chapter 6 Flashcards
It studies the effective use of scarce resources from the
perspective of individual firms and consumers.
Microeconomics
It studies how economies’ overall levels of
employment, production, and growth are determined.
Macroeconomics
Macroeconomics emphasizes four aspects of economic life:
Unemployment
Saving
Trade imbalances
Money and the price level
essential tools for studying the
macroeconomics of open, interdependent economies.
national income accounts and the balance of
payments accounts
Records all the expenditures that contribute to a
country’s income and output
National income accounting
Helps us keep track of both changes in a country’s
indebtedness to foreigners and the fortunes of its
export- and import-competing industries
Balance of payments accounting
The value of all final goods and services produced by
a country’s factors of production and sold on the
market in a given time period
Gross national product (GNP)
It is the basic measure of a country’s output.
Gross national product (GNP)
GNP is calculated by adding up the market value of
all expenditures on final output:
Consumption
Investment
Government purchases
Current account balance
The amount consumed by private domestic residents
Consumption
The amount put aside by private firms to build new
plant and equipment for future production
Investment
The amount used by the government
Government purchases
The amount of net exports of goods and services to
foreigners
Current account balance
It is earned over a period by its factors of production.
National Income
It must equal the GNP a country generates over some
period of time.
One person’s spending is another’s income (i.e., total spending
must equal total income).
National Income
Adjustments to the definition of GNP:
Depreciation of capital
Net unilateral transfers of income
Indirect business taxes
Adjustments to the definition of GNP:
It reduces the income of capital owners.
Depreciation of capital
Adjustments to the definition of GNP:
It must be subtracted from GNP (to get the net national product).
Depreciation of capital
Adjustments to the definition of GNP:
They are part of a country’s income but are not part of its product.
Net unilateral transfers of income
Adjustments to the definition of GNP:
They must be added to the net national product.
Net unilateral transfers of income
Adjustments to the definition of GNP:
They are sales taxes.
indirect business taxes
Adjustments to the definition of GNP:
They must be subtracted from GNP.
Indirect business taxes
It measures the volume of production within a
country’s borders.
Gross Domestic Product (GDP)
It equals GNP minus net receipts of factor income
from the rest of the world.
Gross Domestic Product (GDP)
It does not correct for the portion of countries’
production carried out using services provided by
foreign-owned capital.
Gross Domestic Product (GDP)
National Income Accounting
for an Open Economy
Y = C + I + G + EX – IM
where:
Y is GNP
C is consumption
I is investment
G is government purchases
EX is exports
IM is imports
The portion of GNP purchased by the private sector to
fulfill current wants
Consumption
The part of output used by private firms to produce
future output
Investment
Any goods and services purchased by federal, state, or
local governments
Government Purchases
It is the sum of domestic and foreign expenditure on
the goods and services produced by domestic factors of
production:
Y = C + I + G + EX – IM
The National Income Identity for an Open Economy
In a closed economy, EX = IM =
0
The difference between exports of goods and services
and imports of goods and services
Current account (CA) balance
CA > 0
CA surplus
CA < 0
CA deficit
measures the size and direction of international
borrowing.
Current account
A country’s current account balance equals the change in its _
net foreign wealth.
CA balance is equal to the difference between national
income and domestic residents’ spending:
Y – (C+ I + G) = CA
WHAT is goods production less domestic demand.
CA balance
WHAT is the excess supply of domestic financing.
Example: Agraria imports 20 bushels of wheat and exports only
10 bushels of wheat (Table 12-1). The current account deficit of
10 bushels is the value of Agraria’s borrowing from foreigners,
which the country will have to repay in the future.
CA balance
The portion of output, Y, that is not devoted to household
consumption, C, or government purchases, G.
National saving (S)
It always equals investment in a closed economy.
National saving (S)
A closed economy can save only by building up its _
An open economy can save either by building up its _
capital stock
(S = I).
capital stock
or by acquiring foreign wealth (S = I + CA).
A country’s CA surplus is referred to as its
net foreign
investment.
The part of disposable income that is saved rather than
consumed
Private saving (Sp)
Sp = I + CA – Sg = I + CA – (T – G) = I + CA + (G – T)
T is the government’s “income” (its net tax revenue)
Sg is government savings (T-G)
Private saving (Sp)
It measures the extent to which the government is
borrowing to finance its expenditures.
Government budget deficit (G – T)
accounts keep track
of both its payments to and its receipts from
foreigners.
country’s balance of payments
Every international transaction automatically enters
the balance of payments twice:
once as a credit (+)
and once as a debit (-).
Three types of international transactions are recorded
in the balance of payments:
Exports or imports of goods or services
Purchases or sales of financial assets
Transfers of wealth between countries
They are recorded in the capital account.
Exports or imports of goods or services
Purchases or sales of financial assets
Transfers of wealth between countries
A U.S. citizen buys a $1000 typewriter from an Italian
company, and the Italian company deposits the $1000
in its account at Citibank in New York.
the U.S. trades assets for ?
