Chapter 9: BOPFEX Flashcards
What is the national income account
The national income accounts records the value of national income that results from production and expenditure
National income is the income earned by a nation’s factors of production. An
approximate measure of national income is the gross national product (GNP).
What is the gross national product (GNP)
Gross national product (GNP) is the value of all final goods and services produced by
a nation’s factors of production in a given time period.
What is the national income adjusted for (list 3 things)
- Depreciation of physical capital: Loss of income to capital owners
- Income balance: difference between income received from rest of the world and paid to ROW
- net investment income: net income from capital
- net international payments to employees: net income from domestic labour working overseas and foreign labour working in country
- Net unilateral transfer: payments of expatriate workers sent to their home countries
(private remittances), pension payments sent to expatriate retirees, and foreign aid
How to calculate gross national disposable income (list 4)
1. Consumption (C): expenditure by domestic consumers
2. Investment (I): expenditure by domestic firms on buildings, equipment, machinery
3. Government purchases (G): expenditure by domestic government on goods and
services
4. Current Account (CA): foreign net expenditure on domestic goods and services
(EX-IM), net investment payments, dividends etc.
What is the current account
The current account (CA) is the net foreign expenditure by individuals and
institutions
Current Account = Trade Balance + Income Balance + Net Unilateral Transfers
National Income Identity for a closed economy
Y=C+I+G
What happen when CA Negative/Positive and country has debt
CA -ve –> lead to net external debt going up
CA+ve –> lead to net external debt going down
What is the correlation for trade balance and current account? Are there any execeptions
For almost all countries, the trade balance and the current account move together: A country with a large trade deficit tend to have a large current account deficit and vice versa.
Exceptions: Philippines (TB<0 but CA>0), and Ireland (TB>0, CA<0)
Why? Personal remittances in Philippines, profit payments due to 1990s FDI in Ireland.
What happen when CA>0 and TB>0
When the value of production exceeds domestic expenditure, the value of exports is larger than the value of imports, then there is usually a current account surplus and the trade balance is positive.
When a country earns more income from exports than it spends on imports, net foreign wealth is increasing.
The country is exporting present consumption and importing future consumption (intertemporal trade)**
What happen when CA<0 and TB<0
When a country earns less income from exports than it spends on imports, net foreign
wealth is decreasing. The country is importing present consumption and exporting future consumption (intertemporal trade).
What is national saving
National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G).
In a closed economy, national saving is always equal to
investment (I).
S= Y-C-G
What is private saving
Private saving is the part of disposable income (national income minus taxes,
Y − T ) that is saved rather than consumed
S(P) = Y -T-C
What is government saving
Government saving is net tax revenue minus government expenditure:
S(G) =T−G
National Saving calculation
S(P) + S(G) = S(N)
S(N)= Y - T -C + T-G = Y - C - G = I + CA
Thus an open economy can save by building capital stock I or acquiring foreign wealth
Interpretation of S(P) = I + CA + (G-T)
What can individuals do with private saving
S(P) = I + CA + (G-T)
A country’s private saving can take three different forms:
investment in domestic capital (I)
purchases of wealth from foreigners, i.e. increasing net foreign wealth (CA)
purchases of the domestic government’s newly issued debt (G − T )
What is a net lender and net borrower
A country that has a current account surplus is called a (net) lender.
- In order to provide you that money –> I must have a deficit in my asset account –> Take it that I am buying assets from you
A country that has a current account deficit is called a (net) borrower.
- in order to finance deficit –> must have a surplus of assets (to sell you assets in order to borrow)
What is a country’s Balance of Payment Account
statistical record of all economic transactions taking place between its residents and the rest of the world.
What is credit and debit
once as a credit (+) and once as a debit (−).
What are the BOP Accounts separated into (list 3)
Does it need to balance?
current account: accounts for flows of goods and services (imports and exports), and payments for factors ”at work” (capital and labor).
financial account: accounts for flows of financial assets (financial capital)
capital account: flows of special categories of assets (capital): typically nonmarket, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks
current account + financial account + capital account = 0
How does the BOP account balance
current account + financial account + capital account = 0 (if official reserves are included in the financial account)
current account + non-reserve portion of financial account + capital account = − official reserves (if official reserves are not included in the financial account)
What does the current account entail
Current Account: refers to the current transactions
Imports (−) and Exports (+)
⋆ Goods
⋆ Services: payments for legal services, shipping services, tourist meals
Income balance
⋆ Net investment income: net income from capital (e.g. interest and dividend payments)
⋆ Net international payments to employees: net income from domestic labor temporarily
working abroad and foreign labor temporarily working in the country
Unilateral transfers: Gifts of expatriate workers sent to their home countries (private
remittances), pension payments sent to expatriate retirees, and foreign aid.
What does the capital account entail
records special transfers of assets such as copyright/trademark payments and debt forgiveness. In comparison to the financial account, this is a minor account for Singapore, the U.S. and many other countries
What does the financial account entail
Financial account:
the difference between sales of domestic assets to foreigners and purchases of foreign assets by domestic citizens.
How to denote financial inflow and outflow
Financial Inflow:
- Foreigners loan to domestic citizens by buying domestic assets.
- Domestic assets sold to foreigners are a credit (+) because the domestic economy acquires money during the transaction.
Financial Outflow:
- Domestic citizens loan to foreigners by buying foreign assets.
- Foreign assets purchased by domestic citizens are a debit (−) because the domestic economy gives up money during the transaction.