ch5 international econ
TRANSCRIPT
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1Measuring
MacroeconomicActivity
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NATIONAL AND
INTERNATIONAL
ACCOUNTS:
INCOME, WEALTH, AND3
Balance of PaymentsAccounts
4External Wealth
5Conclusions
THE BALANCE OF
PAYMENTS
Outline
1. Closed Economy National Accounting: A Reminder
2. Open Economy National Accounting: Basic Identities
.
4. External Wealth
Today: 1 and 2
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Introduction
At the beginning, I talked about global financialimbalances, and different kinds of surplus and deficits(trade, current account), about the balance between savingand investment, etc.
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Now the terms will be properly defined
National Accounting
Apparatus constructed in the 1930s and 1940s
mon uzne s, o e
Richard Stone, Nobel 84
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Here, open economy version
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Micro example
Think of a small farm with following accounts
Expenditures
consumption $ 11,797
investment 2,213
total $ 14,010
Income
production $ 13,247
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total $ 13,197
Balance excluding interest: $ -763
Total balance: $ -813
Macro interpretation
Multiply by 1 bn, and this is the US
Expenditures
consumption bn$ 11,797
investment bn$ 2,213
GNE bn$ 14,010
Income
GDP bn$ 13,247
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NFIA bn -50GNI bn$ 13,197
TB bn$ -763
CA bn$ -813
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1. Closed Economy National Account ing: A Reminder
Three approaches to measuring economic activity:
GNE = total expenditure on all final goods and services.
Product approach: GDP
GDP = value of all goods and services produced by firms, lessintermediate goods purchased.
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Income approach: GNI
GNI = value of all payments earned by factor residents in theeconomy.
Flow of Payments in a Closed Economy
Gross national expenditure (GNE): total nationalspending on final goods and services.
Three components: C , I, G
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GNE = C + I +G
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Understanding the Data
for the National Economic Aggregates
U.S. trends for Gross National Income (GNE)
US Consumption, Investment and Government Expenditures
4000
6000
8000
10000
12000
14000
16000
o n o ars
Governmentexpenditure
Investment
Consumption
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2000
Flow of Payments in a Closed Economy
In a closed economy, GNE must equal total salesby firms of goods excluding sales to other firms.
.
Firms sell intermediate goods and services to other firms.These are excluded to avoid double counting.
Sum of value added: GDP
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GDP= GNE
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Flow of Payments in a Closed Economy
Firms use revenues in two ways: Payments for intermediate goods and services.
Income payments to factors of production: wages and salaries tolabor, dividends and interest to capital, and rent to landowners.This is value added.
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Gross national income (GNI) is the sum of factor income
payments received by national entities.
GNI=GDP
The Circular Flow in a Closed Economy
GNE = GDP = GNI
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2. Open Economy National Accounting: BasicIdentities
In the flow of payments for an open economy, the
flow of spending, income, and production.
GNE, GDP, and GNI need not be equal.
Transactions with rest of the world (ROW) come inbetween
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Flow of Payments in an Open Economy
Some home spending is on foreign goods; andsome foreign spending is on home goods.
GDP identity
GDP = GNE + TB
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TB = EX IM
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Flow of Payments in an Open Economy
Exports and imports in the U.S.
US Expor t and Impor t Shares in GDP
4
6
8
10
12
14
16
18
20
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Exports Imports
A subtlety: t rade between f irms
Exports and imports include the trade ofintermediate inputs between firms
Globalization and outsourcing trade inintermediate goods increasingly important
Trade flows not a measure of value added.
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Who Makes the iPod?
The retail value of the iPod is $299
(2007).
American companies and workers.
$80 paid to Apple (e.g., design,IP, support)
$75 distribution (e.g., transport/wholesale/retail)
$8 for various domestic
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components (U.S.-made parts)
Most of hardware imported fromChina, but using imported inputs(little value added in China)
Reuters/CORBIS
Flow of Payments in an Open Economy
Some home GDP is paid as income to foreigners,and some foreign GDP is paid as income to
.
GNI identity
GNI = GDP + NFIA
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NFIA = EXFS IMFS
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Celtic Tiger or Tortoise?
o re an s n us r aGDP originated in foreign-
owned plants in 2004
Ireland is 4th richesteconomy in OECD in terms
of GDP per capita, but 17th
in terms of GNI per capita
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Flow of Payments in an Open Economy
Net unilateral transfers (NUT) is the net amount
(foreign aid, remittances)
Gross national disposable income (GNDI) isincome available including transfers.
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From GNI to GNDI: Transfers in Income
In some countriesNUT can be a
of GNDI
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Recap
Two key expressions for the open economy
GDP = GNE + TB
Can see why the three measures differ in an open
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, .
In a closed economy, TB = NFIA = 0
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The U.S. accounts
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The current account balance
Current account balance: definition
= -
= TB+NFIA
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National income identity
GNI=GNE+CA
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The current account balance
0
100
Billion dollars
US Trade Balance and Current Account Balance
-700
-600
-500
-400
-300
-200
-100
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-900
-800
Trade Balance Current Account Balance
What the Current Account Tells Us
Why is the current account balance an interesting
indicator?
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Applications
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Applications
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