This transaction creates the following two offsetting
entries in the U.S. balance of payments: ?
for goods.
It enters the U.S. CA with a negative sign (-$1000).
It shows up as a $1000 credit in the U.S. financial account.
A U.S. citizen pays $200 for dinner at a French
restaurant in France by charging his Visa credit card.
U.S. trades assets for ?
This transaction creates the following two offsetting
entries in the U.S. balance of payments: ?
for services
It enters the U.S. CA with a negative sign (-$200).
It shows up as a $200 credit in the U.S. financial account.
A U.S. citizen buys a $95 newly issued share of stock
in the United Kingdom oil giant British Petroleum
(BP) by using a check drawn on his stockbroker
money market account. BP deposits the $95 in its own
U.S. bank account at Second Bank of Chicago.
US trades assets for ?
This transaction creates the following two offsetting
entries in the U.S. balance of payments: ?
for assets
It enters the U.S. financial account with a negative sign (-$95).
It shows up as a $95 credit in the U.S. financial account.
A U.S. bank forgives $5000 in debt owed to it by the
government of Bygonia.
This transaction creates the following two offsetting
entries in the U.S. balance of payments: ?
It enters the U.S. capital account with a negative sign (-$5000).
It shows up as a $5000 credit in the U.S. financial account.
Any international transaction automatically gives rise
to two offsetting entries in the balance of payments
resulting in a fundamental identity:
Current account + financial account + capital account = 0
Fundamental Balance of Payments Identity
The Fundamental Balance of Payments Identity
Any international transaction automatically gives rise
to two offsetting entries in the balance of payments
resulting in a fundamental identity: ?
Current account + financial account + capital account = 0
The balance of payments accounts divide exports and
imports into three categories:
Merchandise trade
Services
Income
Exports or imports of goods
Merchandise trade
Payments for legal assistance, tourists’ expenditures, and
shipping fees
Services
International interest and dividend payments and the earnings
of domestically owned firms operating abroad
Income
It records asset transfers and tends to be small for the
United States.
The Capital Account
It measures the difference between sales of assets to
foreigners and purchases of assets located abroad.
The Financial Account
A loan from the foreigners with a promise that they will be
repaid
Financial inflow (capital inflow)
A transaction involving the purchase of an asset from foreigners
Financial outflow (capital outflow)
The Financial Account
Financial inflow (capital inflow)
Financial outflow (capital outflow)
Data associated with a given transaction may come
from different sources that differ in coverage,
accuracy, and timing.
The Statistical Discrepancy
This makes the balance of payments accounts seldom
balance in practice.
Statistical Discrepancy
Account keepers force the two sides to balance by
adding to the accounts a WHAT
Statistical Discrepancy
It is very difficult to allocate this discrepancy among the
current, capital, and financial accounts.
Statistical Discrepancy
Official Reserve Transactions
Central bank
Official international reserves
Official foreign exchange intervention
Official settlements balance (balance of payments)
The institution responsible for managing the supply of
money
Central bank
Foreign assets held by central banks as a cushion
against national economic misfortune
Official international reserves
Central banks often buy or sell international reserves in
private asset markets to affect macroeconomic
conditions in their economies.
Official foreign exchange intervention
The book-keeping offset to the balance of official
reserve transactions
It is the sum of the current account balance, the capital
account balance, the nonreserve portion of the financial
account balance, and the statistical discrepancy.
Example: The U.S. balance of payments in 2000 was -$35.6
billion, that is, the balance of official reserve transactions with
its sign reversed.
signal that it is running down its international reserve
assets or incurring debts to foreign monetary authorities.
country with a negative balance of payments
WHAT is the world’s biggest debtor.
The United States is the world’s biggest debtor.
However, the United States has the world’s largest
GNP.
A country’s GNP is equal to the WHAT
income received by
its factors of production.
equal to GNP less net receipts of factor income
from abroad, measures the output produced within a
country’s territorial borders.
GDP
In a closed economy, WHAT must be consumed,
invested, or purchased by the government.
GNP
In an open economy, WHAT equals the sum of
consumption, investment, government purchases, and
net exports of goods and services.
GNP
All transactions between a country and the rest of the
world are recorded in its WHAT
balance of payments
accounts.
The current account equals the WHAT
country’s net lending
to foreigners.
domestic investment plus the
current account.
National saving
Transactions involving goods and services appear in WHAT
CURRENT ACCOUNT OF THE BOP
international sales or purchases of assets appear in the WHAT
FINANCIAL ACCOUNT
records asset transfers and tends
to be small in the United States.
capital account
WHAT must be matched by an
equal surplus in the other two accounts of the balance
of payments, and any current account surplus by a
deficit somewhere else.
current account deficit
International asset transactions carried out by central
banks are included in the WHAT
financial account.
