROW - unilateral transfers country sends abroad
What is the current account (CA)?
- CA is a tally of all international transactions in goods, services and income occurring though market transactions or transfers
What are a country’s balance of payments accounts?
- a record of its payments to and it’s receipts from foreigners
- records flows of goods and services and flows of financial assets across countries
Describe the two types of transaction that can occur in the balance of payments accounts
Debit - any transaction resulting in a payment to foreigners
Credit - any transaction resulting in a receipt from foreigners
What are the 3 parts of the balance of payment accounts?
- Current account
- Financial account
- Capital account
What is the current account?
- accounts for transactions of goods and services
What is the financial account?
- accounts for transactions of purchases and sales of financial assets
What is the capital account?
- records the transactions of special categories of assets
- I.e non-market or intangible assets
What does theory say about the balance of payments accounts?
Im theory:
CA + FA + Capital A = 0
- an international transaction involved two parties and each transaction enters the accounts twice
- once as a credit
- once as a debit
